Hill's Personal Finance

The ABC's of Foreclosures

Buyers often equate the word “foreclosure” with below market value pricing.But is that really the case? You may THINK you know, but do you really?

What is a foreclosure? In the simplest terms, a foreclosure is a legal proceeding by which property is repossessed by a lender due to the borrower’s failure to fulfill the terms of a mortgage or deed of trust. In most cases, this means the borrower has either been unable or unwilling to make the agreed-upon payments.

All foreclosures are not created equal. There are several different types of foreclosures in the United States, and foreclosure laws can vary by state. The two most common types are foreclosure by power of sale (also known as non-judicial foreclosure or trustee’s sale), and foreclosure by judicial sale.

Non-judicial foreclosure, or “trustee’s sale”. This is a widely recognized and accepted foreclosure process and may be faster and less expensive than judicial foreclosure. In this arrangement, the mortgage holder sells the property without court supervision. This non-judicial foreclosure takes place when a power of sale clause exists, authorizing the lender, in the event of default, to sell the property as a means to satisfy the loan balance.

Foreclosure by judicial sale. This procedure is used when no power of sale is present in the mortgage or deed of trust. A lawsuit must be filed and a court order obtained before foreclosure can take place. Once a court declares a property foreclosed, generally it is then auctioned off to the highest bidder. However, as part of this process the lender could request a deficiency judgment. In this case, the borrower may be given up to one year to redeem the property.

Are foreclosures great deals for homebuyers? They certainly can be … but not always. Each foreclosure is different, and it depends on what you want and what you can afford. One thing to keep in mind is the time factor. Depending on the state and the type of foreclosure in place, the current resident could be allowed to stay in the property for anywhere from four months to almost a year. Also, there is the possibility that the current resident may regain control of the property, as almost every state offers a redemption period.

It’s also important to note that there are certain procedures that must be followed in order to properly purchase a foreclosed property. Many states will require a buyer to provide the seller with particular disclosures, and failure to provide these (and/or failure to use the correct paperwork to prepare offers) can result in the revocation of the sale, fines or even the possibility of a lawsuit.

So, what should you do if you want to buy a foreclosed property? You’ll want to determine what the facts of the foreclosure are – including what type of foreclosure is in place, how long it has been in place, etc. First things first, consult a real estate professional, preferably one with foreclosure experience, and consider speaking with a real estate lawyer as well.

                                    

The ABC's of Short Selling Real Estate

In real estate, what are “short sales” and who needs them?

It’s an all-too-common scenario … Changes in the financial climate can leave even the most responsible homeowners struggling to keep mortgage payments current. When and if that happens, there is more than one way to proceed.

                                                

First things first. If you’re faced with a mortgage you can no longer afford, your first step should be to consult an experienced real estate attorney. Next, you should probably contact your accountant to discuss how the situation and options may affect your taxes. Depending on your current financial situation, the professionals you speak with may offer you advice leading to an alternative to foreclosure proceedings or bankruptcy. One option that might be considered is the “short sale.”

What is a short sale? In simple terms, it’s a settlement. In a short sale, the lender agrees to accept an amount for your home that is less than the amount owed. The lender then regards that lesser amount as payment in full. For example, if you still owe $200,000 on your home loan and sell your home for $175,000, under the terms of a short sale the lender may agree to accept $175,000 as payment in full. So, is a short sale the way to go? Well, that depends. It’s not the only choice you have. Again, I’d encourage you to seek the advice of a professional real estate lawyer and accountant.

The tax consideration. Any amount of debt on a home that is “forgiven” by a lender will be considered income for the seller, and is therefore taxable. If you sell your home with a short sale you are, in essence, canceling (at least in part) a debt that you owed. Any debt not being satisfied by the proceeds of the sale would be taxable as cancellation of debt income. (Rev. Rul. 92-99, 1992-2 CB 518.)

How do short sales affect buyers? Buyers often look for those two hot-button words … “short sale.” Many buyers equate those words with “great deal.” But if you’re a buyer, you may wish to consider a few things before submitting an offer. Consider that the process may take a bit longer. Short sales may not close within 30 days, mainly because there is an additional element involved and some lenders may submit your offer to a committee. Keep in mind that even if the seller accepts your offer, their lender may not. Also, if the seller owes more than the home is worth, the “discounted price” may not put that home below market value.

If you’re considering the purchase of a short sale-listed home, be sure to speak with a real estate professional and do your homework. If possible, consider hiring a real estate agent with experience in short sales. Enlist the assistance of your agent to find out how much is owed to the lender, whether or not a foreclosure notice has been filed and who the title holder is. These factors will help you determine whether or not to proceed, and how much you might want to offer.

Will the "Credit Crunch" Hurt Your Homes Value?

It might mean a lower sale price … and a long time on the market.

Welcome to the reality of real estate in 2007. It’s supposed to be a buyer’s market … but in truth, it’s a tough market. If you want (or need) to sell, you will have to deal with a number of issues stemming from the subprime mortgage fallout. Here’s how “subprime shock” may affect the value of your home.

Fewer buyers, fewer offers. First, the number of potential buyers for your home has decreased as a result of stricter mortgage lending standards. Second, potential buyers may have less money to spend on a home, because they can’t get the kind of mortgages that previous homebuyers could. They’re looking at higher interest rates, larger down payments, and fewer adjustable-rate mortgage options. We are seeing the results of this situation across the country. Homes are sitting on the market longer; prices are coming down in response.

If you think only those with “bad credit” are shut out of buying today, think again. Anyone with a FICO score in the low 600s has a borderline or “poor” credit rating in the eyes of most lenders. Middle-class and upper-middle-class borrowers can find themselves in the low 600s after missing one or two credit card payment deadlines. Today, all kinds of people are finding it tougher to get A-rated loans, including mom-and-pop business owners and the successfully self-employed.

Options when you’re “upside down”. If you used a subprime loan to buy your home, you may now owe your lender more than that home is worth. If you can’t keep up with your mortgage payments, you may want to see if you qualify for forbearance (a temporarily more lenient schedule of payments) or even a deed in lieu of foreclosure, which just might let you sign off on your house and walk away without owing on the mortgage.  Another option that may be available to you is a short sale, in which you ask your mortgage lender to accept less for the home than what you owe. Not every real estate professional is willing or experienced enough to do a short sale; you may want to seek the assistance of a specialist.

Refinancing hurdles. The credit crunch has also made it tougher to extract equity. If you have a “poor” credit score, a second mortgage is now much more expensive – rates have increased by 1-2 percentage points. With home prices down, you might not be able to refinance your way out of trouble if your mortgage is scheduled to reset.

If you have questions about these issues, be sure to speak with a real estate professional about your options. You may want to ride it out, or you may find the way out of your particular dilemma.

The Best Time to Buy?

Is the buyer the winner in today’s real estate market?

Visit any website, pick up any newspaper or magazine, and the news about real estate is negative. But let me suggest something positive: right now may be a great time to get into the real estate market. Whether you want to buy your first home or explore real estate investments, conditions haven’t been this favorable for buyers since the early 1990s.

All the advantages are yours. First of all, there are plenty of properties on the market, and scores of sellers hungry for any respectable offer. In fact, many sellers are realizing (sooner or later) that THEY need to be competitive with other sellers in their neighborhood, so sale prices are trending down. If you want to buy a new home, you might find builders offering you some great incentives – such as no payments for 6 or 12 months, or custom features at no charge. And while mortgage interest rates are a percentage point above where they were two or three years ago, they are still historically low.

Leap in, or look? Some people are tentative about buying right now because they think home values might fall further. We have no way of knowing that; no one is clairvoyant. So while it is sensible to be patient, it is also advantageous to be active. If you see the house you want and the price is fair, you may want to give up trying to predict the future and simply make an offer. Consider looking for a home you can grow with, should prices drop more.

Exploit the Web. If you’re serious about buying, absorb some knowledge online through Zillow and RealtyTrac. Zillow is a valuation site that can give you a reasonably accurate estimate of a home’s value (though it calculates value without the “inside knowledge” of your local market conditions that a living, breathing real estate agent possesses). RealtyTrac is a great place to find foreclosures and to take a look at foreclosures in different regional markets.

Negotiate. If you love a house but feel the price is too high, gather evidence before you submit your offer. If you can show that four or five comparable houses within a few blocks sold for thousands less than what the seller wants, your lower offer gains credibility. You can even bargain with your real estate agent. Some states permit buyer’s agents to offer buyer’s rebates at closing, where they can give you back part of their commission. If you’re using an agent, it may be wise to hire a buyer’s agent who represents your interests, without a commitment to the seller.

Go traditional. If you can put 10% or 20% down, do it. Avoid interest-only loans and other exotic mortgages. Lastly, don’t be swayed by trinkets such as “free trip to Hawaii with house” or “free 2004 BMW with house”. Don’t laugh, it’s actually happening. Focus on the value and potential of the property.

Real estate is in a slump, but this may be the best time to buy for you. Talk to a qualified real estate professional who can show you the range of options in the current market. You might be pleasantly surprised at the affordability, and by the power you have in this buyer’s market.

Interesting Fact

A new study out by Ken Winans, president of investment research firm Winans International, found that stocks are “superior” investments to real estate over the long term, according to USA TODAY. From 1920 through 2006, the average new home appreciated from $4,030 to $276,400, or a gain of 6,759%. Over that 86-year span, the DJIA returned 17,210%, and that figure does not include dividends. Over the past 20 years, the average new home appreciated 268%, vs. a gain of 1,193% for the DJIA.

IRC 1031: Can a lease be exchanged for a property?

Can a tenant exchange their lease for a a piece with property without tax consequences? Under IRC 1031, one may do that exchange as long as the total lease term is over thirty years. Steve Wayner at Blog1031.com details this kind of transaction.

When Is It Too late to do a an IRC 1031 Tax Free Exchange

Are you selling a piece of property and want to do a 1031 exchange? Know the rules so you can get your exchange done yet in timing. Steven Waymer gives some good advice about the penultimate time to do a IRC 1031 exchange.

Timber and IRC 1031 Exchanges

Steven Waymer at Blog1031.com  as some good advice on using timber sales in an IRC 1031 Exchange. do you know the difference between a timber deed and a timber contract?

Common Real Estate Investing Mistakes

Pat Curry at Bankrate.com has a great article on the 10 lethal mistakes real estate investors make. My favorite is #4 -Paying to Much. I cannot express how important getting a good buy price is . "You make your money when you buy" should be everyone's investing mantra, in real estate and other investments.

Another favorite is #2 -Thinking you'll get rich quick. Real estate investing is life consuming endeavor and should not be undertaken by the weak in spirit. Dealing with the three T's - toilets, tenants, & trash - is a constant problem for the real estate investor. You will get rewards, but they will not be easy or quick.

Dr. Mueller interview Part 2

More from our interview with Dr. Mueller of Dividend Capital (approximately 10 minutes).

Download dr. Meuller 2.mp3

Dr. Mueller interview part 1.