Debunking myths about foreclosures, timing the housing market, and hiring the “big name” agent

by Dan Krell ©2012
DanKrell.com

Debunking common real estate myths.

real estate myths debunkingAs a real estate agent, I often encounter people who talk about common and persistent real estate myths.  In recent years, these few seem to be among the top myths:

Myth #1: “If you wait until the market bottoms out, you’ll get the best deal”
Counter point: “People trying to time the market may find in hindsight that they will have reacted either too soon or too late.”

Anderson & Harris, in their reveling study Timing the market: You don’t have to be perfect (Real Estate Issues 35, (3) (10): 42-42-50) indicated that you don’t have to be perfect when timing your purchase and sale of a home.  They suggested that you could do just as well to aim your sale during market peaks and your purchase during market lows; however, they conceded that you would most likely know in hindsight when the market is at a peak or low.

Their results demonstrated that the typical “buy and hold strategy” over a thirty year period results in an annualized return of 8.18%; however, buying when a recession has ended with a predetermined sale period yields a wide range of return that ranged from 13.38% to 1.42% annualized total return.

Myth #2: “Buying a distressed home will result in a good purchase.”
Counter point: “There is inherent risk when purchasing distressed homes.”

There is inherent risk when purchasing distressed homes, regardless if they are foreclosures, bank owned homes, or even short sales.  Although short sales are often occupied, foreclosures and bank owned homes are often vacant for many months; these homes are often sold “as-is; where is” meaning you are purchasing the home regardless of the condition of the home.

Besides the purchase and anticipated fix up costs, unanticipated repairs and expenses are often encountered.  However without risk, there is no reward; due diligence, conducting inspections, and hiring the proper representation may reduce the risk and make your purchase a positive experience.

Myth #3: “The ‘big name’ agent with the most home buyers will sell my home quickest and for top dollar.”
Counter point: “Home buyers typically search for homes by characteristics and location, rather than searching for homes sold by individual agents or brokers.”

real estate myths debunkingI have never had a home buyer tell me they want to see (or buy) a home because it is listed by a particular agent or broker.  Rather, home buyers typically search homes by price, physical characteristics, amenities, and/or location.  Home buyers will view your home if it matches their search criteria, regardless of who listed your home.

When interviewing listing agents, look beyond the sales pitch to list your home, and ask for real data and sources to back up claims.  Agents will often not discuss the homes they could not sell; asking about the homes that did not sell as well as the reasons behind the non-sale may be more revealing than flatly accepting claims made by the agent.  Asking for references of satisfied clients of homes that sold as well as homes that did not sell is useful to not only get a recommendation, but also understand how the agent conducts business.  Ultimately, your home purchase or sale falls upon the experience and skill of the agent you hire. Protected by Copyscape Web Plagiarism Detector

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 23 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Non-hardship short sales on the rise

by Dan Krell ©2012
DanKrell.com

underwater homeowner short saleA March 2012 Housing Wire piece (housingwire.com) indicated that CoreLogic recently reported that there were 11.1 million home owners who owed more on their mortgages than what their home is worth, which roughly translates to 22.8% of all mortgages being underwater. At one time, most home sellers applying for a short sale were experiencing hardships and foreclosure. However, as the housing market continues to recover- an increasing number of short sale listings are from sellers who are current on their mortgage and are not experiencing hardships.

For home owners who are experiencing financial difficulty, there are a number of options available to keep your home; however often a last resort- the short sale is one alternative to losing your home to foreclosure. However, home owners who need to sell their homes (because of a job transfer, divorce, or other reason), but are not otherwise experiencing a financial difficulty nor hardship, are also turning to the short sale process because of depressed home sale prices.

Although short sale horror stories still circulate, much has changed and many lenders have attempted to “streamline” their short sale process. Still, this has not prevented Congress from attempting to force lenders to provide speedy short sale decisions. In 2010, H.R. 6133 H.R.: Prompt Decision for Qualification of Short Sale Act of 2010 was introduced to require a 45 day response from lenders, however it “died” in committee. A recent form of this legislation was introduced in 2011 (H.R. 1498: Prompt Decision for Qualification of Short Sale Act of 2011), but GovTrack (govtrack.us) gives the bill an 8% chance of becoming law. Another bill, S. 2120: Prompt Notification of Short Sales Act, was introduced in February; GovTrack gives that a 2% chance of being enacted.

Beware of the circulated “wisdom” regarding short sales, because it is not always reliable or accurate (e.g., hardships and delinquencies). If your home has negative equity (underwater) and you want to sell, consult with an attorney; there are financial and legal issues that may affect you presently and in the future. The short sale process may seem straightforward, but it can get complicated quickly (especially if there are multiple mortgages involved). Many experienced short sale agents work in tandem with attorneys to make the process much smoother than otherwise would be expected.

underwater homeowner short saleIf you’re an underwater home seller, but have assets and are not experiencing a hardship, your attorney can advise you on the short sale process. The issue pertaining to a successful short sale is not always about the seller’s financial status; but rather, a short sale is more about the amount the lender will accept as payoff for the existing mortgage. Yes, the lender will collect your financial information to use in their short sale determination; but a skilled negotiator may be able to reduce the overall mortgage payoff (even if you have to bring funds to closing).

Finally, an attorney is the only person who can provide you legal advice. Real estate agents advising you to stop making payments on your mortgage or to “fudge” your short sale application could be putting you in a precarious position: your credit can be affected, or your home can go to foreclosure when payments are stopped; providing false or misleading information to your lender is fraud (lenders and law enforcement are working together to stop short sale fraud).

Additional information about short sales:
Short sale is an option
Don’t be pushed into a short sale
House bill proposes 45 day lender response on short sale
Mortgage fraud on the rise

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 30, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

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Buying a home after a foreclosure or shortsale

by Dan Krell
© 2012
DanKrell.com

If you’ve been through tough financial times, you know that it feels as if your financial picture may never improve. But for most people, experiencing a financial challenge turns out to be just a blip in time; they eventually move on with their life. Given that notion, mortgage lenders know that people endure temporary financial problems through their lives- underwriting guidelines may allow for a past foreclosure, short-sale, or even bankruptcy.

In the old days (prior to desktop underwriting), underwriting was “manual,” meaning that a loan’s approval or denial was decided by a human who reviewed your file. If you were lucky enough to borrow from the local small neighborhood lender, there was a very good chance they knew you, your family, and your financial circumstances (much like the Bailey Building and Loan from “It’s a Wonderful Life”); you had a chance to provide explanations and compensating factors to increase your chance of being approved.

Today, mortgage underwriting is mostly accomplished through automated systems, such as “Desktop Underwriter” and “Loan Prospector.” The automated systems make decisions based on algorithms and do not have the ability to weigh circumstances for negative reports on a credit history. Some lenders may still provide manual underwriting, but borrower requirements have become increasingly strict (including higher minimum credit scores).

Take heart; you still may be able to get a mortgage after a foreclosure, short-sale, or bankruptcy.

For conventional mortgages underwritten with Fannie Mae guidelines, you’ll have to wait at least seven years after a foreclosure. Likewise, you’ll have to wait seven years after a short-sale- unless you can muster a large downpayment (you may be able to qualify: after two years with a 20% downpayment; and four years with a 10% downpayment)! You’ll have to wait four years after a chapter 7 bankruptcy is discharged; and two years after a chapter 13 is discharged (but four years if the chapter 13 is dismissed).

For FHA mortgages, you’ll have to wait at least three years after a foreclosure, two years after a chapter 7 bankruptcy discharge, and one year current on a chapter 13 payment plan (with court approval). A short-sale is differentiated depending if the loan was in default: if the loan was not in default at the time of the short-sale and your previous 12 months payments were timely, you may be eligible for a FHA mortgage; however if the loan was in default prior to short-sale, you will have to wait at least three years before you can qualify.

If you are eligible for VA financing, you will have to wait two years after a foreclosure, short-sale, and chapter 7 bankruptcy (one year into a chapter 13 payment plan with court approval). However, if your foreclosure or short-sale was on a VA mortgage, then your eligibility may be reduced.

If you’re financial issues were caused by circumstances beyond your control, you may be able to get an exception that could shorten the waiting periods. However, you’ll have to provide documentation for the underwriter to review, and not all lenders grant such exemptions.

There are many different mortgage programs, and underwriting guidelines vary. The timelines and requirements posted here are as of time of article; it’s very possible that these guidelines will or have changed. It’s important to talk to a licensed loan officer to know what you need to qualify, as well as which mortgage program will be best for your particular circumstances.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of January 9, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

Transfer tax controversy brews in Maryland Counties


by Dan Krell © 2010
DanKrell.com

Most real estate issues usually do not grab people’s attention – unless they are the ones affected. Eminent domain is a prime example; those affected usually become embroiled in the controversy. One current issue that you may have heard (although you may not have become fully aware) of is the transfer tax controversy that’s brewing in Montgomery and Anne Arundel Counties. The anticipated opinion on the controversy from the Maryland Attorney General may have lasting and widespread consequences on how transfer tax is calculated in this state.

The controversy surrounds the decision from Montgomery and Anne Arundel Counties to collect transfer tax on the “forgiven” mortgage amounts in a short sale. At face value, the policy of collecting transfer tax on the unpaid portion of a short sale appears to be a way for the counties to compensate for their declining tax base; however the fundamental method of calculating state and county transfer tax may be more the issue. On January 12th, however, Montgomery County put “a hold” on the collection of transfer tax of the “forgiven” mortgage amount until the Maryland Attorney General issues his opinion.

The “forgiven” mortgage amount is the amount that the seller’s lender agrees to not collect at the settlement of a short sale. However, this amount is not literally forgiven as the lender typically either considers it income and issues a 1099 to the seller or pursues payment through a deficiency judgment against the seller. Since part of the requirement for a short sale is usually to provide evidence of a hardship, some critics have argued that the collection of transfer tax on “forgiven” mortgage amounts to be punitive.

The collection of transfer tax on forgiven mortgage amounts should not be confused with “nominal consideration” rules that are used in some jurisdictions around the country (including Washington, DC). “Nominal consideration” rules typically calculate additional transfer tax when the sales price is less than the assessed value. In Washington, DC, a transaction is considered to be of “nominal consideration” when the sales price is less than 30% of the assessed value.

Title 13 of the Tax-Property section of the Code of Maryland (COMAR) discusses the collection of transfer tax by the State and counties, as well as tax rates and possible exemptions. COMAR discusses various ways in which transfer taxes are calculated and collected; for example tax is calculated on the “consideration payable for the instrument of writing”; and the tax is “imposed on the instrument of writing.”

Some may have mistakenly thought that consideration is only the sales price and the instrument in writing is only the deed; however, others have argued that consideration also includes additional amounts involved in a transaction (such as assumed loans) and instruments in writing to also include deeds of trust. I am not an attorney and I am not attempting to practice or interpret law, but it appears that clarification from the Attorney General has become necessary in interpreting “consideration” and “instruments of writing” when calculating transfer tax in today’s market.

You might consider the collection of forgiven mortgage amounts another sign of a depreciated real estate market. However, the future of transfer tax calculation and collection (at least locally) is sure to be affected by the highly anticipated opinion of Attorney General Gansler.

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

**Update—HB 590/SB 657 – Taxation of Forgiven Debt in Short Sales
STATUS: PASSED – Effective May 20, 2010.
This law clarifies that recordation and transfer taxes MAY NOT be imposed on the forgiven debt in short sale transactions.

Short sale is an option

by Dan Krell
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Simply put, a short sale is asking your lender to take a lower payoff and “forgive” the difference. In today’s market, where home values have depreciated significantly in some areas, the short sale is a viable option for many home owners who need to sell their homes but find themselves “upside down.”

Although the concept is simple, the process can be lengthy and full of surprises. You should consult an attorney about your options (which may include and is not limited to a loan workout or modification, forbearance, deed-in-lieu, or bankruptcy), because the process is not a guaranteed sale and your lender may still foreclose if you have not paid your mortgage.

If you decide to go through the short sale process, you should know that your sale will be subject to your lender’s approval. The lender will decide what they will accept to pay off your loan based on the home’s “fair market value.” They will review a proposed settlement sheet that will include all liens to be paid as well as any unpaid taxes and Realtor commissions. If the net is acceptable, then they will issue an approval. If the net is not acceptable, they will most likely counter the home buyer’s offer to increase their net proceeds.

Additionally, if you enter into the short sale process, you can expect your lender to pry into your personal life by asking for your income and financial documents, a hardship letter outlining your need for a short sale, and any supporting documents.

The pros and cons of going through a short sale include forgiveness of debt, credit reporting, and tax liability. By going through the short sale process, your lender essentially accepts a lower payoff for your mortgage. This differs from a foreclosure, when your lender may serve you with a deficiency judgment to repay any shortage they incur when they sell your home in a foreclosure sale.

Additionally, your credit will most certainly be affected by foreclosure as well as a short sale. However, experts have debated that having a short sale may be the lesser of the credit evils, as there may not be late mortgage payments nor reported judgments or other foreclosure related credit damage.

You also need to know that your lender will most likely issue you a 1099 whether your home is sold at foreclosure or short sale. What an awful surprise for you during your hardship to find out you have a tax liability! If you decide to go through the short sale process, consult with your accountant about your tax liability and if you qualify to file the little known IRS hardship form.

Finally, once you begin the short sale process, you should keep records of documentation of your correspondence with your lender, which includes phone calls, emails, financial packages you complete, and all supporting documentation.

If you owe more on your mortgage than your home’s value and you need to sell your home, the short sale process will allow you to sell your home for less than what you owe your lender without having to pay the difference at settlement. A short sale is a “win-win” for all involved, but there are many considerations. Before you enter in such an arrangement, you should consult with an attorney to understand your options.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of October 27, 2008. Copyright © 2008 Dan Krell.