CALIFORNIA REAL ESTATE PRIMER – Preserve Your Prop 13 Base Year Value For Your Children

 

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

Preserve Your California Prop 13 Base Year Value For Your Children And Grandchildren

In June of 1978, Proposition 13 passed in California and established base years for all real estate properties in the state. For people who owned property before March 1, 1975 the base year was established as of that date. Thereafter, as properties changed ownership the value at the time of the transfer was adopted as the new base year.

On average, property values have increased over time and each new buyer who acquires real estate in California understands they may have to pay more for property taxes than the previous owner.

So far, so good, except children and grandchildren who inherited real property were treated as new owners because by law the inheritance was considered a change in ownership causing the parents/grandparents lower base year value to disappear. As a result, the property tax could jump to 2 or 3 times its previous level.  This type of uannounced tax increase could be quite a surprise to the new owners.

The unintended result was a dampening effect on the continuing family ownership of real estate in California.  Children and/or Grandchildren inheriting the property many times found themselves unable to pay the new property taxes and as a result were forced to sell the property.

To counter this effect, Propositions 58 and 193 were passed in November of 1986 and March of 1996, respectively. The details of these laws can be found in Section 63.1 of the Revenue & Taxation Code.

In general, transfers of real property between parents and children and vice versa, as well as transfers from grandparents to grandchildren are excluded from reassessment. Note that transfers from grandchildren to grandparents are not excluded, and in the case of transfers from grandparents to grandchild, the parents of the grandchild must be deceased as of the date of purchase or transfer.

“Children” are considered to be the natural children, stepchildren, sons-in-law and daughters-in-law, and children adopted before the age of 18. The same requirements apply to grandchildren, step-grandchildren, and grandchildren-in-law.

Principal residences are excluded from reassessment, as well as, an additional $1,000,000 of the seller’s or decedent’s other real property. An exception to the principal residence exclusion exists for grandchildren who have previously received a principal resident (possibly from their parents). In such a case the grandparent’s principal residence will be treated at “other real property” and will be subject to the $1,000,000 limitation.

The $1,000,000 limitation is determined by the assessed value of the property immediately before transfer. The sales price or actual “current market value” does not affect the $1,000,000 limit. This limit is cummulative and once exceeded all later transfers will be reassessed except for the principal residence.

Happily, the $1,000,000 exclusion is a separate limit for each parent giving the community property of married parents a $2,000,000 limit. For grandchildren, the limit would be $1,000,000 from the father’s side (including grandparents) and $1,000,000 from the mother’s side (including grandparents).

The value of professional estate planning becomes obvious when it is realized that transfers by sale, gift, devise or inheritance all may qualify for the exclusion. Moreover, transfers to individuals and from trusts to individuals and from individuals to trusts may also qualify for the exclusion.

It falls to the person receiving the property to file a claim with the appropriate Assessor’s office within three years of the date of transfer and before any transfer to a third party or within six months after the date of mailing of a Notice of Assessed Value Change resulting from the transfer of the property, whichever is later. There are some exceptions to these deadlines. Once the claim is filed, the Assessor will determine if the transaction qualifies.

Any transfers you are planning should also be carefully considered in light of the relevant federal estate and gift tax laws, as well as the relevant state property tax laws.  Consult your tax advisor.

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voice: 949-887-1625

fax: 866-764-6325

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voice: 949-505-3838

fax: 866-764-6325

CALIFORNIA REAL ESTATE PRIMER – Buyer’s Short Sale FAQs

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

Over the course of time, we have fielded a lot of questions from buyers regarding short sales and some of those questions are more frequently asked than others. The questions below are the more frequent ones we’ve been asked:

 1. What is a short sale?

A short sale is the process by which homeowners can sell their home for less money than they actually owe on the mortgage(s). This is accomplished by providing proper documentation to the lender(s) to convince them to reduce the mortgage balance to allow the sale. If the sale is approved, the mortgages lender(s) will actually take a loss on the mortgage.

If a bank approves the discount of a mortgage, the home can be sold for a price lower than the total debt on the property without the seller having to come up with cash to cover the shortfall. The mortgage is satisfied and any foreclosure process stops.

2. Why would a bank or mortgage lender want to cooperate with a short sale?

A common saying is that banks are in the business of lending money and do not want to own real estate. While this is a little misleading, it is essentially true. When banks foreclose on a property it is a long and expensive process and generally means holding the property in their inventory as a non-performing asset. Banks have a limit to the amount of non-performing assets they want to hold. Once this limit is exceeded, they have strong incentives to get rid of the properties at discount prices.

For a lender, agreeing to a short sale avoids many of the costs associated with the foreclosure process. Attorney’s fees, delays from borrower bankruptcies, damage to the property, costs associated with resale, property tax, insurance, etc., must all be paid by the bank during a foreclosure. In a short sale scenario, the lender is able to cut its losses by getting rid of the property faster and at a lower cost.  The most important element in the lender’s decision process is whether or not the property is “underwater.”  If so, then it can’t be sold for an amount equal to or greater than the mortgage and a short sale may be a viable solution.

3. How does a bank determine the price it will accept on a short sale?

Every bank has a specific method of deciding how much they’ll accept on a short sale. Give me a call, Mikey Hall, at 949-887-1625 and I’ll explain it to you.

 4. Can I really get a deal on a short sale home?

Yes, you can, but not every short sale is a deal. You still have to do your research and estimate the current market value of the home. This is one of the areas where a knowledgeable real estate agent’s level of experience really pays off.

5. Who pays the real estate commissions on a short sale?

In a standard sale, commissions are subtracted from the seller’s funds and paid out of escrow to the Realtors. In a short sale, the seller has no funds in escrow which means the commissions end up being subtracted from the monies that would go to the lender. So, the lender ultimately is the one paying the entire sales commission.

6. Are short sales guaranteed to work?

No. All of the criteria must be met before a bank will even consider a short sale. Even then it isn’t easy to convince a bank that the market value of the home is lower than what they are owed.

Even if all the paperwork has been correctly completed it can take several weeks, or even months, only to be denied. If the lender does not approve the short sale, no transaction occurs. The Purchase Agreement becomes void and the listing continues. There are, however, ways to put a time limit on the lender’s time to issue approval.

In a rising market the delay in a short sale approval runs against the buyer for at least two reason 1) The buyer’s purchasing power decreases as prices increase; and, 2) there is no guarantee the lender will approve the sale and the delay may cause the buyer to be priced out of the market.

A falling market has just the opposite affect because a buyer’s purchasing power increases as prices decrease.

7. How long does a short sale take to complete?

From a few weeks to several months.

8. What if the house I want needs repairs.

Remember, when an owner short sells their home it’s because they are suffering a financial hardship. This means there is no money for repairs and as a buyer you can’t reasonably expect the seller to do much in the way of repairs. The good news is we have had some success convincing lenders to repair termite damage and to make reasonable repairs relating to safety. But, this type of cooperation is dependent on the expense involved, the nature of the repair, the purchase price being paid and the direction of the market.

9. What if the house I want has liens on it?

Liens can complicate matters because the owner will not have the financial capability of removing them. Depending on a number of factors, including the real estate market and the purchase price, the lender might be persuaded to clear the liens. Or, sometimes the lien holders themselves might be convinced to reduce their liens. A short sale in this circumstance will take substantially longer.

10. I’m an investor, can I buy a short sale?

The simple answer is yes, you can. However, there can be serious complications.

11. Can I buy the short sale for the price stated in the listing?

An experienced Realtor can quickly tell you whether or not the property is priced unusually low. If so, the home was probably intentionally priced that way to attract offers which might prompt the lender into letting the Realtor know what price it will accept. In which case, the chances of buying the property at the asking price may not be very good.

On the other hand , the property might be priced correctly and your chances of getting the property at the asking price will be reasonably good.

12. How long will it take to get bank approval of my offer?

The answer to this question depends on the expertise of the listing agent, which bank is involved, and how many loans are on the property. Once approval is obtained, the property can go into escrow which takes no longer than a standard sale.

14. Will the banks negotiate on price?

Yes.  More in down markets and less in up markets.

15. Do I get title to the property when I buy a short sale?

Yes, title is transferred to the buyer at the close of escrow, just like in a standard sale.

16. Are my property taxes based on the amount of debt that was on the short sale property?

No. In California, your property taxes are based on the purchase price of the home.

17. Can I transfer my property tax base to a sale short?

Possibly, depending on whether or not you meet the requirements. You might want to read our article entitled, “Transfer Your Property Tax Base Year Value To Your New Home“.

As the housing markets recover, fewer and fewer homes will be underwater until finally the short sale will again become an unusual event.

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“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

DRE #00792478

Return To The Table of Contents

OTHER INTERESTING AND INFORMATIVE INFORMATION SOURCES

OC Property Management & Sales, Inc.

DRE Lic# 01886215

www.OCPropMgmt.com

OCPropertyMgmt@gmail.com

voice: 949-505-3838

fax: 866-764-6325

CALIFORNIA REAL ESTATE PRIMER – Seller’s Short Sale FAQs

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

 

Over time, we’ve collected the questions we are most frequently asked by clients who were considering the short sale of their property. Some of these questions are listed below.

1. What is a short sale?

A short sale is the process by which homeowners can sell their home for less money than they actually owe on their mortgage(s). This is accomplished by providing proper documentation to the lender(s) to convince them to reduce the mortgage balance to allow the sale. If the sale is approved, the mortgage lender(s) will actually take a loss on the mortgage.

If a bank approves the discount of a mortgage, the home can be sold for a price lower than the amount owed without the seller having to come up with cash to cover the shortfall. The mortgage is satisfied and any foreclosure process stops.

2. How does the bank decide what price to put on the property?

Every bank has a specific method of deciding how much they’ll accept on a short sale.

3. What type of situation is the short sale best for?

Most short sales are accomplished on properties heading toward foreclosure. This means the homeowner is at least 3 payments behind, and the foreclosure process has already begun. Recently however, more mortgages that are simply behind or “in default” are considered short sale candidates without actually being in foreclosure.

Next, the homeowner typically has no equity or negative equity in the home. In other words, the total balance owed to the lender is equal to, or greater than, the price at which the house can be sold.  If this weren’t the case, the lender would simply foreclose and sell the property itself.

Lastly, the homeowner must have some type of financial “hardship” which is preventing him from paying the mortgage.

4. Does a homeowner benefit from a short sale?

First and foremost, a short sale relieves the stress of being in foreclosure and it allows the homeowner to get rid of their big mortgage payment and move on with their lives. A short sale allows you to stop a foreclosure proceeding and get a fresh start. In our experience, this is the primary benefit to the homeowner.

On the credit side, a short sale is arguably the lessor of two evils. Having some late payments, and a foreclosure filed has already done damage to your credit.. However, a completed foreclosure generally does more damage than a short sale agreed to by a lender. Obviously, a bankruptcy significantly damages your credit score.

5. I’m an investor, can I short sale my rental property?

Yes, but remember the “hardship” element which must be present. For investors there may also be some income tax issues resulting from mortgage relief.  Remember to consult your tax advisor.

6. Does it matter what kind of loan I have?

Possibly. In some instances there is a potential risk of a deficiency judgement or a lawsuit on a loan contract, as opposed to judicial foreclosure. Give us a call and we can discuss the specifics of your situation.

7. I am in foreclosure. Is a short sale for me?

Each situation is different and must be evaluated individually. The important factors in relation to a short sale are:

  • Property in foreclosure or default
  • Personal financial hardship
  • Little or no equity in the property
  • At least 60 days until eviction date
  • The value of the home has declined below the loan amount

If you feel you fit into these criteria, give us a call and we can discuss your specific situation.

8. What if my mortgage is an FHA, HUD or VA mortgage?

Generally, short sales can be accomplished on all of these types of mortgages, though each one has different criteria.

9. What options other than a short sale might I have?

  • Cure your mortgage default (bring your payments current)
  • Attempt a loan modification that adjusts the terms of your existing loan (lower your payment)
  • Refinance your mortgage with another lender (lower your payment)
  • Try to sell your home through normal channels
  • Attempt to get your lender to accept a deed in lieu of a foreclosure
  • File for bankruptcy

10. What is “financial hardship” and why is it so important?

“Financial hardship” is a critical part of the short sale equation. No matter what you hear about banks “not being in the business of owning real estate”, they DO NOT easily give homeowners a break. They require GOOD REASON to give a discount for a short a sale.  Remember in most cases the bank has to answer to it investors and shareholders.

The only reason a lender will agree to a short sale is if they determine that a short sale will net them more money than proceeding with the foreclosure. Understanding the homeowner’s financial hardship plays a major role in the lender’s estimation of whether or not it will be paid in full for the mortgage. Quite simply, the lender may try to make the borrower pay the shortfall if there is no hardship.

Many homeowners try to use a short sale as a “get out of jail free” card to dump a poor investment. Lenders will not allow this, and it is a waste of time to try. If you are employed and have some assets, but you have simply lost value in your home and want to sell, you probably cannot short sale. If you are current on your mortgage, it’s possible but very difficult to short sale. Lenders need to see that you simply cannot pay them before they will agree to a short sale.

11. Who owns the house after a short sale?

The purchaser of the house is the owner after a short sale, just the same as in a normal sale. The mortgage lender is paid off and the previous homeowner moves to a different home.

 12. What do I do about my back property taxes when I do a short sale?

Just as in a normal home sale, the property taxes are the responsibility of the homeowner until the date the sale is closed. Then they become the responsibility of the buyer. If your property taxes have not been paid this will affect the negotiations between the buyer and the bank, so you must inform the buyer of the taxes owed.

13. Do you handle homes in my area?

Our focus is Orange County, California, however, we will consider listings in other areas of Southern California. In addition, we work with other short sale specialists in California and can often refer your case to local Real Estate Broker if we cannot help you.

14. Do you handle duplexes, apartment buildings, condos, or commercial property?

We handle residential properties of all types in virtually all price ranges, but we currently do not handle commercial properties.

15. My home is already listed for sale on the MLS, but isn’t selling; can I still do a short sale?

Yes, you can and it is relatively common. Some lenders even require that a house be listed for sale before approving a short sale in order to show that a discount is necessary.

16. My home is really nice, why is the short sale offer price so low?

Sellers often have an emotional attachment to their home and may feel a short sale offer is too low. It is important to remember a few things. First, the seller in a short sale can never receive any money in the transaction. It should therefore be of little concern what price is offered as long as the short sale is done. The only real exception is when the seller has tax liability concerns. (If there is tax liability, a lower sale price means a larger mortgage relief and a greater tax liability.) Otherwise, the price should not matter to the seller.

The important factor in a short sale is whether the lender will accept the price offered. Lenders often accept prices for short sales which may be surprising to normal homeowners or Realtors. Discounts of 30% are no longer uncommon. This happens for several reasons:

A. Sellers are often in denial about how bad the market really is for housing and therefore, how far the value has declined.

B. Lenders don’t like the foreclosure process any more than homeowners do (especially in California). Lenders incur substantial costs during a foreclosure process that can last more than 12 months. They have attorney fees, filing fees, publication fees, lost interest on the money that is tied up, property taxes, insurance, maintenance costs, as well as the potential for vandalism of a vacant home. This is all BEFORE having to try to sell the home as a bank-owned (REO) property and pay sales commissions. A short sale is a way to avoid some or all of these costs. If a lender calculates his cost of eviction at $50,000 for a house, they will often take a $40,000 loss on a short sale instead and be better off for having done so..

17. Who pays the real estate commissions on a short sale?

The commissions are paid from the funds the buyer places in escrow and because there is no equity in the house, the lender ultimately is the one paying the entire sales commission.

18. Are short sales guaranteed to work?

No. All of the criteria must be met before a bank will even consider a short sale. Even then, it isn’t easy to convince a bank that the market value of the home is lower than what they are owed.

Even if all the paperwork has been correctly completed it can take several weeks, or even months, only to be denied. If the lender does not approve the short sale, no transaction occurs. The Purchase Agreement becomes void and the listing continues.

Moreover, As the real estate market improves and the value of homes approaches and/or surpasses the amount owed it will become increasingly harder to obtain bank approval of a short sale.

19. How long does a short sale take?

A short sale can take 60 to 120 days or longer to complete. This is very important. The process is complicated and takes a lot of time. So to exercise the short sale option, you must act quickly. If you wait until one week before eviction, no one can help you with a short sale. It is simply impossible. DO NOT WAIT.

20. Why do I have to sign a Borrower’s Authorization?

The Borrower’s Authorization gives the lender permission to speak to your representative about your loan. That’s all it does, but it is necessary. An authorization must be filled out for each mortgage and for each Realtor or escrow officer authorized to act on your behalf.

21. I have heard that I could owe income taxes after a short sale, is this true?

Possibly, but it’s not that simple. There are a number of factors involved. For example, are you an investor or is the property your primary residence. Is the debt on the property “purchase money” or has the home been refinanced. If you’re an investor or if the property was refinanced are you insolvent? You can see how the matter can become complex in very short order. You must consult with an attorney or CPA on this issue.

When a lender writes off part of a loan (discounts it) the portion written off is the equivalent of a cash infusion to the owner. This “mortgage relief” is then reported as income to you by means of a 1099C form.

Even if you receive a 1099C and declare it as income, there is a good chance you will owe very little tax. This is because there is an IRS rule regarding “insolvency” which essentially says if you are insolvent (more liabilities than assets) at the time of the short sale, you don’t have to count the 1099C as income (instead you declare it, then obtain the exemption). There is an IRS form to complete to show you are insolvent. See the Internal Revenue Service website at www.irs.gov

In December of 2007, President Bush signed a new law into effect providing that for a specified period of time homeowners who satisfy certain requirements will not be taxed on mortgage relief. This bill is called, the “Homeowners Debt Forgiveness Act” and it may or may not apply to your situation.  This law was recently extended by President Obama up to December 31, 2013.

Again, you must consult your CPA or tax adviser.

20. I am behind on my mortgage payments, but not yet in foreclosure. Can I do a short sale?

Yes, as the market dropped, this happened with much greater regularity. Sometimes these are the most attractive short sales for both the buyer and the lender because the buyer can take advantage of the lender’s ability to avoid the vast majority of the costs of foreclosure.

In these cases, it is more important to have a very clear “hardship” story to explain to the lender why you are unable to make the payments.

21. My house needs a lot of repair; can I still do a short sale?

Yes, though it can make the process more difficult because the price must be lower to compensate for the repairs. The key is to show the bank’s appraiser all the work that needs to be done. Let me know in advance if this is the case with your home.

 22. I have more than 10% equity in my home – can I still do a short sale?

Probably not. However, you may be a candidate for a regular sale.

23. Other people are on the deed with me, but they don’t want to short sell. Can I still do a short sale?

No. All parties listed on the deed or mortgage must sign the short sale purchase agreement. There are no exceptions to this.

24. I have other liens (i.e. mechanics, IRS, court judgments) on my house; can I still do a short sale?

Yes, but it gets much more complicated and will take longer. If this is the case with your home, be sure to COMPLETELY list all liens you have. Each lien holder must be negotiated with individually. A short sale in this circumstance will take substantially longer.

25. I have property I inherited but I can’t afford the mortgage. Can I do a short sale?

Yes. You might also want to read our article, “Preserve Your Prop 13 Base Year For Your Children and Grandchildren“.

26. I have 2 or 3 mortgages on my house. Can I still do a short sale?

Yes, each mortgage or line of credit (HELOC) can be negotiated individually. It is important to know which mortgage filed the foreclosure or, if more than one are in foreclosure, which one filed first.

As the housing markets recover, fewer and fewer homes will be underwater until finally the short sale will again become an unusual event.

1 Mikey & Pixey Best 1

“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

DRE #00792478

Return To The Table of Contents

OTHER INTERESTING AND INFORMATIVE INFORMATION SOURCES

OC Property Management & Sales, Inc.

DRE Lic# 01886215

www.OCPropMgmt.com

OCPropertyMgmt@gmail.com

voice: 949-505-3838

fax: 866-764-6325

CALIFORNIA REAL ESTATE PRIMER – Short Sales From The Seller’s Point of View

DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.



SHORT SALES FROM THE SELLER’S POINT OF VIEW

Short sales, when considered through the eyes of the seller are, by far, more complex than when viewed by the buyer. Still, each situation is different and will turn on its own facts. The purpose of this discussion is to highlight a few of the areas of concern where the seller should obtain professional legal, tax, and/or credit advice. The law is constantly changing and the reader is warned not to rely on this discussion as anything other than a description of issues to be researched.

The notation C.C.P. refers to the California Code of Civil Procedure and the notation C.C. refers to the California Civil Code.  These are only two codes in what is a rather large body of California statutory law.

Foreclosure: In the event a borrower defaults on a loan, the lender may foreclose on the borrower’s real property which secures the loan. A foreclosure may take the form of a Trustee Sale Foreclosure, or a Judicial Foreclosure resulting in a deficiency judgment. A foreclosure poses a number of threats to a borrower: (a) loss of the borrower’s home; (b) a foreclosure on the borrower’s credit report; and, (c) a potential deficiency judgment.

Deficiency Judgment: A deficiency judgement is a judgment obtained by the lender, in a judicial foreclosure, against the borrower for the difference between either the unpaid balance of the secured debt and the amount produced by sale, or the fair market value of the property, whichever is greater (C.C.P. § 726(b).) A lender may obtain a deficiency judgment only with a judicial foreclosure. The trustee’s sale foreclosure and the judicial foreclosure are mutually exclusive remedies.

When Deficiency Judgments Are Not Available: Under certain circumstances in California a deficiency judgement may not be available to a lender:

a. Purchase Money. If the loan was obtained to purchase an owner occupied residence (1-4 unites) and the loan is secured by that property the lender may not obtain a deficiency judgment against the defaulting borrower. The loan is entitled to “purchase money” protection (C.C.P. § 580b.). However, if the loan is the result of a refinance the new loan is no longer “purchase money” and is not entitled to protection.

b. Seller Carryback. If the purchase money loan for any type of real estate is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower. (C.C.P. § 580b)

c. Trustee’s Sale. A lender may not pursue a deficiency judgment against the borrower should the lender opt to foreclose by a trustee’s sale foreclosure (a non-judicial action). (C.C.P. § 580d.)

d. 3 Month Time Limit. An action for a deficiency judgment must be brought within 3 months from the time of a judicially-ordered sale. (C.C.P. § 580a.)  Be aware that time limits may be subject to exceptions and conditions and it is always wise to consult with your attorney.

e. Fair Value Limitations. A deficiency judgement is limited to the difference between the unpaid balance of the secured debt and the amount produced by judicial sale or the fair market value of the property, whichever is greater, in a judicial foreclosure (C.C.P. § 726(b).)

Junior Deeds of Trust: If a junior deed of trust is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be presonally liable.

Exception To The One Action Rule: Typically a lender may not sue on a debt secured by a mortgage, except by judicial foreclosure (C.C.P. §726). An exception to this is if the property has become valueless after the lender’s security interest was recorded. In this case, the lender may sue directly on the debt, unless the borrower’s loan is either a purchase money or a seller carryback loan.

Risk of Deficiency Judgment and/or Direct Suit: The Seller is warned to consider carefully the risks of a deficiency judgment and/or a direct suit on the debt.

Other Lender Options: Borrowers should understand that lenders will sometimes consider solutions other than a foreclosure. These solutions might include:

a. Loan Workout or Modification: A loan workout is a resolution of the problem between the borrower and the lender which modifies the original loan agreement. Some of these options include forbearance (e.g. forgiving a portion of the debt or late charges); deferment; renegotiating interest rate, monthly payment amount, principal amount, maturity date; or the enforcement of an acceleration clause in the loan. It is worthwhile to investigate the current government sponsed programs such as the HAMP, HARP and HAFA programs.

b. Deed in Lieu of Foreclosure: After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt.

c. Short Sale: A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan. This is generally the result of the borrower’s inability to make the mortgage payments and a property value which is less than the total amount owed on the mortgage(s).

Generally, a lender will not consider a short sale unless the borrower has stopped making payments on their loan and has in hand an actual offer to purchase the subject property.

New Loan: Sometimes it is possible to refinance the Borrower/Seller’s existing loans and thereby obtain an affordable monthly payment. The Borrower/Seller is encouraged to explore the possibility of refinancing the existing mortgage debt.

Debt Counseling: If borrower/seller’s inability to make the existing loan payments is due to other unsecured debt (e.g. charge cards etc) seller may benefit from the advice of a professional debt counselor.

Advice Of Counsel: Borrower/Seller is encouraged to seek the advice of an attorney as to the most appropriate course of action to be taken.

Effect Of A Short Sale On Credit Rating: A lender will likely report a short sale to credit bureaus as being “settled” for less than the full balance. This type of report will show up on the borrower’s credit report as a negative mark for seven to ten years (C.C. §1785.13). Even so, the effect of this negative mark is generally perceived to be less damaging than a reported foreclosure. Typically lenders will not negotiate how they report a short sale.

Tax Effects Of A Short Sale: The tax implications for the borrower can be significant and are relatively complex. In very general terms mortgage relief (i.e. a discount on the amount owed) will be reported to the IRS by the lender, and must be included in the borrower’s gross income.

On December 20, 2007 President Bush signed into law a measure giving tax breaks to homeowners who have mortgage debt forgiven. With the passage of “The Mortgage Forgiveness Debt Relief Act of 2007“, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence. This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).  Since its inception the Mortgage Forgiveness Debt Relief Act has been extended a number of times and may or may not be in effect at the time you are reading this post.

Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

Lender Not Required To Approve Short Sale: Sellers need to understand that lenders are not required to agree to a short sale and may refuse to proceed with a short sale even though a conditional approval has been issued. A lender may resort to a foreclosure all the way up until the actual close of escrow.

Lenders Are Not Required To Respond To Approval Requests: There is no requirement that a lender respond to a request for approval of a short sale/payoff.

Effects Of Late Payments: If borrower stops making payments and the lender begins the foreclosure process by filing a notice of default and then the borrower pays what is owed by the note, these activities may appear on the borrower’s credit report. The lender can report to a credit bureau receipts of any payments made 30 or more days after their due date. This may appear as a “foreclosure in process,” etc. and will harm the borrower’s credit rating. Before stopping payments on a mortgage, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

It bears repeating that lenders are not obligated to accept a short-payoff and that Sellers and Real Estate Brokers have no control over whether Short-Pay Lenders will consent to a short-payoff. . A short sale may create credit or legal problems or may result in taxable income. Seller should always seek advice from an attorney, certified public accountant or other expert regarding such potential consequences of a short-payoff.


DISCLAIMER

This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

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CALIFORNIA REAL ESTATE PRIMER – Mortgage Forgiveness Debt Relief Act

001

DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

 

THE MORTGAGE FORGIVENESS DEBT RELIEF ACT

Recall that in our article, “Short Sales From The Seller’s Point of View,” we mentioned that the tax implications, of a short sale, for the borrower can be significant and are relatively complex. In very general terms, mortgage relief (i.e. a discount on the amount owed) is viewed as income, and will be reported to the IRS by the lender, and must be included in the borrower’s gross income. Having said that, on December 20, 2007 President Bush signed into law a measure giving tax breaks to homeowners who have mortgage debt forgiven on their family residence.  This law was part of the “Bush Tax Cuts” you may have heard about.  Note: The Bush Mortgage Debt Relief Act applies only to Federal income tax.  State income tax rules are set by each individual state and which state laws might apply to you is another subject best covered with your tax advisor.

With the passage of “The Mortgage Forgiveness Debt Relief Act of 2007“, a taxpayer did not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence. This tax break applies to debts discharged from January 1, 2007 to December 31, 2009.  Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the primary residence (up to $2 million for refinances).  The December 31, 2009 date was the date the law was initially set to expire.

Then in 2009, The Emergency Economic Stabilization Act of 2009 was passed.  This law extended the Bush exclusion of income for qualified debt relief.  This extension of the law was set to expire on December 31, 2012 and applied to discharges of qualified indebtedness occurring on, or after January 1, 2010.

On December 31, 2012 , at the 12th hour, congress passed yet another extension of the federal Mortgage Forgiveness Debt Relief Act through December 31, 2013.

Unfortunately, California did not renew its mortgage debt relief law.  In response, the California Association of Realtors has said it will sponsor California Senate Bill 30, introduced December 3, 2012, by Senator Calderon, D-Montebello.  If passed and signed into law, Senate Bill 30 will exempt mortgage debt forgiven on a principal residence as taxable income.  Until that happens however, it appears that in California mortgage debt relief from the short sale of a principal residence will be treated as taxable income.

On January 10, 2013, Senate Bill 30 was referred to the California Senate Governance and Finance Committee.

The following is a set of a set of IRS FAQs which may be helpful in understanding the nuances of the law:

What is the Mortgage Forgiveness Debt Relief Act of 2007?

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

“What does that mean?

Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.

“Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?

No, 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.

“What about refinanced homes?

Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

“Does this provision apply for the 2007 tax year only?

It applies to qualified debt forgiven in 2007, 2008 or 2009.

“If the forgiven debt is excluded from income, do I have to report it on my tax return?

Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.

“Do I have to complete the entire Form 982?

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b. Attach the Form 982 to your tax return.

“Where can I get this form?

You can download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

“How do I know or find out how much was forgiven?

Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

“Can I exclude debt forgiven on my second home, credit card or car loans?

Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

“If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?

Yes. The forgiven debt may qualify under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent. A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

“Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982, page 4.

“Is there anything else I need to know before filing?

Yes. Because the Mortgage Forgiveness Debt Relief Act of 2007 was passed so late in the year, the software systems used by tax preparers and at the Internal Revenue Service need to be updated to accept the revised Form 982. The IRS expects to be able to process the new Form 982 electronically on March 3, 2008.”

Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

The information contained herein is deemed reliable, but must be independently verified.

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DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.

 

CALIFORNIA REAL ESTATE PRIMER – Tips For Buying REO Properties

036 (572 x 428)

Tips For Buying REO Properties

The acronym REO stands for the phrase “Real Estate Owned.” An REO is a lender owned property, meaning it has been acquired by the lender as the result of a foreclosure.

Buyers attempting to buy foreclosed properties will need to understand a few basic principals, because the competition on a well-priced REO can be intense. A well-priced REO will draw multiple offers and your competition may well include professional investors. The key to a successful conclusion is to be organized and to have the ability to move quickly.

Some helpful tips include:

1. Realistically establish your maximum down payment, your maximum affordable mortgage amount and your maximum purchase price. You need to be ruthless about these limits.

2. Get yourself either pre-qualified or pre-approved with your lender so that you can move quickly when the time comes.

3. Be prepared to pre-qualify with the selling bank and to allow the seller to run your credit scores should it be requested.

4. Understand that REO properties (that haven’t been destroyed by the prior owner) aren’t gifts. They are generally no more than 10% to 15% below other properties. A corollary to this is the fact that banks are skilled at understanding the market and assessing the market value of a property. As a result, low ball offers are almost never a productive activity.

5. If the property was priced right in the first place you can expect experienced, skilled competition.

6. If an REO property has been sitting on the market without drawing offers, a bank owner will usually not be shy about adjusting the price to move the property. Banks are not in the business of managing property and are generally pragmatic about their pricing.

7. To make your offer more appealing you might want to consider getting your mortgage from the bank selling the property. This tactic might make your offer more appealing, assuming the seller’s loan terms are reasonable.

8. Remember, REO properties are sold “AS IS” and it will be your responsibility to inspect the property and to determine how much money it will take to repair the property and bring it back up to condition. Don’t forget to factor this cost into your purchase limit, as well as the value of the property.

9. Get the most experienced Realtor you can to represent you. Look for a Realtor who is interested in understanding your situation and working toward your goals.

 

If ever there was a time to use a skilled real estate agent this would be it.

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“ASK MIKEY”

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AskMikeyHall@gmail.com

voice: 949-887-1625

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fax: 866-764-6325

DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.

 

CALIFORNIA REAL ESTATE PRIMER – REO Properties

036 (572 x 428)

REO PROPERTIES

The acronym REO stands for the phrase “Real Estate Owned.”  In the real estate trade, an REO is a lender owned property, meaning it has been acquired by the lender as the result of a foreclosure.  In California, this latter fact can be important, because it means  the lender has acquired “clear title” to the property.  This might not be the case if the property was acquired by a Deed in Lieu

Short Sale

In the normal course of events, a distressed home moves through a series of stages which are many times confused by the general public. In the beginning, when the homeowner is trying to sell the home for an amount less than the debt owed on the property it is called a Short Sale.

Foreclosure

Foreclosures begin when the Trustor (borrower) stops making the monthly payments to the Beneficiary (Lender). The first missed payment is a technical default, but in practical terms, most Beneficiaries do not begin the process until the third payment is missed. During this time period the property remains classified as a short sale.

When the owner becomes 90 days late on the mortgage payments, Beneficiaries typically record a Notice of Default (NOD) and the Foreclosure Process begins. The property is now called a Foreclosure and is sometimes typified as “being in Foreclosure”, however it is still a Short Sale.

REO

A trustee sale date is set for about three months after the NOD is recorded. On the sale date, the property is offered for sale at auction. The successful bidder must pay cash for the property. If no one purchases the property, title is transferred to the Beneficiary (Lender) and the property becomes an REO.

The Lender now has title to the property. The Lender will establish a market value for the property, then assign it to an inhouse Asset Manager (generally an outside company) which specializes in the handling of REOs. This company, in turn, will assign the property to a local real estate broker who will list the property for sale on as “AS IS” basis. This means generally there will be no repairs.

It must be remembered that the lender is an owner who has never “lived” in the property. That means there will be very few, if any, disclosures from the Lender. The burden will be on the buyer to determine what’s wrong with the property and how much it’s going to cost to fix it. Moreover, most lenders either use their own purchase contract instead of the CAR approved contract or require their own contract addendum. Many Lenders will also require the buyer to pre-qualify with them, and some will even require the buyer to submit FICO scores. In this case however, the effort might be worth it.

Typically, the Realtor who gets the REO listing will be responsible for evicting anyone who is squatting on the property, re-keying the property, turning on the utilities, adding a lock-box, and bringing the property up to some minimum saleable condition. In variably the REO listing agent will advance these costs out of their own pocket.

For some reason Lendors will habitually assign REO properties to a limited number of Realtors.  While this might be good from a proceedures point of view it can, and many times has, resulted in the concentration of large numbers of REO listings with a single agent.  As the number of REO’s listed with an agent increases, that listing agent’s available time disappears and the entire process becomes mechanized and unresponsive to the buyer.  As a result, REO buyers must be on top of their game.  There will be no listing agent to answer questions, chat up the property or even show it.

The Pipeline

It is extremely difficult to predict how many homes will move completely through the pipeline to the final REO stage. Some owners will “cure” their default, others will manage to sell their properties before the trustee sale. Some of the homes will be sold by the trustee, and what is left will finally become an REO. The whole process can easily take six to twelve months.

It is not unusual for only 10 or 12 homes out of 80 or 90 to become REOs. For example, in Aliso Viejo, California in May of 2008, there were 85 short sales, and only 14 REOs.  At that time, this was not an unusual ratio.  As markets improve and become more healthy, the number of REO listings decreases.  In a healthy real estate market driven by low unemployment the REO listing will become a rarity.

Are REOs Really A Good Deal?

REOs can be a great deal, but they aren’t necessarily so. While the price may no longer include any owner equity, the property may still be priced at, or even above, the market. On the other side of the coin, REOs priced below the market tend to draw multiple offers. Since Lenders are aren’t in the business of managing REO property, the multiple offer scenario is preferable because it tends to drive up the price on a quick sale.

In addition to a possible price discount, REOs (unlike short sales which require lender approval) provide an opportunity to deal with a single owner. REO purchases tend to be straightforward affairs. The caveat here is that the property is virtually always sold on an “AS IS” basis without the benefit of a Transfer Disclosure Statement.  Moreover, in California, the lender is exempt from certain statutory disclosures regarding the property.  If there’s a problem you must find it yourself.

If ever there was a time to use a skilled real estate agent this would be it.

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“ASK MIKEY”

http://www.AskMikeyHall.com

AskMikeyHall@gmail.com

voice: 949-887-1625

fax: 866-764-6325

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OTHER INTERESTING AND INFORMATIVE INFORMATION SOURCES

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voice: 949-505-3838

fax: 866-764-6325

DISCLAIMER

This article is intended to be a general discussion only, and should not be considered legal or real estate advice. Your use of it does not create either an attorney-client or broker-client relationship. Any liability that might arise from your use or reliance on this article, or any of its links, is expressly disclaimed. This blog is not legal, real estate, loan, accounting or tax advice, and is not to be acted on as such, it was outdated the moment it was written, and is subject to change without notice.  If you are dealing with a potential problem with your investment property you are advised to retain the appropriate licensed professional.