More Ranting and Raving on Short Sales.

I had an interesting conversation today. Seems in January I spoke with a very nice lady who, like many others out there - found herself unable to continue making her mortgage payment. I explained how a short sale works and she said she and her husband would discuss it. I followed up a couple times but she seemed to have lost interest - and I moved on to greener pastures.

Today she called my office and my cell - she needs to speak with me RIGHT AWAY. When I got back to my desk I checked at the Clerk of The Circuit Court site - she is being foreclosed upon. And received a summons. The house had been "Lis Pending" for over two months.

So I did call her, and she said there must be something I can do. I said well you really needed to try to short sell this months ago. Turns out that a neighbor of hers is a Real estate agent and she decided to list with them. They had the house listed for 500,000 (appx). I checked and a list of comparables justified a price of about....333,000!!  She says, well he never got much action and nobody made an offer. I said well why is it listed so HIGH?  She says well THAT'S what we OWE on it!!!!! And that's what my real estate agent  (her neighbor) said we have to sell it for! 

Well it's NOT a SHORT SALE when you sell it for what you OWE on it. And maybe the fact that you OWE $200,000 more than your neighbors are selling their houses for is a reason your neighbor can't seem to drum up any interest in the house!  We call it a SHORT SALE when the proceeds of the sale are going to have you "coming up SHORT" against what you owe the bank!!

For a short sale to work you need to have an offer that the lender thinks is reasonable against the current value of the house - not against what you OWE on it. If you do not have ANY offers you won't have any basis for a discussion with a loss mitigator to justify a short sale. In this case the lady's neighbor/agent told her he was unable to have a conversation with the bank - that they are "Too Hard to Get Hold of". Uhhh that's your job if you're short selling - the agent needs to keep dropping the price until you have an offer you can take to the loss mitigation dept. If you don't have an offer, you've got NOTHING the loss mitigator can talk to you about so sitting for months on the market at the current loan value is downright dumb!!  And for this poor lady what that agent did is use up all of her negotiating time ineffectively marketing the home at the wrong price.

Now, with an auction date set, all I could tell her to do was, call a lawyer and start packing! (I thought the lawyer might be able to help her at least negotiate a Deed in Lieu). Even the lawyer said, they waited too long - it's going to foreclose.

I did ask her - "How many short sales has your neighbor/agent done"? She said he told her TWO. I'd say if he left the home in the MLS for six months at the loan value - he sure as heck doesn't know how to do short sales. And here is proof positive - for that agent all he has is a listing he couldn't sell. But for his customer who was not properly served - well they face foreclosure, a severely damaged credit report for seven to ten years, lots of stress and sleepless nights.

If you needed a Thoracic surgeon and your neighbor was a veterinarian but said he had handled these would you pick a neighbor so there wouldn't be "hurt feelings"? Of course not! This process is way too complicated to leave to amateurs and hurt feelings or not - this is an area, like a doctor, a lawyer or a CPA - you pick it for competence - not because they are "nice" and live close by. Those nice neighbors can now help her pack - or just say "Tsk Tsk - what a shame" as she loses her house and her credit!  And they move on to their next sale....

- Mike W.

Good News If You SHOULD Have to Short Sell

On December 20th President Bush signed into law the Mortgage Forgiveness Tax Relief Act. The gist of this legislation is to eliminate the income tax due on the portion of debt that the bank "forgives" in a short sale, or a foreclosure or in certain instances where the bank agrees to refinance a new smaller mortgage and forgives the portion that the house has declined in value - which IS now sometimes taking place.

In my article in short selling I mentioned that one of the risks is that the bank would issue a 1099 to the borrower for the portion they did not recover in a short sale or foreclosure. Previous to this legislation that 1099 for debt forgiveness would be considered income in the eyes of the IRS and would be taxed at the borrowers tax rate.

This law would eliminate a taxable gain on borrowers who received a forgiveness of debt from a lender in a short sale. Normally, if a lender forgives the debt, to this extent the homeowner would have a taxable gain. HR 3648 would eliminate this "phantom income" on a borrower's principal residence. The law applies to all debt forgiven from Jan 1, 2007 and on.

Note though that this legislation is ONLY for a borrowers principal residence. MANY of these short sales here in Southwest Florida are for either 2nd homes or investment property and this does not offer any help in that case. You would of course want to consult with a tax professional before filing next year if this turns out to be in your future. And in Sarasota it's in a LOT of futures. I have 10 active listings right now and at least half ARE short sales or have the potential to be one if the market declines further. Below is a statement by the National Association of Realtors regarding the legislation.

By the way I can't emphasize enough - talk to a Realtor who has DONE short sales BEFORE you get in trouble missing payments on your mortgage. You need to understand your options and I note now that some banks are making "Deed in Lieu of Foreclosure" seem "easy" - they don't disclose that this is every bit as bad on your credit AS a foreclosure and in MOST cases there are better workarounds.

- Mike W.

http://www.realtor.org/press_room/news_releases/2007/president_bush_signing_mortgage_forgiveness.html