Monday Morning Coffee – Short Sell and Keep Your Home

Monday Morning Coffee

Short Sale Alternative

February 8, 2010

Good morning.  I hope you had a nice weekend and enjoyed the Super Bowl (in which case you don’t live in Indianapolis).  We had a busy week which included both a positive and a negative short sale experience.  Banks are starting to be more aggressive in seeking additional funds from sellers trying to short sell houses if they think they can get it and they are also less willing to delay foreclosure if they think foreclosing is in their best interests.   Details are long and probably of little interest to most of you, but if you are considering a short sale, let me know and I will fill you in.

Speaking of short sales, I have an exciting alternative for those of you who might be stuck in a situation where you could lose your home.  I have an investor who is willing to either buy your home in a short sale and rent it back to you for 3 years until you can buy it back from him (at the same price he paid) or, help you buy a different home after you short sell yours.  I met with him two weeks ago on this program and while it will not work for everyone, it will work for some.  His goal is cash flow, so the way the program works is that you pay all his loan costs, taxes, maintenance, etc. (once he buys the home, he doesn’t put any more into it) plus a monthly fee to him.  The numbers are somewhat complicated, but if you are in a home that is worth about 35-40% less than what you owe and have a good income, he might be able to help you.  If so, shoot me an email and I will get back to you.

We have one new home this week.  It is a short sale in the Gianni complex at 4S Ranch.  It is a 3 bedroom condo with very nice upgrades.  The seller is asking $399k.

That’s it, enjoy the Coffee!

Have a Great Week!

Scott Voak

Foreclosure Alternatives – Short Sale vs Foreclosure

My team and I have been working on an area of our business that I think is extremely important right now; foreclosure alternatives.  The interesting thing is that the most desirable result is one in which we do not make any money – loan modifications.   We don’t make any money from them because I don’t do them and I will not accept a referral fee from people who do.  I want my clients to know that I am sending them to the most qualified people, not the ones who are paying me the most.  Now, I am not doing charity work. I explain to everyone I meet with that if I introduce them to the company that helps save their home, then I hope they will call me in 10 years when they want to sell – and in the meantime tell all their friends about me.  It’s an arrangement that I hope will work well.
However, through this process there is an attitude I am noticing that is detrimental to everyone and I want to let clients as well as other agents know why.  The attitude is, “If the bank won’t approve my loan modification then screw them, I’m going to let them foreclose.”  The problem with this is that it harms the owner more than the bank.
The first obvious reason this is detrimental is that a foreclosure will hit your credit harder than a short sale.  But the second reason is more important.  On June 25, 2008, FNMA (Fannie Mae) put published Announcement 8-16 which amended guidelines for loan approval.  The key point in this document for our purposes is that if a borrower completes a short sale, they cannot purchase a home using a FNMA guaranteed loan (which will be the large majority of loans going forward) for two years after the completion of the short sale.  However, if the borrower goes through a foreclosure, they cannot purchase a home for five years.
Nobody has a crystal ball and can tell you when the housing market will hit bottom and start to rebound.  Nor can anyone say with certainty how far it will fall and how fast it will come back.  There are a lot of people that think we will hit the bottom sometime in the next year or two and then start to come back.  If this is true and a borrower does a short sale today, he or she will be eligible to purchase again at or very near the bottom of the market.  If the borrower instead allows the foreclosure to happen, he or she will have to watch from the sidelines as the market rises.
Short sales are not fun, but there is a way to do them right and to time them so they work best for the borrower.  While a year ago, only 10% of short sales were getting approved, we are now working with a company that is getting 80% of them approved.  It takes more effort than allowing the bank to foreclose and the rewards are not anything the borrower sees immediately.  However, if the borrower can focus on what will put him or her in the best position five years from now it is clear that a short sale is much preferred to letting the bank foreclose – even if all they want to do now is screw the bank.

Loan Modification Trap

I was talking with a client of mine who is doing a loan modification on her own and she told me that the bank was giving her a forebearance.  After we hung up, I thought through what she told me and realized that they are giving her the shaft.  Here is what they told her:

They can’t qualify her for a loan modification now, and they have to file the Notice of Default.  But, if she makes her next three payments they will talk to her about the loan modification then.

Here is what it really means (most likely):

We don’t think you qualify for a loan modification.  The State of California requires that we wait three months after filing a Notice of Default before we can file a Notice of Trustee Sale.  We would rather you pay us the mortgage for those three months.  If you do, we promise to look at your file again at that time (if you don’t qualify now, you probably won’t qualify then) and then decide if we will foreclose.  Bottom line is she pays 3 more months of mortgage and still loses her home.

I have seen this happen a couple of times.  The owner gets to the end of the three month period, does not qualify for a loan modification and only has three weeks to try and sell the home to avoid the foreclosure.  Inevitably, the bank forecloses and the owner now has a foreclosure on their record which makes it next to impossible to purchase a home for five years whereas if we had done a short sale, they could re-purchase in two years (about the time most experts think we will hit the bottom of the market).

When you call a bank as a homeowner, you need to understand that the bank is not required to modify your loan.  They are encouraged by the government to do it, but that encouragement is only about $6,000.  While that might be a nice amount on a loan in South Dakota, it doesn’t do much to offest losses the banks are seeing in San Diego.   So the government is not helping our local situation much. The bank is going to look at your loan modification as a straight business decision with the following factors considered:

• Can you make the new payment?
• At the level of the new payment, how large would the loan be?
• Is the value of the home more than the above loan size (if so, foreclose)

Each bank has its own criteria on which loans it will modify and the calculations are fairly complex.  Understand that although this is emotional for you,  it is just business for the bank.  Most likely, the person you are talking to is new to the industry and doesn’t really know what they are doing.  They have about 500 files on their desk and are emotionally detached from your situation.  Either your file has to fit into a very precise formula, or you had better know how to get past this person and into the department with working calculators and a manager that can make a decision other than what the computer screen tells her.

If you are serious about saving your home and your credit, you should work with someone who has experience modifying loans.  There are two types of people who can modify loans in California:  Lawyers and Real Estate Brokers (I do not modify loans, nor do I accept referrals from people who do – I will refer clients to the best people I know and hope that in exchange they will call me in five years when they want to sell).  If you are talking with a lawyer about a loan modification, make sure they have a background in Real Estate.  A lawyer will likely charge you about $5k to do a loan mod – make sure you do not pay everything up front unless you get several references first.  If you are not a lawyer, California law requires you to have a real estate license to modify loans for other people.  In addition, if an agent is going to collect an advance fee (they all do) for the service, that agent has to get special authorization from the state to do so.  You can look this information up on the California Department of Real Estate web site.  Real Estate professionals will typically charge $2,500 – $3,000 to do a loan modification, but have to put the money in a trust and can only withdraw funds as certain milestones are hit – you get money back if they are unsuccessful (unlike with most lawyers).

It might be attractive to try this yourself, but if you do, be sure you have all the information on your rights and responsibilities so that you don’t use up all your time counting on the bank’s good intentions.

What the Bailout Does for Mortgages – Speficially Yours

While many of the terms of the bailout have not been announced (since Congress only had 24 hours to read the 1000+ page bill, they might not know what’s in it yet), the basic framework of the mortgage portion has been announced (more details to be released on March 4.)  While there are positives, I think that for the majority of people in San Diego County, it is going to be more negative than positive.  With the limited information that we have now, here is why:

• Only loans that are guaranteed by Fannie Mae or Freddie Mac are eligible.  The problem with that is while at the peak of the market when many of these loans were made, the median price (including condos) in San Diego was over $500k, the limit for Fannie and Freddie loans was $415k.  So, most people in San Diego don’t qualify (Arizona is estimating only 19% of their loans are Fannie or Freddie, California is probably less).
• The first mortage must not be more than 105% of the home’s value.  That is fine, unless you bought in 2004-2006.  For example, if your first loan is $400k, you home value can not be more than $420k.
• Only first mortgages qualify.  If you have a second mortgage, it doesn’t get adjusted.  Most people I have worked with can handle the first mortgage, it is the second mortgage that pushes them over the edge, and that will not be adjusted.

As more details come out, I will provide more information, but for Californians, I don’t think the news will be good.  Whether you like Obama and think he is doing what is needed to solve the problems Bush started, or think the Democrats are taking this opportunity to take the country in a socialistic direction, the one thing that is very simple to understand is that the Democrats are in power, and like all politicians, they want to stay in power.  It is much more to their advantage to point the mortgage money into states that are boarderline Democrat so they can claim to be solving problems and pick up more votes where it counts.  There is not a large need for Democrats to help California because the state is as likely to vote Republican as Texas is to vote Democrat.  Not that it is good or bad, but as the party in power, the Democrats are going to try and keep that power by influencing borderline states.  California is not a borderline state, so I don’t anticipate the rules being writen to help us out.
I hope I am wrong, but we won’t know for sure until March 4 when the definitive rules come out.

Mortgage Foregiveness – May Work in More Situations

I spent several hours Friday on the phone with the IRS and reading through various sections of the Internal Revenue Code and think that I may have found a loophole for people who need to do a short sale or are being foreclosed on a rental property that used to be their primary residence.
Before I go into details let me once again state that I am NOT AN ACCOUNTANT or TAX LAWYER.  Please, use the information I will provide below and do your own research or hand it to your accountant to research.  DO NOT DEPEND ON THIS TO DO YOUR TAXES or SET YOUR FINANCIAL PLAN.

On Dec. 20, 2007, President Bush signed H.R. 3648, the Mortgage Foregiveness Debt Relief Act of 2007.  There are two portions of this law which are important for this discussion:

Section2.(a) which modifies Paragraph 1 of section 108(a) of the Internal Revenue Code of 1986 by adding subparagraph (E) “the indebtedness discharged is qualified principal residence indebtedness which is discharged before January 1, 2010.”

and

Section 2.(b) which adds, among other things, to the end of Section 108 of the Code section h of which paragraph 2 reads, “(2) QUALIFIED PRINCIPAL RESIDENCE INDEBTEDNESS. – For the purposes of this section, the term ‘qualified principal residence indebtedness’ means acquisition indebtedness (within the meaning of section 163(h)(3)(B), …”

The result of both these paragraphs are well known.  The first says that if your bank receives less money than you owe them during either the sale or foreclosure of your home, while the bank will still send you a 1099 for the “debt relief gain” (the amount you did not pay back), the Federal Government will not tax you on that gain if the sale or foreclosure is completed before January 1, 2010.   The second says that this holeds for Acquisition Indebtedness (the loan you took out to purchase your home).
There are two points to dig for a little deeper:  What if you re-financed your home, and what if it was your primary but is not any longer (you moved out prior to the sale)?

To look at the question of re-financed loans, I looked at section 163(h)(3)(B) which is below:

(B) Acquisition indebtedness

(i) In general The term “acquisition indebtedness” means any indebtedness which—

(I) is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and 

(II) is secured by such residence.

 Such term also includes any indebtedness secured by such residence resulting from the refinancing of indebtedness meeting the requirements of the preceding sentence (or this sentence); but only to the extent the amount of the indebtedness resulting from such refinancing does not exceed the amount of the refinanced indebtedness.

 

What does it mean?
This means (once again, my opinion only) that if you have re-financed your home, you are still covered.  If you pulled money out of the home and used it to improve the home, that money is covered also.  However, if you pulled money out of the home to buy toys or take vacations, that is not covered and you will be taxed on that portion.  For example:

Purchased home for $500k with 100% financing.
Re-financed pulling out $200k.
Put $100k into the yard.
Put $100k in Enron stock which is now gone.
Sell the house and the bank gets $550k back with $700k in loans so they lose $150k.
You will get a 1099 for $150k in gain (the amount the bank lost).
You cannot write off the $100k you used for Enron stock but you can write off the $50k of the loss that was put into improving your home.
Hopefully, you can show that all the money from your re-finances went back into the home.

Now, the second question is more interesting.  What if you didn’t live in the house at the time it sold?  The reason this is important is what if you had rented out your home when you purchased your current home and then have to short sell or foreclose on your current rental (former primary).  My reason for pursing this is that if you sell a home and have a capital gain (wouldn’t that be nice), you can exclude $250k of that gain ($500k for a married couple) if you lived in the home two of the previous five years.  Can we use the same rule here?

Well, Section 2 of H.R. 3648 also adds Section 108(h)(5) to the IRS Code that reads:

(5) PRINCIPAL RESIDENCE. – For the purposes of this subsection, the term ‘principal residence’ has the same meaning as when used in section 121.

Ok, back to the revenue code looking for section 121 (I know, get a life).  There it is.  Section 121(a):

(a) EXCLUSION
Gross income shall not include gain from the sale or exchange of the property if, during the 5-year peiod ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregatin 2 years or more.

What it means:

If you rented out your previous primary residence for a period of time once you purchased your current home, and you have to do a short sale or foreclosure on that home, if you lived in it 2 of the previous 5 years (based on the close date of the sale or foreclosure transaction), the home qualifies as a primary residence and you can exclude the “debt foregiveness gain” from your taxes.  Yes!

Summary

Many of you are learning to jump straight to the end as I spell things out in great detail.  The main points here are:

• I need a hobby
• Your may be able to exclude the debt foregiveness gain on your home even if you have re-financed, but only up to the amount that the refinance was used to absorb your purchase price and add any improvements, but not any funds used for anything other than your home.
• You may be able to exclude the debt foregiveness gain on a prior primary residence if you lived in that home 2 of the previous 5 years.
• However, what I suspect, and is the case with the client I did the research for, is many people refinanced their first home and used the extra money to purchase the second home.  The extra money used to purchase the second home is not eligible for foregiveness, you will still be taxed on that portion of the debt foregiveness gain.
• This says nothing about the right of the bank to pursue you for a deficiency.  If you have refinanced your home and the bank accepts less that full payment in a sale or foreclosure, they can pursue you for the balance.  That is why if you are doing a short sale, be sure to use someone who has experience (like the guy who needs a hobby) so that they can try and negotiate with the bank to give up their deficiency rights.

How Far Have We Fallen? Part 2 – 4S Ranch

It has been about a month since I posted my analysis of downtown San Diego and spent this week looking through the numbers for 4S Ranch.  For those of you who don’t know where 4S Ranch is, it is a master planned community that consists of roughly 4,000 homes (including the nearby communites that were built a couple of years earlier, but that are similar enough that they are included).  There are a couple of reasons for looking at 4S:

• It is a new (sales started in 2002) master planned community
• Because it is newer, there are a lot of loans made since 2004 when banks were playing fast and loose with money.
• Foreclosures have been moderate, but are poised to quickly increase.
• Because it has a lot of “troubled loans”, trends seen in 4S have and will lead the San Diego market by about four to six months.
• Because of the positives in the neighborhood (Poway schools (2 elementary, 1 middle and a high school in the neighborhood), easy access to I15 and Hwy 56, numerous parks and trails, and close proximity to employers and shopping – not to mention the great weather), 4S Ranch is likely to bounce back faster than some of the other master planned communities that do not have all these positive attributes – so we will see the turnaround start in 4S before San Diego in general.

I have tracked quartery sales in 4S, every quarter since the beginning of 2005 and it makes sense to break the market into three broad categories:  Detached Single Family Homes, Detached Condominiums, Attached Condominiums (For those of you familiar with the area, detached condominiums include: Tanglewood, Summerwood, Garden Gate, Garden Walk and Amante.  Everything else is self explanatory.)  So, let’s look at each group independently.

Single Family Detached Home Sales

These homes break into four categories by square footage (Ivy Gate is broken out as its own category based on uniqueness of the homes and lots and the fact that mortgage fraud that occured in almost 1/4 of the innitial purchases skews the current foreclosure numbers).  The two smaller catgories peaked (based on price per square foot) in the second quarter of 2005.  The two categories of larger sized homes peaked a couple of quarters later.  Since their peaks, each grouping of homes has fallen between 26% and 34%.  The drop in the last year has been between 9% and 12%.

Detached Condominiums

These homes break into four sections by square footage.  The peak prices are consistently in the third quarter and prices are off between 25% and 30% since then.  In the last year however, the drop has been between 3% and 7% as these homes fell in price first as models similar to both Tanglewood and Garden Gate came on the market in Amante and Garden Walk at lower prices than the re-sales were getting.

Attached Condominiums

The attached homes did not peak until the first quarter of 2007.  That is due largely to newer product that was superior coming on the market in late 2006.  Since the peak two years ago, the condos have fallen between 17% and 22%.

Same Home Sales

There were 25 homes that sold in the fourth quarter of 2008 that had also sold in the previous three years.  Rather than list each home, I will provide a quick summary:

• 9 of the 25 homes were foreclosures and 5 were short sales.
• The largest drop from the last sale was 31% and the smallest was 5%
• The average annual drop for all the homes sold in the fourth quarter that had also sold in the previous 3 years was 9.4%.
• Of the 11 homes with the largest annualized price reduction, 10 were foreclosures or short sales (the 11th was one of the aforementioned Ivy Gate homes).

Summary

The 4S Ranch neighborhood has seen a drop of roughly 25-35% since the peak of the market in late 2005.   A large percentage of the homes that sold in the fourth quarter that had been purchased within the past 3 years sold as foreclosures or short sales.   When the banks are involved through either a short sale or a foreclosure, they price the homes lower than the general market.  This can be specifically seen in two homes that were purchased from banks by investors and flipped within 3 months.  Each was re-sold for 26% over the price paid to the bank (these were purchased using agents on the mls, not at the Trustee Sale).  Given the amount of built in profit in those two sales, one can estimate that the true drop in the market is less than the 25-35% shown by the numbers because the current numbers include a high percentage of bank properties that are being sold at less than market value (it also means there are isolated opportunities where the banks are making large mistakes that investors can profit from).

Forecast

Prices are firming here in the first quarter and should remain strong until about April thanks to the moratorium on foreclosures by Fannie Mae and other banks.  We are starting to see more foreclosure homes hit the market now as the moratorium (for most of the banks) is over.  The inventory will start to rise in late spring, which could lead to downward pressure over the summer again.  I am going to take a risk and stick to my forecast that the fourth quarter of 2009 will end up being the bottom and that starting in the third quarter there will be a nice 1-2 year window of opportunity for investors in the neighborhood.

Mortgage Modifications

Last Thursday evening I hosted a Town Hall style meeting on Mortgage Modifications.  The speakers were Mr. Ande McCarron from Harbin & McCarron and Sergio Soberanes, the Branch Manager of Wells Fargo in 4S Ranch.  The speakers and I agreed ahead of time that there would be no written material handed out as each bank is changing its requirements and it would not be to anyone’s benefit to have dated material in circulation that people are using as a guide. 

There were however, a few very good points made that bear putting down as information; with the caveat that they are applicable today, January of 2009:

To help understand the bank’s point of view, realize that in many (if not most) cases, they are the middle man.  Your loan is held by someone else (or pieces of it could have been broken up and sold to several people) and the bank is just servicing it.  So while on your side the home has gone down in value and the payments have gone up, understand that if the bank makes a modification favorable for you, they have to go to that person who is loaning you the money and explain why that person has to take less money than they were promised.  It is easy to get angry at a bank or institution, but if you start to look at the other side as a single mom whose retirement plan loaned you that money and she is depending on it put her kids through school, then you can see that there is more to it than the bank.

There were a couple of people who have 3/1, 5/1, or 7/1 ARMs that are about to start adjusting.  Sergio brought up the fact that most ARMs have a feature where you can convert them to a 30-year fixed at any time.  The new rate would be tied to Prime or LIBOR, etc.  The interesting thing is that those rates are a lot lower than when you took out your loan, so you may actually get a drop in payment while giving yourself the stability you need.   Just as important – this is not a re-finance.  You do not have to qualify.  If it was built into your loan, you still have the option.

Most loan modifications and government assistance are for primary residences only.  Investment property does not qualify (in most cases).  The government is interested in keeping people in their homes, not helping investors who made bad decisions.

We are not seeing many (if any) principle reductions.  Most of the modifications are to lower your payments by either lowering interest rates or extending the loan.  If you think success in a loan modification is reducing your principle by $200k, you are likely to be disappointed.  The investor on the other side still wants his money, but may be willing to wait a little longer for it.  However, it is important to note that you still have to be able to qualify for the new loan.  Nobody is looking to delay the inevitable.  If you really can’t afford the modified loan, the banks aren’t going to do it for you.

If you are in a situation that will require a loan modification or a short sale, do it sooner rather than later.  Your credit will start to recover after two years and for some government programs you can buy again in two years (four if you do a foreclosure).  The market is going to go down for another year or so and then level out.  If you take the credit hit now and repair your credit while you save up a down payment, you may be able to get back in at a lower level than we are today.

That’s it.  If you would like to talk about this further, feel free to call or shoot me an email.  I would be happy to put you into contact with Ande or Sergio also.  If you missed this seminar, we will probably do another one in a couple of months.

Short Sale Update

Haven’t posted in awhile.  We have been busy, actually growing the business in this market.  Most of the growth is coming in short sales (not an easy way to do it) and foreclosures (easy but a little disheartening).  We saw an interesting trend recently in that most of the banks we work with all hired large numbers of short sale negotiators.  This happened at the same time that the rumor was circulating that the banks want to slow down the foreclosure process so that “foreclosures” do not become a major election issue.  That’s great with us, but what happened next has been interesting.

The lenders in second position have increased the amount they will require in cases where they are due to be wiped out.  In other words, if a sale will generate only enough money to partially pay back the first loan and the second is due to get nothing, the second typically had been agreeing to accept $2k to process the paperwork.  Not anymore.  In one case, Countrywide insisted on receiving $8k.  This is understandable.  In cases where homes are selling for $400k – $800k, they are counting on the agents or sellers to chip in the extra $6k.  And, they only have to be right 1 out of 4 times to break even.  Plus, many sellers can dip into a credit card to cover the small amount if it means a short sale instead of a foreclosure.

The really surprising case was GMAC.  We had been negotiating a short sale since September and they were demanding 10%, or a little over $13k to settle.  The length of time it took to negotiate with the first lender and put the deal together caused us to have to sell the home 4 times!  Well, we finally got the deal approved by the first lender and all the brokers, giving GMAC their 10%.  That’s when GMAC bounced the negotiations to a different department (the first lien holder had an auction scheduled only 30 days away).  I should have realized that things were going to get interesting when the first negotiator in the new department insisted on being called “Mr. Trimble”.  Well, after Mr. Trimble lost several faxes (and the ability to answer his phone), we were assigned another negotiator (to rename nameless to protect the knucklehead – and hopefully our deal) who said that even though GMAC had commited to accepting 10%, if he didn’t get $40k, he was going to refuse the deal which would a) force a foreclosure and b) cost his company $13,700.  Now, I don’t mind someone negotiating hard, but when you negotiate and make a commitment that everyone else works to meet, getting you what you want (at the expense of 4 months of everyone else’s work) and then welch on your deal, that’s unethical and I told him so (along with a few choice f- bombs.)

Then he backpeddeled and said it was a “counter offer” and we should give him our counter.  I countered with $5k  -which he didn’t think was funny.  Eventually he came back and said his final position is $19k.  His reasoning is that the sellers (who divorced and moved out of state) are paying all their bills except the mortgage (makes sense to me since that is the one they can’t afford).  So, knucklehead with GMAC is willing to blow up a deal to make his company 15% on a loan the should not have issued instead of 10% which took 4 months to get them; all while trying to keep the foreclosure crises from being a major election issue.

I thought my 2 year old was challenging.

Short Sale Primer – Part 3

In this post, I will look at the advantages and disadvantages to a homeowner using a short sale.

A seller will have to consider a short sale when, for any reason, they need to sell their home and will not be able to fully pay off the mortgages with the proceeds from the sale. If this is your situation, you have a couple of options in addition to the short sale:

• Bring in extra money at close of escrow to cover the negative. This makes a lot of sense if you a) have the money and b) want to preserve your credit so you can buy a home in the near future.
• Let your home go back to the bank in a foreclosure.
• Negotiate with the lender to accept a short sale (see Part 2).

By far the best option if you can do it, is to bring in extra money at escrow. This can obviously be expensive, but can save your credit. If you do not have the cash, but have extra income that you can put towards a loan, the bank may be willing to take an unsecured loan for the balance you owe.

If you chose the foreclosure route, not only will it be hard to purchase a home for a few years, but if you do buy a home, your interest rate will be higher. In addition, with a foreclosure on your record, your interest rate will be higher on car loans and credit cards.

With a short sale, you loan will usually show as “settled” on your credit report. This is not as bad as a foreclosure because it shows you did not completely abandon your responsiblity, but tried to do the best you could. However, in talking with several banks and lenders, nobody can quantify the difference between a “foreclosed” and a “settled” on a credit score because the scoring system is closely guarded and the exact methods of scoring are not known.

An additional issue to consider is the tax consequence. Under current tax law, owners who do either a foreclosure or a short sale are liable for taxes on the amount of the loan that was not repayed. (The easiest way to understand this is if you re-financed your home and took out $100,000 which you used to buy a very nice car, you took that money out of your home tax free. If then you sold you home and did not pay back the $100,000, you would have purchased your car with tax free money.) This assumes you have re-financed. If the loans on the property are purchase money loans (the loan you took out to buy the home), the lender takes the property as payment in full and there may not be a tax issue. While this law makes sense in the above situation, it also punishes individuals and families that have fallen on hard times. With the rising number of short sales and foreclosures, Congress is currently working on a bill that will eliminate (in most cases) the tax on debt foregiveness in a short sale or foreclosure. However, if you are thinking of a short sale or foreclosure, please do not plan on the debt being forgiven until and if the bill is passed and signed into law.

Short Sale Primer – Part 2

This is Part 2 of my series on short sales. In this article, I will talk about what you need to get your short sale approved.
First of all, let me say that if you are going to need to do a short sale to sell your home, make sure you have an experienced agent helping you. Most buyer’s agents will not show short sale properties for several reasons:

1. The approval process can take 4-6 weeks during which buyer’s can get frustrated and move on.
2. The buyer’s agent has no control over the process as the seller’s agent handles the bank negotiations which can be very tricky.
3. The bank will most likely require the agents to take a commission reduction.

For the reasons above, most agents strongly resist showing short sale properties. To increase your chances of success, be sure to hire an agent with short sale experience.
Once you have made the decision to sell you house using a short sale, you will need to prepare a packet of information for the bank. Each bank has different requirements, but the following is a list of what the bank is most likely to ask for:
A financial worksheet that will have questions about your income, expenses, other loans, property tax situation, and assets.

• Copies of 2 most recent bank statements.
• Copies of 2 most recent paycheck stubs.
• Copies of 2 most recent tax returns.
• Copy of listing agreeement.
• Copy of sales agreement.
• Buyer’s Pre Approval letter.
• Closing estimate (HUD1).
• Copy of payoff statements from all other lenders on the property
  Hardship letter explaining why you can no longer make payments on this loan and need to sell.

Basically, the bank is trying to determine if their best option is to accept your short sale, to reject it and hope you keep making payments, or to reject it and foreclose on the property.
In the next article, I will focus on the plusses and minusses of a short sale to the seller.