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 Question: What are the Tax implications when a lender forgives debt in a foreclosure or short sale?

Answer: The short answer – Ask an accountant! The long answer is that the forgiven debt may or may not be taxable. Normally, debt that is forgiven or cancelled by a lender must be included as income on a tax return. But the Mortgage Forgiveness Debt Relief Act allows owners to exclude certain cancelled debt on their principal residence from income. It only applies to “qualified principal residences,” and the law expires at the end of 2012. So, if the bank forecloses or agrees to a short sale and forgives debt, and the owner lives in the home as his principle residence, the IRS suggests that the debt will likely not be taxable. For more information, go to the IRS website or IRS Publication 4681.
 

Question: Why are some banks taking so long to approve Short Sales?

Answer: Lenders are completely overwhelmed and understaffed. The foreclosure crisis struck quickly and grew at a staggering pace – too fast for lenders to keep up. There were nearly 2 MILLION foreclosure filings in the first half of 2009 alone. A large lender may have a few hundred loss mitigators. Dane County saw over 1,400 foreclosures in 2009. That is one relatively small county out of thousands nationwide. Lenders simply can’t keep up. At the same time, they can’t keep up with defaults and late payments. It is taking lenders longer than ever to deal with customers in default, start the foreclosure process, and push the foreclosures to completion.

Question: If a Realtor hires a third-party negotiator, can the Agent be held liable for that negotiator’s actions?

Answer: Probably. Third-party negotiators often charge their fee from the agent’s commission. Some go further and contract only with the agent for their services. In this case, the negotiator is essentially a sub-agent of the Realtor and the Realtor may very well be liable for the negotiator’s actions. This is a question for the Realtor’s broker or legal counsel.

Question: Are agents allowed to hold offers, if the bank hasn’t looked at them yet, and play offers against each other until the bank examines the offers?

 Answer: An agent can delay submission of an accepted offer, but doing so is not likely in the client’s best interest. By delaying submission, the Agent would be delaying initiation of the short sale process. In addition, a seller cannot accept multiple primary offers.  Only one offer can be accepted and any other offers would be in secondary position. Thus, there should be little reason to delay submission. There is some disagreement as to whether agents should submit secondary offers.  Many experienced agents suggest submitting only one offer and suggest that submitting multiple offers only slows the process.  Other agents suggest that the secondary offer, if better, improves your chances on two levels: one, it is a better offer, and it also shows sincere marketing efforts.   

Question: Short Sale are high risk, take incredible effort and long hours, often result in reduced commission, and often involve angry sellers. Why would any sane Realtor touch one of these?


 Answer:
Short Sales, Foreclosures and REOs comprise anywhere from 20-30% of the sales market in Dane County and will continue to be a large part of the market for quite some time to come. Distressed properties are hard, but they are also a fantastic opportunity.  Realtors who commit to this are having their best years ever.  Those agents are careful about which short sales they will take and avoid those that will just be impossible to close.  And they develop systems and shortcuts that make the overwhelming work manageable.  Agents can do more than survive, while truly helping sellers and buyers. The key is to stay educated, develop efficient systems, and work with a team of experts. The most important member of your team is a nimble, experienced title company, like Homestead Title.

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An Ohio man, facing foreclosure, took matters into his own hands.

Terry Hoskins said he’d received an offer to purchase the home for $170,000 — enough to pay off the house — which was in foreclosure and subject to multiple Federal Tax Liens. The bank refused, saying they could get more from selling it in foreclosure.

Hoskins refused to give in, telling the bank “I’ll tear it down before I let you take it.” And that’s exactly what Hoskins did.

The Moscow, Ohio man used a bulldozer to level the home he had built years earlier.

“As far as what the bank is going to get,” Hoskins declared, “I plan on giving them back what was on this hill exactly (as) it was.”

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Short Sale Investors are flooding the real estate market, purporting to help distressed home owners in the midst of foreclosure. These investors usually claim to be experts in “short sales” — sales where the bank holding the mortgage agrees to accept less than the full amount due. Some are, many are not, having no training and only the expertise of having lived through their own financial crisis.

How Investor Transactions Typically Work

The investor signs an offer to purchases the house at a discount and tries to convince the mortgage holder (the seller’s bank) to accept a short payoff. At the same time, the investor searches for a new buyer to purchase the home at a marked up price. In a typical example:

The investor will buy the house from the distressed seller for $100,000 and turn around and sell it to the new buyer for $125,000. These two transactions will close on the same day. This is known as back-to-back closings.

What is the Catch?

The problem is that this system may not help sellers and often hurts them. Sellers who use this Investor-Flip model rather than a typical sale with a Realtor, are often left with:

  • A greatly reduced pool of potential buyers
  • A larger deficiency (the debt still left owing to the bank)
  • Increased debts from other liens
  • An increased likelihood of foreclosure

Lets discuss each of these potential problems.

A Reduced Pool of Potential Buyers
The majority of lenders have a “seasoning” requirement. Seasoning refers to the length of time the seller owned the property before the purchase. Lenders want to make sure that the seller owned the property for a sufficiently long period of time: usually 60-90 days. The Investor buys the property and resells it on the same day, thus owning the property for only a matter of hours. There is no seasoning. This means that the distressed seller is limited to finding buyers with unique lenders or buyers willing to pay cash! Thus, by choosing “an Investor,” the seller most in need of available buyers has drastically limited the pool of available buyers.

A Larger Deficiency
A deficiency is any amount of money still owing after the mortgage is released. A mortgage is only a security interest against the property. When it is released or satisfied, it releases the property but it may not release the debt. Many banks will release the property but reserve a deficiency — the right to seek future repayment of any left over debt. Investors do not hide the fact that they will offer the lowest possible purchase price. After all, they need to make a profit too. In many cases, however, each dollar of profit to the investor is a corresponding extra dollar of deficiency.

Increased Debts
In most short sale closings, there is more than one debt to be paid. Often a seller has multiple mortgages, judgments, and other secured debts against the property. Investor transactions reduce the purchase price and thereby increase the likelihood of these debts remaining due.

Increased Likelihood of Foreclosure
Investors market that they can save distressed seller’s from foreclosure. Many do just the opposite. Because the seasoning and disclosure rules limit the pool of buyers and many foreclosing lenders prohibit investor-flip transactions, the odds of a foreclosure increase. Indeed, a typical short sale payoff contains the following requirement: This transaction may not inovolve any third party who received a deed from the seller at, prior to, or after settlement, and the purchase contract may not be assigned. This prohibits investor transactions. A distressed seller, working with an investor, may find out at the last moment that they have wasted their time. And when they do, it may be too late to avert foreclosure.

Finally, these double closings are simply much more complicated and, therefore, more likely to fail. Both the seller’s old lender and the new buyer’s lender need to be given full disclosure and approve of the structure of the deal. The property must have a low enough appraisal to satisfy the seller’s lender and a high enough appraisal to satisfy the buyer’s lender. And the closing instructions and payoff letters must not prohibit this kind of transaction. While this is all possible, it certainly is far more difficult than the traditional short sale.

Why Do Investors Get Involved?

The obvious reason is cash. While investor transactions are difficult and may not close, those that do close often net the Investor $15,000 – $30,000 with little or no overhead or risk. In addition, many investors will consider purchasing the property at the sheriff’s sale. Their involvement ties up the property and prohibits most, if not all, buyers from having a chance of purchasing. Then, the Investor can get an even better deal at the Sheriff’s auction.

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