short sales

Good News for Short Sale Sellers… and How the Fiscall Cliff provisions affect you, your home and your taxes

On January 1 both the Senate and House passed H.R. 8, legislation to avert the “fiscal cliff.” The bill will be signed shortly by President Barack Obama. Below are a summary of real estate related provisions in the bill:

REAL ESTATE EXTENDERS:

  • Mortgage Cancellation Relief is extended for one year to January 1, 2014 (This is huge.  Many of you toward the end of the year did not consider “short sale”ing your home to reduce your financial burdons because you were concerned about income tax consequences.  Please talk to your tax advisor to have him firm that the coast is clear until the end of 2013.  With an abundance of buyers on the market, I can help you set up a quick and virtually seamless short sale transaction that retains privacy and peace of mind.)
  • Deduction for Mortgage Insurance Premiums for filers making below $110,000 is extended through 2013 and made retroactive to cover 2012
  • Leasehold Improvements: 15 year straight-line cost recovery for qualified leasehold improvements on commercial properties is extended through 2013 and made retroactive to cover 2012.
  • Energy Efficiency Tax Credit: The 10% tax credit (up to $500) for homeowners for energy improvements to existing homes is extended through 2013 and made retroactive to cover 2012.

Permanent Repeal of Pease Limitations for 99% of Taxpayers
Under the agreement so called “Pease Limitations” that reduce the value of itemized deductions are permanently repealed for most taxpayers but will be reinstituted for high income filers. These limitations will only apply to individuals earning more than $250,000 and joint filers earning above $300,000. These thresholds have been increased and are indexed for inflation and will rise over time. Under the formula, the amount of adjusted gross income above the threshold is multiplied by 3%. That amount is then used to reduce the total value of the filer’s itemized deductions. The total amount of reduction cannot exceed 80% of the filer’s itemized deductions.

These limits were first enacted in 1990 (named for the Ohio Congressman Don Pease who came up with the idea) and continued throughout the Clinton years. They were gradually phased out as a result of the 2001 tax cuts and were completely eliminated in 2010-2012. Had we gone over the fiscal cliff, Pease limitations would have been reinstituted on all filers starting at $174,450 of adjusted gross income.

Capital Gains

Capital Gains rate stays at 15% for those the top rate of $400,000 individual and $450,000 joint return. After that, any gains above those amounts will be taxed at 20%. The 250/500k exclusion for sale of principle residence remains in place.  (Chances are you fall into the 15% category, so if you need to sell an investment property this year, the extra 5% capital gains tax won’t affect you.)

Estate Tax
The first $5 million dollars in individual estates and $10 million for family estates are now exempted from the estate tax. After that the rate will be 40 percent, up from 35 percent. The exemption amounts are indexed for inflation.

The hottest segment of the Orange County housing market is also plagued by ridiculous pricing

Short Sale PricingThe expected market time for short sales is down to 13 days.

Buyers are still climbing into the cars of REALTORS® for the first time with high hopes of getting a “deal.”  As they experience the caravan of cars touring the few homes that pop onto the market in a given week and have to wait at the door of a home to allow the buyer in front of them to finish looking around, buyers are quickly brought up to speed: they are NOT in charge.  It is no longer a buyer’s market, quite the opposite.  Unbelievable competition, multiple offers, offers at or above the asking price, this is the new Orange County housing market reality, a seller’s market. 

Only 6% of all home sales in September were foreclosures, lows not seen since the beginning of the onslaught of foreclosed homes back in 2007.  The number of foreclosures coming on the market is dwindling.  Currently there are only 138 on the active market today.  There just are not enough foreclosures to go around.  For September, the average foreclosure sold for 2% above the asking price.  Below $500,000, the average sold 3% above the list price.  This segment of the housing market is as hot as molten lava.

It is no wonder that buyers looking for a “deal” have veered their attention to short sales.  Even though the short sale process still can take months before closing, there is no other segment of the housing market to find a deal, given the anemic inventory level and pent up buyer demand. There are only 425 short sales on the active market today.  The short sale inventory has been dropping like a rock, faster than any other segment of the OC housing market.  It has dropped 43% since July compared to 23% for the market as a whole and 25% for foreclosures.

For September, short sales, on average, sold 2% below their asking price for all price ranges and at a 1% reduction for homes priced below $500,000.  Incredibly, the expected market time for short sales is a mere 13 days.  Comparatively, the foreclosure inventory is at 21 days and the entire market is at 39 days.  Short sales are the hottest segment of the Orange County housing market.

Given that there are barely 425 on the market and 969 new pending sales within the last month, buyers are tripping over each other in lining up to buy them.  When supply is low and demand is high, these homes should be selling for very close to their market value and should not be subject to major discounting.  It does not matter that short sales take an unknown lengthy amount of time to close due to lender approval requirements and the complexity in closing them.  There simply are not enough short sales to satiate the ferocious appetite of buyers eager to be the winning bidder of a home.

If short sales are the hottest segment, then why are they selling below their asking price?  Short sales are selling for less than their asking prices because sellers are not emotionally tied to the price.  A seller with equity cares about every dollar that they walk away with; whereas, the short sale seller is attempting to market their home for less than what is owed.  They are not going to hold out for an additional $5,000 when they are still going to walk away with nothing.  On the other hand, an additional $5,000 to the homeowner with equity is an extra $5,000 in their bank account.  The short sale seller is not motivated by the amount of money they will net; they are motivated to get out from under their upside down home.

Memo to all short sale sellers:  do the housing market a big favor in helping it heal faster, price your home according to the fair market value.  In the end, you will still achieve your objective in selling, but you will also help your neighbors in strengthening the value of their homes as well.

 Many REALTORS® used to price a short sale listing below the market value, knowing that the chance of the initial buyer sticking with the long process was slim.  It would then require a new buyer to enter the fray several months down the road.  When values were dropping, if they submitted too high of a value initially, inserting a new buyer at that higher value months later proved to be impossible.  The banks expected a similarly priced offer to be resubmitted, an impossible fete given that values had dropped during the lengthy process.  To circumvent not being able to sell down the road, short sales were often sold well below their market value to insure successfully closing even with a replacement buyer.

As values are now rising and demand is scorching hot, it is time to sell short sales very close to their fair market value and be a part of the housing market recovery.  Neighborhoods are counting on short sale homes to do the right thing.

How long until I can buy again after a short sale or foreclosure?

How long until I can buy again after a short sale or foreclosure?  This question comes up a lot.  The answer depends on the type of defaulted loan and circumstances.  See the chart and commentary below.

Right now, I think a more important question is, “If I do a short sale on my home in California, will I have any tax obligations on the forgiven amount?”  The answer is NO if we start before July.  The mortgage tax forgiveness act is due to sunset at the end of the year, so there is still time get started and end the year with a Short Sale approval and no tax consequences.

CONVENTIONAL LOAN    
Reason Extenuating
Circumstances
Financial
Management
Bankruptcy 2 years 4 years
Multiple Bankruptcies 3 years 5 years
Foreclosure 3 years 7 years
Deed in Lieu 2 years 4 years
Short Sale 2 years 4 years
FHA LOAN    
Reason Extenuating
Circumstances
Financial
Management
Bankruptcy 12 months 2 years
Foreclosure/
Deed in Lieu
3 years 3 years
Short Sale* 3 years 3 years

* New FHA financing is allowed, before the 3 year waiting period, if borrowers’ were current on their mortgage and other installment debts at the time of the short sale of their previously owned property and the proceeds from the short sale serve as payment in full.

Borrowers will not be eligible for new FHA financing before the 3 year time period if they took advantage of declining market conditions and purchased at a reduced price a similar or superior property within a reasonable commuting distance.

Per Fannie Mae, Extenuating Circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim.  Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).

Individual lenders will usually have their own credit guidelines as well when the mortgage that was attached to the adverse credit was their own, i.e., if mortgage attached to a property that was foreclosed upon was Wells Fargo, borrower would need to wait 7 years to get a new Wells loan.

Borrowers must also exhibit improved credit history since the adverse credit incident, for all situations.

* New FHA financing is allowed, before the 3 year waiting period, if borrowers’ were current on their mortgage and other installment debts at the time of the short sale of their previously owned property and the proceeds from the short sale serve as payment in full.

 Borrowers will not be eligible for new FHA financing before the 3 year time period if they took advantage of declining market conditions and purchased at a reduced price a similar or superior property within a reasonable commuting distance.

Per Fannie Mae, Extenuating Circumstances are nonrecurring events that are beyond the borrower’s control that result in a sudden, significant, and prolonged reduction in income or a catastrophic increase in financial obligations.

If a borrower claims that derogatory information is the result of extenuating circumstances, the lender must substantiate the borrower’s claim.  Examples of documentation that can be used to support extenuating circumstances include documents that confirm the event (such as a copy of a divorce decree, medical reports or bills, notice of job layoff, job severance papers, etc.) and documents that illustrate factors that contributed to the borrower’s inability to resolve the problems that resulted from the event (such as a copy of insurance papers or claim settlements, property listing agreements, lease agreements, tax returns (covering the periods prior to, during, and after a loss of employment), etc.).

Individual lenders will usually have their own credit guidelines as well when the mortgage that was attached to the adverse credit was their own, i.e., if mortgage attached to a property that was foreclosed upon was Wells Fargo, borrower would need to wait 7 years to get a new Wells loan.

Borrowers must also exhibit improved credit history since the adverse credit incident, for all situations.

1,557 sq. ft. home for $325,000? Last Minute Grand Opening Open House in Lake Forest. This place is to die for…and a steal!

GRAND OPENING SATURDAY FROM 12-4.  LUNCH AT NOON.

Just a few days ago I got a verbal bank approval on this fantastic short sale townhome in Lake Forest. At $325,000, it is 10’s of 1,000’s below market.  This morning when I woke up and looked at the beautiful interior photos, I decided to try to pull off a GRAND OPENING OPEN HOUSE on Saturday, May 28th with one day notice.   I designed and dropped over 300 flyers around the community by 3pm (with the help of Gary and friend, Catherine) and just completed the 4-color property brochure and pricing scenario chart.  My lender, Jeff will be there with me at noon to welcome neighbors, friend and buyers with a light lunch.  I hope you can make it as this will be the one and only day to get in the home.  There will certainly be offers at the end of the h0liday weekend.  Here is the scoop on the home:

You will love the setting of this large 3-bedroom, 2-1/2 bath, 1,557 SF, 2-car direct access garage townhome.  Feels like SFR! Gourmet kitchen has stainless appliances and nook.  Formal dining area off living room. Kitchen and Living room open to expansive backyard with patio, sparkling fountain and terraced landscaping. One of the biggest yards in the community! Just steps to Montbury and Pittsford Parks and the desirable Lake Forest Elementary School.   Upgrades include neutral patterned Berber carpeting, Cherrywood floors, Decorator paint & more. Romantic living room fireplace. 2 large masters with walk-in closets. Third bedroom/loft currently used as child’s bedroom makes perfect home office.

Your family & pets will love the park-like setting of this community adjacent to the beautiful residences of Montbury.   Community offers pools, spas and tennis.  Short stroll to shopping, Starbucks and local eateries. It just doesn’t get any better!

22014 Summit Hill Drive, Lake Forest – Up from Trabuco and El Toro off of Aliso Hills.

Many banks moving at a snail’s pace on short sales

Banks are dragging their feet when considering so-called short sales, an increasingly prevalent type of real estate transaction in which lenders allow homes to be sold for less than what is owed on them, according to a survey of California real estate agents.

Fewer than three of five short sales close in California, illustrating the complexity and difficulty of navigating lenders’ and servicers’ short sale procedures, according to C.A.R.’s survey, which gauged REALTORS®’ experience in working with short sale transactions – transactions in which the lender or lenders agree to accept less than the mortgage amount owed by the current homeowner.

  • Although not every homeowner or mortgage is eligible for a short sale, those who are able to finalize a short sale avoid a foreclosure on their credit record and can move on with their lives.
  • Banks are taking much longer to respond to short sale offers than those specified in government guidelines for banks.  Nearly two-thirds of survey respondents said banks took longer than 60 days to respond to short sale offers.  Often, this results in buyers walking away from the transaction.
  • “Increasing the number of successful short sale transactions is one important way we can help California families avoid foreclosure and move our economy closer to recovery,” said C.A.R. President Beth L. Peerce.
  • The California Association of Realtors  is asking government agencies, such as the U.S. Dept. of the Treasury, to force banks to complete all short sales following HAFA guidelines and to comply with the program’s time frames.

If you are considering short sale relief for your household, give me a call and I will let you know your bank’s recent track record.

CALIFORNIA LAW RESTRICTS LENDER’S ABILITY TO COLLECT DEFICIENCY JUDGMENT AFTER SHORT SALE

Effective January 1, 2011, California first trust deed mortgage holders who consent to a short sale of residential property (up to four units) are prohibited from seeking a deficiency judgment for the difference between the mortgage balance and the proceeds realized through the sale.

This new law was brought about through Senate Bill 931 (Ducheny) which was passed by the legislature in August and approved by the Governor September 30, 2010.

According to the author, the purpose of the legislation was “primarily to protect distressed homeowners who have non-purchase money recourse loans on residential property (1-4 units), when the fair market value of the subject property is less than the balance of the first deed of trust.  The legislation will make sure that these homeowners do not incur a higher dollar amount of liability after a short sale than they would otherwise have after a foreclosure sale.” 

The author noted that, under California law, a variety of anti-deficiency protections applied to homes that were sold through foreclosure, but that there were no similar protections available when a short sale occurred.  Ironically, this could provide a disincentive to completing a short sale.  In some cases it would be financially more sensible to the borrower to allow a home to go to foreclosure and to avoid any deficiency judgment.

But that, in the author’s point of view, made for bad public policy.  It was, he argued, “favorable to have a home sold to a new owner who will upkeep the property as opposed to potentially reverting to the lender at a foreclosure sale.”

The provisions of SB 931 do not apply to junior liens.  So it is still possible for a 2nd or 3rd mortgage holder to consent to a short sale by releasing its lien, but nonetheless to proceed against the seller for the deficiency between the balance of the note and whatever proceeds the lien holder received from the short sale.

Additionally, SB 931 does allow a 1st trust deed holder to pursue a deficiency after a short sale if the borrower “commits either fraud with respect to the sale of, or waste with respect to, the real property that secures the first deed of trust…”

SB 951 received no registered opposition during the legislative process.  However, if similar legislation is introduced with respect to junior liens, it is expected that institutional lenders will be opposed.

This article was written by my associate, Bob Hunt .  He is a Director of the California Association of Realtors® , past longterm OCAR Director and is the author of Real Estate the Ethical Way.  His email address is scbhunt@aol.com

September Data Shows Foreclosure Timelines Extending; Extreme Delinquencies on the Rise

The current real estate market is really a mixed bag.  Every day I see first-hand the pain and frustration of homeowners losing their jobs …and then their homes.  Their crises are personal and devastating.  At the same time buyers who thought they would never have a chance at home-ownership are looking at a market with extremely affordable home prices and record low interest rates.  If one has good credit and patience to deal with the short-sale bank’s slow pace and the purchase money lender’s many ‘hoops’, this is an amazing time to buy a home.

It is sad to know that one family’s opportunity stems from another family’s hardship.  Shortsales and Foreclosures abound. Following is today’s report on what is happening in the foreclosure market:

The September Mortgage Monitor report released by Lender Processing Services, Inc. (NYSE: LPS) shows that foreclosure timelines continue to increase, with the average number of days delinquent in five judicial foreclosure states (New York, Florida, New Jersey, Hawaii and Maine) exceeding 500 days. At the same time, the foreclosure timeline extension has been significantly more pronounced in non-judicial states (California is a non-judicial state).

Approximately 275,000 loans started foreclosure during the month and, while delinquencies in September dropped 7.8 percent as compared to a year ago, in the context of “normal market conditions,” delinquencies remain at historically high levels and foreclosure inventories are only slightly below all-time highs. More than 4.3 million loans are 90 or more days delinquent or in foreclosure. Read the rest of the article:
http://rismedia.com/lowes/8355/10950″>http://rismedia.com/lowes/8355/10950</a>

What kind of homeowners choose to default?

Underwater homeownersI know this sounds a lot like my last post, but it is different enough that it is worth reading.  More and more homeowners who are borderline hardship cases are opting to put their homes on the market so that the bank will consider the offer they receive and negotiate a short sale with them.  Here is what Kenneth Harney has to say about this:

People who walk away from their mortgages are not as calculating as you’d think, says Brent T. White. Memo to the bank: Take this underwater, money-gulping house and go ahead and wreck my credit for years to come. I’m walking away no matter what.  Why? That’s the provocative question posed by Brent T. White, a University of Arizona law professor whose academic paper on the fast-spreading “strategic default” phenomenon last year drew sharp criticism from lenders and Wall Street, who viewed him as the Pied Piper of the walk-away movement.  Read more:

http://www.latimes.com/business/la-fi-harney-20100523,0,2614547,print.story

Important information about short sales

Recently, I found an interesting article about what is happening with the housing market. The article reflects the recent change in attitudes from banks regarding short sales. Banks are now seeing that they are the way to deal with homeowners struggling with their mortgages and are finally giving them priority. Approval time can now be measured in weeks instead of months. The recovery time for the homeowner is now two years compared to five. It can be a much better solution than losing a home to foreclosure. Read on…