This morning (Saturday) I am writing during a rental open house. We hold rental open houses for our investor clients to help them find tenants for their newly purchased investment properties. Unlike open houses for sale properties, we find that rental open houses are highly effective for finding tenants. (This is not the point of my blog today, just an interesting bit of real estate marketing trivia.)
This morning a young lady came to the open house looking for a rental because she was frustrated with the buying process. She had been searching since December for a home priced under $400,000 in Orange or Riverside county. Despite what she was hearing on the news and around the office water cooler, picking up properties for 20% below list price or "pennies on the dollar" was simply not the reality. In fact, after placing four offers over list price, only to get outbid on every one, she finally throw in the towel.
Was it really time to through in the towel? Heck no - it's time to use the towel to wipe off the misconceptions and approach the market correctly.
If you are frustrated buyer trying to buy property under $500,000, here are five rules in this market.
Rule #1 - Understand that the list price is meaningless. Most properties on the market today under $500,000 in Orange County are either bank owned foreclosures or distressed short sales. Both types of properties are typically priced incorrectly - either too high, or more often - too low. In fact, I dare say that "Zestimates" are more accurate that the actual listing price, and that's not saying much! So the first rule is simply to ignore the list price. Don't get attached to the number. Don't think about how much lower you can get it under list price. Don't even worry about what nearby properties are listed for, because those prices are probably incorrect, too.
Rule #2 - Focus on current market value. Current market value has nothing to do with prices, and everything to do with recently sold properties. Have your agent pull sold comparables and pending comparables to determine the current value of the property. Here's the interesting thing - an overpriced house is more likely to sell for a discount than an underpriced house. That's right - if you are looking for a good deal, focus on the overpriced properties, not the underpriced properties. Here's why. Underpriced properties get all the attention. And when demand is high and supply is low like it is right now, a bidding war commences and the momentum tends to drive offers over market value. Overpriced properties get no attention. With no traffic, a seller will have to consider any offer, even if that offer is lower than market value.
Rule #3 - Don't be afraid to overbid a property. Despite Rule #2, don't be afraid to overbid a property. I'm a poker player and the most important lesson I learned in poker is that only aggressive players win. Your first goal in purchasing property is to be get your offer accepted. When you are competing against 20 other bidders, your goal is to present the cleanest, strongest offer with the best terms and conditions for the seller. Once you enter escrow, now it's just you and the seller - no other bidders. Now you can perform your inspections and appraisal. In this tight lending market, appraisers are very conservative about value. In fact, it's nearly impossible to overpay for a property because the appraisal will protect you. If your purchase price is $300,000 and the appraisal comes back at $290,000 - simply go back to the seller and ask for a price reduction. In our experience, you'll usually get it. Remember, you are now the only buyer at the table and the seller recognizes that any other buyer is going to have the same issue.
Rule #4 - Don't let "as is" fool you. Yes, I know the scary language in the bank addendum tells us that the bank will not make any repairs, so don't even bother asking. Wrong - huge myth. We represent banks and buyers and have found that they are even more open to repair credits than our regular equity sellers. Do some sellers responds with something like, "No way, read the addendum, absolutely not, how dare you even ask, are you new, what's wrong with you?" Sure, but it's not like they can back out of the deal because you dared to ask! I'm willing to ask scary questions all day long to save our clients a few thousand dollars here and there.
Rule #5 - Get the inside scoop. In the private remarks of our MLS, some very busy agents write very professional notes to other agents like, "MLS updated daily. Don't call for availability. Your calls will not be returned." However, despite their good intentions, they do not update the MLS daily and properties showing "active" are not, or there are already 20 other offers over listing price, or the property is hours away from final bank approval and your chances are at the needle in the haystack level. As professional agents, working for our buyers, we ignore these threats and call anyway. Why would we want to waste our client's afternoon looking at properties that are not really available?
Actually, we email, text and then call. We find that busy agents, are more than happy to send a quick email or text. In addition, by developing good industry relationships, we can usually find out whether there are already offers and if they are over listing price. While agents typically will not disclose actual offer amounts, they tend to come pretty close because they really don't want to process another 25 page offer package that doesn't have a chance.
The Biggest Rule - Work with a professional Realtor who understands the current market, isn't afraid to call agents, ask tough questions, thoroughly researches the comparables and is able to get your offer at the top of the stack for the best properties in the market.
Nancy Moeller, CPA, Real Estate Broker
Seven Gables Real Estate
Direct (714) 276-7006
www.TheOCExperts.com (About Our Team)
www.OCMarketUpdate.com (Real Estate Blog)
www.ZeroShort.com (No Cost Short Sales)
www.OCBankDeals.com (Search Foreclosures)
Every day, our team addresses questions related to the following the title of this article which include:
1. What are the benefits of a Short Sale vs. Foreclosure?
2. Can I short sale an investment property? (Yes)
3. Can the debt forgiven on a short sale or foreclosure be taxable income? (Yes)
4. Is it possible to have a taxable gain after a short sale or foreclosure? (Yes)
5. Can the lender come after me for a deficiency judgment after a short sale or foreclosure? (Yes)
This article is intended to provide general information to provide general guidance and dispel many myths on the topics of taxability and personal liability after a short sale or foreclosure. While I am a Real Estate Broker and Certified Public Accountant, this is not intended to be tax advice and you should always consult with your own CPA, attorney and trusted advisors to discuss your specific situation, goals, rights and options.
That said, grab a cup of coffee and hang on tight ...
Definition - Short Sale
A "short sale" is selling a property you own for less than the combined loans on the property, and getting the lender(s) and other lien holders to accept less than they are owed. This is accomplished with a seasoned real estate broker and top notch negotiation team. This can be accomplished at no cost to the homeowner (reference www.ZeroShort.com).
Definition - Recourse vs. Nonrecourse Loans
In California, most mortgages that are used to purchase a owner occupied residence are nonrecourse, but mortgages from refinancing a previous mortgage, equity loans and lines of credit are usually recourse. A recourse loan means that the debtor may remain personally liable for the debt even after a short sale or foreclosure. (see DEFICIENCY JUDGMENTS below)
DEFICIENCY JUDGMENTS
If you have a recourse loan, the lender may still come after you for the balance of your loan even after a foreclosure or short sale. If possible, attempt to get the bank to accept "payment in full without pursuit of any deficiency judgment" during your short sale negotation.
Often, a recourse lender will issue a 1099 for the difference between what they were owed, and what, if anything, they collected. This may create taxable cancelation of debt income. However, there are many exceptions which would preclude a taxpayer from owing this tax. (see TAXABLE CANCELLATION OF DEBT INCOME below)
It's important for you to know that the lender cannot pursue a deficiency judgment and issue a 1099. They can only do one or the other, not both. In other words - you either have to worry about a deficiency judgment or taxable cancellation of debt income, but not both.
If it turns out that your worry is a deficiency judgment, bankruptcy may be an option to explore with your attorney to discharge the judgment. And there are certainly other options to consider including negotiating payments, a reduced amount or some other arrangement.
Taxable cancellation of debt income from a foreclosure or short sale:
In a foreclosure, the amount of "cancelled debt" is generally taxable unless an exemption applies.
Here's the formula:
1. Enter the total amount of the debt immediately prior to the foreclosure.___________
2. Enter the fair market value of the property from Form 1099-C, box 7. ___________
3. Subtract line 2 from line 1.If less than zero, enter zero.___________
The amount on line 3 will generally equal the amount shown in box 2 of Form 1099-C. This amount is taxable unless you meet one of the exceptions below.
Here are the exceptions: (Call your CPA to discuss your specific situation)
Taxable GAIN from a foreclosure or SHORT SALE.
Yes, at first it seems crazy, but you could likely have a taxable gain on a foreclosure or short sale.
For a recourse loan, the property is treated as being sold for its fair market value on the date of foreclosure. (For a short sale, FMV is the actual net sales proceeds). For a non-recourse loan, the property is treated as being sold for the balance of the mortgage.
In other words, the debt cancellation of a non-recourse loan is included in the sale proceeds or added to the FMV. This means, that while there is no taxable cancellation of debt income, there is a higher taxable gain on the sale.
Here's the formula to calculate the gain:
1. Enter the fair market value of the property foreclosed (or net sales proceeds from a short sale). For non-recourse loans, enter the amount of the debt immediately prior to the foreclosure. __________
2. Enter your adjusted tax basis in the property. (Usually your purchase price plus the cost of any major improvements.) ____________
3. Subtract line 2 from line 1. If less than zero, enter zero. __________
The amount on line 3 is your gain from the foreclosure of your home. If you have owned and used the home as your principal residence for periods totaling at least two years during the five year period ending on the date of the foreclosure, you may exclude up to $250,000 (up to $500,000 for married couples filing a joint return) from income.
For non-recourse debt short sales when the seller and buyer require the cancellation of the debt by the lender as a condition of the sale, the debt cancellation is included in the sale proceeds, like for a foreclosure.
SHORT SALE vS. FORECLOSURE
What will be the effects on my future loans?
Fannie Mae backed mortgages will be available to you following a short sale after two years. Fannie Mae backed mortgages will not be available to you for at least five years if you have lost your home due to a foreclosure.
Future Loan with any mortgage company
On any future 1003 Application (Standard Loan Application), a prospective borrower will have to answer YES to question C, in Section VIII, that asks, "Have you had property foreclosed upon, or given title or deed in lieu thereof?" This will affect all future credit rates. There is no similar question regarding short sales.
Credit History
Foreclosures will remain on your credit history for 10 years. A short sale is not report on a credit history. However, both will impact your credit score.
Does it affect my employment opportunities?
A short sale does not appear on a credit report and will not challenge your current employment status. In comparison, if you have a foreclosure on your credit report, some employers consider it a reason for termination or reassignment since many run credit checks on employees for certain positions. A foreclosure can be extremely harmful to your chance of being selected for a new job if your credit report is taken into consideration.
We hope you find this summary useful, concise and worthwhile. Feel free to bookmark the article for future reference as it's a complicated subject that rarely sinks in during the first read. Most importantly, before making a decision regarding real estate, including a short sale or foreclosure - consult with your trusted tax, legal and real estate advisors.
My best,
Nancy Moeller, CPA, Real Estate Broker
Seven Gables Real Estate
Direct: 714 276-7006
Demand has heated up in Anaheim Hills. We currently have 134 properties on the market, 95 in escrow and 26 closed last month. While prices are down 20% over last year, the market is shifting as demand is starting to outpace supply. Coupled with low interest rates and tax breaks, it's now the right time to buy.
# Active Listings - 134
# Closed in April - 26
# in Escrow - 95
# Supply of Inventory - 5 months
Median Price - $538,000 (down 20% from last year)
For information on buying or selling property in Anaheim Hills, visit us at www.TheOCExperts.com
Nancy Moeller, CPA, Broker
Seven Gables Real Estate
Direct: 714 276-7006
We had a new client ask our team last week if we thought a buyer and seller should be represented by the same agent. Almost always, we believe the answer is no.
Here's the problem. Who does the agent really work for when they represent both the buyer and seller? Who are they negotiating for and against? Whose interests are they representing? If you are skeptically thinking "their own" ... you are probably right.
In most cases, the agent just wants to make sure the deal happens. They are not partial to the buyer or seller. It's like going to court and having the same attorney as the opposing party. At best, that's called mediation, not representation. Are both the buyer and sellers best interests served? Rarely. It can happen, but it takes a very unique situation - one in which the parties instantly agree on the terms and conditions of the sale. How often does that happen? Rarely. And even in these cases, a lot can go wrong.
So back to the exception. Because of the inefficiency of the short sale process (see http://activerain.com/blogsview/1050146/Short-Sale-Reform-A-Better-Way), we do see the value in having the buyer and seller represented by the same agent. Having the same agent can help facilitate the entire arduous process, keeping all parties informed, working toward the same common goal. But be careful, serving two opposing parties will always require strong ethics, integrity and the wisdom to refer one party to another agent if their interests are not being fully served.
So, how do we feel about turning away a dual commission? We don't. There is near-perfect accounting system. Simply refer the buyer to another agent. And the next time that agent is faced with the same situation, he or she will refer their buyer to you. The end result is the same, but in every scenario, each valued client has full representation with an agent 100% committed to their interests.
Nancy Moeller, CPA, Realtor
www.ZeroShort.com for Short Sales
www.TheOCExperts.com for Orange County Real Estate
Direct 714 276-7006
Short Sale Reform - A Better Way
2009 and 2010 will certainly be the year of the short sale. A short sale makes sense for the lender who will incur less expense and will never have to take ownership and responsibility for the property. A short sale can also make sense to the property owner who wants to sell their home for no cost, eliminate their mortgage and avoid foreclosure. Yes, it's more complicated, but this article is more about the process.
Here's the problem. The short sale process is the most inefficient, ineffective sales process in real estate. While there are exceptions, a short sale is normally priced below local comparables to generate high traffic and multiple offers. The highest and strongest offer is then submitted to the lender with the homeowner's hardship package for an approval of the price, terms and net cost to the lender. The process of gaining an approval typically takes anywhere from 30 days (rare) to 90 days or more with no guarantee of success. In the meantime, the listing agent will often keep the property listed as active, knowing the buyer whose offer was originally submitted is likely continuing their search and not holding their breath waiting for a bank approval on this one property.
So now we have an "active listing" which should in "back up" position overcrowding our inventory, confusing our buyers and creating mass inefficiently. Of course, if you call every listing agent as we do (regardless of their rude "do not call - just submit your highest and best offer" warnings in the private agent remarks), you'll usually learn that there are multiple offers on these short sales ranging from list price up to 20% over list price - all of which are sitting in a large pile, or perhaps to save a tree, in an Outlook folder named "123 Elm Street Back Up Offers".
Frankly, I don't like wasting my client's time touring short sales so we can submit an offer to be sorted by price in a huge back up pile, hoping the bank approves a price higher than our offer, no higher bids come in during the process, Buyer #1 backs out and my buyer still remembers the property in the event this needle claims victory over the haystack. Do I do it anyway - yes, but I'm going to call every agent regardless of their warnings that they are too busy for me and see how high this haystack really is so my client can decide whether to invest their time.
Here's the solution. Lenders - treat short sales the same way you treat them after you foreclose. When a short sale package arrives, order several broker price opinions and an appraisal. Determine what you willing to accept as a net sales price after concessions, pre-negotiate with any second lien holders and provide a 60 or 90 day approval letter at that price. DO NOT require an offer to be submitted with the package. And don't worry - if you price it right, we'll get the offer for you.
This way, listing agents can wait until they have an approval to list the property. Then, and this is the best part, the listing agent can price the property at the APPROVED price. And it gets better - buyers will know that they can actually buy and close in 30 - 45 days on this property if they are the highest and best offer with a minimum bid of listing price. And are you sitting down ... we'd sell a lot more short sales because people would not fear them and agents would not avoid them.
Bottom line, we would save the entire industry millions and millions of dollars, and turn this crisis around faster than we otherwise would.
In the markets that are most impacted by foreclosures, demand has skyrocketed. Properties that are not overpriced are generating multiple offers over list price within days. In Orange County, California we have only a 3 week supply of bank owned foreclosures. We have plenty of demand to absorb these short sales, side-step the foreclosure process and save everyone time, money and frustration.
Nancy Moeller, CPA, Real Estate Broker
Short Sale Specialist at www.ZeroShort.com
Direct Access: 714 276-7006
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As a CPA, REALTOR® and financial expert, I focus on protecting our clients financial interests in the sale.
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