Prior to 2007 homeowners who had a short sale or foreclosure were subject to pay income taxes on any amount of forgiven debt. So let’s say a homeowner in 2006 had a mortgage of $400,000 and decided to sale as a short sale for $200,000, that homeowner would have had income of approximately $200,000 according to the IRS. Assuming this put that homeowner in the 25% tax bracket, this homeowner would owe an additional $50,000 taxes to the US government. Keep in mind, perhaps none of this money went into the pocket of the homeowner, it was simply forgiven debt. The same would be true for a bank foreclosure.

Important Tax News Could Save You Thousands
Important Tax News Could Save You Thousands

Back in 2007 the US government signed into law the Mortgage Relief Act which provided homeowners who used their home as a primary residence relief up to $2 million for married couples and $1 million for individuals from any shortage being treated as income by the IRS. In the previous example above, the $200,000 would be free from being treated as income as long as it was their primary residence. The lender must formally forgive the loan.

The US government is giving homeowners until December 31, 2012 to complete a short sale or foreclosure. Starting January 1, 2013 any debt forgiven, even on a primary residence, will be treated as income by the IRS and subject to taxes.

A homeowner doesn’t always control when the bank will take back a home or when the bank will complete the foreclosure transaction, so they cannot guarantee they’ll make the December 31 deadline.

A distressed homeowner does control to a greater extent the execution and timing of a short sale. While there is no guarantee the bank will agree to a short sale, or that the buyer will wait around long enough for the lender to agree, it is generally known the seller has more control over their fate in a short sale than a foreclosure.

Time is running out for many sellers as we have 11 ½ months to complete the short sale. Some short sales go smooth, and others are a bit trickier. Sometimes we have to sell it 2 or 3 times if buyers walk. The bank may respond right away, or it could take several months for the banks to complete their analysis depending on who the lender is, whether there is a 2nd mortgage or equity line involved, and especially if mortgage insurance is involved.

Most people just think the banks are slow, which is true. However, the process can be more complicated as the 1st lender may be due money back on certain losses by a private mortgage insurance company. This takes time for all to evaluate, and it must go in steps.

Some loans are guaranteed by FNMA or Freddie Mac, and there are governmental programs in place the lender must follow. A popular program you may have heard of is HAFA (Home Affordable Foreclsoures Alternative) Program. If the home falls under this program, certain procedures and timelines must be followed. Sometimes it takes time just to see if the loans qualify for this program. There are other programs as well.

This is why a seller should decide soon if they may need to sell their home due to hardship. The decision today could save thousands in taxes for years to come. Waiting too long could cost a seller big time.

A bankruptcy may be a solution to avoid such taxation after 2012, so we wouldn’t be surprised to see bankruptcies rise next year from sellers who miss this deadline.

The good news is lenders have beefed up their short sale department staffs the last few years and are equipped to handle more sales today than they were 5 years ago. We’ve had much success completing short sales, although the buyer must be educated that the bank will take some time, and they may counter the accepted price with the seller a bit higher.

No short sale is complete until the lender(s) sign off and everybody agrees to the terms. Short sales are a way to bring otherwise underwater overpriced property to the market at today’s lower prices. Education is the key for everyone involved. The agents involved, both buyer agent and seller agent must be competent in handling complex short sale transactions as both buyer and seller must be educated about the process.

Sales are already heating up this season, so 2012 could be an interesting ride. We’ll keep you posted on news affecting buyers and sellers in the SW Florida real estate market.

 

As you can see from the graph, short sales have been on the uptick over the past two year period as lenders have geared up to handle more short sales. It is proven that banks lose less on short sales as the property tends to stay in better condition throughout the process, and the banks spends much less on attorney’s fees and vacancy on short sales than foreclosures.

SW Florida Short Sales
Fort Myers, Cape Coral, Lehigh Acres Short Sales

 

As you may recall, the government came out with programs like HAMP and HAFA as well as others, but none have been largely effective at curtailing foreclosures. You might ask yourself when has the government ever setup a big program that worked as the politicians said it would.

These programs were also mostly voluntary. Some of the banks have realized that selling a home as a short sale is in their best interests, and some must have decided it’s not. We wonder if perhaps banks don’t want to show losses on their balance sheet today, so they’d rather wait and take a bigger loss tomorrow on a foreclosure because the income statement can better handle it in the future. Perhaps the answer to that theory is best answered on a case by case basis.

Some banks have invested significant resources to address short sales. Bank of America for example has trained certain agents and put their entire short sales system online similar to how we work their foreclosure system. The beauty of an online system is that everyone involved can look at the file and upload their piece of information so the bank can make quicker decisions. We’re finding this system works miracles over previous antiquated fax and wait systems, only to find out the bank lost the fax.

Now there is accountability and tracking. Chase is another example of a large bank we’ve had good success with lately. Besides Bank of America, Wells Fargo, ASC, BSI Financial Services, and Nationstar Mortgage have also gone to the online system known as Equator for their processing of short sales. We expect to see significant improvements in the communication, processing, and closing times of the banks that have gone to online processing.

Banks such as Ocwen, SunTrust, and many others have been particularly difficult to deal with and take their time, even when they know the buyer has waited too long and is about to walk from the deal. There just doesn’t seem to be any sense of urgency or accountability at some of these banks and you get the feeling of indifference from them.

Nothing hurts a business more than indifference. A customer can receive bad service, but as long as they feel like somebody cares they’ll still repeat. When a customer feels like nobody cares, bad service is remembered and even talked about. Sometimes I wonder if indifference in tough times will be remembered by customers when the good times flow again and how this will affect these banks business in the future.

Each short sale is different though and even though we may be dealing with a bank, there may be an investor on the backend that just doesn’t want to accept less than the full amount owed. You would think by now most of these investors would look at the BPO (Broker Price Opinion), the appraisal, and the payment history of the borrower and realize doing the short sale may be in their best interest.

Sometimes we blame the banks, and believe me they deserve much blame, but we must remember that they also may be dealing with an investor and they’re just the middle man. It’s always easy to blame the middle man, but a little communication would go a long way in a tenuous process.

Short sales can also be complicated when there are liens on the property such as utility, or homeowners associations, property taxes, or even unpaid workers who worked on the property. Adding to the complexity is when we have to deal with multiple loans or home equity lines of credit, PMI companies, etc.

The short sale process isn’t easy for amateurs. While it is complex, we do salute the lenders who are taking it seriously and utilizing today’s technology to facilitate communication and expediency. It will be nice one day when we never have to do a short sale. Until then, it is the new normal so we might as well master the process, and that includes agents, lenders, appraisers, title companies, lawyers, and everyone involved in an intricate process.

This is the question most often asked, by both buyers and sellers.  The truth is nobody knows for sure, but the market usually leaves clues.  Sometimes the market leaves strong clues a kindergartner can figure out, and sometimes they’re more obscure only a tea leaf reader might understand. 

So what clues is the market leaving right now?  Median single family home sale prices are up about 10% over last year in June.  July numbers haven’t been released yet.  Prices are down .31% over last month, so we’ll call that about even.  Home sales are down 12% over last year, but home sales are up 2.81% over last month. 

SW Florida Real Estate Sale Prices
SW Florida Median Sale Prices 2009-2010

As you can see by the attached chart, last year home prices rose steadily in 2nd half of the year, perhaps due to the home buyer tax credit, low interest rates, and bargain buys in the SW Florida market. 

Prices continued to rise this year right up until the home buyer tax credit ran out.  Is this coincidence?  We don’t know.  Some speculate it is due to the expiration of the tax credit, others speculate it could be effects from the oil spill, while still others wonder if it’s not the economy and the job situation.  Perhaps it’s all three, or perhaps its simple supply and demand at equilibrium in this new economy. 

Banks have slowed down bringing bargain homes to the market, and we’ve long wondered what will happen to our market when the bargains are gone.  Because we don’t have sustained employment opportunities, it seems almost impossible for prices to shoot up drastically once the distressed sales are gone. 

The distressed sales are not gone; it’s just that foreclosure listings have slowed recently.  We’re hearing that FNMA has more properties coming to the market soon, and we have seen a slight jump in pre-listed foreclosures we’re working right now.  We’ve also seen a slight increase in short sale transactions, although not enough to make a dent. 

HAFA, the government program designed to make short sales easier to sail through with the banks has been a huge flop.  It’s almost to the point the government should stop trying, because they’re making things worse.  Last year the government intervened and tried to instill loan modifications and workouts, but it was a flawed theory and failed miserably.  Because of this, we said 2010 was the year of the transaction either a short sale or a foreclosure.  Short sales have not worked like intended.  It was a voluntary program and had no teeth or real chance.  It was just an arbitrary deadline designed to make the politicians look good, but now they just look bad. 

Right or wrong, this all leads up to more eventual foreclosures.  We believe more are coming, and they take time to work through the process.  The Lee County Clerk’s office has been working down the backlog of files lis pendens, and this is a good sign.  Unfortunately, there are more to come.  The stimulus has not worked, nor has the governments plan to revive housing.  It’s time for a new plan, a plan that can actually work.

 We invite local, state, and federal officials to sit down with those on the street and think about the big picture.  Theory should align with reality, and implementation should be realistic, and have teeth.  Otherwise politicians are kicking the can down the road, prolonging the housing crisis, and adversely affecting the economy.  Housing is 32% of GDP, so it makes sense to work on a comprehensive solution that helps both, not one that sounds good for votes but does nothing. 

Where is our market headed?  We’ve identified some clues, and maybe there are others.  You can read the tea leaves and decide for yourself which elements will win out.  We can say we have record low rates, below replacement cost prices, and affordability is at an all-time high.  So if a buyer has a job, has good credit, and wants to buy, now is a good time.  I just want to get more people good jobs so more people can take advantage of this market.

Watch this week’s The Future of SW Florida Real Estate Video Show August 13, 2010

We just posted two new videos of our Future of Real Estate show. The first segment, Pricing Your Home to Sell – Future of Real Estate demonstrates the Pricing target, which shows homeowners how well their property is priced depending on the number of showings, drive-up, and drive-bys.  This graph is very informative and has been tested across North America with many Star Power Stars and attendees, which are the highest producing agents in the country.  Brett, Mike, and Sande of the Ellis Team are Star Power Stars and and enjoy learning and sharing great ideas with other high powered agents.

We also talk about the expiration of the National Flood Insurance Program for the third time this year and what that means for closings in SW Florida, as well as a new Condo and HOA law that was signed by Governor Charlie Crist this past week.  Also information on banks participating in the HAFA (Home Affordable Foreclosure Alternatives).  Stay tuned to Topagent.com

The second video  Featured Hot Listings – Future of Real Estate SW Florida features four new listings, one in Daniel’s Park which is a gated community in South Fourt Myers for $165,000, and other in Brandywine in Myerlee for $20,000, one in Carillon Woods and another in the Forest Country Club.  We also tell you how to view virtual tours of all the Ellis Team Listings, as well as search the entire MLS for free.

Future of Real Estate SW Florida New Videos.

It’s a fact that 7 out of 10 distressed home sellers go into foreclosure without visible intervention to improve their situation.  We speculate that sellers do not realize there is help available, and that doing something about their situation is better than just walking away. 

Many sellers we talk to are embarrassed about their situation, while others are simply depressed and don’t wish to speak about it, hoping their financial situation will improve in time to change things.  The sad reality is once a homeowner falls behind; it’s very difficult to ever catch back up, even if their job situation improves. 

We’ve been reporting about the new government HAFA (Home Affordable Foreclosure Alternatives) program announced on April 5 designed to improve short sales.  We’ve also told you that 2010 will be the year of the Transaction, either a short sale or foreclosure as loan modifications have not worked. 

This past week we’ve met several large banks who have all committed to diligently approving short sales in a quick fashion.  Many agents and buyers have been reluctant to offer on Short Sales because the truth was they were really Long Sales.  This has changed and may now be a viable alternative for sellers and buyers alike.  If your loan is with Bank of America, Wachovia, or Wells Fargo, it may now be possible to streamline your short sale.  Other banks are following suit depending on who the end investor is on each loan. 

We’ve provided a chart for sellers to illustrate the financial advantages of considering a short sale VS.  foreclosure.  Some of the details may affect you well into the future.  You may wish to discuss this with your attorney as well, especially if you’re considering bankruptcy. 

Short Sale Vs Foreclosure Benefit Chart
Why a Short Sale May be better Financially Than a Foreclsoure

The good news is the short sale process has just improved dramatically, and while still very complicated, can provide relief for struggling homeowners and help them restore their credit so they can move on with their lives much sooner.  This economy will improve one day, and it will be nice when current distressed homeowners can look back and not be held down by circumstances of the past.  The short sale is one such tool to accomplish this.

This past week we sat in on a meeting with the founder of RE/MAX, Laurie Magiano with the US Department of Treasury, Matt Vernon who heads the Bank of America Foreclosure and short sale department, and the president of Equator, the online transaction management platform for 7 of the 10 largest banks for foreclosures and short sales. The topic was HAFA, the government’s new initiative which stands for Home Affordable Foreclosure Alternatives Program. 

Fort Myers Cape Coral Florida REO foreclosures short sales graph
SW Florida Foreclosure Versus Short Sale Graph

The government’s new plan is voluntary for lenders, and it does not include Fannie Mae and Freddie Mac owned or guaranteed mortgages as they are working on their own solutions to assisting and speeding up the process.  The government’s new plan allows for homeowners to receive $3,000 for moving expenses if the seller agrees to a short sale or deed in lieu of foreclosure.  A short sale or deed in lieu of foreclosure is better on the sellers credit than a full blown foreclosure and will allow the seller to purchase a home much sooner than a foreclosure. 

The plan also stipulates that the seller will not receive a deficiency judgment, so the seller won’t be bogged down with debt payments in the future resulting from the sale of the property.  This is big as it’s been a stumbling block for many sellers in accepting a short sale.  The seller’s housing expense ratio should exceed 31% or lender will believe seller can afford payment, and lenders will be particularly mindful of strategic defaults where seller has money saved but chooses to walk away anyway, especially on the higher loans. 

The new regulations, if the lenders agree, stipulates that the 2nd mortgage holder will receive 6 cents on the dollar, which is far more than a foreclosure where they won’t receive anything, and much more than the 2-3 cents banks sell debt for on open market.  The 2nd lien holders have held up many short sales, and now that the government has set guidelines, it should make it easier having a roadmap to negotiations. 

The new guidelines also call for lenders to make decisions within 10 business days as to the viability of doing a short sale, and banks such as Bank of America are committing resources so that agents will now receive communications within 2 days, so the days of asking questions and not hearing anything for weeks or months may be over.  Bank of America has put systems in place whereby an agent can contact a negotiator’s supervisor if the agent has not heard a response within 2 days, and the Treasury department has given us an e-mail address to escalate all inquiries no matter who the lender is so they can step in and help. 

Everyone in the room agreed that short sale transactions could one day outnumber foreclosures, and that would be a good thing as sellers credit is better preserved, and lenders generally lose less money on a short sale versus a bank foreclosure, and 2nd lien holders get paid something.  The property tends to remain maintained and require less fix up than an abandoned or vandalized property, which further upholds values in the neighborhood. 

There is one other advantage few people think about to a quick process.  Many short sales are priced too low and will never sell, but they subliminally drive values down in the market as some view the unsalable short sales as the new market value when in fact they’re artificial and won’t be approved.  By speeding up the process, or issuing pre-approved pricing, this should help alleviate this phenomenon and improve the market almost immediately. 

Stay tuned as these are lofty ideals, and we’ll report back on how well they actually work.  Of course, this will depend on how many of the lenders and investors participate in the voluntary program.  See our Future of Real Estate Show discussing new HAFA program on short sales.