Loan Mod, Short-Sale or Bankruptcy Oh My!

Many times in today’s economy homeowners are internally wrestling with the question: Do I Modify, Short-Sell or file for Bankruptcy? Yes, you can also throw in do I simply let it go if you would like but for the sake of the post it is not included.

The answer to the question is not a simple one. Many times I find the reason that it is most difficult to decide is the lack of understanding the consequences. Each option comes with serious pros and cons that will have a long term affect on your life.

Important Questions to consider when looking into your options are:

Is my loan a recourse debt or is it non-recourse debt? - Click here for Wikipedia’s Definition of Non-Recourse Debt .

What tax consequences will I face if I execute a Loan Mod, Short-Sale or file Bankruptcy?

What are the Long term Credit Consequences?

How Much do I have to pay to get this done?

How do I find the right Loan Mod company, Realtor or Attorney there are so many? Does this person specialize?

These are only a few of the important questions that you should ask when considering your options. Let’s take a moment to explain in the most basic terms what each of the options mean:

Loan Modification – A Loan Modification is a modification to the terms and conditions of your current note. Common modifications include extending the payback period(amortization), decreasing the interest rate for a set period of time, extending the period of time your rate will be fixed, switching from an adjustable to a fixed rate option, principle reduction or any combination of the aforementioned and more. Loan modifications can be done directly through your lender(recommended) or you can hire a third party Loan Modification specialist (ask if they are approved by the Department of Real Estate). Here is a great place to start for a Loan Modification. Be careful if you get a principal reduction on your loan modification as you may have tax liability on the debt that was forgiven.

Short Sale – A short sale occurs when you sell your home for less than you owe on the property. Your lender has to agree to take a loss for the amount that you will be short.  Ex – you owe 500K and the property will only sell for 400K. You are shorting the lender a 100K plus Real Estate commissions. This is where it can get tricky. If you have a first and a second on the property it is imperative that you consult both a CPA and an Attorney or qualified Real Estate agent. Depending on the type of debt (recourse or non-recourse and purchase money or refinanced loan) there can be tax consequences that can hurt you bad come tax time. See what happens is the amount that you are forgiven by the lender 100K in our example will be treated as income. The lender will 1099 you for the amount that you shorted them and you may have to pay income taxes. There is also other potential tax ramifications. (Consult your CPA as I am not qualified to discuss your tax liability. The above are merely for illustration and example purposes.) If the debt is recourse debt the lender may also come after personal assets that you may have. If the debt was purchase money in the state of California a bill was passed that for a short period of time they will forgive the debt without the tax consequence. Debt must have been purchase money. Will take care of tax consequence but if it was Recourse debt this does not mean the bank will not try for personal assets. Again please see qualified accountant and/or Real Estate Attorney for legal advice. If you are considering a short-sale make sure that you seek out a qualified referral. There are many agents out there that understand the process and will do an extraordinary job for you.

Bankruptcy – In my opinion, this is the last option that I would seek out. My opinion is merely that but in Dave Ramsey’s Total Money Makeover he too advises strongly against this option. In the last few years new Bankruptcy laws have made it harder to file for bankruptcy Chapter 7. Credit recovery from a Bankruptcy is the most difficult of the three options. If you have one slip up post Bankruptcy it will be scrutinized and can ruin your chances of future loan approval. More than that the humiliation of all your items being taken away from you will remain in your mind for a long time. However, this could be the option that best suits you. Chapter 7 is a complete wiping out of the debt. You can apply for a Mortgage 24 months after the Bankruptcy is discharged as long as you have re-established credit. Chapter 13 is the reorganization of debt to a more affordable payment. You can apply for a home loan after 1 year of timely payments on the debt but the loan must be approved by the trustee. Can a home loan be included in a Bankruptcy? In short this is called a Cram-Down and has been argued for and against in light of the economic crisis. Wikipedia gives a good explanation of where we stand but this is continually changing as the need changes and as the voices are heard. For current information please consult a Bankruptcy Attorney.

So the question remains: What option is best for my situation? As you can see the answer is not very simple and will be very different for each family. Please do not take the advice of a friend who short-sold and says this is the right thing for you. Consult your local professionals. Proverbs 24:6 “So don’t go to war without wise guidance; victory depends on having many advisers.” – Basically what is being said is get the advice of many wise professionals. Sift through the information find the consistencies and inconsistencies and determine what route works best for your individual situation.

****Again, I will say that I am not legal counsel and what is posted is meant to be illustrative and thought provoking only. Always consult legal counsel regarding your specific situation. If you need the name to someone that may be able to help you I can always refer you to quality professionals in their respective industries********

Buyer’s Market? Think Twice and Consider the Facts!

The last few years of the market have caused many buyers to get in the mind frame that it is a buyer’s market. That the market needs them and that they are in control. I have had many buyers that do not want to acknowledge the shifts in the market. Traditionally, we would say it is a buyer’s market if there is greater than a 6 month supply in inventory. This is definitely specific to the area that you live in but here in the Sacramento area we are short of six months inventory. What does this mean? It means that we are in a seller’s market people.

Few Things to Consider:

1. Sale to List Price Ratio – This represents the average list price of a home compared to the final sale price. In a buyer’s market we would generally see the sale price well below or below the list price. This would signify saturation of inventory and sellers that have to adjust the expectation based on interest and demand. Currently in certain price points in Sacramento, especially those under 300K we are seeing the final sale price above list price. Why? Banks are listing the properties at prices that are extremely attractive and many buyers are battling for the home. Some homes have as many as 20 offers on the property. This creates an emotional bidding war and the home goes to the highest bidder (with the best financing or apparent financing). The price is then pushed up and the Sale to list price is effected.
2. Days on the Market – Just like Sale to List Price the average time on the market is a good indicator of who is controlling the market. The majority of the sales are selling with less than 90 days on the market. In a buyer’s market the sale time is extended and we see up to 180+ days on the market. The homes that are coming on the market are selling and there would be no reason they would not. Interest Rates are low and with the Tax Credit one would be foolish not to consider buying.
3. Months of Inventory – Late 2007 and early in 2008 we had as much as 11 months of inventory on the market. This is not the case right now. With less than six months of inventory on the market the seller’s are in control. With their ridiculous per diem charges for extended escrows to their choices of southern California Title and Escrow companies. The seller is setting the terms and the standard and with multiple bids they can sort through and pick the cream of the crop. That being said there are a ton of homes that are owned by the banks that they are not releasing to the market. There is enough inventory in the wings, in my humble opinion, to turn the market right back to months of inventory. The banks are holding it back so that they do not drive prices down by over saturation.

Questions I hear from Buyers:

1. The property is listed for 140K. Do you think that I can offer 135K and ask for 5% seller credit? – No! That property will at least go for 140K and many times more. The things that you must take into consideration are the days on the market, whether or not it is seller owned, bank owned or a short sale. This will make a difference and this will change the strategy. Short Sales tend to have less interest because of the time they take but they also have little flexibility in price and credit. Traditional sellers have a number they want and it comes down to a meeting of the minds and the banks are the game that I described above.
2. Can I write offers on several properties and take the one that gets accepted? – This is where I defer to the Real Estate agent. Agents are effective because they build a reputation with other agents. The better the reputation the better the odds that your offer would be accepted. If you are writing offers on properties that you really do not want you are wasting a lot of people’s time.
3. I am approved for 150K and I really like this property. It is listed at 155K do you think I can qualify? In today’s market climate I suggest that if you are qualified for 150K that you start your search in the 130K – 140K range so that you have room to be consider if you are asked for Highest and best. If you are pushing your approval amount you are putting yourself at risk. With the Volatility of the rates I would ask your Loan Officer to make sure that they have padded the rate on the approval to cover any swings. If your approval is a best case rate and your offer is accepted and rates have gone up you may not qualify or feel comfortable with the new cost.

In conclusion, if you are in the market to buy you must understand the climate that you are in and have reasonable expectations. My most recent closing searched for one year for the right home and my most recent contract wrote 40 offers before one was accepted. That does not sound like a buyer’s market to me. The good news is that you are going to buy at a Low Price with a Low Rate or so we hope!

* Much of the information provided is specific to certain price points and in certain geographic locations. Always consult your Real Estate Professional to determine your market conditions as they may vary.  Traditional Sellers may have a different experience and short sales have their own behaviors which we will examine in posts to come with a very Special guest. A local Short Sale Specialist. If the banks begin to dump the inventory that they are holding back we could see another swing. Stay Tuned.

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Pre-approval Letters Devalue like the Dollar

The following post is an older post that I had written on Active Rain. Although some of the content is dated the overall theme of the post exists today and is getting worse. Since the time of the original post REO’s and Short Sales are beginning to ask for Direct Lender aka Bank approval. We as a Broker have lost all credibility in one part of the market! Please enjoy the following information:

As the value of the dollar continues to crumble so too does the value of the pre-approval letter. For a long time we wrote, as Brokers, a pre-qualification letter and we gave that to the consumer. This letter was the letter that they would show to their Real Estate agent and it would accompany the offer. Then the boom came and Real Estate agents were swamped and so were we so the need for a PRE-APPROVAL letter became the dominant force.

Let me pause for a moment and explain the difference. A pre-qualification letter can be given to any walking soul that states they have a job, decent credit, and some money in the bank. It is generally issued based on a conversation versus documentation. Pre-approval letter’s are issued after the loan officer has taken a full application and reviewed the credit report, income documentation and assets. A pre-approval letter is a further form that may even involve an automated approval prior to writing them. (This is what I do in the current market).

So, what I was saying was Pre-approval letters used to mean something when the offer was written. The dollar used to be a force among all currencies also. The dollar has been smacked and the value is much less. In fact that is the conundrum a weak dollar while inflation is an issue. I once called it a double edge sword. I can now say that I feel the same about the pre-approval letter. With the emergence of REO’s in the market place it is very common that the bank request a pre-approval letter from their institution. My approval letter has lost all credibility. What I have been doing is I send my approval letter and my findings (automated approval) and most institutions have used this to write a letter for me.

However, I am not always so lucky. As we fight for the deals that are on the table I have had banks want all the information that I used to get the automated approval in their attempt to borrow my borrower. To put this in perspective getting automated findings is like getting a listing appointment, meeting with the consumer, filling out all the paperwork and when you get back to the office handing to another agent for them to do. It is not all the work but it is the hardest work of the process. If everyone could get clients easily everyone would be in Real Estate. It has been my fortune that my clients want to work with me so this is less of a problem.

Pre-approval letters are now virtually meaningless if the property is bank owned. The Broker has lost credibility. Everyone is afraid that the deal will fall through. Honestly, I understand the fear of a deal falling through. Deals have not all fallen through because of Broker misrepresentation. Washington Mutual shut down their wholesale division. If I had my client approved through Washington Mutual, we were in contract moving forward and the bank closes shop unexpectedly whose fault is it? It could happen no matter who writes the pre-approval letter.

In conclusion, just like the dollar has lost value in the market place so has the pre-approval letter. It is the result of a mess of things that are out of our control. I have learned to deal with it but it still bothers me. I am in the business still because I am good at my job. I have a good reputation when it comes to my clients and the people that I work with. I certainly have my faults but overall I am here and closing deals. I am eager to get back to a point where my word has some substance. The same world that my dollar actually affords me a good meal and more than a 1/4 gallon of gas.