Fiscal Cliff for Short Sales?

Short sales are very popular right now.  In fact, they account for about 1/4^th of all home sales occurring right now.  A short sale can be a good way to buy a house at below market prices but it is not for the impatient or faint of heart (www.buybelowmarket.com). In case you aren't sure what a short sale is – it is where the owner of a home sells their home for less than they owe the bank and convinces the bank to accept that payment to release their lien against the house.

The difference between what the seller owes and the amount the bank is paid is called a deficiency.  Traditionally, the bank has a couple of things it can do with that deficiency.

1. They can go to court and get a deficiency judgment against the seller.  This judgment will allow them to attach to other assets the seller has to try to get their money at a later date.
2.  They can forgive the deficiency.  When they do this, they issue a 1099 to the home seller. George W. Bush signed legislation which waived the tax implications to home sellers (not investors) who got a 1099 on a short sale.  Before that, the IRS would then come after the home seller for taxes on the amount of the deficiency as though they had received the deficiency in cash.
3.  They can write it off and eat the loss without issuing a 1099. This doesn’t happen often and may be illegal.

 

The legislation that George W. Bush signed in 2007 (the Mortgage Debt Relief Act) was extended through 2012.  It is now about to expire and although there is support for extending it, there are no guarantees when common sense meets politics. The law was extended in 2010 but is due to expire at the end of the year unless Congress acts to steer away from the so-called “fiscal cliff.”  Separate bills have been introduced in the House and Senate to extend the mortgage relief tax break for another year. The measure would cost about $1.3 billion in uncollected taxes.

Expiration of the tax treatment would create a major new headache for the one in four homeowners who owe more than their house is worth. Those "underwater" sellers would have to come up with a big check for Uncle Sam to pay the tax on the difference. That “would be a blow to the housing recovery,” said Paul Diggle, a housing economist at Capital Economics. “The increased use of short sales, rather than foreclosures, has become an important support to the recovery.”

Bank of America Wednesday reported that some 62,000 borrowers have completed short sales that saved them $7.4 billion in debt, or an average of about $120,000 each.

The law is credited with helping pull the housing industry out of the worst recession in nearly a century. Though still deeply depressed, sales of both new and existing homes have been steadily rising. Home prices appear to have bottomed out and are rising again in many parts of the country.

Restoring the tax on debt forgiveness could throw cold water on one in four home sales by sticking the seller with a large tax bill. “If (homeowners) decide that a short sale is not the best option, and they just allow (the mortgage) to be foreclosed, that has a more negative impact on the neighborhood and on home values,” said Blomquist. That would be bad news for lenders, too.

The average price of a bank-owned property seized in foreclosure is about $30,000 lower than comparable house transferred in a short sale. Banks also avoid the legal costs of seizing a home and the extended cost of maintaining it. “(A short sale) really does work out to both the borrower’s and lender’s benefit in most cases,” said Michael Fratantoni, a research analyst at the Mortgage Bankers Association.

As an investor, although I recognize the value of short sales, I stay away from them.  As I mentioned, they are not for anyone who needs to buy a house right now and wants to get a bargain.  I have a connection to a service that will handle short sales for me, but short sales take a long time and most end up failing.  All too often the bank forecloses even while the short sale is being negotiated.  In some cases, they have rejected a short sale offer only to foreclose and sell the house for less than the short sale offer.

When working with a potential seller who is underwater on their mortgage, I will always educate them on the short sale option (along with other options), although I seldom offer to buy their house on a short sale.  In most of those cases, I would rather wait until the foreclosure happens and all the junior liens are wiped out and the bank is facing the additional costs of holding the property in the face of a less than favorable market.

If you know anyone who is looking to buy a house at below market prices, encourage them to go to www.BuyBelowMarket.com.  The Gold Seal Homes Group (www.theGoldSealHomesGroup.com) buyers are constantly working the Charlotte market (including Mecklenburg, Cabarrus and Rowan counties) and buying houses at below market prices.  They make sure the houses have clear title and are in good condition and then sell them at a discount to people who want to own their own homes. In some cases, they can even arrange for seller-financing or rent-to-own programs for those who cannot get a bank loan right now.

If you are wanting to invest in real estate, please contact me at Charlotte Wealth Partners (Tom@CharlotteWealthPartners.com) and I will help you.  If you don't know what to do, I can guide you.  If you are already familiar with the risks of real estate investing, I can connect you with people who can provide you with a variety of real estate investment opportunities, ranging from totally passive, risk-managed investments, through turn-key rentals and right up to your own fix-and-flip opportunities.

Tom Sheppard is the author of "Fire Yourself: Get the Job You Want" available from XLibris Press. Tom has been successfully investing in real estate since 2001 while working part time. In 2008 he left a six-figure job as an enterprise project manager with a major national bank to manage his real estate business full-time. His goal is to help 100,000 people find peace of mind by finding quality, affordable homes. He is currently looking to expand his network of funding partners who are helping him achieve this goal. If you would like to know more about how you can Do Well By Doing Good (TM), go to www.CharlotteWealthPartners.com

Why is Seller Financing NOW Such a Great Deal?

"No brag.  Just fact."

"No brag.  Just fact."  Those are the words Will Sonnett used after telling folks that he was better with a gun than his notorious fast-gun grandson in the old ABC series "The Guns of Will Sonnett."

It is no secret.  My specialty is using seller-financing to buy and sell homes.  I do it better than most people and know more about it than most of the real estate "gurus" (aka notorious fast-guns) who are touring the country today. No brag.  Just fact.  More on that later.

Whether you are buying or selling, using seller financing is probably the best possible way today to buy or sell a home.

Today, we are facing a perfect storm in the housing market - one that makes seller financing ideal.

#1 - There is a lot of inventory.  There are vacant houses in almost every neighborhood in the country.  In addition to the houses that are currently on the market, there are many more where the owners are in default and the banks are holding off on foreclosure because they don't want the houses on their books.  This "shadow inventory" ensures that there will be a steady supply of cheap houses for some time to come.  Because as the current inventory is bought up, then the banks will move forward with their foreclosures against those who have not been paying and who are currently getting a free ride.

#2 - The banks are in financial distress and uncertainty.  They have lots of non-performing loans, foreclosures and REOs (Real Estate Owned by the bank where the foreclosure process has been completed) on their hands. Every one of these non-performing loans (where people aren't paying) and REOs are forcing the bank to maintain much higher reserves than normal.  With the drop in home values, those reserves are often close to 100% of the value of the home.  And the bank cannot use reserves to fund operations, make loans, or even to pay depositors. 

Adding to this financial strain is the uncertainty caused by regulators and changes at Freddie Mac and Fannie Mae.

At any moment, regulators may reinstate "Mark to Market" rules which would have the effect of making nearly any bank today become instantly insolvent.  The result would be bank closure and being taken into receivership by regulators.

Freddie Mac and Fannie Mae, currently in receivership by the government, are being managed out of the housing market by degrees.  They have been forced to raise their standards for loans they will buy from banks and if they buy a loan and it goes bad, they immediately force the bank to buy it back from them at full value.  This means that banks can no longer shift risk to taxpayers via Fannie and Freddie.

#3 - The banks are not lending very much at all.  Oh sure, they advertise that they have low rates and some even advertise programs for people with 650 FICO (credit scores).  But the reality is that they are only making loans either to prime customers (700+ FICO) or to those low income customers who can get a third-party loan guaranty from places like NACA (Neighborhood Assistance Corporation of America www.naca.com), famous for their byline "Sue My Lender."

So, you have lots of houses available, but no money to buy them.  

For the seller that means that there aren't many buyers out there, because most people don't have $10,000 in cash on hand, much less the $60,000 to $200,000 it takes to buy a home without getting a bank loan and there are lots of sellers trying to get the attention of those few buyers.

For the buyer this situation means that although you can see lots of available homes for sale, you cannot buy any of them because the bank won't lend you the money.

Seller Finance is the Solution to this double-bind.

When you sell your home using Seller Finance you are basically relieving the buyer of the need to get a loan from the bank.  You are letting them use your loan and pay you for some of your equity over time.  When all goes well this has three great advantages for you as a seller;

1. YOU SELL YOUR HOUSE NOW! - The buyer takes over the payments on your current loan so that you don't have to keep making those payments.  That will free up your cash to pay for your new home.  You can now move on with your life instead of living in deadly suspense waiting to either default on your current loan, being unable to move to your new home and job, or leaving behind a vacant house for vandals to destroy.
2. As the buyer makes the payments on your home loan, they are actually strengthening your credit record.  They loan is still in your name, so every payment they make, your credit rating is being bolstered.
3. You may be able to collect payments above and beyond your loan payments, recapturing some or all of the equity in your home that you had to give up in the pricing to compete with all the other homes for sale in your area.

When you buy your home using Seller Finance you will probably pay a premium.  The interest rate you pay will likely be significantly higher than the rates the banks advertise for the mortgages they aren't really going to give you.  The contract price for the house will likely be higher than for similar houses in the area.  That is because the prices on the other houses represent what the sellers are hoping to get from an all-cash buyer or what they must have to pay off the loans on their home.  Regardless of the premium and increased price this can be a GREAT deal for the buyer.

1. YOU GET THE HOME YOU WANT NOW! - Buying your home using seller finance avoids all the expense, hassle and delays that come from the banks' lending and underwriting processes.  You don't have to wait 60 days for someone to appraise the home while a loan officer is looking at your personal financials through a microscope, making you explain every financial transaction for the past six months (or more) while making you hope that your car doesn't need a sudden $300 repair that could make the bank decide to restart their financial due diligence on you.
2. Buying now gets the lowest price you will see in the foreseeable future. The market price of homes today is the lowest it has been for more than a decade.  Currently, the housing market is bouncing along its bottom.  It will continue to bounce along like this for another couple of years and then values will begin to rise.  In some places they will rise rapidly, in other markets more slowly, but they will rise.  When they do, the value of your home will go up.
3. Your house payments may go down when you refinance in a few years.  For the sake of argument, let's say that you buy today with seller finance and are paying 10% interest.  When the banks start lending again the rates will they charge will probably be higher than they are right now.  Let's say they go from the 3% range they advertise today to 7% (a 130% increase over today).  Because you already own you home, you will be asking them to refinance.  A refinance loan is less risky and less costly to the bank, so they are more likely to offer one of their best rates and a loan with the lowest administrative costs (origination fees, appraisals, etc.).  And, since you have been paying down the loans on the house, the amount of money you need is less than when you did the seller financed purchase.  This, coupled with the increased value of the home should make your loan even less risky for the bank.   Regardless, when you refinance at 7% you will save $3,000 per year in interest for every $100,000 of home value.  And, if when you bought using seller finance at a payment point you could actually afford, then the new payments will be even easier on your budget and your quality of life will increase a lot simply because of the eased finances.

"No brag.  Just Fact."

I told you near the start of this article that I know more about seller financing than most of the real estate gurus touring the country right now.  Here is why I say that is a fact, not a brag.

Not long ago I spent four days in a seminar with one of these leading gurus as he was teaching "advanced topics" for real estate investors.  I found that it was a good review of what I already knew, but didn't cover some of the emerging issues in seller finance.

Did you know that the government is trying to make it illegal for you to use seller financing to sell your own home?  Under the guise of financial and mortgage reform the so-called SAFE Act and other laws they are trying to regulate this option out of existence.  They tried to make it illegal, but they got too much push-back from too many people like you and me.  So instead, they said you couldn't do more than so many seller-finance deals in one year and you had to comply with their mortgage regulations.

If it is so great, why is the government trying to kill seller financing?

The answer to that question is simple.  Banks don't like seller financing.  They don't get a piece of the action. When you buy or sell a home using seller financing, you are legally robbing the bank and you are not doing anything unethical or immoral.  The bank wants to have a stranglehold on buying and selling homes because home loans are one of their most lucrative products.

When you get a bank loan to buy a home you typically pay thousands more in closing costs than you would with a similar seller-finance deal. In addition to the interest you pay the bank for using their depositors' money (it isn't really the bank's money at all), they layer in all kinds of fees to fatten their bottom line.

• Origination fees are typically about 1% of the amount being financed.
• Points used to buy down your interest rate can go as high as 3% of the amount financed.
• Document preparation fees are "gimmes" the banks use to cover the costs of printing and signing documents (costs that are already being paid for under their ordinary operating expenses)
• Overnight fees are charges for next-day delivery of documents.  Although they occasionally use an overnight service, often they use their own internal couriers (again already paid for in their ordinary operating expenses) and when they do use an external service the actual cost is usually significantly lower than the "Overnight Fee" you pay them.
• Appraisal Fees usually have little or no relationship to the actual cost the bank pays for an appraisal.  If they can get by with it, they will have a bank employee do a "drive by" appraisal (sometimes done without ever leaving the office).  If they have to get an outside appraisal, chances are high that they have negotiated a low, volume price from the appraiser or they own the appraisal company.  Either way, the figure you see on the closing documents is usually significantly more than what the bank actually paid.
• Real estate agent commissions - okay, the bank doesn't get these, the real estate agents do and they usually amount to from 3% to 6% of the purchase price of the home.  With seller-finance deals real estate agents are usually unnecessary.  In fact, at times they are a huge threat to the deal.  The threat can arise because their commission may eat up the down payment a buyer has, or it may be because the agent doesn't like or understand seller-finance because it doesn't fit with the bank-financing model that agents were taught in school.  If you are trying to do a seller-finance deal (buying or selling) and a real estate agent is involved, then don't try to weasel out of the contract - pay them what you owe.  But, if you don't need to get them involved, then don't go using an agent to buy or sell a seller-finance deal. The exception is when you have agents like those I deal with.  They understand seller-finance and know how to facilitate these kind of deals.  But they are exceptional agents.

These fees, taken together can easily amount to nearly 10% of the purchase price of a home.  These fees suck up the money a buyer has for a down payment and take profit out of the seller's pocket.  A seller finance deal, done right, will save both the buyer and the seller a lot of money.

What About Those Regulations You Mentioned?

Banks spend hundreds of millions every year to comply with all the regulations our government imposes on them.  In fact regulations often keep many financial companies from becoming banks, making the costs of doing business too high.  Recently, our regulations have even begun to cause some foreign banks to quit doing business with US banks - they can't afford the costs of showing that they are complying with all our regulations.

The government, in collaboration with banks, has been steadily escalating the regulations on mortgage brokers and seller financing for the past several years.  They have successfully destroyed most mortgage brokers in this country, driving them out of business by the costs of showing their compliance with complex and confusing regulations which change frequently.

Today, most seller finance deals that are done are illegal and if the seller wanted to foreclose on the buyer, they would be unable because their contract would be unenforceable in court.  

Fortunately, my attorney is a very experienced real estate investor.  Because of that, he has a vested interest to stay on top of the seller-finance regulations and the expertise to understand them.  So, he does all my seller-finance contracts and closings for me.  That way, I can be sure to keep inside the law whether I am buying or selling using seller-finance.  In addition, we use a process that has successfully gotten nearly every bank to accept the take-over-payments approach without invoking the "due on sale" clause in the mortgage.

Seller Financing is GREAT and You Need to Know What You Are Doing

If you want to save money buying the home you want with seller financing or sell your home fast using seller financing, it is entirely do-able.  You need an attorney like mine as well as the kind of knowledge that I bring to the table.  You can either do what I did, spend years learning how to do this right and struggling to find an attorney who actually knows real estate law, or you bring your business to me and we will work together to create a win-win solution.  You can reach me at TSheppard@ADBProperties.com. Although my focus is on properties in the Charlotte area of North Carolina, through my network I can help buyers and sellers almost anywhere in the US.

If you would like to know more about Seller Finance, A+ Results has just published "Seller Finance for Sellers: The Ultimate Guide" as a downloadable e-book.  Seller Finance For Sellers Link

Tom Sheppard is the author of "Fire Yourself: Get the Job You Want" available from XLibris Press. Tom has been successfully investing in real estate since 2001 while working part time. In 2008 he left a six-figure job as an enterprise project manager with a major national bank to manage his real estate business full-time. His goal is to help 100,000 people find peace of mind by finding quality, affordable homes.  If you would like to know more about how you can Do Well By Doing Good (TM), go to www.CharlotteWealthPartners.com