10 Common Short Sale Myths

t’s likely you’ve heard the term “short sale” thrown around quite a bit. What exactly is a short sale?

A short sale is when a bank agrees to accept less than the total amount owed on a mortgage to avoid having to foreclose on the property. This is not a new practice; banks have been doing short sales for years. Only recently, due to the current state of the housing market and economy, has this process become a part of the public consciousness.

To be eligible for a short sale you first have to qualify!

To qualify for a short sale:

• Your house must be worth less than you owe on it.
• You must be able to prove that you are the victim of a true financial hardship, such as a decrease in wages, job loss, or medical condition that has altered your ability to make the same income as when the loan was originated. Divorce, estate situations, etc… also qualify. There are some exceptions to hardship now, but for the most part the bank or investor will need to verify some type of hardship.

Now that you have a basic understanding of what a short sale is, there are some huge misconceptions when it comes to a short sale vs. a foreclosure. We take the most common myths surrounding both short sales and foreclosures and give a brief explanation. LET’S BUST SOME MYTHS!!

1.) If you let your home go to foreclosure you are done with the situation and you can walk away with a clean slate. The reality is that this couldn’t be any farther from the truth in most situations. You could end up with an IRS tax liability and still owing the bank money. Let me explain. Please keep in mind that if your property does go into foreclosure you may be liable for the difference of what is owed on the property versus what is sells for at auction, in the form of a deficiency balance! Please note this is state specific and in most states you will be liable for the shortfall, but in some states the bank may not always be able to pursue the debt. Check your state law as it varies widely from state to state.

Here is an example of how a deficiency balance works

If you owe $200,000 on the property and it sells at auction for $150,000, you could be liable for the $50,000 difference if your state law allows it.

Not only could you be liable for the difference to the bank, but in some situations you could also be liable to the IRS! Although there are exemptions (mostly for principle residences) under the Mortgage Debt Forgiveness Act, there are times when you could be taxed on both a short sale and a foreclosure, even in a principle residence situation. Since the tax code on this is a little complicated and I am not a CPA, I advise always talking to a CPA when in this situation as you are weighing your options. Hard to believe? Well, believe it or not, the IRS counts the difference between the sale and the charged off debt as a “gain” on your taxes. That’s right-you lost money and it’s counted as a gain! (I didn’t make that rule, that’s a wonderful brainchild of the IRS). Banks and the IRS can go as far as attaching your wages. Not to mention if you let your home go to foreclosure you will have that on your credit, as well.

Guess What? A short sale can alleviate your liability to the bank, in most situations. There are also exceptions to this, but in most cases banks are releasing homeowners from the deficiency balance on a short sale.

2.) There are no options to avoid foreclosure. Now more than ever, there are options to avoid foreclosure. Besides a short sale, loan modifications along with deed in lieu are also examples of the many options. In most cases (but not all) a short sale is the best option. Either way, there are more options today than there have ever been to avoid foreclosure.

3.) Banks do not want to participate in a short sale, or, it is too hard to qualify for a short sale. Banks would rather perform a short sale than a foreclosure any day. A foreclosure takes a long time and creates a huge expense for the banks; a short sale saves both time and money. In working with some of the biggest lenders and servicers in the country they have told me that on average they net 17-25% more on a short sale than on a foreclosure. A testament to this is the financial incentives now being offered by banks, and how much the entire process has recently changed to try and streamline the process for all parties. Banks more than ever welcome short sales. Qualifying for a short sale is easier than you think, you need to have a true financial hardship, or a change in your finances and your house has to be worth less than what you owe on it. Not only do consumers, but banks also now have government incentives to participate in short sales.

4.) Short sales are not that common. At this present time, short sales range from 10-50 % of sales in various markets and it is predicted that in 2012 we will have more short sales than any other year, to date. Due to economic changes in the last few years, this is something that is affecting millions of Americans. Short sales are in every market, and are not just limited to any particular income class. This has affected everyone from all facets of life. A short sale should be looked at as a helpful tool, not a negative stigma. That is why the government is offering programs that actually pay consumers to participate in short sales. It is not just affecting one community; it is affecting communities and consumers across the nation.

5.) The short sale process is too difficult and they often get denied.Though the short sale process is time consuming; it is not as difficult as the media would have you believe. The problem is that most short sales are denied because of a misunderstanding of the process. It is true that if the short sale process is not followed correctly there is a good chance of getting denied. An experienced agent knows how to avoid this. Short sales require a lot of experience, and a special skill set. If you are looking to go the option of a short sale make sure your agent is skilled and experienced in this area.

6.) Short sales will cost me money out of pocket. A short sale should not cost you any out of pocket money. In fact, you could get between $3000-up to $30,000 to participate in a short sale. In many ways, a short sale may put you in a better financial position than prior to the short sale. Almost every short sale program now has some type of financial incentive for the home owner, as long as it is a principle residence, and we are even seeing relocation money being paid on some investment/second homes. As a seller of a property you should never have to pay for any short sale cost upfront to any professional service. Realtors charge a commission that is paid for by the bank. In most communities there are also non-profits and HUD counselors who can help you with foreclosure prevention options for free. The only potential cost you could incur is if the bank would not release you from a deficiency balance in the short sale, which is happening less and less now.

7.) If I am behind on my payments, I can perform a short sale any time. The farther you get behind on your payments, the harder it is to get a short sale approved. The closer a property gets to a foreclosure the harder it is to convince the bank to perform a short sale. As they get closer to a foreclosure sale more money is spent, thus deterring them from doing a short sale. If you think you need to perform a short sale, time is of the essence; the sooner you start the process, the better. Waiting too long can trigger the ramifications of a foreclosure, losing the ability to do a short sale as a viable option.

8.) I have already been sent a foreclosure notice so I can’t perform a short sale. For the most part just because you received a foreclosure notice or notice of default it does not mean that you do not have time to perform a short sale. The timeline and specifics do vary from state to state, but having done short sales all over the country, I have seen banks postpone a foreclosure to work a short sale option as close as 30 days prior to the scheduled foreclosure auction, but the longer you wait the less chance you have. If you have received a legal foreclosure notice, please reach out to a professional right away. The longer you wait, and the closer you get to foreclosure, the fewer options you have. If you have received a notice to foreclose this means the bank is filing paperwork and starting the process to take legal action to repossess the house. You still have time at this point to prevent foreclosure, but do not hesitate! The closer you get to the foreclosure date the harder it becomes to negotiate with the bank for whichever option you choose.

9.) I was denied for a loan modification, so I know I will get denied for a short sale. Short sales and loan modifications are handled by two separate departments at the bank. These processes are totally different in approval and denial. If you got denied for a modification you can still apply for a short sale; in some cases you can get a short sale approved faster than a loan modification, as some loan modifications are denied because they cannot reduce the loan low enough based on the consumers income.

10.) If I go through a short sale I cannot buy another house for a long time. The time to buy another house depends on your entire credit picture and can vary from 2-3 years. There are even a few FHA programs that allow for a purchase sooner than that. It is possible to purchase a home in less than 2 years after going through a short sale, but the guidelines are pretty tight, each case is different but that is a reality.

These are just a few of the common myths surrounding short sales and foreclosure. With the options available today, no homeowner should ever have to go through foreclosure, and hopefully this information can help a few more homeowners think twice before walking away from their home not realizing the possible long term ramifications a foreclosure can have.

10 Things You Need to Know About the 3.8% tax

1.) When you add up all of your income from every possible source, and that total is less than $200,000 ($250,000 on a joint tax return), you will NOT be subject to this tax.

2.) The 3.8% tax will NEVER be collected as a transfer tax on real estate of any type, so you’ll NEVER pay this tax at the time that you purchase a home or other investment property.

3.) You’ll NEVER pay this tax at settlement when you sell your home or investment property. Any capital gain you realize at settlement is just one component of that year’s gross income.

4.) If you sell your principal residence, you will still receive the full benefit of the $250,000 (single tax return)/$500,000 (married filing joint tax return) exclusion on the sale of that home. If your capital gain is greater than these amounts, then you will include any gain above these amounts as income on your Form 1040 tax return. Even then, if your total income (including this taxable portion of gain on your residence) is less than the $200,000/$250,000 amounts, you will NOT pay this tax. If your total income is more than these amounts, a formula will protect some portion of your investment.

5.) The tax applies to other types of investment income, not just real estate. If your income is more than the $200,000/$250,000 amount, then the tax formula will be applied to capital gains, interest income, dividend income and net rents (i.e., rents after expenses).

6.) The tax goes into effect in 2013. If you have investment income in 2013, you won’t pay the 3.8% tax until you file your 2013 Form 1040 tax return in 2014. The 3.8% tax for any later year will be paid in the following calendar year when the tax returns are filed.

7.) In any particular year, if you have NO income from capital gains, rents, interest or dividends, you’ll NEVER pay this tax, even if you have millions of dollars of other types of income.

8.) The formula that determines the amount of 3.8% tax due will ALWAYSprotect $200,000 ($250,000 on a joint return) of your income from any burden of the 3.8% tax. For example, if you are single and have a total of $201,000 income, the 3.8% tax would NEVER be imposed on more than $1000.

9.) It’s true that investment income from rents on an investment propertycould be subject to the 3.8% tax. BUT: The only rental income that would be included in your gross income and therefore possibly subject to the tax is netrental income: gross rents minus expenses like depreciation, interest, property tax, maintenance and utilities.

10.) The tax was enacted along with the health care legislation in 2010. It was added to the package just hours before the final vote and without review. NAR strongly opposed the tax at the time, and remains hopeful that it will not go into effect. The tax will no doubt be debated during the upcoming tax reform debates in 2013.

Preparing Your Home for Sale

Preparing Your Home For Sale? Think Builders Model Home

Are your Preparing Your Home For Sale? Think Builders Model Home.  

Have you visited a Builders Model Home recently? If not maybe you should prior to preparing your home on the market.  Most builders especially national builders are savvy business people, they have conducted an immense amount of research on trends, buyer expectations and what buyers respond to.  Home builders spend a lot of money to properly stage and present their model homes....why? because it sells homes.  If a buyer were to walk into three of the exact same builder floor plans with one being the builders staged model, another being a finished but “Blank” home and another occupied home poorly decorated, unkempt or unorganized which do you think the buyer would favor?  Even when priced higher the model home wins every time!  It’s warm with good light, soft colors, soft furniture and everything beautifully coordinated.  

I realize most sellers are not professional stagers but when it’s time to prepare your home for the market Think Builders Model Home!  You won't find clutter, nicks and dings, dirty carpets or dingy windows. You won’t find years of dirt standing on top of baseboards or ceiling fans.  You won't find kitchen cabinets lined up with small appliances and last nights dinner. What you will find is organization, cleanliness and purpose.  Builders sell hundred of thousands of homes utilizing the principles of simplicity, color and design. 

As a home seller be prepared when listing your home, de-personalize, deep clean, paint, clean windows, organize and since you're moving anyway go ahead and  box it up and store it away.  Think Builders Model Home while you prepare your home for sale then try to emulate their philosophy.  Remember when a full service Realtor® as myself markets your home they are sharing high resolution photographs all over the world wide web so make it shine and be proud.  Don’t give buyers unnecessary objections.  A little work today can easily shorten your time on market and add to your net proceeds. Make that upfront effort, we’ll have your home SOLD in no time.

More lenders offering FHA 203(k) rehab loans

With distressed and bank-owned properties often in need of work to make them move-in ready, more lenders are offering renovation loans backed by the Federal Housing Administration.

Irvine, Calif.-based Impac Mortgage says it will offer both standard and streamline FHA 203(k) loans through its consumer lending division starting in September.

Sherman Oaks, Calif.-based Prospect Mortgage is opening a correspondent lending divisionto help lenders serve customers in search of FHA renovation loans.

"With so many REO and foreclosure properties available today, renovation lending has grown from a niche product to one of the best financing solutions in today's market," said Doug Long, president of Prospect Mortgage Retail and Correspondent Lending, in astatement.

Correspondent lenders originate and fund loans in their own name and, after closing, sell those loans to other, larger lenders.

"Through our new correspondent division, we're excited to share our experience -- and our commitment to renovation opportunities -- by helping lenders offer the 203(k) product to capture new business and help more homebuyers," Long said.

The FHA Section 203(k) program insures loans made by FHA-approved lenders for the rehabilitation and repair of single-family properties. Prospect Mortgage's new correspondent lending division will focus on funding FHA 203(k) loans.

Impac Mortgage -- the "doing business as" name of Excel Mortgage Servicing Inc., a subsidiary of Integrated Real Estate Service Corp. -- say's it's entered into a relationship with another company, RenovationReady, to provide services to home buyers who want to renovate or rehabilitate their homes.

RenovationReady, a joint venture between Granite Companies and Chadron Group LLC, provides property certification, loan fulfillment, and risk management services for banks and mortgage professionals originating renovation loans, including FHA 203(k) and Fannie Mae HomeStyle or HomePath loans.

"With 70 percent of America's housing stock being built before 1992 and too many foreclosed properties damaged and uninhabitable, we see a tremendous opportunity to meet the demands of an underserved market," said Impac Mortgage President William Ashmore in a statement.

Prospect Mortgage is backed by Sterling Capital Partners, a private equity firm with about $5 billion of assets under management and offices in Chicago, Baltimore, and Miami. Citing HUD data, Prospect Mortgage says it is the second-largest FHA 203(k) loan originator in the country.

"We've ... achieved this position by focusing on our renovation lending platform and consistently supporting it with a team of sales and operations specialists with more than a quarter century of renovation lending expertise," Long said.

In July 2011, Prospect Mortgage agreed to pay $3.1 million to settle allegations by federal housing regulators that the company entered into sham affiliated business arrangements in order to pay kickbacks to real estate brokers, agents, banks, mortgage servicers and others who referred business to it. The company denied the allegations and agreed to dissolve the affiliated businesses.

FORECLOSURE STARTS DECLINE IN AUGUST

Notices of Default filed in California during August were down 23.6 percent from the prior month, and down 49.1 percent compared with last year, according to data from ForeclosureRadar. The decline in foreclosure starts is even more significant on an average daily basis, down 30.2 percent from the prior month in California with 23 business days in August compared with 21 business days in July.

 

Foreclosure sales, however, increased 23.7 percent in California on a month-over-month basis. On an average daily basis, the increase was up 12.9 percent from the prior month.

"We continue to see reports that there will be a wave of foreclosure sales after the election or at the start of the year,” said Sean O'Toole, founder & CEO of ForeclosureRadar. “The lack of foreclosure starts this month puts a nail in the coffin of this theory. There will be no wave of foreclosures for at least five months. The good news for investors and first-time buyers is that foreclosure sales have at least remained flat or slightly up, continuing to provide some opportunities in the meantime.

Interiors: Study hardwood flooring options before buying

If installing new hardwood floors is on the list of things you'd like to do around the house before the holidays, you are probably looking for some great deals.

If so, here are some things to expect and some things to consider.

The ad barrage is constant –– in the newspapers, tabloid inserts and television spots boasting of real deals on wood flooring. Are they really deals? Or are they just a tease to get you in the store?

There actually are some pretty good deals available, and with the economy being what it is and jobs being scarce, contractors are willing to do work at lower prices. That's good news for consumers. But as always, you get what you pay for.

With an ad for wood flooring, check to see if the price includes installation. If so, does it include all the materials, such as glue, staples, nails? What about the finishing trim?

When you actually go to purchase the flooring, the price might vary greatly with different installation scenarios. Will the wood be floated? Will it be glued to cement? Is a sub-floor needed? Moisture protection might be needed in some instances. If you live in a condominium, soundproof sub-flooring usually is required.

The labor is usually the most expensive part of the deal. Other price increases might include removing carpet or moving furniture.

Rick Menger, president of Vintage Floors and Interiors in Hollywood, Fla., offers this advice for dealing with companies offering competitive pricing:

-- Expect limited selection.
-- Expect work that is average to good, at best.
-- Don't expect attention to every detail. You will find imperfections.
-- Expect the price to go up dramatically if the job presents any unforeseen challenge.
-- Plan to take on some of the prep work and cleanup. Don't expect "white glove" service.
-- Anticipate that your floor will have a limited life and will need to be refinished within three or five years.
  
There will be some exceptions to the above, but don't count on it. If you can live with these things, then you know you are making the right choice. If you can't, then don't go down that path. Always remember, if it sounds too good to be true, it usually is.

Did You Know?

Unclog a Drain
1) Pour 3/4 - 1 cup baking soda in the drain
2) Pour 1/2 cup vinegar in the drain and immediately cover the drain (use a plug or set a plate over it-you want to keep everything inside the drain).
3) Leave everything to sit and work for about 30 minutes (don't us the sink during this time).
4) After 30 minutes, remove the cover and let hot water run through the pipes for about 2-3 minutes.

for really tough clogs you may need to repeat-but if you do this on a regular basis (once a month)it keeps the drains clear and fresh without any problems.