True story…Seller is an elderly widow. Her husband became quite ill and they spent every penny of their savings trying to return him to health. After his death she did the best she could to hang on and make things work. She rented out all the extra bedrooms, turned the thermostat down, and crimped on every expenditure. It was a slowly losing battle and finally she just could not do it any longer. She put the house on the market as a short sale.
The house was listed at $229K, she owed a little over $300K to the bank. Her home had lots of delayed maintenance but was in a good area of Santa Rosa and was basically sound construction. 7 days and 19 offers later, she accepted an offer for $345K curing her short sale and paying all her expenses related to the sale. She also side-stepped a potential credit issue.
If you haven’t taken a look lately, there is a huge demand for homes in the $500s and below, but very little on the market. The offers are aggressive…cash, as is, no appraisal and a fast close. This could be your chance to cure your financial situation and get out from under your mortgage.
Less than two miles from that house and within the last 3 months this happened…
- 429 Bosley (South of A neighborhood), an early 1900s bungalow listed for $229K as a short sale got 33 offers and finished up in contract at $329K.
- 521 Hendley (Burbank Gardens), listed at $249K, in contract in one day, closed in 27 days at $255K.
- 410 Brown (Burbank Gardens), listed at $249K, it had a price increase to $289K within 3 days because of the intense interest. Went into contract in 7 days with multiple offers.
Call me and I can tell give you an idea of the market value of your home. Good decisions require good information.
Short Sales are a hybrid transaction and it can be hard to remember that there are some things you need to do differently because it is not a “regular” transaction. I’ve collected 5 of what I think are the major pitfalls that can jeopardize the sale, or even put the homeowner at risk for liability.
- Make the home reasonably available to show. Agents need to preview, and Buyers need to see the inside in order to make a decision to buy. Blocking access wastes the Seller’s time. There is a window of opportunity to sell before it reverts back to a foreclosure, and all of that time is needed.
- Fill out the Seller disclosures. This one is actually the fault of the agent. I have heard of listing agents telling their Short Sale Sellers that they do not have to supply disclosures. This is categorically wrong. Not only is it in the state statutes that the Buyers have a right to disclosures, it creates a huge liability for the Seller to be brought to court later over something that could have easily been disclosed up front in the transaction.
- Do NOT sell personal items directly to the Buyers. Say a Buyer really likes your dining table & chairs and offers to buy them so they stay with the house. If you accept money for them outside escrow it is considered fraud because you are withholding money connected with the sale from the lender.
- Insist on quality representation by the listing agent. What do I mean by that? Simply, that your house should look just as nice as any other listing on the MLS. It should have a sufficient number of pictures and be promoted just as much as a regular sale. Your listing agent is being paid a commission out of the proceeds of the sale for their work. So, there is no reason to short change a short sale. (Sorry, could not resist that.)
- Get advice upfront. Before you jump in, talk to your tax person and find a good attorney in case you need legal advice. Then, interview agents who are experienced at Short sales and/or have earned a designation in Short Sales. Usually, if someone went to the trouble and expense of getting a designation, they are taking the sale of your home seriously. If you do not have someone to turn to for tax or legal advice, check out the Resources Page.
What is point 5 ½ ? Breathe…..you will get through this. There are thousands of others in the state of California in all price ranges doing short sales. By making a decision to move on the best way you can, you’re closing a difficult chapter and getting on with your life. Keep your focus on that.
Like 2012, 2013 may just continue to be the perfect storm for doing a Short Sale:
- Sonoma County’s available inventory of homes for sale continues to be the lowest in years.
- Competition for what inventory does exist has pushed up prices and turned the tables, making it a Sellers Market.
- Bank and Government programs are getting more and more favorable for the Distressed Homeowner who needs to sell.
- Lenders have too many foreclosures on their books, making Short Sales a better alternative for them.
- Short Sales are getting, well, shorter because of improved operating standards by the banks and programs by the government.
- The option to Short Sale is easier on your credit than a foreclosure, making it possible to buy another home sooner.
And the Number One Reason: The Forgiveness of Debt Tax Relief Act has been extended to the end of 2013 saving you literally tens of thousands of dollars you would otherwise owe the IRS in Federal Income Tax after a Short Sale.
When you escape a debt the IRS normally counts the amount of the debt you were forgiven as income, and taxes you accordingly. In terms of a taxable event, this could be significant to you financially if you short sale your home.
Example: Mr. & Mrs. Jones owe $550,000 on their mortgage, but the current market value for the house is $350,000. Faced with a transfer, they have to sell their home. Their lender allows them to Short Sale their home for the current market value even though it will net less than the balance owed on the mortgage. In agreeing to sale short, the lender also agrees to forgive the debt on the outstanding balance; in this case, $200,000. Enter the IRS, who view the $200,000 as taxable income!
The Mortgage Forgiveness Debt Relief Act addresses this very scenario, and has been in effect for the last since 2007 when the market began its collapse, throwing many homeowners into financial distress by owing more on their mortgage than what their house was actually worth in the changed market. (It has recently been extended to the end of 2013.)
This act allows a home owner a tax exclusion for the forgiven mortgage debt. Without this Act, in the scenario above, the Jones would get a tax bill on the $200,000 as though it were regular, earned income. That means a bill of somewhere around 30%, or $60,000. Quite a deep hole to fall into!
The Mortgage Forgiveness Debt Relief Act is about making it possible to get out from under financial hardship so you can get back on your feet again.
Note: While this is fantastic news, there are some qualifiers to this tax act. Be sure to consult a qualified tax preparer before moving ahead. Also, another thing to consider; the state of California is expected to follow suit with their own forgiveness of debt relief. However, as of this writing, they have not yet extended this tax break on the state level. Plain English: You may get off the hook at the Federal level, but the state is not there….yet.
January 2, 2013
Dear Fellow REALTORS,
I’m please to start the New Year with some good news.
Late last night, Congress reached a settlement in the “fiscal cliff” negotiations. As a result, the Mortgage Forgiveness Debt Relief Act has been extended for another year. The measure will continue to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale, loan modification (including any principal reduction) or foreclosure. REALTORS® should tell their clients to keep their short sales on the market and encourage them to consult with their own tax advisers about their tax situation.
I want to thank the 26,296 California REALTORS® who sent messages to their members of Congress and made 1,862 calls in response to our Call-for-Action.
The settlement also will allow capital gains rates to rise from 15 percent to 20 percent for high-income earners. However, capital gains rates on the sale of principal residences will remain unchanged and continues to exclude the first $250,000 for single taxpayers and $500,000 for married couples.
I will continue to keep you updated with more detailed analysis as it becomes available.
Happy New Year to you all!
CALIFORNIA ASSOCIATION OF REALTORS®
Fannie Mae Reaches Short Sale and Deed-in-Lieu Delegation Agreements with Mortgage Insurers
WASHINGTON, DC – Fannie Mae (FNMA/OTC) announced today that it has reached delegation agreements with all of its mortgage insurer counter parties so that servicers can complete short sales and deeds-in-lieu of foreclosure without seeking approval from the insurer. These agreements will further streamline the foreclosure prevention process and allow short sales and deeds-in-lieu to be completed more efficiently.
“Short sales and deeds-in-lieu are important tools to prevent foreclosures and help struggling borrowers,” said Leslie Peeler, senior vice president, National Servicing Organization, Fannie Mae. “These delegation agreements create an even more streamlined process that will ultimately help more families avoid the costly effects of foreclosure and benefit taxpayers. We are pleased that the mortgage insurance companies have stepped up to the plate with us to help more homeowners.”
Previously, Fannie Mae had individual delegation agreements with the majority of its top mortgage insurer counterparties. Now, a standard delegation agreement has been reached with all nine mortgage insurers, making the approval process more consistent and efficient for servicers and borrowers.
The new delegation agreements allow servicers to approve any short sale or deed-in-lieu that meets Fannie Mae’s requirements without individual mortgage insurance approval.
These agreements are an important achievement in Fannie Mae’s efforts to stabilize neighborhoods and have been established with CMG Mortgage Insurance Company, Essent Guaranty, Inc., Genworth Mortgage Insurance Corporation, Mortgage Guaranty Insurance Corporation, PMI Mortgage Insurance Co., Radian Guaranty Inc., Republic Mortgage Insurance Company, Triad Guaranty Insurance Corporation, and United Guaranty Mortgage Insurance Company. All delegation agreements will be effective as of November 1, 2012.
Borrowers can visit http://www.knowyouroptions.com/ for foreclosure prevention information and resources, including how to contact Fannie Mae’s twelve Mortgage Help Centers across the country. Through the first six months of 2012, Fannie Mae completed 142,987 loan workout solutions, including 46,226 short sales and 7,509 deeds-in-lieu of foreclosure. Earlier this year, Fannie Mae announced new short sale guidelines and new short sale timelines.
Fannie Mae exists to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market. Fannie Mae has a federal charter and operates in America’s secondary mortgage market to enhance the liquidity of the mortgage market by providing funds to mortgage bankers and other lenders so that they may lend to home buyers. Our job is to help those who house America.
If you fit this description:
- Have low to moderate income
- Owe more than your house is worth
- Live in your home
- Are delinquent, or have a hardship that puts you at risk of default
- Have a mortgage balance of less than $729,750
Read this article….
Principal relief for stressed homeowners
A limited number of underwater homeowners in California will soon be able to get principal reductions of up to $100,000 apiece on Fannie Mae and Freddie Mac loans through the federally funded Keep Your Home California program.
The federal agency that oversees Fannie and Freddie has steadfastly refused to allow permanent principal reduction on loans they own or guarantee on the grounds it would cost taxpayers money. But in mid-September, Fannie and Freddie told servicers they could immediately begin accepting money for principal reductions from programs financed by the U.S. Treasury’s Hardest Hit Fund, including Keep Your Home California.
Fannie’s and Freddie’s willingness to accept money from Hardest Hit Funds does not signal a change of heart on the part of their regulator, the Federal Housing Finance Agency. Lest anyone get the wrong idea, Freddie says it will allow funds to be used for “principal curtailment.”
Read the rest here…
After earning my CDPE (Certified Distressed Property Expert) designation I was fired up. The landscape in my profession had changed drastically over the preceding 4 years. People were hurting…lots of them.
Our homes are one of the things we tend to take for granted and if there’s one thing this recession has taught us, it’s just how central a role our homes play in our lives.
Not knowing if you can continue to stay in your home, and being worried about where else you could live if you lost it, is a tremendously stressful ordeal to go through. Add children to the mix, and it is pure misery.
The CDPE training showed me just how many options people had. The problem was that no one wanted to own up to their situation. When your security is shaken to the core, the appearance of stability affords you a comfort you are reluctant to give up, even if it is only the appearance and not the reality.
So, I started this blog with some definite standards…
- Put all this great information from my training out there
- Be unbiased and present ALL the options (not just Short Sales)
- Allow people to access it in privacy without having to sign up
- Be current
- Give links to helpful sites
- Alert readers to potential pitfalls
The blog has helped me too. After months of wading through the morass of a tortured real estate market this blog gave me an outlet to do something positive. Being able to make a difference, even if I don’t know the person I helped, was such a relief
Things are improving, gradually. First with the Robo Signing settlement, then the refinement and improvement of some government programs, as well as changes in both federal and state laws that protect the homeowner and help to level the playing field between them and their lenders.
I am happy you found your way here, and it is my sincere hope that the information here helps you.