After a writing hiatus, I’m back! It’s been a crazy spring. As a Certified Foreclosure and Short Sale Specialist, I’ve been very busy consulting with homeowners and working with them to avoid foreclosure. Every day, I’m talking with people who are facing the prospect of losing their home.
In part 1 of this 3-part series, I talked about the options a homeowner has to keep their home. In this part, I’ll discuss the three options that allow them to get out of the house and out from underneath their loan.
The first option is a conventional sale. This obviously is only an option for homeowners who have equity in their homes. It’s not out of the question that someone may have an adjustable rate mortgage which is going to reset soon, or recently has, and is too much for them to afford. In this case, if the homeowner has enough equity to afford the costs of selling a home (which can commonly totals 7% of the sales price), including title insurance, escrow fees, brokerage commissions, county taxes, and other miscellaneous fees, then they can get out of the loan through a conventional sale.
The second option is a short sale. If the homeowner is “underwater,” meaning that the total value of the loans against the property are more than the current market value, then they might be able to attempt a short sale. This involves putting the home up for sale at current market value, and getting the lender to take the loss on the difference. As I discussed in a previous post, “What is a Short Sale?“, this is accomplished by sending the lender a “Short Sale Package” which includes many documents supporting the fact that the borrower can no longer pay their mortgage and must sell the property at a loss to the lender, and the only other alternative is foreclosure. This whole process is best conducted by a Realtor who is experienced in short sales, because the process is long, tedious and complicated. Many agents, in a desperate attempt to get any business they can, are trying to do short sales and not getting very good results.
The third option for getting out from underneath the loan is to simply give the home back to the lender in what is known as a deed in lieu. When a lender foreclosing on a property agrees to allow you to deed the property back to the lender before the foreclosure is complete, it is called a “deed in lieu of foreclosure.” This can be advantageous to lenders because they get the property back sooner from cooperative homeowners which mitigates their losses. It can be advantageous for a homeowner because they may have less damage to their credit and they can move on with their lives without a stressful foreclosure hanging over your head. This option is usually not available if there is a 2nd mortgage on the property, because the 2nd mortgage would still be on the title after the deed-in-lieu-of-foreclosure is completed. The only way for the 1st mortgage holder to clear the 2nd mortgage from the title is to proceed with the foreclosure.
As you can see, the most viable option for homeowners tends to be a short sale. Since so many people bought homes over the past 5 years with either subprime loans or simply have adjustable rate mortgages which are resetting to a higher interest rate, it’s no wonder that fully 28% of the 8,592 homes for sale in Santa Clara County are short sales. But as I said, these are no easy feat. It takes an agent with patience, knowledge, skills and training to successfully negotiate a short sale with a homeowner’s lender. In the end, because most agents don’t have this training, a very small percentage of short sales actually close. If you are facing foreclosure, and would like to get out from underneath your loan, don’t let this happen to you - talk to an agent who has experience closing short sales. If you need a referral to someone in your area, let me know. If you live in Santa Clara County, and would like to discuss your situation, give me a shout - I’d be happy to help in any way I can.
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More and more these days, it seems I’m hearing good people say, “What are my options if I’m facing foreclosure?”
In the last few years, so many people bought homes with either 100% financing or risky loans that have negative amortization and/or an interest-only payment for a couple of years which adjusts after the initial period. God forbid if your loan has all of those characteristics! Consequently, lots of those loans are now resetting to a higher interest rate and therefore a much larger payment. As home values decline in some areas, lots of people owe more than their home is worth. This can be best illustrated with a quick story.
There’s a man here in the Willow Glen area of San Jose who bought a beautiful, newer home at the end of 2005 for $940K with a 100% financing, 2 year interest-only option ARM loan. His payment, between the 1st and second mortgage, was about $6,000 per month. “Don’t worry,” Mr. Sub-Prime Lender told him at the time, “since property values are going up at more than 20% per year, in two years you can simply refinance your house with a more stable, long-term loan and you’ll have plenty of equity to get an 80% 1st mortgage.” Yeah right.
Fast forward to a month ago. Mr. Homeowner-Been-Screwed gives me a call and says that in December, his payment jumped from $6K per month to over $9,000 per month! Not only that, but the house across the street from him which is the same age, about the same square footage, is of similar design, features and construction has been sitting on the market for the past 6 months at a list price of $850K. Ouch.
He tells me that he lays tile for a living, and has been working a second job over the past couple of months to try and make his new $9K mortgage payment, but he just can’t seem to make ends meet anymore and is going to miss this month’s payment, so he’s afraid that his lender is going to foreclose on him. He says he feels angry, betrayed, helpless and stuck between a rock and a hard place and doesn’t know where to turn. I tell him that he actually does have options, 11 options in fact. So I offer to sit down with him and show him a new report I just wrote entitled “11 Options for Homeowners Facing Foreclosure.” He was delighted to know that there are things he can do to avoid foreclosure.
So in this first part of a three part series, I’ll share with you the first set of options in my new report, which break them into three categories:
- Things you can do to try and keep your home,
- Things you can do to sell your home,
- And finally, some “last resort” options.
Lets look at the first category and review a summary of the options. First of all, if you want to try and stay in your home, then you need to open a dialogue with your lender. Ask them if the will do a loan modification. This is where the terms of your loan are changed to make the mortgage payments more affordable. If you are behind in your payments, then you may be able to work out a payment plan, where the missed payments are either added to the loan balance or simply divided up and paid over time. This option will usually go in hand in hand with a forebearance agreement where the bank agrees to postpone taking further foreclosure action, particularly if you can prove that your setback is temporary.
At any time during the foreclosure process, you have every right to cure, or reinstate your loan by paying it off. This can be done with a conventional refinance, however many times, a conventional refinance is out of the question, because a new bank will require at least 10% equity in your home, and if you’ve missed payments, then your credit is likely suffering enough to prevent you from getting that new loan anyway. Another option might be an equity loan or what is know as a hard money loan. Hard money lenders don’t really care about your credit, they are just concerned that your property can secure the loan. These loans usually have incredibly high interest rates and all kinds of up-front fees, so they should only be used as a short-term solution, usually buying you enough time to stop the foreclosure and sell the home. Again, these types of lenders will need to see significant equity in your property.
If you would like more detail on each of these 6 options to stay in your home, as well as all the other options I will be discussing in part 2 & 3, you can download a full copy of my report, “11 Options for Homeowners Facing Foreclosure” right here on my Website.
In part 2 of this three part series we will examine the three options to stop the foreclosure by getting out of your property and the loan. Stay tuned!
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February 19th, 2008 · 6 Comments
A “Short Sale” is a sale of real property in which the outstanding obligations (loan balances) are greater than the amount that the property can be sold for. This is typically the case when home prices are falling, and the seller has financial distress from either a reduction in income or an increase in monthly loan payments such a re-casting of the existing rate. Successfully completing a short sale may have a far less negative impact on the seller’s credit and tax circumstances than a foreclosure would. A foreclosure will severely damage the borrower’s credit score for the next 7-10 years, and rates on any future loans they apply for during that time will have interest payments based on about 3 times what prevailing interest rates are.
A short sale is typically done during the foreclosure process, after a Notice of Default” has been filed. A short sale will stop the Trustee Sale which concludes the foreclosure process.
At this point, you may be thinking to yourself, “Why in the world would a bank agree to a short sale?” The answer is fairly simple:
Banks are in the business of lending money and not owning real estate. If a home is in foreclosure because the borrower is in default, that’s called a non-performing loan. Federal Reserve guidelines state that the bank must put aside two to eight times the amount of the non-performing loan to cover the bad debt. If this money is sitting in reserve, it obviously can’t be loaned out to new customers to make the bank more money. As a matter of fact, there are strict federal guidelines as to how many bad loans a bank can even have on their books at any given time. If a certain percentage of their outstanding loans are considered bad debt, they can be fined, sanctioned and even federally regulated. So you see, they are quite eager to get rid of a property before they have to take it all the way to a Trustee Sale and possibly take it back as an REO (which by the way stands for Real Estate Owned.) Not to mention the fact that the foreclosure process is long and expensive for the lender involved.
A short sale is accomplished by sending the lender a “Short Sale Package” which includes many documents supporting the fact that the borrower can no longer pay their mortgage and must sell the property at a loss to the lender, and the only other alternative is foreclosure. Things included in the short sale package include: financial statements, pay stubs, medical bills, divorce decree, etc. Also included will be a detailed letter from the homeowner, called the “Hardship Letter,” explaining why they can’t make their mortgage payments anymore. The most important part of the package will be… an offer! True, the lender will most likely not even look at a short sale package if it does not have an actual written offer from an interested buyer.
A short sale is an often complicated process, and can be lengthy, sometimes taking upwards of 3-4 months to get the whole thing done, especially if the real estate agent doesn’t know what they’re doing. Therefore, much of the success or failure in accomplishing a short sale depends on the real estate agent involved. I specialize in foreclosures and short sales and have many unique methods for getting short sales approved quickly. I also work with a large number of homebuyers and investors who are ready to make offers on properties immediately.
I know that being in the middle of the foreclosure process can be very stressful and frightening, and that understanding the process and what your options are can shed some light on the situation and help you feel better about it. My goal is to truly help people get out of this terrible predicament and move on with their lives.
If you have any questions about your particular situation, or about foreclosures and short sales in general, please don’t hesitate to .
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December 20th, 2007 · 2 Comments
President Bush signed into law today a new measure giving tax breaks to homeowners who have mortgage debt forgiven. Under preexisting law, the debt forgiven by a lender, such as for short sales and refinances, was generally taxable to the borrower as debt discharge income. With the passage of the Mortgage Forgiveness Debt Relief Act of 2007, a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence.
This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).
For purposes of calculating capital gains, any debts discharged excluded from income under the new law must be subtracted from the basis of the taxpayer’s principal residence (but not below zero). However, taxpayers may generally exclude from capital gains income up to $250,000 (or $500,000 for married couples filing jointly) for properties owned and used as their principal residence for at least two of the last five years.
This is great news for homeowners who have gone through either a short sale or deed-in-lieu of foreclosure. Prior to this act, it was a double-whammy — not only did the homeowner not have enough equity to sell their home and took a big hit on their credit score, but they were taxed on the differential between what they owed on the house and what it sold for (because it was treated as income). Now they can at least know that Uncle Sam will not come after them to pay taxes on that differential.
For a copy of the Mortgage Forgiveness Debt Relief Act of 2007, go to http://www.govtrack.us/congress/bill.xpd?bill=h110-3648.
Also, keep an eye out for my upcoming article that will explain “What is a short sale?”, in the coming days.
Tags: capital gains, forgiven mortgage debt, income taxes
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November 14th, 2007 · 2 Comments
As part of my ongoing involvement with foreclosures and how to buy them, I get asked lots of questions. One that comes up frequently is, “When buying a foreclosure at auction, do I have to pay off all the liens?”
The answer is, “It depends on the lien priority.” What is lien priority, you ask? Well, properties always have a Title document that shows who or what entities have an interest against that property. Each interest is recorded in chronological order:
- First and foremost, County property taxes are always in first position on Title (we all know that there are only two things for sure in this world - death and taxes).
- Second is usually a lien for supplemental taxes, based on any new assessed value.
- Third is usually for neighborhood CC&R’s (Covenants, Conditions and Restrictions) which govern how you can and cannot use your property in that particular development, neighborhood or homeowner’s association.
- Fourth position is sometimes for easements (which is a right for someone else to use a portion of the said property), for example for the gas or electric company to come onto your property and read the meter, or for a land-locked neighboring property to have a driveway run along the edge of your property in order to gain access to theirs.
- Fifth will normally be for the first mortgage holder, if there is one.
- Sixth would be for a second mortgage, if there is one.
- Seventh would be for any additional mortgages
- Eighth would be for any other interests against the property, such as a Mechanic’s Lien (i.e. that contractor who installed your new bathroom, but whom you failed to pay)
If the first mortgage holder is the one doing the foreclosing, and have brought the property to auction on the County Courthouse steps, then all the subsequent liens (called junior liens) are wiped out! If the lien holder down the line, the contractor who never got paid for the bathroom, for example, is the one doing the foreclosing, and you buy the property at auction, then you need to pay off all the liens that are above him (called senior liens). In that case, you would be responsible for paying off the first, second, and maybe third liens as well as HOA dues and county taxes. So be very careful when buying a foreclosure property at auction - do your research! You can always go down to the County Recorder’s Office in the county where the property is located (usually in the county offices or at the city hall) to research all the recorded liens against a specific property - this is public information.
Every week, I send out the list of Notices of Default and Notices of Trustee Sale for foreclosure properties in Alameda, Santa Clara, San Mateo & San Francisco Counties. If you would like to be included on that list, you can sign up here.
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Investors who time any market hope to buy low and sell high, but homebuyers have a trickier time knowing when to sit on the sidelines and when to jump in. The reason? There are several… Buying a home is one of the largest financial investments a homebuyer will make. Transaction costs are expensive enough that homeowners remain in their homes approximately six years before trading up or down. As the recent buyer’s market shows, homes aren’t liquid, and sellers may not find buyers at the price and in the time frame that they prefer.
On the other hand, homeownership provides significant benefits including property rights, tax benefits, quality of life, appreciation, and equity.
Since two factors move markets — fear and greed — it’s easy for buyers to be overanxious to buy in a seller’s market and reluctant in a buyer’s market. In a seller’s market, prices rise, sellers hold firm, inventories are short and days on market are short. In a buyer’s market, buyers are fearful that home prices will either flatten or drop below what they paid, causing inventories to rise, days on market to increase, prices to drop, and sellers to sweeten deals.
If buyers pay attention to housing news, they can be discouraged: interest rates are near year-ago highs, builder confidence is down, and some predict that housing will drop in value for the first time since 1968.
So is it the right time to buy a home?
Here are a few factors for you to consider:
According to a recent article, “When The Housing Rebound Comes,” by George Mannes for Money Magazine, the time for buyers to jump in is when conditions improve. Mannes suggests that buyers look for four signposts: declining inventory (preferably under 6.5 months of inventory on hand); houses selling faster; Realtors opinions of local market conditions growing more favorable; and signs that sellers are less desperate, such as fewer incentives and homes selling closer to asking price.
For some buyers, the lesson that it’s time to buy is a hard one. They may wait so long that the home they hoped would go down in price sells to someone else. They have to start their search over finding that the remaining homes don’t compare to the “one that got away.” They may wait for interest rates to drop, and find that they stubbornly stay at higher rates. They’re knocked out of the neighborhood and price range they wanted to buy into and find themselves looking at homes with fewer features, less square footage, or more distance from work, family and friends.
When those scenarios happen, buyers learn that there’s an opportunity cost for waiting.
If you’re a buyer, you sadly realize that to get the home you want — at both the price and interest rate you want — will be nearly impossible. If you’re lucky, you’ll get two out of three. So, if you’re waiting to see what other buyers are going to do, you’ll soon find that once buyers move collectively, they will either drive prices down or drive them up. If prices are down, but likely to recover, do you really want to compete with other buyers on the way back up?
In other words, the price of feeling more comfortable about buying is inevitably paying higher prices and having less to choose from.
So here are some surefire ways to tell that it’s really time to buy:
- You found the home you really want and you can see yourself living there.
- It’s affordable.
- You can get a reasonable loan.
- It will serve you and your family for years to come.
- You’re not looking for perfection.
- No home is perfect.
- You’ve given up trying to beat the market.
- You’re comfortable with your compromises, whether it’s location, size, price, features, or condition.
- You’re confident the home you’ve chosen is desirable enough that you will be able to sell it in any market.
Best of luck in your home search!
Image courtesy of Getty Images Royalty-Free Collection.
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As a real estate consultant, I often get asked questions about foreclosures, especially as the number of these distressed properties skyrockets. According to a recent RealtyTrac press release, there were a total of 176,137 foreclosure filings in May of this year, a 19 percent increase from the previous month and up nearly 90 percent from May 2006.
Purchasing a foreclosure property is a little-understood process, so I thought I would help by explaining a bit about them, and answering a few of the most commonly-asked questions I get.
The very first question I can answer is,
Q: What is a foreclosure?
A: Foreclosure is the process by which a lender or creditor can recover an amount of money owed on a loan which is secured by real property (the house) that is in default. The process starts when a borrower/owner does not pay their bills for a period of time, and the lender files a public notice with the County Recorder’s Office, called a “Notice of Default” (NOD). The borrower has a grace period, called ”Pre-Foreclosure” during which they can bring their account current. If they do not, or the property is not sold to a third-party during this time, the lender then files a second notice with the County, called the “Notice of Trustee’s Sale” (NOT), which describes their intent to sell the property at public auction, usually on the County Courthouse steps. If the property does not sell to the highest bidder at the public auction, then it goes back to the lender, and becomes what is known as “bank-owned property” or an REO, which stands for “Real Esate Owned (by the bank).” When the bank gets the property back, they list it on the open market through the Multiple Listing Service (MLS) with their team of Realtors they specifically use to list these types of properties.
So to recap, the three categories of “foreclosures” are:
- Pre-Foreclosure. Begins when the NOD is filed.
- Foreclosure sold at auction. This is the Trustee’s Sale.
- Bank-owned property (REO). Begins when the property reverts to bank ownership.
Q: How do I find a foreclosure?
A: There are several ways to find foreclosures:
If you are looking for pre-foreclosure properties, the most obvious way is to check with the County Recorder’s office. Since these filings are made public, you have access to them. Simply go down to the recorder’s office and ask to see this week’s filings. Or, you can subscribe to my weekly distribution list of pre-focreclosures (NODs and NOTs) in Santa Clara County, which will update you every Wednesday when the county publishes the new pre-foreclosure filings.
If you are looking for Trustee’s Sale auctions, they are published in the newspaper on a weekly basis under “public notices.” Notices are also posted at the entrance to the courthouse in the County or City where the home is located.
If you are looking for bank-owned properties (REOs), you can also check sites like RealtyTrac. You can also go directly to the major banks, like Wells Fargo, Bank of America, Washington Mutual, etc., and ask to see their list of REO properties for sale.
Q: How do I buy a pre-foreclosure?
A: Pre-foreclosures are not technically “for sale.” These are simply homeowners who are having difficulties paying their bills. They may be experiencing financial difficulties, medical problems, having family troubles such as divorce, job loss, or any other myriad of problems people have paying their bills. Buying a property in pre-foreclosure involves approaching the borrower/owner directly and offering to buy the property outright. You would likely offer the owner a price that pays off the obligation (allowing them to avoid the bad mark on their credit), plus some extra money so they can walk away with something to show for any equity in the property. You will have time to research the title and condition of the property during this process. If researched thoroughly, you may be able to get these properties at discounts of 25-50% below market value.
Q: How do I buy a property at auction?
A: Simply go down to the County courthouse steps at the pre-determined auction time.
Q: Should I have financing arranged before the auction?
A: California state law say that you need to have enough liquid funds to buy the home when your bid is accepted. The Trustee will accept cash or cashier’s checks, that’s it. So, you need to have enough money to buy the home at the final bid price, right there, at the auction, on the spot. Many buyers will have several denominations of cashier’s checks with them, $100,000 each for example, up to the amount they are willing to pay for the property they want to buy. If you have two $100,000 cashier’s checks, and the property ends up with a final bid of $150,000, the overage ($50,000) will be returned to you.
Q: Why is the auction price listed so low?
A: The price listed is the principal loan amount plus back payments and foreclosure costs incurred by the foreclosing lender, it is NOT the asking price of the home. Sometimes, this lender may be a second mortgage, and that amount is typically far less than the first mortgage. Foreclosure of the 2nd mortgage is always subject to the covenants of the first mortgage (meaning that the 1st mortgage must be paid off too.)
Q: Can I preview forclosures before I bid on them?
A: If the property is listed on the open market (through the MLS), or as a For Sale By Owner (FSBO), then yes. If it isn’t, then probably not. All foreclosure sales are “As-Is”… buyer beware!
Q: Do I need a Realtor® to attend the auction?
A: Whether you are buying a pre-focreclosure from the owner directly, bidding on a property at auction, or purchasing an REO property from the bank, I recommend having professional buyer representation. Everyone’s situation is different, and due to the fact that you are entering into a legally binding contract, it’s always a good idea to have a skilled consultant give you help and guidance along the way.
If you have any more questions about the foreclosure process, please feel free to contact me!
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So many people I know rent… If you live here in the Bay Area, have a good job, make decent money and have a good credit score (i.e. manage your money well), then it simply doesn’t make sense to be throwing your money away every month. Maybe you don’t understand the home buying process… Maybe it’s a bit scary… Or intimidating… Or just plain confusing. I’d like to help by explaining the process in layman’s terms in a laid-back, no-pressure, no-obligation setting.
I am holding an informative, 1.5 hour workshop this week called “How to be a Smart & Successful Home Buyer and Stop Paying Rent Forever!” You’ll learn:
- What’s happening in today’s real estate market
- Why it makes sense to buy a home vs. renting
- How the “IRS Pays You” to own a home
- What financing options are available
- How your credit score affects your buying power
- How to get pre-approved for a mortgage
- The home buying process, step-by-step
- What is Title & Escrow?
- How to get started & your next steps
- And best of all, this workshop is FREE!
For those people who are renting a place to live in the San Jose / Campbell area, this will be a great opportunity to become more educated and informed. Please plan on coming to one of my upcoming seminars, you can choose one of two convenient times the week– either:
- Thursday evening, June 14th from 6:00p - 7:30p
- OR -
- Saturday morning, June 16th from 10:30a - 12:00p
The seminar will be held at North American Title Company, 2542 S. Bascom Ave #111, Campbell, CA 95008.
Please let me know you’re coming by calling my 24 hour toll-free registration line at 1- x4038. If you just stopped by to say hello and listen in, that wouldn’t be the end of the world either.
Hope to see you there!
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Thank you Kevin, for the wonderful introduction! I too am thrilled to be a part of your growing 3Oceans community here online.
Yes, it’s true - I am fascinated by technology. Always have been. To the point that my friends call me the ”gadget guy.” Perhaps it’s just in my nature as someone who has always had the deep desire to “figure things out”, always wondering how things work, exploring, learning, finding ways to do things more efficiently.
Years ago, before becoming a Realtor, I worked in the high tech industry as a Product Marketing Manager, where I had the distinct pleasure of evaluating all kinds of nifty new gadgets, many of which had not even come to market yet. Not only was I on the bleeding edge, I was there before the first cut drew any blood!
Today, as Kevin mentioned, I am using the latest technology tools in my real estate practice in order to make the process more streamlined & efficient, paperless & wireless, interactive & engaging, and most of all - fun! The cornerstone of my technology arsenal is a Motion Computing TabletPC. With the ability to sign documents electronically on it, I have become paperless. With the always-on wireless broadband Internet connection, I have become truly mobile. No longer must I say, “Let me run back to my office and look that up on the Web… Or fax that document… Or print that out.” It’s become permanently attached to my hand — I don’t go many places without it.
My TabletPC also consistently draws the attention of people around me. Gazes of wonder, inquisitive stares, plentiful questions & engaging conversations. That’s undoubtedly the primary reason that Kevin and I were drawn to eachother that sunny afternoon a couple of years ago at a focus group in Palo Alto regarding real estate technology being conducted by our regional MLS company. He noticing my Tablet, me noticing his. It was a match made in Real Estate Technology heaven.
I look forward to contributing on 3Oceans, thank you for your invitation Kevin.
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