West Palm Beach Real Estate News

Florida Homeowners to receive up to $20,000 to short sale their home.

By: Gabriel Diaz,GRI- REALTOR /Real Estate Broker-Home Options Group

Bank of America has launched a new program for homeowners facing foreclosure, to place their homes for sale as a short sale. To qualify the property must submitted for approval by November 30^th and the sale must close by August 21, 2012.

The Bank of America plan has a minimum payout amount of $5,000 to a maximum of $20,000 and is designed to help struggling homeowners to avoid a long and strenuous foreclosure process. This program will also benefit Bank of America as currently the average time it takes a bank to foreclose on a homeowner is 676 days which is more than twice the national average. Homeowners represented by attorneys can actually wait 3-4 years for the foreclosure process to take its course.

Some of the banks have already offered similar programs called “cash for keys” but typically these exchanges happen after the foreclosure process. Bank of America’s deal will actually provide the added benefit of not being foreclosed on which is a public record that can stay on your credit report for up to ten years and exclude you from major credit purchases for four years or more.

This is a great article I saw on Trulia.com...

Roughly forty percent of the homes for sale on today's market are short sales and foreclosures! Distressed properties are well known for their value (a reputation which is sometimes accurate, and sometimes not), but they also have a reputation for causing buyers to become distressed, too!

Transactional snafus, last-minute surprises and long, drawn-out escrows that never close seem to be par for the course.

Instead of avoiding these properties altogether, get educated about the most common dramas that go down in these deals, and how you can avoid falling victim.

1.  Run-on (and on, and on) escrows.  When you’re buying a home (or selling one, for that matter), time is absolutely of the essence.  And buyers reasonably expect that the big time suck in real estate is in the house hunting process itself; seems like once you find a home you want to buy and the seller agrees to your price and terms, things should move pretty quickly, right?

Not so much, when it comes to some distressed property sales. I’ve heard tell of the occasional, swiftly-moving escrow on an REO (real estate owned - by the bank). But for the most part, these transactions take anywhere from a few days to a few weeks longer than “regular” sales, because of the extra signatures, supervisor-level approvals and even investor involvement required to seal the deal.  Banks don’t have the same sense of urgency individual home sellers do, and it’s not uncommon for the people who need to sign on the dotted line to be on vacation or scattered across the country, adding days’ or weeks’ worth of time to the escrow.

And short sales are also an entirely different animal when it comes to escrow timelines. While a standard sale from an individual seller to an individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 45 days to 6 or 8 months (!) to get the deal closed, after the seller has accepted the contract.

Avoid the drama by: expecting your escrow to run long, and being pleasantly surprised if it doesn’t.  Expectation management is everything. Make sure you take these extended timelines into account when you’re working with your mortgage broker on the issue of when to lock your interest rate, and how long your rate locks will last. You might even need to plan on and/or set aside an allowance for the cost of extending your low interest rate, if rates are rising rapidly during the time you’re waiting for the deal to be done.

2.  Bank won't take lowball offer.  If I had a dollar for every time I’ve received a question from an outraged reader to the effect that a buyer has had their short sale or REO offer rejected on grounds that it was too low,  even though the bank has no other offers, I could buy a foreclosure myself (admittedly, it’d be one of those $150 foreclosures in some blighted town with tax liens and no plumbing, but still).

Banks owe their shareholders and investors a duty to get as much as they can for these properties. Just because you see it’s on the market and listed as a short sale or a foreclosure doesn’t mean they’re going to give it to you for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes, with some adjustments made for the property’s condition.  Fact is, many banks would rather see the listing agent reduce the price by a moderate amount, and wait to see what offers come in, than to accept an offer 30 percent below the asking price just because there are no other offers on the table.

Avoid the drama by:  working with your agent to make a realistic offer, based on recent comparable sales in the neighborhood, not just on what you think you can get away with.  You can waste a lot of time, spin a lot of wheels and lose out on a lot of properties making lowball offer after lowball offer on distressed homes. Sit down with your broker or agent, review the ‘comps’ and make a smart offer that reflects a good value for you, is within your budget and is not bizarrely out of the realm of the fair market value of the property.

3.  Last minute postponements/cancellations.  These transactions have an uncanny way of being delayed at the last minute - or never going through at all, through no fault of the wanna-be buyer. You signed docs yesterday, put your dog in the crate this morning and just hopped in the moving truck, only to get a text from your broker that the deal didn’t close because the escrow company which was selected by the bank flubbed the checkboxes on a single sheet of paper (it happens). Or, you’ve been in contract (with the seller) on a short sale for four months, and the bank refuses the sale entirely because the seller refuses to kick even $1 of their own cash into the deal, despite having a flush savings account.

Avoid the drama by:  staying as flexible as possible with your moving plans as long as possible.  Best practice is to plan on some overlap between the time you can be in your last place and your scheduled move-in date.  Also, if you’re in contract on a short sale, you should take the point of view that you don't have a firm deal until you get the bank’s approval of the transaction. So don’t even think about starting to make moving plans or paying for home inspections and appraisals until you know the bank has greenlit the deal and that the purchase price and terms they’ve approved work for both you and the seller.

4.  The bank’s black box.   Make an offer on a normal home and you’re likely to know what the outcome will be within a few hours or a few days, at the outside. If things take longer because the seller is out of town or some such, the listing agent tells you that, and you at least know what’s going on.

Make an offer on a bank-owned property or a short sale?  It’s a crap shoot - could be days, but could also, easily, be weeks or months before you know what’s going on.  And no amount of calling, pleading, prodding or nudging is likely to get you much information on how your offer or the seller’s short sale application is being handled or what (if any) progress is being made.  And that “black box” into which your offer disappears at the benk level is very frustrating.

Avoid the drama by:  continuing your house hunt until you have an answer back.  Maniacally pestering the listing agent for answers or harrassing your buyer’s broker into spending hours on hold with the bank is highly unlikely to get you any insight. (With that said, it does make sense for your agent to check in regularly - sometimes even daily -  with a short sale or REO listing agent to stay updated on any developments with the property and to make sure your offer/transaction stays in the front of their mind.)  

Most of the angst in these situations arises when a buyer feels they passed on properties that would have really worked for them when they pinned their hopes on a distressed home.  You can only control your efforts and activities, not the bank’s.  So, consult with your own broker or agent about staying proactive in viewing and even pursuing other properties until you have a firm “yes” from the bank on your short sale or REO offer.  Until that time, and usually for a short time after you get the bank's approval, you have the right to back out of the transaction if you need to (make sure your broker briefs you on precisely when your right to rescind your offer or exercise contingencies - i.e., bail - will expire).

5.  Double standards. In a “regular” equity sale with no bank involvement, both buyer and seller are obligated to meet various timelines.  Seller has to provide disclosures by X date, open the property to inspections - with utilities on - by Y, and close and move out by Z.  REO and short sale buyers, on the other hand, are often dismayed to find that  even though the bank might take weeks or months to sign or handle its deliverables, the bank will insist that the buyer show up, sign or send a check quick-like.

Avoid the drama by: chalking it up to the (admittedly irritating) way things are - the price you pay to buy from the bank.  Realize that working with the bank on the bank’s terms is unavoidable when you buy a distressed property. Then, go into the deal with realistic expectations - including the expectation that the bank will drag its feet, despite expecting you to keep every deadline - and you’ll be less frustrated, and less likely to make poor decisions out of frustration.

Also, make sure you do respond in a timely manner to the bank’s requests and your obligations under the contract.  I’ve seen banks capitalize on buyer delays in returning signatures and removing contingencies to accept higher offers they received in the interim.  Don’t lose your home on a technicality because you assume that the bank’s lackadaisacal timelines apply to you as well.

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I'm often asked..." so what happens if I just walk away from my house and the bank forecloses on me" & the answer unfortunately is many different things can happen.  This artiocle below illustrates just one otr ther many issues to be concerned with when deciding whether to walk away from a home, modify the loan or short sale.  As always, feel free to contact me for a private , free & no obligation consultation to learn all your options.

WASHINGTON – March 7, 2011 – One can only imagine all the high-fives and fist-bumps that erupt once a can’t-make-ends-meet borrower finally, finally talks a lender into forgiving $3,000 in credit card debt.

Now let’s picture that same person months later handing over a little piece of paper called a 1099-C to a tax preparer.

The tax preparer must break the bad news: Most times, canceled debt is treated like income. And $3,000 of forgiven credit card debt must be reported as income on state and federal income tax returns.

“Sort of what you did is you switched creditors,” said George W. Smith IV, a certified public accountant and partner at George W. Smith & Co. in Southfield, Mich.

“I had one guy storm out of here saying, ‘I’m not going to report it,’” Smith said.

If you don’t report it, you can expect the Internal Revenue Service to come calling.

“The IRS gets a copy of that 1099,” said Jim Van Grevenhof, senior tax analyst for the tax and accounting business of Thomson Reuters. “They’re going to be looking for that on your tax return. And if you don’t deal with that, they’re going to ask why.”

A Form 1099-C is issued when a debt of $600 or more is forgiven or canceled. According to the IRS, the number of 1099-C forms filed with the federal government by creditors and debt collectors grew from fewer than 1 million forms in 2003 to more than 1.987 million in 2008. Some estimates project 2.8 million 1099-C forms will be sent out in 2011 for the 2010 tax year, according to CreditCards.com.

What’s unsettling, of course, is that people who couldn’t afford to pay their debt now owe thousands in taxes.

“It’s very unlikely they have several thousand dollars sitting in the bank that they can use to make an unexpected tax payment,” said Ben Woolsey, director of marketing and consumer research for CreditCards.com.

They’re going to need to borrow money – or enter into installment payment plans with the IRS.

“We’ve seen this issue more frequently in the past several years, both with credit card debt and home mortgages,” said Marshall Hunt, certified public accountant and director of the tax-assistance program of the Accounting Aid Society in Detroit. If you’d need to add $50,000 in canceled debt to your income, you could be looking at another $15,000 owed on a tax bill.

All canceled or forgiven debt, though, is not treated the same.

For example, if student loan debt is canceled as part of a forgiveness program for working in a particular field, such as health care in an underserved community, the debt that is forgiven is tax-free. The same is true for public service loan forgiveness programs, said Mark Kantrowitz, publisher of Fastweb.com and author of “Secrets to Winning a Scholarship.”

But the forgiveness of the remaining student loan balance after 25 years in an income-based repayment program is taxable.

Given the complex rules, you should provide the 1099-C to the tax preparer.

There is a special provision that allows up to $2 million of canceled debt on a mortgage to be excluded from income. This applies only to a principal residence – not a second home. And the exclusion applies only if a foreclosure or short sale takes place from 2007 through 2012.

The canceled debt must have been incurred to buy, build or improve your main home.

Consider this example from Van Grevenhof: Say a couple paid $500,000 for their home. But the house’s value tumbled to $350,000 after the collapse of the housing market. Their mortgage was for $450,000. One person lost a job and the couple couldn’t afford the monthly mortgage. They handed the deed to the bank and walked away.

The bank sold the house for $350,000. The house sold at a $150,000 loss, and the couple had $100,000 in canceled debt.

The loss is not deductible. But that $100,000 in income now is covered by the “Principal Indebtedness Exclusion.” So this foreclosure does not drive up their tax bill.

Who faces the most headaches?

Watch out if you tapped into the equity of the house to make an investment in a sure bet, but later lost your shirt and walked away from that debt.

“You had a buddy who said ‘I’ve got a great deal for you’ – and you put it in a Ponzi scheme,” Smith said.

You could end up with an extra $50,000 showing up as income on your tax return.

And if you faced foreclosure on your vacation property, you would have to report that forgiven debt and would owe taxes on it.

“All of a sudden, I’m saying ‘Guess what? Here’s your tax problem,’ “ Smith said.

What you should know

If you had debt forgiven, here’s what you need to know at tax time:

• A 1099-C is sent to the borrower and the IRS if a creditor or debt collector agrees to forgive $600 or more in debt.

• You would want to look at Box 2 of Form 1099-C for the amount to be reported as “other income” on Form 1040.

• Make sure to dig deep into your mail to find all Form 1099-Cs that you would receive from a federal government agency, credit union or bank.

• Complex rules exist for mortgages and some student loan debt. You need to know rules about when forgiven or canceled debt can be excluded from income. For example, a special exclusion exists for health care professionals who have student loans forgiven and they work in underserved communities.

• Other exclusions apply, too. For example, cancellation of debt income that occurs during bankruptcy proceedings is excluded from income, as is cancellation of debt income to the extent of the borrower’s insolvency immediately before the debt forgiveness event occurs. Also, there is no cancellation of debt income if the mortgage was nonrecourse or seller financed.
 
© 2011 Detroit Free Press, Susan Tompor. Distributed by McClatchy-Tribune Information Services.