Category Archives: foreclosures-shortsales

What’s easier: Modify your loan or win the lottery?

foreclosures-shortsales

A loan modification happens when a homeowner is a few months behind on mortgage payments. The lender agrees to modify the loan and adds the missed payments to the end of the loan in an attempt to help the homeowner avoid foreclosure.

The problem is that lenders reject many applicants for loan modification and most of those granted are temporary.  Matt Hernacki points out that a homeowner has about the same chances of winning the lottery as he or she does of getting a loan modification.

All of the generic media stories about foreclosure tell homeowners to “communicate early” with their lender. It’s a sad truth that the lenders are overwhelmed with delinquent mortgages. They really have no interest in talking with borrowers. They pay lip service to loan modifications and really do nothing to help the homeowner in trouble.

The Quirks of Buying a Fannie Mae Foreclosure

foreclosures-shortsales, Real Estate-Purchases

fannie(4/14/11- This post was recently updated here.)

Fannie Mae is perhaps the most difficult seller of foreclosed homes. Fannie Mae and Freddie Mac own more than half of the country’s mortgages. Delinquencies of Fannie Mae homes are rising, so we will likely see more and more of these. Unfortunately, Fannie Mae pops up a lot as a seller of REO (real estate owned) foreclosed properties and I always cringe when I get one of these contracts.

Why is the purchase of a Fannie Mae foreclosure different from any other foreclosure buy? Let me count the ways:

1. The Infamous Addendum

All REO sellers make the buyer sign an Addendum. The Fannie Mae Addendum is tricky and close to incomprehensible. When a buyer makes an offer, the buyer signs a standard real estate contract and sends it to the listing agent. Fannie Mae doesn’t sign this contract. It verbally accepts the contract. (Never mind that real estate contracts have to be in writing an can’t be verbal–they’re Fannie Mae, and if they feel like undoing centuries of contract law…you better get used to it)

Once the contract is verbally accepted, then the listing agent sends the poor, unsuspecting selling agent the Addendum.  The buyer then signs and returns the Addendum. Usually, it takes about three weeks from the time the Addendum is signed by the Buyer to get a signed contract and Addendum back signed from Fannie Mae. It takes FOREVER to get these back. I have a file now that is ready to close according to the closing date in the Addendum, but we don’t even have the signed contract and Addendum back yet from Fannie Mae.

2. Confusion on the Verbal Acceptance Date and the inspection

The main problem with the Addendum is that the home inspection contingency period begins on the verbal acceptance date and runs for 7 days from that date, not on the date that the contract is accepted in writing by Fannie Mae. Many buyers don’t realize this and think that the inspection contingency starts when the signed contract is received back from Fannie Mae.

So the inspection period may pass by and expire, without the Buyer knowing this, and the Buyer cannot cancel the contract if the inspection turns out poorly. So if you buy a Fannie Mae home, schedule your inspection immediately after the verbal acceptance date or your home inspection contingency may expire and you will be stuck with the house or lose your earnest money. Here is an Arizona case in which the Buyer couldn’t get the earnest money refunded after the inspection turned out poorly, largely due to confusion over the verbal acceptance date.

3. Dewinterizing is on the Buyer

Fannie Mae properties are always winterized. The gas, water and electricity are turned off. Fannie Mae does not turn the utilities on. Most REO sellers will dewinterize for a buyer to inspect the property, but not Fannie Mae. On a Palatine property last year, the buyer dewinterized the townhouse and leaks sprang from everywhere. It took the plumber most of the day to patch the leaks and it cost more than $600.00, which the buyer had to pay.

If you can get the place dewinterized yourself and you are lucky enough to do an inspection before the contingency expires (due to the verbal acceptance date), please do not even consider asking for any credits or repairs after the inspection because the answer will be no. It is strictly an in/out situation and credits or repairs are extremely unlikely.

4. Buyer pays for Title and Transfer Tax

The Addendum also says that the buyer has to pay for the state and county transfer tax and for the seller’s share of title insurance. This is at least $2000.00 in most cases, that the buyer would not otherwise have to pay. Most buyers do not see this term buried in the Addendum. You can ask for a closing cost credit in Par. 36 of the Addendum to cover the cost of the title and transfer tax. The seller’s attorney will furnish the title even though you have to pay for it. You can’t buy your own title insurance.

5. Penalties for late closing

Whatever closing date you put in the Addendum, you had better be able to close that day, or you will be penalized $100 to $150 per day for each day you are late. Some buyers think that because it took three weeks to get the signed contract back, that the closing date will be extended easily, and that the Addendum closing date is not set in stone. Wrong. Fannie Mae is very strict on closing dates and the Buyer will have to pay for any extensions. Also, the buyer will have to sign all extension requests on a Fannie Mae-provided form. The attorney cannot request extensions unless they are on the Fannie Mae form signed by the buyer.

6. Sorry no keys

Fannie Mae does not provide a key at closing. If you are able to run the gauntlet of buying a Fannie Mae foreclosure, then the listing agent will not furnish a key and will take back all keys from the selling agent at closing. Supposedly, all FM homes are keyed the same (which I find hard to believe) and there is too much “liability” for Fannie Mae to furnish a key. Thankfully, most of the listing agents pay little to no attention to the property, so doors are often left open and I have not had a buyer have to call a locksmith yet to get entry to the house after closing.

Short sale vs. foreclosure

foreclosures-shortsales, Real Estate-Purchases

I was reading this great Wall street Journal  article on “Are distressed homes worth it?” The common wisdom is that it is easier to buy a foreclosed home than a short sale home. This is true in that it is more likely that a foreclosed home will actually close and it is more likely that a short sale will not close.  One telling statistic in the article says that no more than 20% of short sales are successful. I used to say 40% of short sales actually closed, but I now think 20% is right.

However, buys of foreclosed properties are getting more painful for the buyer. A partial list of what makes them hard(er):

1. Seller takes forever to respond to original offer.

2. It takes about two weeks after agreement to get a signed contract.

3. The seller’s attorney does not respond to any requests under the attorney approval or home inspection. They have a million files and will never call back.

4. The utilities are turned off. If you are not smart enough to extend the home inspection until the utilities are turned on by the seller (and all leaks–there will be many– are fixed) then you will be stuck repairing 20 leaks that spring in the walls when you turn on the water.

5. When you do an inspection, it’s unlikely you will get any credit for repairs. The sale is “as is” and the seller means it.

6. Sellers constantly give artificial deadlines. “If this doesn’t close tomorrow we are putting the house back on the market and keeping the earnest money.”

7. The seller may try to stick you with title insurance, transfer tax etc, or if you are buying a condo, they can force you to pay 6 months of the foreclosed owner’s condo dues.

8. No sellers representative will come to closing.

9. Once you are lucky enough to get to closing, it may take up to two days after closing to get a “seller signed HUD.” After the seller has imposed all kinds of phony and irrational deadlines, they will take forever to sign the final closing statement. You cannot move in until they do, so don’t have that moving van parked in the drive.

That being said, many buyers find that the appraisal of the foreclosed home is thousands more than they paid for the property, so they put up with this basically unpleasant exercise.

One man's mortgage meltdown

foreclosures-shortsales, Real Estate-Purchases

I love the NY Times web site’s most emailed list. It was there that I clicked on a story called My Personal Credit Crisis. The story was actually a book excerpt from Times writer Edmund Andrew’s new book called “Busted: A reporter’s look inside the mortgage meltdown.”

The story goes into excruciating detail of how Mr. Andrews got series of  “liar loan” to buy and then refinance a house, ran up $50,000.00 in credit card debt and used the $10 overdraft protection feature on his checking account almost daily. I would be embarrassed to admit doing some of this stuff, but he doesn’t seem terribly worried about it. Most of the comments by readers on this site are less than sympathetic.

The book provides a rear view mirror look at how easy it was to get “no doc” and “stated income” loans. My favorite part is when he tries to apply for a loan modification with Chase because he can’t make his payments no one from Chase will call him back. When he finally gets in touch with Chase, they can’t help him because he’s not 90 days in default on the loan. Now that’s real life for you.

Stripping of foreclosed homes continues

foreclosures-shortsales

This story in the Daily Herald talks about how foreclosed homeowners are taking fixtures like copper wire, appliances and toilets from homes before they leave (notice the fireplace torn out of the wall in the picture). The answer to this problem is “cash for keys.” The foreclosing lender offers cash that’s paid after the owner turns over the keys and the property is checked. A Phoenix real estate agent (who’s one gutsy hombre) was charged with selling fixtures from a foreclosed home on Ebay.

Lenders seeking money back after short sale

Bankruptcy, foreclosures-shortsales

Short sales of real estate are everywhere now. A short sale happens when there are not enough funds to pay the existing mortgage holder, so the seller and the lender agree that the mortgage can be paid short.

After closing, the shorted lender can either:

1. Issue a 1099 to the seller for the amount forgiven (which is then taxable to the seller as ordinary income, unless it was a primary residence).
2. File a deficiency judgment lawsuit against the seller for the unpaid amount (this rarely happens).

This WSJ story discusses how many lenders are asking the seller in a short sale to sign a promissory note for the amount unpaid in a short sale. Then the lender files suit under the note for the unpaid amount. This is happening primarily in cases where the seller has other assets that can be used to pay the shortage and with investment properties.

I have not had a lender ask the seller to sign a note in a short sale. Nor have I seen a seller sued for a deficiency judgment. So far, lenders have 1099’d the seller for the amount unpaid.

The 1099 can cause a cascade of tax problems. The sellers only relief may be to file bankruptcy to get rid the income from this “cancellation of debt.”

Don't give Buyer the steering wheel in short sale

foreclosures-shortsales, Real Estate-Sales,

shortsaleRecent, real-life case: Buyer makes offer on house being sold as a short sale. In the offer, buyer refuses to put down any earnest money and wants authorization to negotiate directly with the seller’s lender.

So the seller would be out-of-the-loop in negotiations with his lender to try to unwind the single biggest (failed) investment of seller’s life. And he is supposed to trust a complete stranger with negotiating a way out of the mess. This buyer also added, “Don’t worry, not  many people know about this technique yet,” as if the buyer talking with the seller’s lender direct was an ancient secret passed down on a piece of paper to Moses right after the ten commandments.

My client said no to this proposal. I can’t think of a single reason why a seller in a short sale would let the buyer negotiate directly with the seller’s lender. It’s just a bad idea.
You are much better off having an experienced attorney or real estate agent, who is working for the seller, handle the details with the lender.

This buyer above was an investor with an out-of-state phone number. Investors are now jumping into the short sale game. They form an LLC and make multiple offers on short sale properties, often with no earnest money. They make very low offers. Most offers are way, way below the asking price; many times up to 40-50% below asking price. Some investors don’t even make a written offer, but want an option agreement.

This gives them an option to buy the property if they can beat down the price enough with the lender. They can also walk away from the option at any time.

If you are facing a short sale of your property, here’s some steps that you need to take to get things rolling:

1. Prepare a hardship letter explaining why the payments can’t be made.

2. Put together recent pay stubs and a list of assets.

3. Ask your agent to print out the listing history and pricing history of the property.

4. Give your attorney or realtor written authorization to deal with your lender and send it to the lender.

5. Make contact and find out who will be the “negotiator” with your lender.

6. Ask the lender to order a Broker Price Opinion (BPO) right away so that you will know how much the lender thinks the house is worth.

7. Be very courteous, gentle and kind to the negotiator. If you steamroll him or her and tell him war stories about your years of short sale experience and how “It’s always done like this…” you will go to the bottom of his or her very large pile of cases.

8. Prepare a closing statement showing the amount the lender will net and be careful not to underestimate anything because the figures are hard to change once they are approved.

Most of all don’t trust negotiations with your lender to the buyer.

How to buy real estate at the sheriff’s sale

foreclosures-shortsales, Real Estate-Purchases,

sale1Over the years, clients have called to ask how to buy foreclosed real estate at a sheriff’s sale (The sheriff’s sale is the auction of a property that happens as the last step of a foreclosure.) This is one of those client questions that sets off mild alarm bells in my mind. Generally, I tell the client “You don’t want to do that. It’s too risky.” On a risk scale of one to ten, I would rate this about a nine.

It’s still as risky as it ever was, but there are bargains to be had these days because so many foreclosed properties are being auctioned and lenders don’t want them back. As a result, the lenders are setting low opening bids at the sheriff’s sales and that creates opportunities for savvy buyers who know the risks.

You will need an above-average knowledge of real estate to even consider this. If you have closed on two properties in your lifetime, I would say that this is best avoided, or that you should team up with someone experienced. The internet has tons of information on the properties, so a savvy buyer with good real estate knowledge can get enough information to evaluate the properties offered at the sheriff’s sale.  It would be best to buy, fix up and rent the property and hold it for awhile.  “Flipping” real estate, or quickly reselling it at a profit, is an advanced skill and can lead to a profits that will make one the stuff of legend at neighborhood block party (hey, did you hear he made $60k on ONE foreclosure) or can lead to financial ruin.

The key to buying a property at the sheriff’s sale is in knowing the approximate current value of the property.  Many of the mortgages being foreclosed were 100% loans made at the peak of the market in 2004 and 2005.  They are not worth anywhere near the amount of the foreclosed mortgage. Once you know the approximate current value of the property, you can set your bottom line price for the property. Keep in mind you will have to pay a real estate commission to list and sell the property (5%), closing costs on the sale (1%), real estate taxes (about 2%) and fix up expenses for the property (2%), that will add up to about 10% of the value of the property so you will need a steep discount to make this mission worthwhile. Discounts are usually up to 35%- 45% of the property value. 

Using Kane County as an example, here is rundown of how it works:

1. What properties are available? The sheriff has a list of properties for sale each week.  Beware that individual properties are frequently dropped from the sale for a particular week or properties are taken off the list at the last minute as the sheriff’s sale date is extended. Kane County has 37 properties, mostly in Aurora, up for auction next week (1/22/09). I would not buy a condo at the sheriff’s sale in this market because you will have the added expense of unpaid association dues. These are not wiped out in the foreclosure. Also the market is saturated with condos and lenders are charging more for buyers to get loans on condos. You have to research the list of property, determine the current value and relentlessly eliminate properties from your list. If you have one or two properties you think are worth it, then you have done your homework.

2. How do I know what the property is worth? It’s best to buy in an area that you know. To determine the value, you have to check the comparable sales (“comps”) of properties that have closed in the last year through a real estate agent. You can check the comps on many websites including trulia and zillow  Many real estate agents have websites that require you to register and then you can search properties through their site.

3. Can I see the property? No, not the inside anyway. You are buying it without seeing the inside of the property. But always drive by a property. It may be next to a creek, a tannery, a noisy bar or it may be burned to the ground for all you know. An in-person visit will tell you if it’s vacant (most are) and it will give you a general idea of the home’s condition.

4. Who bids at the sheriff’s sale? In Cook County,  the sheriff’s sales are outsourced to private companies for the most part. There may be as many as 50 bidders in Cook County. In the outlying counties like Kane or DuPage, there may be 10 and 20 bidders. This Chicago Tribune story describes a DuPage County sale with “20 attendees”, but only 1 house was sold during this auction. If no one bids on the property (this happens a lot) then the property goes back to the mortgage holder and the mortgage holder will list the property and try to sell it after the sale part if its REO (real estate owned) inventory. Buying an REO is easier than buying at a sheriff’s sale because the taxes are paid and you get a title search.

5. Can I attend the sale just to watch? Yes. In fact, some savvy folk watch the sale and then contact the winning bidder and offer to buy the property from the successful bidder. There’s no sales commission and they might get a discount for a quick sale by the auction winner. FHA used to have a “seasoning” requirement that made owners of foreclosed properties wait 90 days before selling it to a buyer getting an FHA loan, but that requirement is gone until June 2009. 

6. Who sets the opening bid price? The mortgage holder sets the price. If the foreclosed mortgage was $300,000.00, the lender might set the opening bid as low as $100,000.00. The mortgage holders set the opening bids very low because they don’t want the property back and they are trying to entice you to bid on it. The setting of a low opening bid is what makes the purchase potentially profitable for the buyer.

7. How much do I have to put down? Most sheriff’s sales require that you pay 10% at the sale and the balance within 24 hours. You need all cash. No financing or mortgages are allowed. If you bid on a property and win and pay the 10% and then can’t come up with the rest, you lose the 10%. Some investors pool their money and set up a Limited Liability Company (LLC) to bid at the sale.

8. What liens do I have to pay? As a buyer at the sheriff’s sale, you get no title insurance and no survey. You get no tax credit; just a deed from the sheriff. The foreclosed mortgage is wiped out. But, you will be responsible for any unpaid real estate taxes. You also have to pay unpaid condo dues for a condominium. It is easy to check if the taxes are paid on the county treasurer’s website. Keep in mind that taxes are one year in arrears, so no matter what, you will get stuck paying one year of taxes.

9. Are you buying a property with a foreclosed first mortgage or a second mortgage? There are a lot of second mortgages out there. Sometimes the second mortgage holder files a foreclosure. You do not want to buy a property where the second mortgage was foreclosed. That means you will have to pay off the first mortgage. You want to buy a property where the first mortgage was foreclosed. This is one big reason you need to check the title to the property and the court file.

10. What does the title search show? In Kane County you can check the title of any property on the recorders web site or you can order a title search from a title company.  Cook county also has a site, but it’s sluggish and not user friendly. It shows the owners name and the amount the owner paid for the property (you have to figure it out by the amount of transfer tax paido of $1.50 per thousand of the purchase price). It also shows other mortgages on the property and the lis pendens that was recorded by the foreclosing lender. The lis pendens shows which lender did the foreclosing. If the title shows IRS liens and other U.S. government seizures I would avoid it.

11. What else should I check? Most counties have online access to the foreclosure court file and this should be checked. (Kane’s site is terrible, but Cook County’s is good.)

12. When do I get the deed? You get a certificate of sale if you are the successful bidder. Next, the sale has to be confirmed in court. The foreclosure attorney for the bank does this. It happens a few weeks after the sale. Once the sale is confirmed by the court, you get a deed from the sheriff.

13. Usually the owner is gone by this time. If the owner is not gone, you will have to file a forcible entry and detainer to evict the owner. You can try to do this yourself, but realistically you will need an attorney. It will cost about $900 for an average eviction, although every one is different and the cost easily can be twice that amount.

Are "Short sales" taxable?

foreclosures-shortsales, Real Estate-Sales

“Short sales” are sale of real estate where the seller does not have enough money to pay off the existing mortgage(s). The lender reduces the amount owed voluntarily. The “forgiveness of debt” is taxable.

However, there is an exception if you sell your primary residence in a short sale and have lived there for at least two years before you sell. In that case, there is no tax due on the forgiveness of debt.

 

Unfortunately, this rule does not apply to any investment real estate or to second homes. If either of these types of properties are sold in a short sale, the amount of the loan that is “forgiven” is TAXABLE to the seller.