No one will deny that the market over the past five years has been a real roller coaster ride. No one will deny that either they, or someone they know, has been personally affected by the backlash. But many homeowners in distress are in denial about what is to come and may become additional victims as a result of hanging on to false hope.
If you have been denied a loan mod due to the inability to pay and are on the fence about whether to sell your home in a short sale or just “walk away” via foreclosure, here is what you need to know and take into account as you consider.
SB 458 (No Deficiency Law – California Residents Only) – This state law, modified in 2011 to include investment properties and second homes, states that once a lender approves a short sale, they cannot pursue you for the difference (deficiency). It’s that simple.
How to assess this as a homeowner in distress? If you foreclose, the second is wiped out, but the first (the larger of the two amounts) can come after you for the difference and penalties, interest, and attorney fees. Typically to resolve this, people are forced into bankruptcy. The cost of filing bankruptcy alone, for someone already experiencing financial difficulty is not practical. If you don’t qualify for Chapter 7 and are compelled to file chapter 13, most people fall out of the repayment agreement and are right back where they started, still overwhelmed with huge debt.
By choosing to sell your home in a short sale, once the lender agrees to the lower sale price, they cannot come after you for the difference. If you have two or more lien holders and they agree as well, they too are wiped out after the short sale.
Mortgage Debt Forgiveness with the IRS – If your lender allows your short sale, normally there are tax implications. For example, if you purchased a home in 2004 for $350,000, sold it in a short sale for $125,000 (what it was worth – market value) in 2011, your lender would send you a 1099-C for the difference, $225,000, and the IRS would view that as income earned for the year and swiftly ask you to pay taxes on it.
As a result of Mortgage Forgiveness Debt Relief Act of 2007 (HR. 3648) enacted by then U.S. President George W. Bush, if you are a homeowner whose mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you may be able to claim special tax relief and exclude the debt forgiven from your income. Read “Ten Facts About Mortgage Debt Forgiveness” directly from the IRS website.
This act expires on December 31, 2012. It is likely that President Obama will extend this act. President Obama released his budget proposal for 2013 on Monday, February 13th, and is calling for an extension of this Act through January 1, 2015 (see link, and chart on page 218, Under Tax Proposals, Tax Cuts: Extend exclusion from income for cancellation of certain home mortgage debt). However, we won’t know until after the election, in November, assuming he is re-elected, one month before the act expires.
Keep this in mind – It takes on average, six months to complete a short sale; and you can’t file bankruptcy on taxes.
How to assess this as a homeowner in distress? Just do the math. You would be taking a huge risk placing all bets on Obama being re-elected, keeping his proposed budget promise, and getting the bipartisan support needed in order to pass it. Likely to happen, but still very risky.
Rather than being placed in a position wher you need to make a decision under pressure, listing the home sooner will give you the peace of mind and time that you need to make better decisions for you and your family, such as finding a place to live and starting on your plan to recover sooner and buy again!
Low Inventory and The Law of Supply & Demand – Tried making an offer on a property within Sacramento County and the surrounding areas lately? If you have, chances are, you have experienced a multiple offer situation and got bumped out or looked over for the next highest and best offer.
Due to extremely low housing prices, record low interest rates, and rising rents, currently, there are more buyers than there are sellers. This is the recipe to real estate investment success – an investor’s dream.
Some areas are even noticing an increase in property values as a result of this growing trend. Pockets of more stable neighborhoods with little to no new development and once booming neighborhoods where the developers were throwing in granite counters, cherry wood cabinets, and professionally manicured backyards are flying off the MLS inventory lists faster than Wendy’s having your order ready at the next window.
Almost any home can sell in this market. Investors in this climate tend to be very savvy, know what they want, and have the money to back it up. Your chances increase if your home is in an area of high desirability, near move-in ready, showable, and priced right.
How to assess this as a homeowner in distress? If you were wondering if your home will sell, wonder no more. There are plenty of websites with info on how to prepare your home to sell. Enlisting the help of an experienced real estate professional, someone closing deals actively on a monthly basis, will help you tremendously. Be open to your agents recommendations with the understanding that your goal is to get from under the debt as quickly as possible and with dignity.
Also, because this is a short sale, don’t have expectations from your real estate professional of a traditional sale. For many agents who specialize in short sales, they have processes in place and a team of individuals to help them move your property swiftly through the short sale process, swiftly to escrow, and swiftly to closing. It may not be a warm and fuzzy experience. It may look more like “please get me all of these items by noon tomorrow”, and you need to comply. Remember, your goal is to get it sold, get rid of the debt, and recover sooner.
Federal Settlement of Foreclosure Misconduct – On February 9th, 2012 the United States Justice Department released the details of a $25 billion dollar settlement they reached with 5 major banks:
The settlement occurred because the banks were accused of widespread use of “Robo-signing”.
Robo-signing is a practice employed by banks to automate the processing and approval of foreclosure proceedings against homeowners. In many cases, the banks were discovered to have processed thousands of foreclosures in a single day, all signed by one person.
The settlement presents a unique opportunity for homeowners who are in danger of losing their home. The reality is, the banks would rather explore other options than foreclosure and this settlement gives them both the motivation as well as the funding to explore them.
How to assess this as a homeowner in distress? Under the settlement, lenders are now more inclined to allow your short sale and offer additional incentives to help you avoid foreclosure.
Also remember, there is never a fee to you for the short sale. It is assumed, if you can prove hardship, that you have no funds to contribute to the sale. Your lender will make the decision as to how the proceeds of the sale will be distributed.
“Short Sale Lenders shall collectively agree to reduce their respective loan balances by an amount sufficient to permit the proceeds from the sale of the Property to pay the existing balances on loans secured by the Property, real property taxes, brokerage commissions, closing costs, and other monetary obligations the Agreement requires Seller to pay at Close Of Escrow (including, but not limited to, escrow charges, title charges, documentary transfer taxes, prorations, retrofit costs, Homeowners Association Fees and Repairs) without requiring Seller to place any funds into escrow or have any continuing obligation to Short Sale Lenders.” (from Winform Doc SSA – Short Sale Addendum).
For a more borrower/seller specific assessment of your personal situation, please consult with either a real estate attorney (I personally recommend the BPE Law Group, tell them The Short Sale Lady, Keisha Mathews, recommended you), a CPA, or contact me directly for a free consultation, (916) 370-1803, or at firstname.lastname@example.org via email.