This is a question that I am frequently asked when discussing a possible short sale with a homeowner and I have decided to use this blog post as a means to share my answer with everyone. Please note that I’m not a CPA and for more clarification on this subject, I urge you to consult with a tax professional. Now that I am done with my disclaimer, let’s dive in!

The IRS’s perspective

When you are absolved of your responsibility to an unpaid debt, according to the IRS, this is income. For instance, let’s say that you still owe $100,000 on the home. The lender agrees to a $50,000 payoff as the terms of a short sale. This means that the lender is cancelling $50,000 of the debt. According to the IRS, this $50,000 is extra money in your pocket, and is therefore income.

The good news for those selling their “principal residences”

If the short sale was on a home that you consider your principal residence, it’s possible to be exempt to taxes on this gain, mostly because of the 2007 Mortgage Debt Relief bill, signed by President Bush. This act allows a taxpayer to exclude all income that comes from discharging debt on a primary place of residence. The mortgage debt which is forgiven as a result of the short sale qualifies for the provided relief.

The bad news for those selling “non-principal residences” and possible solutions

What if excluding income through this Mortgage Debt Relief law is not possible because the property is not your primary residence? In that case, then the IRS might expect to receive taxes on your gain, even if you received no actual money.

Going back to the home we mentioned above: $100,000 was owed on the mortgage and the lender accepted a $50,000 short sale. If the property is worth $50,000, the income is a “cancellation of debt” or COD income. If the property is worth more than $50,000 and less than $100,000, then a portion of the income is considered COD income and a portion of it is capital gains. Let’s say the home’s market value is $80,000. In this case, you’d have $20,000 in COD income and $30,000 in capital gains.

How does the IRS get informed of the income?

The IRS will receive a 1099-C from the lender which shows them the total amount of “phantom income” from the canceled debt. The form will show the lender’s assessment of the home’s market value. Although you can use a different amount when you file your taxes, the IRS might have questions if your assessment of the property’s value is way too different from that of that the lender. In either case, though, you’ll still need to be able to justify the value that you indicate. You’ll usually be better off if you treat the income like COD income. By doing so, you might possibly qualify for a waiver on the tax.

So how do you get COD income waived? (The possible solutions as promised)

There are three possible ways.

• Claim insolvency on Internal Revenue Service Form 982 when doing your taxes. (You’ll need to consult with the IRS or a professional to discuss how to prove insolvency.)
• Applying for a Qualified Real Property Debt Exception, if the property was not a principal place of residence. Though this is a little “iffy”, qualifying for this exception might be possible if the property was used as a trade or a business. For instance, if you’re a landlord, you could consider the property a trade or a business, if you were involved in managing the property. Again, consult with a professional for the criteria.
• Getting debt discharged because of a bankruptcy. In this case, you won’t owe taxes on the debt.

Keep in mind that the IRS expects you to look for a way of reducing other tax deductions to make up for not paying COD income taxes. For more information on this, see Internal Revenue Service Publication 4681.

Question for you:

• This whole discussion, of course, brings up the controversial topic of capital gains taxes. I’d like to know what you think the U.S. Government should do. Should they Lower capital gains taxes? Keep them the same? Tell me what you think.

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Generally, when we think of home foreclosures, we’re thinking of the mortgage foreclosure. This refers to the situation where the homeowner cannot keep up with his loan payments, and defaults. After a period of time, the lender begins the foreclosure process.

But there’s another type of home foreclosure; it is called the Tax Foreclosure. The bad news is that current trends are for property taxes to rise higher and higher. As they do so, not only will some people face mortgage foreclosure, but others who manage to escape that will be unable to pay their property taxes. This could force many of them into tax foreclosure.

In the near future, tax sales will become more common throughout the United States. This will especially be true in areas around the country that are worst hit with high unemployment rates.  Although the tax foreclosure resembles a regular foreclosure in many ways, there are also a few differences worth mentioning, so let’s dig in and explore the topic.

If a homeowner’s tax bill becomes due but remains unpaid, that bill becomes a lien on the property. The lien is usually imposed on the first day of the year once the tax has been assessed by the county.  In many states, a tax lien is given priority over other liens, including a first mortgage. Lenders, to protect their first mortgage lien, expect that the property tax be paid via an escrow account.

Sometimes it’s the servicing company or the lender’s action or inaction that drives the property to a tax foreclosure sale. Whether because of malice or incompetence, it’s an absolute fact that sometimes, tax payments are lost or put toward the wrong account. Or sometimes, they’re held in the account and never sent to the county. In a few instances, it’s the county itself that misapplies the payment or neglects to credit it toward the homeowner’s account. The result is a much more complicated process, since there might be many extra parties who become involved in the foreclosure than would be involved in a mortgage foreclosure. The borrower pays into the escrow account, which is administered by the servicing company. That company holds the funds until the tax becomes due, when it’s sent to the tax authority to pay the bill. The representative at the taxing authority is then obligated to apply the payment. Mistakes are bound to happen, with so many players involved.

In the mortgage foreclosure, whenever an escrow account is unpaid, the lender often pays the property taxes to keep the lien from getting placed on the home. However, the amounts that the lender must pay to keep taxes current will without exception be charged to the homeowner.

Tax sales as a result of the Tax Foreclosure also differ from the mortgage foreclosure process in that the winning bidder must only pay the delinquent taxes in order to take over the property. This means that the home can be sold for just a few thousand dollars in back taxes.

Another difference: a buyer of the tax-foreclosed property often has to wait longer before he can evict the former owners than is true with a default on a mortgage. In many cases, the former homeowner is given many months, even years in depending on their state laws, to come up with enough to pay the back taxes plus any other associated costs, interest and penalties.

Normally, a tax foreclosure issue will not at first go to the courts for resolution. Instead, if the owners want to dispute how much they owe or the payment amounts, they will usually go through an administrative appeals process. The courts usually become the final venue—a last straw for resolving the situation.

Although tax sales aren’t as common as mortgage foreclosure auctions, they can become a bigger and more difficult issue for the homeowner, because of the lethal combination of falling home values and rising property taxes. Nowadays, borrowers are beginning to question whether it’s worth it to try to make payments on a property where the taxes keep going up. For many, the answer is an inevitable “No!” That said my answer is for you to find your local real estate agent, share your situation with them and let them determine what your best options are.

Questions for you:

• I’d like your input: What should the government do to help homeowners stay in their homes and not fall victim to foreclosure?
• What can be done to streamline the process of paying home taxes so that a homeowner is not accidentally forced into tax foreclosure?

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My reason for doing this:

When a homeowner finally decides that he/she wants to sell their property via a Short Sale, they know that they only have a limited amount of time before the foreclosure and they need to be rest assured that the agent they are about to hire has the necessary experience to get the job done. This is the reason why I now write blog posts about my successes with Short Sales with various lenders. I pinch myself now because I wish I have started doing this a long time ago (enough with the rant – now to gist of this deal).

The background story:

Just this past April, I got a call from Patrick; a friend of the seller, Peace A. (my client and seller of this short sale). He explained to me that he had seen one of my blog posts online on short sales and he felt that I would be the best person to help Peace. After I explained my process to him, he referred me over to the seller whom I called immediately and took the time to explain how a short sale would help her avoid foreclosure. To cut a long story short I met with her and her friend at the property, signed up the listing and got to work. This short sale was different because she was going to be out of the country while I was negotiating with her lender and trying to get her property sold. Well, I took up the challenge and got the ball rolling!

Deal Details:

Bank / Lender Name: Formely called Indymac Bank (IMB); now called Indymac Mortgage Services a division of OneWest Bank (OWB).

Seller Hardship: Mortgage Adjustment – could no longer afford it.

Listing Date: 04/28/2010

Contract Date: 04/30/2010 (it was gone before I could blink my eyes – I listed it at a price that brought in a flood of buyers)

Short Sale Packet Submission Date: 05/09/2010 (At the time the seller was getting ready to leave the country so I had to work around her free time to get all the necessary paperwork to begin the short sale process – it all worked out in the end)

Short Sale Approval Date: 06/23/2010

Closing Date: 07/28/2010

The End Result:

• I negotiated a discount of $85K on this short sale for the seller
• The seller’s total out of pocket expense was $1700 (due to unpaid taxes and HOA liens)
• She did not have to sign a promissory note and she got a full release
• She gladly gave me an audio testimonial over the phone from her country two days after I successfully closed on the deal. Check it out below you might like what you hear
• I also got a written testimonial from the buyer’s agent. Check it out below you might like what you read

Audio Testimonial from the Seller:

Below is the audio testimonial from Peace A.

Written Testimonial from the Selling Agent (AKA the Buyer’s Agent):

Below is the written testimonial from Shawn Cathey.

Testimonial From Shawn Cathey to Owen McGab Enaohwo Short Sale Maryland

The actual IndyMac Mortgage Services (OneWest Bank) Short Sale Approval / Demand Letter:

IndyMac Mortgage Services OneWest Bank FSB IMB OWB Demand Approval Letter for 85k Discount MD Short Sale Su…

Lessons I Learned from this Short Sale Negotiation:

I learned that I could get a short sale done for a client even though they are not in the country (my phone bill was a little more expensive than usual because I was making international calls every now and then – I am not complaining but should have been using a calling card instead). It was all about planning ahead of time for all the things that will be needed. In this deal I got the seller to make her friend the Power of Attorney and I got her to go to the US embassy in her country to notarize the necessary paperwork so that her friend could close the deal on her behalf.

Special Thanks To:

• Peace for believing in my abilities to get the job done and seeing it through all the way to closing.
• Shawn, for being a buyer’s agent that really gets it and knows how to set the expectations of his clients (If you are looking for a buyer’s agent in Maryland contact Shawn @202-391-1199, you will be pleased)
• Jacquie and Maritza from “Wall Street Title Corporation” for being my go to title company here in Maryland – you ladies are the best!
• Kristen King from Indymac Mortgage Service (OneWest Bank) for being an awesome Loss Mitigation officer and for making this short sale negotiation as smooth and fast possible (Also I want to thank Indymac / OneWest Bank – you guys rock too!)

Call to action:

So I hope you enjoyed reading my blog post. If you a homeowner in Maryland (MD) going through a tough time financially, I want you to know that there is a way out. The first step is for you to contact your local Realtor to discuss all your available options. On the other hand if you like what you read so far and feel I am the agent for you then I will like to hear from you; you can do so by “clicking on this link” to enter in your information and I will get back to you ASAP – I promise!

Visitors who read this post also read:

• Maryland short sale approval success story: $91K Forgiven (discounted) by American Home Mortgage Servicing
• Is a Short Sale Right for You? Read and then Decide!
• A True Foreclosure Story – Note: the tale you are about to read might be yours!

Irony of irony: Though I am a little late blogging on this story because this event actually took place February of this year, I think the moral of the story is still valid so let’s begin the tale! Once upon a time, one of the major organizations that complained about homeowners who opted for a short sale sold its D.C. headquarters as a short sale for $41 million dollars. That’s just about half of what they paid for their building about three years earlier.

The beginning of the tale: As the story goes, the organization called the Mortgage Bankers Association (AKA MBA); the trade group which represents more than 2,000 real estate finance companies bought the building in 2007 for just over $70 million. At the time, MBA said it would partly finance the property by leasing part of the space to other companies. It is said that they actually called the purchase one of the smartest moves they’d ever made.

Things fall apart: Then suddenly, of course, as with all stories something drastic happened! Specifically, the economy happened. The MBA couldn’t attract the tenants that they’d hoped to get. In fact, they rented just only 10 percent of their space. The MBA themselves occupied about 40%, which left half the building sitting idle and empty. That’s what caused the group to eventually announce their intentions to sell.

The knight in shining armor to the rescue: What will a story with a “damsel in distress” be without the young prince charming coming to save the day? So as luck will have it, CoStar Group, the real estate firm ended up purchasing the building, and made plans to move its HQ there and use 80% of the space.  And what happened to the MBA? Word is that they ended having to shop for rental space.

The moral of the story (sort of!): The short sale that MBA eventually arranged was somewhat more complicated than the average homeowner’s short sale, but still it amounted to the same thing: They were able to get out of a bad situation by selling the property as a short sale for less than what they owed on it. Granted, they had to get their lender’s approval in order to sell it because they owed more than the property was worth.

Reviewing the irony of the situation again for emphasis: The irony here is that for years, the MBA had preached against borrowers being irresponsible for walking away from their financial obligations.  Some of their top execs had even gone as far as saying that even when a borrower’s mortgage payments are no longer in their best financial interest, that person should continue paying their loans. Their reasoning is that defaults harm neighborhoods, since they lower property values, and walking away from the mortgages sends a bad message to their kids and friends – some high level moral mumbo jumbo. So basically the MBA execs bad-mouthed the whole idea of short sales and eventually end up selling their property as a short sale themselves. The end of story!

Reasons why you should not feel guilty about doing a short sale on your underwater property:

• Your number one obligation is not to the neighborhood. It’s to your family. If getting out from under the mortgage payments will allow you to start moving forward with your life again, gaining the much deserved peace of mind and happiness for your family that you currently lack due to your situation, then who can argue with that?
• You owe it to yourself and your family to protect your credit history. You’ll hear all sorts of debates about how a short sale affects your credit report. However, when you move forward with a short sale instead of going into foreclosure, you demonstrate that you did something to redeem yourself. It’s true that in some cases, a short sale causes your credit score to go down. In most cases however, it does not suffer as much damage as it would have if the house had been foreclosed. In fact, in several cases, homeowners have reported that they’ve gotten a “satisfied” or “paid in full” on their credit reports following the conclusion of a short sale.

My verdict and call to action: A short sale is never fun, but those who pursue one almost always have legitimate need and financial reasons for doing so. There’s no reason to regret the decision or feel guilty about it. Just ask the Mortgage Bankers Association, they did a short sale because it was in their best interest to do so, so why haven’t you?

Questions for you:

What do you think? How much can we trust agencies that preach against short sales and then engage in them themselves? What justification is there? Share your thoughts.

Visitors who read this post also read:

• A True Foreclosure Story – Note: the tale you are about to read might be yours!
• How does a short sale affect my taxes? The two answers to your question
• Strategic Default Vs. Strategic Short Sale; which one do you think is the best choice? – Part 2

Real Estate is totally different today than it was just ten years ago, especially because of the “Great Recession”. One thing that has changed is that, more than ever, the term “Short Sale” is now a hot topic that almost anyone paying attention to the news media must have heard. Many sellers who have determined that they can’t sell their home for the amount they owe are now considering doing a short sale instead of allowing the lender to foreclose. But is it always a good thing? How can you tell whether a short sale is right for you? Let’s take a look at some guidelines that will help you decide.

What a Short Sale?

Nowadays, a lender will agree to accept a lesser amount for the sale of a home than the amount which is due. This is considered a short sale. For instance, perhaps the home mortage is $150,000, but the home is worth only $120,000. This means you are $30,000 short. This is not even considering closing costs, recording fees, real estate commissions, or title charges.

Why will a lender approve a short sale?

The lender who agrees to the short sale does so to avoid going through foreclosure and incurring the costs associated with it. When the lender approves a short sale, they are basically allowing the buyer to purchase the home for an amount less than the mortgage balance.

Here is an example of a short sale, in five steps:

• The seller and real estate agent sign a listing agreement; the home is listed for sale on the Multiple Listing Service (MLS) as a short sale pending the approval of a third party (your lender).
• The agent finds a buyer who makes an offer that is less than the mortgage amount (an amount that reflects the current market value).
• The seller accepts the offer.
• The short sale negotiation with the lender starts once the agent submits the short sale packet (the offer contract from the buyer and other required documents from the seller).
• The lender accepts the purchase offer.
• The buyer presents funds, the lien is released, and the seller signs the deed to the buyer at closing.

It’s a great solution, as long as you’re a good candidate for the short sale.

What are the qualifications that indicate that the short sale is right for you?

• Your home’s market value should have dropped. Furthermore, you need to be able to substantiate that the home is now worth less than the balance that is still owed on it.
• The mortgage should be near or in default status. At one time, lenders wouldn’t even consider a short sale when payments were current. That’s changed because lenders are now considering Strategic Short Sales as well. Many lenders now, understanding that other factors might contribute to a possible default, want to head off future problems. Therefore, they are open to consider a short sale.
• The seller should have fallen on hard times. This means that you, the seller, should expect to demonstrate to the lender why you’re not able to keep making payments on your mortgage. As in you need to show the true reason for your financial hardship which should include why you have or will soon stop making monthly payments.

So what constitutes hardship?  Any of the following usually qualify:

• Unemployment
• Death
• Bankruptcy
• Medical Emergency
• Divorce
• Lack of Assets by the Seller

On the other hand, the following usually are not accepted as financial hardships:

• Problems with the Neighbors
• Plans to Buy Another Home
• Bad Spending Decisions
• Pregnancy
• Plans to Move to an Apartment

Keep in mind that usually, the lender will ask for a copy of your tax returns or other financial statement. The lender might not grant the short sale if he discovers that you, as the seller, have significant assets. They’ll feel—probably correctly—that with those assets, you should be able to pay the balance. This doesn’t mean that sellers with assets are never granted a short sale.  But when they are, they are frequently asked to repay part of the short-fall.

In conclusion

Finally, remember that being granted a short sale will depend on if there is a buyer who makes an offer to purchase and the experience of the real estate agent negotiating the short sale.  Without such an offer, you won’t qualify and without a seasoned agent working on your short sale, it will not get approved by your lender. It also will depend on whether or not the lender agrees to accept the buyer’s offer. The short sale will not take place of the lender rejects that offer.

Bottom line: The short sale is not a miracle pill that will solve all problems for the person who is behind on their mortgage payments. However, it can be a life-saver for the person who meets all of the qualifications. If you are a Maryland (MD) homeowner in needs of an agent with proven short sale experience? Check out one of my successful, approved short sales and then feel free to contact me. I will be glad to answer all your questions!

Questions for you

• At what point would you think that a short sale is the only option left for you?
• What would keep you from considering it? Tell me your thoughts.

Visitors who read this post also read:

• A True Foreclosure Story – Note: the tale you are about to read might be yours!
• Maryland short sale approval success story: $85K Forgiven (discounted) by IndyMac Mortgage Services (OneWest Bank) in 45 days!
• Maryland short sale approval success story: $91K Forgiven (discounted) by American Home Mortgage Servicing

In my Part 1 of this blog post, I pointed out a new study by Experian that showed an alarming number of homeowners who were electing to intentionally have their homes foreclosed upon by refusing to make their mortgage payments even though they can afford it. This trend which is now called a “Strategic Default” was accelerated greatly with the housing collapse of 2008, when homeowners suddenly found themselves in possession of homes that are now worth as little as half of what they paid for it, their home values have been reduced to the point that they feel like they are swimming in negative equity. Also the mortgage payment for many of these people have become more expensive than what they can pay as rent for a similar house—hence, they have made the financial decision to strategically default, to essentially walk away. Is this the right choice?

There is a better option

While this might seem like the only logical option for homeowners facing the situation described above, I believe a much better solution is the Strategic Short Sale. In case you’re not familiar with the term, a short sale is the sale of property in which the amount received for the property is less than (or “short of”) the balance that the homeowner owes on their loan. A strategic short sale is a modified form of this process. If you’re a homeowner, a strategic short sale would be a situation where you’re able to continue making your payments on the home loan, but you’re upside-down on it. Usually, you would be behind on the payments, but it’s even possible that you might be current on your payments.  However, because you owe more than the property is worth, you would seek a strategic short sale because you need to unload it because it has become such a negative investment.

When you opt for a strategic short sale, you’re making a business decision. You’re deciding to accept a slight decrease in your credit score (as a result of the short sale), the possibility that your lender might ask you to share in the loss by coming to closing with some cash or sign an unsecured promissory note in order to get rid of an upside-down property and to decrease your debt load.

Please note that both the cash option and/or the promissory note option will be negotiated on your behalf with your lender by your real estate agent on terms that you can afford. Hence it is of utmost importance to have a discussion with your agent on what those terms should be ahead of time.

Why is a Strategic Short Sale better than a Strategic Default

Let’s look at several ways in which a strategic short sale is preferable to a strategic default.

• Although both a short sale and default will negatively impact your credit rating, the short sale will not affect it as badly as a foreclosure will.
• Opting for a short sale will allow you to qualify for a decent mortgage with two years as opposed to a foreclosure which will put you at a disadvantage; for instance Fannie Mae just came out with a new lending guideline that punishes homeowners for strategically defaulting by not allowing them to qualify for mortgages until 7 years after the foreclosure.
• Many banks, because of the state of the economy, will be willing to accept the property’s current market value and consider it “payment in full.” This is preferable to them over the time and costs involved in foreclosing on the property.

Is a Strategic Short Sale right for you?

My point is not to say that a strategic short sale is for everyone. So if you’re able to afford your home and you’re still happy in it despite the significant loss in value, then keep on making your mortgage payments and keep your property. After all, my assumption is that you bought the home to live in long term, and if this is the case, years from now the market will eventually correct itself and your home will eventually begin to gain value hence positive equity.

What is the process for moving forward with a Strategic Short Sale?

There are four main steps involved:

1. Hiring a real estate agent who has experience with getting short sales approved
2. Finding a buyer
3. Putting together the paperwork required by the lender from the homeowner and the buyer
4. Negotiating the short sale and getting it approved by the lender so that the home can be sold to the buyer and hence allow you to avoid foreclosure

Of course, these steps are more complicated than those four simple statements. That’s why it’s so important that you work with a seasoned professional to help lead you through what could be a minefield. Not too many lenders are going to give you a “do-over.” In other words, if you try to get the short sale approved by yourself, without any expert guidance, and if you make a total mess of things, don’t expect the lender to listen to you a second time after you finally decide to hire a professional.

Remember also that a short sale often takes longer to complete than a regular sale, since lenders must spend some time deliberating over it. However, it doesn’t take as long as many people fear. And in most cases, you save time, because you’ll typically be able to buy a new home in a shorter time following a short sale than you would be after a foreclosure. In the end, a strategic short sale will save you years worth of headaches trying to get into a new home.

Questions for you?

• How is housing in your area? How many foreclosures are you noticing?
• Do you see it improving or getting worse? Please tell me what you’ve personally noticed.

Visitors who read this post also read:

• Strategic Default Vs. Strategic Short Sale; which one do you think is the best choice? – Part 1
• Should I Strategically Default on my mortgage and “punish” Fannie Mae?
• How does a short sale affect my taxes? The two answers to your question

There was an article on the Los Angeles Times website a few months ago that discussed the increasing problem of Strategic Defaults in the United States. I want to tell you why the study cited in the article is right and why this is a growing problem that is gradually reaching crisis proportions in America. Then on my next blog post (Part 2 of this series), I will show you why Strategic Short Sale is the solution.

This LA Times article cited a study conducted by Experian, one of the three national credit bureaus.  They studied the credit files of 24 million Americans and discovered that “homeowners who have high credit scores when applying for a home loan are about 50 percent more likely than low-scoring borrowers to go into strategic default.” In other words, they intentionally and abruptly abandon their mortgages. (SEE ARTICLE http://www.latimes.com/classified/realestate/news/la-fi-harney20-2009sep20,0,2560658.story)

Findings from the study:

• Roughly two-thirds of strategic defaulters have just a single mortgage from which they’re walking away.
• The number of homeowners who strategically defaulted in 2008 was 588,000; double the number from 2007. This strongly hints that the homeowners did this as a response to the “Great Recession”, which hit hardest in 2008.
• Strategic defaulters were 18 percent of all serious delinquencies which extended for longer than 60 days into the fourth quarter of 2009.
• The homeowner with a larger mortgage balance is more likely to walk away from the mortgage than the person with a lower balance. Also, someone with credit scores in the two highest categories are more likely to opt for a strategic default than those in the lower score categories.
• None of this appears to be done by ignorance on the part of the homeowner who defaults. The study suggests that someone who defaults strategically and as a result, loses the house, is completely aware that this would be the outcome. They further understood all of the future negative ramifications of their action. The TIMES quotes one person who worked on the study who said that the strategic defaulters are “clearly sophisticated.” Her reasoning was that they seemed to make intelligent decisions as to where to make payments and when. They didn’t default on equity credit lines until after bailing out on the primary mortgage, for instance, presumably to receive more cash on the equity line.

My opinion of the study:

Although 588,000 strategic defaulters is an incredibly high number already, I believe the number will unfortunately continue to rise. I say this because many option ARM and interest-only products will be hitting recast dates from now through 2012. This will seriously impact the borrower’s monthly payment. A great many of these loans are far below loan modification program caps of being underwater. It’s possible for someone to have a $600,000 on a property worth just $300,000.

Frankly, before the Great Recession of 2008 struck, most homeowners would have said that they would not consider a strategic default, because it seemed somehow wrong.  It was as if they were walking away from their responsibilities.  But desperate times call for desperate measures, and the housing crisis caused thousands to reconsider this position—and to conclude that caring for their families required that they default.

Put yourself in the other guy’s shoes. Suppose you bought a home for $500,000 during a housing bubble. You figured that a worst-case scenario would be selling the home for $600,000 or $700,000 in three or four years when your loan recast.  Now, however, your home is worth only $300,000. And it may never reach $500,000 again, let alone $700,000. Your payment might jump up to $3,000, from its previous amount of $1,500 monthly. You think about the fact that you could rent a similar home for less than that. This is the position that thousands of home-owners are in. In their eyes, a strategic default is the only smart move, and some would say that they might be right.

In my view there’s a better solution for many of them; this solution is the Strategic Short Sale. This solves most of the same issues as the strategic default, and yet quickly creates a brighter future for the sellers. We’ll talk about this solution in detail on my next blog post, and why it’s usually preferable to the strategic default.

Questions for you:

• How do you foresee the housing market playing out over the next several years?
• Tell me what you predict will happen regarding the economic recovery and how you think this will impact homeowners.

Visitors who read this post also read:

• Strategic Default Vs. Strategic Short Sale; which one do you think is the best choice? – Part 2
• How does a short sale affect my taxes? The two answers to your question
• Should I Strategically Default on my mortgage and “punish” Fannie Mae?

The Employment Retirement Income Securities Act (ERISA) made you responsible for your retirement savings, plain and simple! How you invest your funds that you have set aside for retirement is at your discretion. The law excludes only two types of investments under the ERISA and IRS Codes. These investments are: 1. Collectibles and 2. Life Insurance Contracts

The rules of the IRA investment game are so simple it’s stupid – in a good way!

Essentially, you are prohibited from engaging in “self-dealing” transactions. Simply stated, you should invest your Individual Retirement Account (IRA) funds to increase the amount in your IRA, not to spend your IRA on yourself or those related to you. Each transaction you make should solely be for the benefit of the IRA itself. You are allowed to invest your IRA funds, such that the investment makes your IRA grow, meaning all profits from the transaction that your IRA funds are used in goes back to your IRA.

Investing your IRA funds so that the return on your investment makes your IRA funds grow will allow you to grow your retirement funds at a pace that is comfortable for you on terms that you can understand. The ERISA law has been in effect since 1975, yet only less than 5% of all IRA holders are aware of this.

Most IRA holders entrust their IRA funds to fund managers who manage the funds for them, investing their funds on stuff that are hard to comprehend. With the crash of the economy and the credibility of Wall Street being “nothing to write home about”, many IRA fund owners are looking into Self Directed IRA Investments.

The total amount of IRA funds in the hands of employees is estimated to reach $2 Trillion. With only 4% of these invested on Self Directed IRA Investments, those of you who have not yet done so are relying on old fashioned investment methods that have brought the same results over the years – investment growth that is just a little better than a bank deposit, and a tad more riskier than a slot machine in Vegas, leaving many IRA holders out in the cold when the market crashed more than 18 months ago.

The current real estate market and the opportunities therein

The real estate market is at the bottom now. Whether we like it or not, people will be looking for homes to live in. That is the American Dream, and no one is giving up on this dream anytime soon. With so many houses up for sale, it has essentially become a buyer’s market and there are hot deals to be had. The real estate property value have fallen due to several distressed properties on the market at the same time, which makes now the right time to invest in properties; as in you can buy them at discount prices. That said you still need to make sure that you only invest in the right types of properties or work with real estate investor who have the experience and understanding of how to invest in this market. I am sure you will agree with me when I say Warren Buffet is indeed a savvy investor; one of my favorite quotes from him is “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” What this means to me and should mean to you is that even though most uninformed people including the news media says investing in real estate in this market is too risky, you should realize that the more people running scared, the more you can cherry pick the best deals to invest in using your IRA.

So how can you invest in real estate using your Self Directed IRA?

That is a good question, one that I answered in a previous blog post titled “Now is the time to set up your passive income strategy through Real Estate Investment.” Check it out and let me know what you think

Questions for you:

Does investing in the stock market seem like a wise move these days? Do you feel the need to fully control what you use your retirement funds to invest in?

Visitors who read this post also read:

• Now is the time to set up your passive income strategy through Real Estate Investment.
• How does a short sale affect my taxes? The two answers to your question
• Is a Short Sale Right for You? Read and then Decide!

Although a short sale is a much better option than a foreclosure—one which won’t leave you foreclosed out of your property with a foreclosure on your record—it is, granted, not a happy time. It can be quite stressful. One of the biggest stresses for the person going through it is wondering what life will be like after the short sale. Just how will it affect your future? There are two primary considerations that I’ll examine:  how the short sale will affect your credit, and how soon after a short sale you can again buy a home.

The Short Sale and Your Future Credit

One of the benefits of doing the short sale is that you will not have a foreclosure on your credit report.  It’s important that you remember that a short sale will be much less damaging to your credit than a foreclosure or a deed-in-lieu would be. With a foreclosure or a deed-in-lieu, your credit score would likely drop about 250 points or more. Compare this to the drop of 75 to 100 points that your FICO score will probably drop following a short sale.

The above information is not absolute and might not be the case for everyone. In some cases, a person takes as much as a 160 point hit on their FICO score following a short sale. And in some cases, the person who goes through foreclosure might have their credit score be decreased by an amount less than 250 points.  These are the exception rather than the rule, however.  The typical person suffers more of a hit following foreclosure than he does after a short sale.

The Short Sale and Your Future Ability to Buy a Home

This brings us to the question of how soon, following a short sale, will you once again be able to buy a house? Here again, the person who did the short sale is in better standing than the person who underwent foreclosure. Let me explain why.

Because of the recent economic crisis, which was primarily related to housing loans, Fannie Mae has made some changes.  Fannie Mae, in case you don’t know, is the entity which holds the most power in the United States’ conventional mortgage market. Put simply, they buy mortgage loans on the secondary mortgage market. Because the properties wind up going back to Fannie Mae if the borrower defaults, they have a substantial interest in establishing guidelines to keep a foreclosure from taking place.

Under Fannie Mae’s new guidelines, even if you went through foreclosure, your waiting period for getting a new mortgage can be cut down significantly if you provide documentation of extenuating circumstances that led to the foreclosure. These extenuating circumstances are basically the same types of circumstances that a person puts in his “hardship letter” to qualify for a short sale. They include things such as death, major illness, accident that resulted in severe injury, job transfer, and other things that were beyond your control which significantly affected your ability to stay up-to-date with your house payments.

Without proof of extenuating circumstances, the person who goes through foreclosure can expect a waiting period of about five to seven years before he qualifies for a new loan. With proof of extenuating circumstances, this wait can be cut down significantly:  three to seven years.

However, even this best-case scenario is not as good as the situation with the person who has done a short sale.  For him, the waiting period is just two years to be able to buy another home. Furthermore, if a seller doesn’t have a sixty-day late-pay, then the seller can immediately purchase a new home. This should be considered a strong incentive to remain current on your house payments even when your home sits on the market as a short sale; a situation known as a “Strategic Short Sale”.

A Short Sale is better for You. Seriously!

So, no, the short sale is never exactly a happy event. No more than nearly drowning, but being saved, is especially happy. It is, however, something that gives you a much brighter future than many of the other would be alternatives such as a foreclosure, deed-in-lieu and so on.

Questions for you:

• I’d like your views on something: Given the economic collapse of 2008, what part do you think Fannie Mae played in it? Are their lending practices better or worse now than they were previously?

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In a previous blog post, I mentioned that one of the documents required by lenders in order to begin the short sale process is a hardship letter. I will now take some time to explain what it is, why you need it and how to write one. I will even include an example that you can remodel to suit your own true situation.

In my opinion, the hardship letter is one of the important documents you’ll be expected to submit to your mortgage lender because it gives them a snapshot of the financial distress that you are experiencing. It is basically is a signed and dated one page letter (handwritten or typed) through which you explain the reasons why you are having a difficult time making payments. You can also include information on what you have done so far to resolve the situation and why you need the lender to approve the short sale in order for you to avoid foreclosure. Of all the other required documents, the hardship letter leaves the most room for creativity, and therefore the most potential to confuse people as to what it should contain.

Tips that you should keep in mind as you prepare the hardship letter:

• You cannot use someone else’s letter as your own; your letter must be truthful.
• However, you should try to make the letter dramatic. Tell a dramatic story in a dramatic manner.
• The letter should evoke emotions and sad feelings from the person who reads it.
• Most importantly, the letter must present at least one documented, valid reason why you’re no longer able to afford your home.  Some acceptable reasons could include sudden unemployment after you’d already bought the house; large, unexpected medical bills; incapacitation and an inability to work because of an accident or illness; skyrocketing interest rates which have left it impossible for you to make payments. (Generally, reasons such as bad buying decisions, pregnancy, moving into an apartment or smaller home, or being unhappy with the neighborhood will not suffice.)
• A timeline of events that led to your inability to pay the mortgage.
• An explanation of the steps you’ve taken to try to correct your financial challenges.

Remember that your hardship letter should be concise yet thorough. The lenders want to have enough information to help with making a decision, but they don’t want to know every minute detail of your life.

Below is a sample hardship letter. I have included it as a means to guide you on how to write yours, because, as I said above, your letter should be totally your own, with your own personality, your own life story, and your own challenges given. Remember that I’m only showing you this letter so that you have an idea of how to put all of the elements together.

Dear Loss Mitigation Officer:

I am an electrical engineer by trade. Recently, I was laid off from a job that I’ve had for 19 years due to the recession. I was one year away from retirement, yet there was nothing they could do to take care of me. That means I’m at a loss now to take care of my family.

My wife has taken a job to try to help out with our situation.  Unfortunately, all she managed to get is a minimum-wage job at a local convenience store. Our life savings is drained, and even with my wife’s new income of $325 a week, we are far short of being able to afford our mortgage payments.

As a result, I am embarrassed to tell you that we’ve had to move in with my brother, who has given us one bedroom and a small study to turn into our “living room.”

We have hired a real estate agent, and fortunately, he found a buyer for our property. Their purchase agreement offer is $____________ (the property’s current market value). The offer is less than what we need to pay off our first and second loans for the property. Still, the offer is a good one, but I must have the first and second lenders agree to work with us on a short sale and accept short payoffs

I have attached my authorization for my real estate agent and escrow officer to speak with you.  The real estate agent is _________________ and the escrow officer is ________________. with (Title company). I’ve also enclosed this with this letter all the other required documents needed for you to approve the short sale.

Thank you for your time and consideration in this matter.

In conclusion; while your letter should be considerably different from this, hopefully you understand the elements that your lender will want to see in it.

Questions for you:

Given the chaos that is going on in the homeowner’s life at the time, do you think the process of requesting a short sale is too complicated? If so, how could it be streamlined? I will like to hear your thoughts!

Visitors who read this post also read:

• Short Sale VS Foreclosure VS Deed-In-Lieu of Foreclosure; which of these represents the best choice for a homeowner in distress
• Documents required by lenders in order to begin the Short Sale process
• How does a short sale affect my taxes? The two answers to your question