Short Sale vs. Foreclosure

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Some homeowners at their wits end are ready to throw in the towel and give up on their house. They can’t afford the payments, they are stressed out and no longer want to deal with a mortgage. If you’re in a similar situation, take a deep breath and listen up. I know it’s a lot easier to walk away from your problems, but this is what I tell homeowners facing foreclosure: “Short sell it”.

The consequences of going through a foreclosure process is a lot more damaging than short selling your home. The biggest and foremost reason to try and avoid foreclosure proceedings against you is to minimize damage to your credit history. When you short sale your home, the lender is willing to accept a payoff amount that is less than what you actually owe. Yes, this information is reported to the credit bureaus, but it shows that you made an effort to rectify your financial situation by selling your home at the current market value. Short sale information typically stays on your credit history for about a year.

Conversely, foreclosures are judgments against you and therefore, can stay on your credit history report for 5 to 7 years. Furthermore, the next time you apply for a mortgage, you’re going to have to check that little box that asks whether you have ever been involved in a foreclosure. Even if it’s been more than 7 years, it still doesn’t look good.

Bottom line: hang in there, and seek the advice of a real estate professional in your area who can work through a short sale process for you.

Categories: Selling Short Sales and Foreclosures

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Capital Gains Tax in Real Estate

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When you sell a stock, you owe taxes on your gain—the difference between what you paid for the stock and what you sold it for. The same is true with selling a home (or a second home), but there are some special considerations.

How to Calculate Gain

In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate this:

  1. Take the purchase price of the home: This is the sale price, not the amount of money you actually contributed at closing.
  2. Add adjustments:
    • Cost of the purchase—including transfer fees, attorney fees, inspections, but not points you paid on your mortgage.
    • Cost of sale—including inspections, attorney’s fee, real estate commission, and money you spent to fix up your home just prior to sale.
    • Cost of improvements—including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.
  3. The total of this is the adjusted cost basis of your home.
  4. Subtract this adjusted cost basis from the amount you sell your home for. This is your capital gain.

A Special Real Estate Exemption for Capital Gains

Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:

  • You have lived in the home as your principal residence for two out of the last five years.
  • You have not sold or exchanged another home during the two years preceding the sale.

Also note that as of 2003, you also may qualify for this exemption if you meet what the IRS calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency. Consult your tax professional for detailed information.

Categories: Investing Selling

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8 Ways to Improve Your Credit

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Credit scores, along with your overall income and debt, are a big factor in determining if you’ll qualify for a loan and what loan terms you’ll be able to qualify for.

  1. Check for and correct errors in your credit report. Mistakes happen, and you could be paying for someone else’s poor financial management.
  2. Pay down credit card bills. If possible, pay off the entire balance every month. However, transferring credit card debt from one card to another could lower your score.
  3. Don’t charge your credit cards to the maximum limit.
  4. Wait 12 months after credit difficulties to apply for a mortgage. You’re penalized less for problems after a year.
  5. Don’t purchase big-ticket items for your new home on credit cards until after the loan is approved. The amounts will add to your debt.
  6. Don’t open new credit card accounts before applying for a mortgage. Having too much available credit can lower your score.
  7. Shop for mortgage rates all at once. Too many credit applications can lower your score, but multiple inquiries from the same type of lender are counted as one inquiry if submitted over a short period of time.
  8. Avoid finance companies. Even if you pay the loan on time, the interest is high and it will probably be considered a sign of poor credit management.

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This information is copyrighted by the Fannie Mae Foundation and is used with permission of the Fannie Mae Foundation.

Categories: Buying

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How can a home have multiple appriasal values?

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I had a client once who didn’t understand why his house had multiple appraised values. He had hired an appraiser to come out and tell him what his house was worth before deciding to place it on the market. When he called me in to list his house, I did my research and provided him with a comparable market analysis which averaged an amount much different than his appraised value, and when we got a ratified contract, the buyers appraisal showed yet another value. So he wanted to know what the deal was with the different amounts.

Here’s the thing: appraisals are really opinions… educated and objective opinions, but opinions none the less. Appraisals are used for different purposes and because of that, can sometimes vary. When a home is bought or sold, appraisals are normally based on the market selling price. For tax purposes, the value is based on a lot of factors specific to to the jurisdiction the house is in. Insurance values are based on how much it costs to replace the home, factoring in the cost of materials.

So it is possible to have multiple appraisal values, but if you’re thinking about selling your home, save yourself a few hundred dollars and ask a real estate agent to provide you a current and detailed report of the market value in your neighborhood.

Categories: Buying Selling

Is now the time to invest in tax liens?

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It’s a buyers market these days: market values are down, appraisal values are down, short sales and foreclosures are on the rise. If you happen to have ready cash available for a down payment (long gone are the days of 100% investment loans), now is the time to invest. But say you don’t have $20k – $60k liquid cash to plop down right now? Well say hello (again) to tax liens!

With the mortgage situation going the way it is, numerous homeowners are falling behind on their mortgage payments. Chances are those same homeowners have an escrow account set up with their lender for home insurance payments and tax payments. If a mortgage falls behind, that could mean that the taxes on the property have not been paid, and so, the state can issue a tax lien against the home. These tax liens go up for auction to any willing bidder in an effort for the state to receive the funds that they would have normally received from the homeowner. Those tax liens can start out as little as a few hundred dollars, upwards to a few thousand, but definitely less than the price of home– even in a down market. And almost like winning the lottery, the winning bidder gets to own a piece of property for an incredible discount! But not so fast, Tonto! Some states offer a recovery period for delinquent homeowners, in which case, they pay their taxes, any late fees, PLUS interest back to the winning bidder and get to keep their home.

Tax liens? Yes! Yet another way to diversify that portfolio!

Tax Lien Investing Secrets. Online Course – How To Invest In Tax Lien Certificates And Tax Deeds. Audios, Manual, And Resources. Click Here!

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Categories: Investing

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Selling Price vs. Timing

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Most people planning to sell their home are anxious to know how soon their house will be sold. Aside from obtaining a comparative market analysis report from your real estate agent, a good general statistic to keep in mind is that most activity occurs when the house is first listed and tends to slow down the longer the home remains listed:

Activity based on weeks on market

Timing is extremely important in the real estate market. Remember that the greatest opportunity you have to get your home sold is during the first few weeks it is listed.

Categories: Selling

Preparing For A Short Sale

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As difficult and stressed as things may be, the lender is going to want some information about your financial situation as part of their decision to accept a lowered payoff amount. The information needed is similar to the information needed to complete a mortgage application, except, instead of trying to prove your credit worthiness, you are trying to prove your financial insolvency.

Here is a list of items you may need:

  • A hardship letter explaining your financial situation. Include what you have done to rectify the situation.
  • Documentation on any other liens against the property.
  • Bank statements.
  • Pay stub and W2’s.
  • Monthly bills, especially utility bills on the property.
  • Property taxes.
  • Homeowner insurance policy

Categories: Short Sales and Foreclosures

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Can I still short sale my home if I’ve filed for bankruptcy?

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The absolute answer to this question is to consult an attorney who practices law in the state you filed, because bankruptcy is a legal issue.

Ask your attorney if the state in which you filed for bankruptcy will protect your home from foreclosure. The Bankruptcy Court or Trustee would have to approve your entering into a listing agreement. In most cases, it will be nearly impossible to complete a short sale.

Consult an attorney for legal advice.

Categories: Short Sales and Foreclosures

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What Is A Short Sale?

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If you’re keeping up to date with real estate news, chances are you’ve heard the word “foreclosure” more and more. If you want more detailed information about foreclosures, then read my post called, “What Is A Foreclosure”. For this post, just know that a property in foreclosure means that the homeowner can no longer pay the mortgage. What does this have to do with a short sale? Read on.

When a homeowner can no longer afford the payments on their property, they may try to refinance their loan to a better rate in order to lower their monthly payments and avoid foreclosure. But when the total balance of a mortgage exceeds the current appraised value of the property, refinancing that mortgage becomes extremely difficult, if not impossible. It becomes a huge risk for any lender to lend money on an asset that is worth less then they are lending. So what is a homeowner to do? They cannot refinance but cannot afford the mortgage. The only option they have is to sell the property. But since the appraised value of the house is less than what the homeowner owes, the home must be sold at a loss. This loss is considered a short sale from a lenders perspective since they are willing to accept less than the amount they are owed as payment in full.

Categories: Investing Short Sales and Foreclosures

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Can’t Pay Your Mortgage?

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For some reason or another, you just can’t seem to pay your mortgage. Whatever the reason, you must know that you do have choices:

  • Sell your home and find a more affordable one. If you owe more than what your home is worth, you may need to sell your home as a short sale. Talk to a knowledgeable real estate in your area for more details.
  • Refinance the mortgage.
  • Ask your lender if they would agree to a forebearance, wherein the lender agrees to temporarily suspend or reduce payments.
  • Ask your lender if they could agree to permanently modify the terms of the loan to reduce monthly payments.

If you miss a payment or know that you are going to have trouble keeping up with your payments, contact your lender immediately! Open communication with your lender shows them that you are willing to do what you can to resolve the problem. Consult with a real estate agent in your area for help if needed.

Categories: Short Sales and Foreclosures

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