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Here’s a report out of the Marco Island Eagle that addresses two potential options for homeowners that are behind on their house payments.  One option is the Short Sale, the other is the Deed in Lieu of Foreclosure.

Q: I am in over my head on a condominium and cannot make the mortgage payments any longer. Friends of mine have told me I should try a short sale. Other friends tell me I should just deed it back to the bank. Can you explain these options?

A: Many people brought property that they can no longer afford. Some of those involve the adjustable rate mortgages with extremely low starter rates. Others involved loans that the lenders simple should not have approved in the first place. In any event, our country is faced with a large number of real estate loans that the borrowers cannot afford.

The easiest option would be to give the property back the bank. The bank must accept the property for that to be a viable option. You can not merely sign a deed, record it and be done with it.

Deeding to the bank is known as a deed in lieu of foreclosure. The bank accepts a conveyance of the property and releases the borrower from further liability under the mortgage. In some cases, the bank accepts the property but does not completely release the borrower.

When the bank accepts a deed in lieu of foreclosure, the bank investigates the property to be sure it does not have any other liens, such as a second mortgage, home equity line or mechanics lien for improvement. If such liens are present, the bank usually wants them released or it will refuse the deed in lieu. If the bank forecloses, the foreclosure process will wipe out the inferior liens so the bank will usually prefer foreclosure before a deed in lieu where there are other liens against the property.

The bank also will appraise the property to determine value and review the borrower’s financial position to see if the bank agrees the borrower is not financially strong enough to continue the mortgage. If those criteria are met, the bank may accept the property and discharge the debt. Banks are more reluctant to accept a deed then they are to foreclose. If the bank forecloses and the property is worth less than the mortgage debt, the bank can also obtain a judgment for the difference against the borrower. In the typical deed in lieu scenario, the debt is discharged and the bank is left holding property that may be difficult to sell.

A short sale is a sale in which the lender agrees to accept less than full payment of its mortgage and to release the mortgage lien from the property at closing. As with a deed in lieu, a short sale requires convincing the lender that it is in the lenders best interest to accept the deal. That usually requires proof that the borrower is in weak financial position and that the proposed sale is at or near market value for the property.

The short sale is to a third party buyer, not to the lender. The lender will review the borrower’s financial position and may even require tax returns. The lender reviews the contract, has the property appraised, and has to approve the closing statement. The lender sometimes will limit the commission to be paid, will usually refuse any unusual expenses and will always mandate that the borrower receive nothing from the sale. If the lender is receiving less than full payment, the lender is certainly not going to allow the borrower to get anything.

In a short sale, the lender usually accepts whatever money it is going to get from the sale as payment in full of the mortgage. Where the borrower has other real estate or financial resources, the lender may require the borrower to sign a new note for part or all of the shortage or a new mortgage to transfer the shortage to other property.

What can be a surprise to the borrower after closing is that the borrower may have to pay income taxes on the amount of debt that is forgiven. This is true even in a foreclosure. If the borrower does not have to repay the entire debt, the portion not paid is forgiveness of debt income.

There are some exceptions to taxation of forgiveness of debt income. It is not generally taxed if the forgiveness is in connection with a debt secured by the taxpayer’s principal residence. There is also no tax if the cancellation is due to bankruptcy, the taxpayer is insolvent or certain business related debt.

As you can see, there are many factors to consider when trying to get out of a mortgage you can no longer afford. Before proceeding further, I suggest you consult with an experienced attorney and discuss the potential tax ramifications with your CPA.

William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@embarqmail.com or by fax to (239) 642-0722. Read other columns at wgmorris.com.

If you need assistance with a short sale or you want to explore other options for selling your home or getting out of payments, please contact me at MS Buys Houses.

MS Buys Houses - Sell Your Washington House Fast

Rent to Own Offers Sellers Advantages

Homeowners that can’t sell their houses may want to consider the advantages of selling it as a rent to own.

A lease-to-own house purchase (also “rent-to-own purchase” or “lease purchase option”) is a lease combined with an option to purchase the property within a specified period at an agreed-upon price.  The tenant/buyer (aka the borrower) usually pays an option fee, 1% to 5% of the price, which is credited to the purchase price.  The tenant/buyer pays rent, and an additional rent premium that is also credited to the purchase price.  If the purchase option is not exercised, the tenant/buyer loses both the option fee and the rent credit.  Rent to Own agreements usually run about 3 years, but I have seen them as short as 1 year and up to five.

As with any kind of financial contract, lease-purchase deals can be structured in such a way that all the benefits flow to one of the parties and none to the other.  Tenant/buyer especially need to be careful because there are many poorly written contracts out there.  So if you are a tenant/buyer make sure you have someone very knowledgeable on rent to own agreements review them.

Lease-purchase plans have a sound economic rationale, which means that they can be structured so that both parties benefit. Lease-options can be especially advantageous for home sellers. Many sellers like lease-options because they provide necessary cash flow to pay the mortgage and property taxes from a tenant who has a vested interest in treating the property well and who is likely to buy it.

Some additional benefits include:

• Selling your home for top dollar, even if demand is low for your property

• Saving thousands of dollars on commissions

• Reliable cash flow

• No long vacancies

• Retain tax deduction benefits

• Virtually eliminating all risks associated with land lording

• Never worrying about home maintenance headaches again

So, if you need to sell your house, I encourage you to consider selling it as a rent to own.

MS Buys Houses - Sell Your Washington House Fast

With the number of foreclosures still going up and with all forecasters saying they won’t stop increasing until the fall of 2009, more and more homeowners are being confronted with a decision on whether to sell their houses before the foreclosure occurs.   Before deciding to sell, a homeowner should make sure that selling their home is the best option.

In order to research your options correctly, the home owner should talk with a bankruptcy lawyer, consult a knowledgeable mortgage broker or other lender about the possibility of refinancing, start negotiating with the foreclosing lender (at least make sure you tell them what is going on), contact local governmental agencies to see about assistance programs (like HopeNow), talk to a foreclosure expert to see what price you would get for your home if it were sold in foreclosure (or a short sale) and to understand the process, and talk to a real estate agent with experience in short sales, loss mitigation and foreclosures.  A good real estate agent can also help you with helping you price and market your home correctly. 

I can’t say enough about how important is for you to talk to people with expertise in foreclosures.  They are likely to be far more helpful than realtors or investors with only general experience.

If you determine that selling your home is the best option you or your real estate agent need to check the laws of the state to see if their are any restrictions that may apply.  A good realtor will already know any state specific laws and reg.  Some states, such as Washington, have distressed property laws that were intended to protect distressed home sellers, but in some cases restrict a home owner in how their home can be marketed and sold.  .

Recent state laws, generally speaking, reduce the number of real estate investors that buy distressed homes.  As a result, you need to find investors and/or realtors that know how to comply with the laws. 

Many of the new home owner protection laws also dramatically reduce the number of “foreclosure rescuers” who badger distressed homeowners.  This is a welcome change.   Many of these so called foreclosure rescuers have only made things worse for the distressed home seller.

Perhaps the best course to take is to list your house with a real estate agent that has knowledge and experience in the area.  If you try to sell your home on your own and not use an agent, give yourself a deadline.  Then list it if the house has not sold.  A realtor will be able to provide much more marketing expertise and exposure than the typical for sale by owner and the expertise in this situation is usually helpful.

When you do try to sell your house emphasis should be placed on assuring any prospective buyer that you have done your homework and that the buyer can be confident all state laws are being followed.  A lawyer can help with this, but most good realtors know what the laws are (and they will tell you to consult an attorney when necessary or advised.)

And, you should always have a backup plan in case the first one, selling your house, doesn’t work out as planned (e.g. not being able to negotiate a work out with your lender).  Many people decide to file bankruptcy if the property hasn’t been sold by a specified date.  My personal opinion is that you should try all other options before considering the big BK.  However, it is a good idea to have already consulted with a bankruptcy lawyer and be ready for the BK option if necessary.

I specialize in helping people sell their houses fast.  I provide home buying and house selling services in Bellevue, Seattle, Issaquah, Kirkland, Redmond, Sammamish and other parts of the Eastside.

If you have an Owner Occupied property that you need to sell, and you are, or think you may be a distressed homeowner, I have relationships with real estate attorneys that can assist you.  Because of the laws in Washington, I cannot assist you unless you are not facing foreclosure or behind on your loan / tax payments, etc.  Give me a call and we can discuss your options.

MS Buys Houses - Sell Your Washington House Fast

Okay, so you’ve decided to list your home for sale using a real estate agent because you can’t sell it yourself or you are in a short sale situation.  After you pick a Realtor, you will need to decide what type of listing agreement to have with them.

Types of Listing Contracts

A listing contract is an agreement between you and a licensed real estate broker that authorizes the broker to represent you in the process of selling your home. There are several different types of listing contracts, but very few of them are used.  The most common one used is the “Exclusive Right to Sell”. But you will find that there are a lot more types, allowing you to choose the level of authorization to give to your agent. Here are some of them:

Open Listing

Considered the one that is probably the best (for the home seller) but seldom used.  This type of contract is for people who want the option to sell their home o their own (FSBO) and work with real estate agents. What the contract does is giving the right for agents to do showings of your home, and gives them an amount of commission if the client chose to buy your house.  A good thing about open listing is that there are nothing exclusive or painfully bonding about them. The bad thing is that you can expect less marketing or advertising done.

One-Time Show

This type of listing agreement is pretty much the same as the open listing. It’s generally used by people trying to sell their own home and involves an agent for the home showings. The listing contract identifies the potential buyer and guarantees the agent a commission if that buyer buys the home. Just like open listings, this type lacks of marketing efforts.

Exclusive Agency Listing

While selling your home, you will find that different types of listing contracts involve a lot of different people. This one
involves a broker. Basically an exclusive agency listing will give you the right to sell your own home, without paying the broker any commission unless the house is sold through a licensed real estate professional. Should the house be sold without any help of agents, the contract allows homeowners to pay no commission at all. The reason why this type of listing contract is widely used is the temptation of not having to pay your broker.

Exclusive Right to Sell Listing

The most common type of listing with sellers and brokers, this contract gives the full right for your broker to do whatever it takes to sell your house. For obvious reasons, this is probably the type of contract where you can expect the most incentive from the agent – a good marketing plan and effort can take place here, and the homeowners’ work is much reduced.

Before you select your contract, always make sure you know every type of listing contracts available to you. Take in mind how much effort you would like to contribute to the home selling – this is often what distinguishes the types. Discuss the possibilities and disadvantages of each type. Remember, a listing contract is your first legal step in selling your house – take that step carefully.

MS Buys Houses - Sell Your Washington House Fast