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Archive for the ‘Short Sales’ Category

The concern of some homeowners looking to do a short sale that a 1099 issued from the bank will expose them to a new problem, namely a huge income tax bill on the forgiven debt, is understandable. With home values in Westchester in 2010 at a median of $630,000, a six figure 1099 is entirely possible. In the past, a bank could issue a 1099 for forgiven debt, rendering it akin to income for tax purposes.

However, even if the bank does issue a 1099, the likelihood that you’ll have a tax problem is virtually nonexistant for owner occupants thanks to a law passed in 2007, the Mortgage Forgiveness Debt Relief Act. From the IRS website:

The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness.

Most definitions of “principle residence” mean that you have resided there for at least 2 of the prior 5 years. That means that if you move out due to a job transfer or or other reason, you are not out of luck. Obviously, as a licensed real estate broker I do not give tax advice. You have to consult a tax professional like a CPA. However, make sure you discuss this law when you speak. It runs through 2012, and may well be extended.

 

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I have been prominent in two separate stories in the media this past week regarding default properties and their effect on the market and the borrower. This past Sunday I was in the New York Times, and on Tuesday I was in a nice piece on AOL Daily Finance.

The Times piece centered on strategic defaults, where borrowers who could otherwise afford a mortgage stop paying on purpose. Many people who do this do so for cash flow reasons; if you paid $350,000 for a house in the peak and the same house is for sale at foreclosure down the street for $180,000, some people just buy the cheaper one and let the old house go, cutting their payment. However, the credit consequences can be dire. The debate on the ethics of the practice is heated.

The AOL Daily Finance article is part of a series on how the housing crisis has affected different places. Mount Vernon, a city in Southern Westchester County which has been rife with short sales and foreclosures, was discussed in the article. Values are down in the neighborhood I am quoted on about 50%. What is not mentioned is that many of the foreclosures were actually renovated by the prior owner before they ran into financial problems, which punctuates the crisis, for me, in a very sad way. You hate to witness broken dreams.

Which is why we work so hard on getting our short sales closed and done for our clients. Preventing foreclosures is what we are all about.

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After two similar discussions the past week, it would be wise to address how a short sale should be priced. After all, if the offer submitted to the lender is subject to approval and therefore not a certainty, all the more that the asking price is also a hypothesis.

It is. But, as educated guesses go, a good short sale broker’s list price is pretty educated. It takes into account comparable sales, competing listings, and, sometimes, the gut sense of a seasoned professional. You have to skate a nuanced line in some cases between what will get the phone to ring and what the lender will sign off on.

I have blogged before on the stress that a short sale can put on a home seller. They are typically in default, getting collection calls and letters from the bank, facing the steps up to a foreclosure, and often overwhelmed with distress. When one is under stress, it is natural to instinctively move to eliminate the source of the stress, so often sellers want to lower the price to get moving, and dramatically so. The problem is that if you lower the price to be the lowest asking price the neighborhood has seen in 5 years, you can foster too much skepticism from the lender and  the offers you get might not be enough for the bank accept.

For example, if comparable sales put your homes estimated value at $400,000, it is irresponsible to whack the price to $320,000 just to get an offer and be done with it. You have to balance between what the buying public will respond to and what the lender will accept. And few homes sell in 10 or 20 days. It takes some time. Not all short sales tale a long time to find a buyer,  but some can, and too many reductions too soon can sabotage your efforts.

The best (and really only) approach is to price the home aggressively based on comparable sales, and then review and reduce every 30 days unless market activity indicates something faster. But it is market activity, and not nerves or stress, that should source the price strategy.

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Contrary to what some may think, an owner is not obligated to submit every offer to the lender for approval in order to do a short sale. As a matter of fact, there are offers that an owner should never submit to the lender. That is the owner’s right, as they still hold title and ownership of the property, and the bank’s decision in a short payoff is simply the amount they’ll take to release the lien and settle the debt.

In Westchester and the surrounding areas of New York, offers are not submitted to the lender for approval, contracts of sale are. And those contracts are between buyer and seller, not the bank. The contracts are conditioned upon bank approval, but they are binding contracts none the less. And it can take every bit of 3-6 months for the lender to render a decision, all while the foreclosure wheel turns. If the owner goes to contract with an offer that is less than a realistic expectation of value, they can be six months closer to foreclosure when the bank issues their denial of the short sale.

Sellers are therefore looking for realistic offers, not for their own pockets, but to ensure the bank accepts the short payoff. If an offer can be judged favorably by 3 recent (i.e., 6 months or less) closed and 3 active comparables, the offer bodes well. Buyers who submit speculatively low offers, unsupported by 3 sold and 3 active,  are doing something ill advised; if their amount is not close to what comparable sales for similar properties are getting on the market, they could waste months waiting for the inevitable “no.” And that “no” could cost the owners their house.

We have a enough offers in multiple bid situations meeting resistance to the banks; lowball offers invite peril to the seller and frustration to the buyer. And it is ultimately the sellers decision as to whom they’ll go to contract with. A short sale sellers surrenders proceeds. But no owner surrenders their rights. While the bank makes the final decision on amount, it is the owner, on advice and market data from their agent, who determine what to submit to the bank for that decision.

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We recently closed on the short sale in Peekskill, NY and it was rather unique. For one, the seller, a licensed professional, had to come up with some money at the closing due to being lighter in the hardship department. We warned the client of this possibility, but the way the bank went about it is indicative of why we have the problems we have in this economy. In addition to that, the buyer almost couldn’t close because of a discrepancy on the taxes.

The seller had relocated out of state and was renting the home. He moved to an area of the country with a lower salary scale, and was now teaching in his field rather than in practice. He therefore could not write a check for 6 figures to make the lender whole. There was some acrimony with the lender as to the value of the home; as  is often the case, the lender broker price opinion was done by an out of area licensee with no clue on the local market, and their “value” came in at a  price point where we once were, and could not get anyone to even come look. Bad BPOs are a problem that could easily be solved by using local brokers and appraisers. Why lenders do not grasp this is beyond me.

Meanwhile, the buyer’s purchase appraisal came in too low! Their bank was reticent to loan that much on the home, and there was another problem with a re assessment raising our published tax figure. Evidently, both my and the buyer agent’s verification of taxes came prior to the bill going up. Their appraiser caught the discrepancy. This temporarily put the kabosh on the buyer’s mortgage.

As with many short sales, it was our job to go to the mat with the lender to get the deal done, which we did. The seller had to write a small percentage of the shortfall at closing to avoid any long term deficiency, which he had and did.

Lessons learned:

  • Re-verify taxes when homes are listed on or near reassessment dates.
  • For the banks: stop using out of market brokers for price opinions. The same goes for out of market appraisers.

I give credit to our proactive seller for helping himself and remaining in strong communication. I am more leery than ever as to the wisdom of those people at the lenders, whose myopia about local knowledge for BPOs contributes to muddying up the short sale process and causing more stress and angst. I am sure this is part of the issue with recent moratoriums on foreclosures– the banks are getting unforgivably sloppy.

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As short sales become more prevalent in Westchester County, the anxiety around their newness tends to fade. With familiarity comes some confidence. We just closed on one such sale. The sellers were being transferred out of state after buying the house in 2006, right after the peak. They bought with a smaller downpayment, so when the market crashed they joined millions of other Americans (and thousands of fellow Westchester County homeowners) in being under water.

Being upside down is not necessarily a problem unless you have to sell. Well, when you get transferred, you typically have to sell. In going over our options, it was clear that they could not rent the home out and remain in the black, and there was no savings. Their housing expense in their new home would not enable them to carry two homes, so the house in Ossining couldn’t be kept. A short sale would be their best option. Wisely, they consulted with their attorney as part of the decision.

After listing the house they made one price adjustment, an offer came in, we went to contract, submitted everything to the lender, and it was accepted. No problems with the appraisal on either side, no issues with the new buyer, the buyer agent did her job, and we closed. The only drama was how a boat left in the driveway would be dispensed with. The seller’s relatives removed it.

It was that simple.

It took a little over 4 months for the short sale to be approved. I have to give credit to my clients for doing everything they needed to do, and to the buyers for having their act together when the approval came through. There was no drama and no suffering because everyone did their job and kept focus.

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Earlier this month we closed on a short sale that was another marathon. I listed it in April of 2009 and got an offer that August. It went under contract in early September and everything looked like a relatively smooth deal until about a month into the contract period we still did not have a negotiator assigned to our case. I always warn short sale clients that we might be in for a wait, so we were all on the same page.

My client was a very nice man- a widower, originally from the Bronx, and had the house decorated “bachelor style” in his own words, and I knew what he meant. His other half had departed this earth, and he couldn’t handle the house alone.

By the time the autumn rolled around, we finally started to get some communication from the lender. They moved slow as molasses, and the buyers were getting understandably restless. These were cash buyers; we wanted to keep them and avoid the uncertainty of waiting out a loan approval once we had the short sale finalized. However, as autumn gave way to the holidays and Winter, it was clear that the bank did not share our zeal to put this transaction to bed.

A title issue was discovered in March when we thought that this was going forward, and at that point the buyers asked for their money back. Deadlines had long since passed, and we had no contractual enforcement to keep them in the transaction. It took until May to clear up the title issue, thanks in so small part to my clients’ hard work to produce needed documentation (clearly, his late wife was the organized one in that partnership, by his own admission).

I had remained in touch with the buyer agent and our attorney kept the lines of communication open with the buyer’s attorney. When we informed them that the issues were cleared and the bank was ready to close, they elected to return to the table. On July 12, 13 months after I listed the home, we closed. We successfully held off foreclosure action from the bank for over a year, the seller had a fresh start with no liability or debt after the closing, and he left the house with dignity. He deserved it- he was a good guy and a team player, and if he was stressed, he dealt with it very well.

Short sales are seldom this long a process, but even if they aren’t, a good short sale broker will help stop foreclosure action on the client’s house and keep negotiating with the lender until we get to “yes.” Moreover, it took some real teamwork to clear the title issues and get our client to the table. To his credit, he was very cooperative, and that is all you can ask for from a client selling his home in a short sale. Except maybe tidy up a little!

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