Posts Tagged ‘short sales’

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Tax Relief For Certain Homeowners Ends in 2012

Tuesday, January 10th, 2012

Mark it on your calendar.  Without an extension, the 2007 Mortgage Foregiveness Debt Relief Act (MFDR) will expire at the end of this year.  How could it have been almost five years since this important law was created to help address a portion of the housing crisis??

The MFDR was originally created by Congress to assist people who needed to sell their homes with an approved short sale.  It also found value for foreclosed homeowners…in some very limited cases.  Basically, owner occupants who had borrowed up to $2 million are able to exclude what otherwise would be a taxable event-the forgiveness of mortgage debt.    So, a homeowner with a mortgage balance of $250,000, and an approved short sale for $175,000, had a bank forgiveness of $75,000.  This gift was taxable and reported with a 1099-C tax form with a potential cost to a 25% tax bracket of $18,750.  Up to the creation of the MFDR I had watched homeowners choose to file bankruptcy rather than be burdened with the tax debt as a bankruptcy provided a similar tax forgiveness-along with many years of credit problems.   After the MFDR was created, the IRS essentially could not tax the homeowner for what is otherwise considered a gift, and the homeowner did not have to file bankruptcy to receive this protection.

What do you think the chances are that this very helpful law for continuing to create a positive environment for owner occupied short sales will be extended?  I think that is anybodys guess based on election year politics.  If you have been considering selling and have been on the fence, and a short sale is likely, start now to make a decision.  Avoiding taxation on the amount forgiven by the lender is an important part of your future financial well-being.

 

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Posted in Laws, Short Sales, Taxes | No Comments »

The 10 Pitch Strike Out!

Monday, August 29th, 2011

Anybody who f0llows baseball understands how a great at-bat can wear on the pitcher and even the defense.   A typical at-bat might consist of 4 to 7 pitches.  An at-bat where the batter starts fouling off balls, can extend the at-bat until the batter gets a base on balls or hit by a pitch, strikes out, or puts the ball in play.  The more pitches, the more the batter eats into the pitchers total pitch count.  Eventually the pitcher’s day is over, even when having a great game, when the pitch count gets around 100.  So, an extended at bat can wear on a pitcher, as the batter keeps in the game, but is not actually moving the game forward other than wearing out the pitcher.

Unfortunately, today’s home buyers and Realtors  are finding that trying to buy a home for their family is a little like a 10 pitch strike out.  In record numbers, contracted home purchases are not closing due to issues related to financing.  Whether it is the buyer’s credit, or objections of the lender to the condition of the home, what we call “pended” transactions are not making it to the closing table.  According to the National Association of Realtors (NAR) is reporting in July that one in six Realtors had  contracts cancelled, in contrast to the previous 16 month average of 8 to 10%.  Essentially doubling the failure rate over the average!

When interviewed, the agents are saying the biggest factor causing these cancellations are not the well documented struggles with financing approval but actual concern about the economy and fear that now is not a good time to make a commitment as significant as housing.   This fear has caused many of these recent cancellations to be based on minor problems that could have easily been resolved, but also were used to cancel the contracts.  This usually occurs in the inspection phase where almost any home will have some issues, but due to inspection contingencies, buyers can utilize one of these problems to demand a repair from an unwilling seller, or simply state that they do not wish to proceed.   To a lesser extent, the difficulty in closing short sales-something I have written about several times-also is causing problems with buyers who eventually give up.   This problem has been a part of the housing market though for the last three years.  I am not sure buyers are any less patient with short sales today.  Appraisal values also present challenges as appraisers find less and less comparable sales other than distressed sales to provide values.  The argument remains if those values are the new norm or just an aberration.  I think one has to be aware in their market tract, what percentage of sales are distressed or bank owned, and understand that may seriously impact value.

Realtors representing buyers though  really have to become a part of the solution instead of just blaming the buyers.  It is very unfortunate for sellers to pull their property off the market to any other buyer, and then incur the 10 pitch strike-out!  With each new pitch, the seller finds a way to foul it off and stay in the game.  The buyer slowly wearing down their total pitch count.  I hear far to many agents blame the buyers when transactions cancel, but often later find that the buyer was not properly prepared to be making offers on homes.  Here are some simple steps agents and buyers can take to make sure they are ready and not experience a strike out!

  • Pre-qualification for a mortgage is not enough!  Get a pre-approval and have it in hand with each offer.  Make sure it is no more than 30 days old.
  • Complete a fair opinion of value to assist the buyer when considering a home.  Make offers on homes that seem to be valued realistically.
  • Approach home inspections with an understanding of who the seller is.  Bank owned or distressed properties are rarely going to be able or willing to make repairs.  The inspection is a tool for the buyer to make sure there is nothing major that the eye could not discover, and to prepare their checklist for after they close.
  • Finally, interview your buyers enough to understand their level of motivation.  Is this a need or a game?  The buyers agents really should not have time for a 10 pitch strike out either!

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Posted in Buyers, Buyers Agents, Closings, Economy, mortgage, Offers, Selling Process, Viewing Property | No Comments »

Short Sale or Foreclosure..It Depends!

Wednesday, June 29th, 2011

A new article at bankrate.com tackles the question from a buyers perspective.  Both short sales and foreclosures make up over 40% of the market sales so if you are trying to buy a home for occupation or investment, you are likely going to run into one of these types of sellers.

Foreclosures offer faster closings, and more negotiation opportunities.  They also have been vacant for a period of time that might exceed a year or more.  The effects of being vacant this long are often combined with a poor condition left by the last owner, making the foreclosure a project with possible hidden surprises.

Short sales are often still occupied and the occupant is still trying to maintain the property.  If a buyer is not wanting a potential project, short sales are the better alternative.  Yet, short sales have many more hurdles to the sale process.   Making an offer, and receiving a response can offer a different level of frustration and delay.  Negotiations may be very limited.  Approvals and closings can drag on.

Every day I see agents showing foreclosures to buyers who probably have no business purchasing a foreclosure. Similarly, I witness the buyer who needs a home in 30 days being shown short sales by their agents.  Short sales and foreclosures are so much a part of the real estate world today that buyers believe they need to get in on the opportunity in order to save the most money.  It is really important agents help buyers understand the challenges and benefits of both types of properties.  This article is a good piece to hand out to buyers before starting the process of showing homes.

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Posted in Buyers, Buyers Agents, Foreclosure, Selling Process, Short sales | No Comments »

It Is Getting Harder To Find Buyers For Short Sales

Thursday, December 2nd, 2010

For the homeowner with a mortgage that far exceeds the value of their home (keeping in mind home values on average have fallen 25% over the last three years this is not unusual) the options have been:

Refinance-really hard due to loan to value ratios and lack of equity

Walk away

Deed In Lieu of Foreclosure

Modify and hope for a burst of inflation

Pursue a bank approved short sale

In many parts of the country the short sale has become so common that it is the majority of a listing agents marketing.  It seems most Realtors have some short sale specialty.  This post is to not spend a bunch of time debunking the fact an entire industry has sprouted to separate Realtors from whatever hard earned cash they have, promising to provide short sale education and certifications, but to look at a very real trend developing that I will call the educated buyer.

It use to be a buyer would find a property and make an offer and then find out that the seller’s approval of the offer was actually contingent on a mortgagor approval.  The buyer would look at their selling agent and ask what that means.  Most of the time nobody really knew because the process was different depending on the bank.  Sometimes there were pre-approved short sales and they could move quickly to close, and sometimes the offer was headed to the Loss Mitigation department where eventually a net sheet would be sent that usually caused buyers and Realtors to pop for a bunch of extra funds if the sale was going to go through as a short sale.  Not to mention the issue of recourse to the borrower and whether the borrower could get let off the hook for the shortfall.  Many times after months of waiting for an answer, the mortgage company would pronounce an offer requiring the seller to execute a note for all or a part of the deficiency.  I have watched many sellers at that moment file bankruptcy which will end your buyers dream immediately.  It was really the wild wild west for these purchases.

So, in 2009 this was all supposed to change as banks indicated a willingness to smooth over the areas of difficulty in making short sales a reality.  A combination of the fact that 20% of sales were short sales, and new government programs in support of a uniform short sale process (HAFA) made it appear that the bad word that had developed among potential short sale purchasers would get better and the process would be less headache filled.

I always get asked why is it so hard to complete a short sale?  Wouldn’t the lender prefer to not undergo the costs of foreclosure and taking the hit on resale?  The answer is of course they would.  That is why for years there has been so much positive said about the short sale option.  The issue really gets back to the cause of so many issues in the mortgage business recently.  These mortgages that are trying to be approved for a short sale are not your father’s mortgage note.  They are usually part of a collateralized security pool and not only is it difficult to break out one little piece and settle for less, but there are a lot of stakeholders in the pool and some of them are really concerned only with the return on the pool.  This is not to trash securitization of mortgages because once you understand mortgage finance you understand how important this tool is for allowing a thriving housing market.  It is to point out the reason short sales are not so simple as a person sitting at a desk reviewing the buyers offer, and subsequent short payoff make sense, and therefore approving the short sale.

Also making this issue more complicated is assessing true market values.  Often a mortgage company will have a different assessment of value, combined with a buyer who has set unreasonable standards for their offer on the assumption that the property is distressed and should sell for less than market.  My experience is these sales do not occur for less than what the mortgager believes is the market value.

In the last 18 months we have seen more requirements from listing services that short sales must be disclosed on the listing.  Subsequently, buyers are taking all they have learned about the process of short sales, and their own need to find housing in a timely manner, and increasingly shying away from the process.  Given the current mortgage crisis, it is imperative that sellers be led by knowledgeable Realtors into the HAFA process and try to have a pre-approved short sale prior to placing the home on the market.  It has been published that the average response time for a short sale offer is eight weeks.  This will not occur under HAFA and while not all mortgagees will qualify, it is becoming imperative that listing agents stop flashing around their short sale certifications in order to add to their listing inventory, and do everything possible to have a short sale pre-approved prior to listing.  Otherwise it appears buyers are going to start throwing out the baby with the bath water and increasingly deciding to pass on looking at the short sale listing.

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Posted in Buyers, Short Sales | No Comments »

Fradulent Short Sales

Thursday, September 16th, 2010

While just a small percentage of the sales, short sales have always struggled for one reason because servicers have to determine that they are not getting taken to the bank (no pun intended) when approving the sale.  There are so many ways to try and use the short sale as an escape from a bad real estate transaction.  Whether hiding assets the borrower possesses, or the true value of the property, sales agents seem to often be found helping to create the fraud.

That is a shame.  It is also the dirty underside as to one of the major reasons it is so time consuming to complete a short sale.  Whenever a new story comes out with shady antics around a short sale, there is one less argument  to just blame the banks for not more actively using this tool from their chest.

A recent study from CoreLogic (formerly First American) highlights that short sale transactions are risky for lenders when there is a second sale soon after the short sale.  Clearly, what is defined as fraud is evolving.  CoreLogic’s study found a “consistent pattern of lenders incurring more loss than necessary.”   The study estimates lender losses in short sale transactions at the rate of $310 million per year.  

As the complaints about short sales continue,  I think it is only fair to point out the role fraud has created in the sale.  Fraud prevention becomes a part of the due diligence that must be completed.  As there is more due diligence, more time ticks away and the more likely a sale will not be completed.  What is truly unfortunate is that most examples of fraud that CoreLogic and I find simply searching the internet, involve sales agents.   Of course, there are many more legitimate transactions and honest sales agents who are being harmed by the minority.  Yet, I think it is time that the minority are confronted when we face a potential fraud in our daily business. 

Other recent examples of how real estate agents have made their mark adversly in trying to profit from short sales.

Conneticut agents sentenced for fraudulent representation of value on short sales.

Option contract scammers  recruiting agents to perpetrate their scheme.

A short sale flip example from Tampa Bay.

So if you run across a borrower or agent  structuring a possible short sale fraud, do everybody a favor and try and figure out who the bank is that will be harmed, and let them know about your suspicions.  You are actually going to be serving a much bigger cause that just helping the bank.  Until stakeholders can find a way to underwrite these transactions quickly, and the cases stop turning up of people creating short sale scams, the number of short sales actually approved will continue as  a small drop in the default bucket.

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Posted in Default, Fraud, Short Sales | No Comments »

Fannie and Freddie Release Short Sale Guidelines

Thursday, June 3rd, 2010

When the original government sponsored short sale program, known as HAFA, was released there was no such program for Fannie or Freddie.  Considering the volume of loans owned or serviced by these entities, there was a collective groan from the masses wondering when the government’s own agencies would release a program that was being encouraged on private entities.  This week, that day came.  As one of the most knowledgeable people in America on short sales, Tim Burrell has written an excellent piece  describing the good and bad of these programs.  As I have said before, any organized program is better than no program.   Only time will tell if people struggling to make a mortgage payment feel a short sale offered un this manner provided a way out of their personal difficulties.

If you are so inclined, I am also posting the Fannie and Freddie short sale guidelines for your more in-depth review.  If you have a short sale that you would like to discuss, contact me at joel@wilmothgroup.com.

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Posted in Default, HAFA, Short Sales, Uncategorized | No Comments »

So You Want To Buy A Foreclosure?

Thursday, May 6th, 2010

Did somebody (late night television?) convince you that now is the time to get in on the greatest investment opportunity since gold?  Well, just like gold, there is/was an opportunity.  The question now is has the ship already sailed?

The reason for this question lies in the unreasonable returns potential buyers of foreclosures are seeking.  Even owner occupant buyers have it in their heads that they can purchase a foreclosure and immediately see 20% appreciation.  There are several problems with this line of thinking.

The market does not lie. 

There are some big questions about the future.

My comment on “the market does not lie” is based in the reality that when a home is priced below market we see multiple offers.  Makes sense.  More than one person sees the value versus the list price.  What ensues though is a process called “highest and best” that usually ends up with the winning offer getting the home very close to what we believed originally to be the correct value.  The market does not lie.  That is what is so great about “free markets”.  Real estate sales are very much a free-supply/demand market.

The future is a question because nobody, and I mean nobody, has their arms around the amount of foreclosure inventory that is in existence or is still to occur.  You may have heard of the shadow inventory of foreclosures?  This is a reference to the large number of homeowners who are either not making payments, being given modifications that may ultimately default, trying for a short sale, or are just struggling-in addition to the existing defaulted inventory of homes.   Many homes in default and vacant have not been foreclosed on.  The more of these homes that hit the market, the more there is a moderating force on home values.  I continue to see homes sell for a value far below other traditional sales on the same street.  One foreclosure sale can be overlooked as to value.  Several foreclosures, defaults, possible defaults and the market may not ignore.  Remember value, as objectively determined by reviewing recent comparable sales, is not the same thing as what the market will pay.  Uncertainty still is a big factor in what the market will pay.

If you want to buy a foreclosure..time to learn all about the many ways homes become a foreclosure.   CNNMoney.com published an article this week that covers the three ways a home in default can be purchased.  All are relevant and the article is worth your time to review.   It use to be that 90% of default homes were sold in the REO stage (my estimate).  Today we see an increasing percentage occuring in Pre-Foreclosure.  These are usually called short sales because the mortgage is more than the market will pay.  Sheriff sales are very tough and very risky.  Better know what you are doing and have ample cash before trying that game.

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Posted in Buyers, Foreclosure, Modifications, Shadow Inventory, Short Sales | 1 Comment »

The Mystery Of Credit Scores and Default

Wednesday, April 28th, 2010

A very interesting article was pointed out to me yesterday.  Published at CNNMoney.com, there is a run down of how defaulting on your mortgage is going to affect your credit score.  With the government encouraging homeowners to go for short sales or deed in lieu programs, one of the rarely talked about paths to these programs is you really need to be struggling to make your payment.   Struggling means late, partial payments, or maybe just stopped making payment.  I know people that have good credit but feel like they will never get out from an upside down mortgage.  At the advise of some well meaning people, they are now trashing their credit scores in order to qualify for one of the new government plans.

In the past, it was hard to define just how much damage these types of decisions were going to make to somebody’s credit score.   The referenced article states Fair Issac, the inventor of the FICO score commonly referred to as your credit score (by the way this is just one of several different credit scores) has provided estimates of the point declines these actions will cause.

Here is the average hit your credit will take:

30 days late: 40 – 110 points

90 days late: 70 – 135 points

Foreclosure, short sale or deed-in-lieu: 85 – 160

Bankruptcy: 130 – 240

As to the old theory that a short sale will not hurt your credit as much as a foreclosure, I was surprized to learn the following:

Mortgage borrowers can lose their homes three basic ways: a foreclosure; a short sale, where the home is sold for less than than is owed and the bank  forgives the difference; or a deed-in-lieu, in which the borrower gives back the property and the bank again forgives any unpaid balance.

Maxine Sweet, vice president for public education at Experian, one of the nation’s main credit bureaus said credit bureaus generally slash scores equally for those three resolutions to someone losing their home. The important factor, she said, is that “it’s reported that you paid less on a settled account.”

Some borrowers may think that because they never missed a payment, they can “walk away” from their homes with relatively little impact on scores. Not true. “When a deed-in-lieu or short sale is reported as a partial payment, it’s treated as a serious delinquency,” Watts said, “just like a foreclosure.”

Even if borrowers made payments faithfully for years before short selling or doing a deed-in-lieu, their credit score will still take a hit. The total decline will run about 85 points for the 680 score borrower to as much as 160 for the 780 score.

So, the expectation should be that your credit is going to suffer no matter which resolution course is chosen.  The world today though is making it much less of a stigma, and the doors for future home lending are being re-opened much quicker for short sales and deeds in lieu.  So, avoiding foreclosure continues to be the most favorable option.   Just don’t expect your credit score to confirm that.

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Posted in Credit, Default, Short Sales | 1 Comment »

New Help For Short Sales? Maybe…

Thursday, April 15th, 2010

Unlike the HAMP modification program announced by the government last spring and supposed to be available immediately to borrowers eligible for a modification, the new Home Affordable Foreclosure Alternatives  (HAFA) program has had time for implementation.  The program was announced in May 2009 and began being offered by servicers last week.  The HAFA program is the first time a standardization of procedures have been created to create a short sale transaction.   Unfortunately, the two largest owners of loans in America (Fannie Mae and Freddie Mac) for some reason are not participants.  I find this a little odd since they are now fully owned and run by the same government offering incentives for short sales through HAFA.   I have been told for some time now both entities will be announcing their own short sales incentive plans in the near future.  Unless I missed it, that has not occurred yet.

As somebody who has been actually creating short sales for distressed homeowners since 1996, I find the ideas of this program noble and I do hope they create a model that can be duplicated by Fannie and Freddie.  At this point it is to early to tell if HAFA will work.  I can tell you that anything that creates a process within servicers for reviewing and approving/rejecting short sales will be an improvement…and I mean anything.  I have always supported the idea that contract law requires a borrower to repay the amount borrowed per the terms of the contract.   Unlike programs that force mortgage holders to take haircuts on balances or waive interest due, short sales are actually a business decision made within the free market.  The mortgage owner assesses the chances of a default and whether allowing the borrower to settle their mortgage and obtain a release for less than the outstanding owed is better business than seeing the same borrower eventually lose their home to foreclosure and the resulting loss of value of the property.

I have spent a great deal of time familiarizing myself with the new HAFA program.  I have also created a Frequently Asked Questions document to help anybody considering this alternative understand it better.  We also have started to build a website addressing the options for homeowners who wish to avoid foreclosure.  The first site is for Indianapolis metro homeowners and it is called www.IndyHomeownerSolutions.com.  Check it out and let me know what questions you have. 

If you need to discuss short sales you will find every Realtor seems to have some designation that allows them to say they are a specialist.  The question to ask them is how many short sales have they successfully completed?  Veterans of this industry generally do not have the newest alphabet soup of default or short sale certifications after their names.  We have been too busy working in the trenches to have to pay out a lot of money for something we actually have the experience to  perform successfully.

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Posted in Default, HAFA, Short Sales | 2 Comments »

Walk Aways And Short Sellers May Not Be Able To Escape The Tax Man

Monday, April 12th, 2010

There seems to be a lot of confusion about who gets to pay taxes when they sell their home with a short sale or complete a deed in lieu of foreclosure.  The confusion started in 2007 when the Mortgage Forgiveness  Debt Act was passed and offered a key to the lock that had stalled homeowners trying to get out from an underwater mortgage.  Basically, through 2012, the act provides a pass from tax liability for mortgage debt forgiveness.  Formerly, if a mortgage holder forgave part of the debt, a taxable event ensued.  I was involved in numerous potential sales that the ensuing taxation of this forgiveness ended up stopping the owner from proceeding with a sale…actually choosing to allow a foreclosure on their record instead of the tax liability they could not pay.

So, this is a good law with some built in safeguards that limit the ability for certain more speculative borrowers to enjoy its benefits.  As anybody who has read much of my writing knows, I have a problem with the government providing assistance to people in states where so much phantom equity was created, who then borrowed against this equity and bought investment properties in states where prices stayed affordable.  This happened a lot and I witnessed it.  I also heard stories of phantom equity being used for paying off credit card debt and taking of vacations.  

Buying an investment property or paying off debt with funds later forgiven by a lender (or now the government) should be a taxable event.  And it is a good idea to reinforce that there are exceptions to this law and in these types of cases, logic wins.  I write this after talking to a business contact in one of these situations who firmly believes they are going to be able to complete a short sale on an investment property purchased with phantom equity…and under the new HAFA short sale program sell the original property with no tax burden!  It just does not work that way..and it shouldn’t!

The following is an outline of the exceptions with much more detail available here:

• A cash-out refinance where the money was spent on something not housing related, then the borrower got in trouble and lost their home to a foreclosure or short sale, will owe the IRS.

• The IRS will forgive tax liability only on money from home-equity loans that was spent to improve the property.

• Anyone who lost a vacation home or investment property to foreclosure or short sale will owe taxes

• Multi-million dollar homes  are always subject to tax.

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Posted in Short Sales, Taxes | 1 Comment »

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