Foreclosures – A Last Resort for All Parties: Part III

Last week I reviewed non-judicial foreclosures, but since this is a complicated subject, there’s more to be said.

To bring you up to speed, here’s what happened so far: you determined your borrower will no longer pay on the loan, so you began foreclosure proceedings by contacting a foreclosure service company. They did their part to get your property to auction and you did your part by paying for their services and making the opening bid on your property at the foreclosure sale (auction).

Remember, I suggested you bid 80-90 percent of current market value, unless you would truly like to have your property back; in which case, you should bid up to the fair market value.

Bear in mind that in a foreclosure sale, the buyer gets no title insurance. For you, the prior owner, this isn’t a major consideration, because the condition of title reverts back to the condition when you sold it. Any monetary liens, judgments, or easements recorded after your loan (assuming you didn’t subordinate—or give permission for any of those to take a higher priority than your loan) will be eliminated from title.

If, when you sold the property and provided financing, there was already a loan on the property or if the buyer got a loan from a third party when he purchased the property, that loan will still be in place, and the prevailing party (including you) at the foreclosure sale will still be obligated for that loan.

Regardless, at the end of the day, the property is sold. Let’s say you purchased the property back. You are now, once again, the proud owner of 123 Main Street. However, the prior owner still lives in the house. You are now a landlord, and if you don’t want to be a landlord to the person who proved unreliable when it came to making loan payments, you must begin the eviction process. (I’ll talk about that in a future column.)

If the person you just foreclosed on had rented to a third party, you probably have a tenant for the remaining term of their lease agreement, so long as the agreement was at arm’s length and bona fide. That means the terms of the lease agreement are at fair market value and that this wasn’t done to take away the value of the property at the foreclosure sale. For example, if the owner leased the property to his brother-in-law on a 99-year lease for $1/month, that lease won’t hold up.

Long story short, foreclosures are problematic for everyone involved. They cause major damage to the borrower’s credit and require the lender to go through the expensive and time consuming process of either selling the property at auction or repurchasing the property at auction. Both borrowers and lenders should do their best to avoid foreclosures. Talk to each other. Try to work something out.

If the borrower cannot make the payments, a short sale might be better than a foreclosure. A short sale occurs when a home is sold for less than is owed on it – for example, if the buyer owes $275,000, but the home will only sell for $250,000.

A short sale is usually preferable to a foreclosure. If you’re a seller, a short sale is better because it’s less damaging to your credit (and your privacy) than a foreclosure. Clearly, you won’t be too motivated to sell your home since you’re not making any money on the deal, but at least you’re not digging a deeper hole financially. Avoiding a foreclosure is worth some money. You just have to figure out how much.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

 

 

 

Foreclosures – A Last Resort for All Parties: Part II

Last week I talked about the two types of foreclosures. This week, I’ll walk you through the most common type: non-judicial foreclosures.

As the lender, once you’ve concluded your borrower is no longer paying on the loan, your only course of action is to foreclose. To do so, you’ll need to contact a foreclosure service company. Basically, they will substitute themselves in as trustee in the deed of trust and sell the property for you. It sounds simple, but it rarely is.

The foreclosure service company will require all the information you have concerning the borrower and the loan on the property: the note, deed of trust, outstanding principal (amount borrowed), any outstanding interest (cost of the loan), and any outstanding late fees or advances.

The foreclosure company will then record a substitution of trustee and a notice of default. At this point, the foreclosure service company will have incurred a small amount of expense on your behalf, which you’ll pay—along with what they call the trustee fees. The trustee fees are typically on a sliding scale based on the remaining principal due on the loan. The percentage of the outstanding principal that goes to the trustee decreases as the overall amount of the remaining balance increases.

Ninety days after the notice of default, the trustee will record the notice of sale and post a notice on the property (on the front door, gate, or a tree, so long as it is on the property). The trustee will also advertise the full notice of sale in the local newspaper. These two actions often get a little pricey. Someone must be paid to post the notice; plus the full text of the notice must run in the newspaper; this includes the time, date and location of the sale and a complete legal description of the property that may be pages long. Newspapers charge by column inch.

Until five days before the sale, the borrower still has the right to bring the loan current by paying any outstanding loan payments, late fees, advances plus interest, and fees or costs associated with the foreclosure. If you decide to delay the foreclosure sale, that five-day window moves with the date of the sale.

When the day of the sale arrives, you’re probably thinking your worries are over: the property will be sold and you’ll be paid.

Or not.

Here’s how the sale actually goes. You have the right (and responsibility) to make the opening bid on the property. It is generally not a good idea to make a bid for the full amount owed to you. There’s an argument that if you bid the full outstanding principal plus accrued interest, and you acquire the property at that price, you may have just recognized several thousand dollars worth of interest income you didn’t receive, creating a tax obligation to add to the other frustrations surrounding the foreclosure.

In addition, under rare circumstances, had the borrower committed fraud or created waste, or perhaps had hazard insurance proceeds pending, you may be able to recoup some or all losses from the borrower or his insurance company. If, for example, the house burns down prior to the foreclosure sale and the insurance company hasn’t paid the loss, then if you bid the full amount owed to you (called a full credit bid), the insurance company might contend—successfully—that your bid pays your debt off in full.

Consequently, I suggest you do your best to determine the current fair market value of the property and bid 80-90 percent of that value, unless you would truly like to have your property back; in which case, I’d bid up to the fair market value.

More next week!

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

 

Foreclosures – A Last Resort for All Parties: Part I

Last week I talked about servicing a real estate loan yourself. That was a prelude to the next couple articles, which are in response to a reader’s question about foreclosures and what other options may exist when a borrower stops paying his loan.

If a borrower misses a mortgage payment, there could be a perfectly innocent reason. Before you do anything dramatic, call the borrower to see what happened: did he forget to make a payment? Did the check get lost in the mail? These things do occasionally happen. If the borrower says the check is in the mail, go ahead believe him the first time, but file this information away for future reference.

Once in a while, a borrower will call to admit a payment will be late or that a personal emergency has prevented him from making a payment this month. While this is rare, again, I’d take him at his word the first time. (If you’re a borrower reading this, take note: lenders are generally much more forgiving when you call them rather than forcing them to track you down about a missing payment.)

As the lender, once you’ve concluded the borrower is no longer making payments on the loan, it’s time to begin foreclosure proceedings. They aren’t fun and they aren’t cheap, but they are sometimes necessary.

Two types of foreclosures exist: judicial and non-judicial, and both result in the public auction sale of the property in question. If you can go with the non-judicial option, it’s cheaper and faster, but depending on your circumstances, it isn’t always better.

A judicial foreclosure requires an attorney and a court order, and it’s the only way to go if flaws exist in the loan documents or the property’s legal documents. Also, if there is no equity in the property but your borrower has assets, and the note involved in the foreclosure wasn’t a “purchase money note” (the note used to purchase the property), then a judicial foreclosure opens the door for a deficiency judgment.

A deficiency judgment helps you get your money back. Here’s how: if the foreclosed property is sold for less than the total amount owed, the court can order the borrower to pay the difference between the foreclosure sale price and the amount owed. If you choose a judicial foreclosure in hopes of recouping your money, be sure the borrower has some assets with which to pay you. If you’re relatively sure he does, once you’ve completed the judicial foreclosure, you can call the borrower into court for an examination of debtor, where you can ask the borrower about his holdings. If he lies under oath, he’s perjuring himself, and courts really frown on that.

Do not go down this path without consulting an attorney and someone who can give you good advice about the true value of your property, because while a non-judicial foreclosure usually takes four to six months, a judicial foreclosure is likely to last at least a year—maybe two. And the judicial option is significantly more expensive.

In addition, the borrower in the judicial foreclosure retains the right of redemption. That means that for the whole time the foreclosure is in effect, the borrower can pay you what he owes you to bring the loan current (paying any outstanding loan payments, late fees, advances plus interest, and fees or costs associated with the foreclosure). In most situations, that’s not a problem, because the property is worth less than is owed and you’d be happy to get all your money back. But here’s the downside: even though the borrower will never pay you what he owes, he still has the option, so you cannot sell the property until the redemption period expires.

More next week!

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

 

What Is Seller Financing And What Should I Watch For?

When a buyer wants to purchase a property but doesn’t want to pay the whole price in cash, and the seller wants to sell the property but doesn’t need the whole amount in cash, an opportunity exists for both to get what they want through seller financing.

The buyer can acquire a property that may be worth more than he or she has in cash (or the buyer may want to reserve cash for other uses like improving the property after purchase). The seller is able to sell a property that may be hard to sell for cash because it is not attractive to institutional lenders, or the seller can get a higher price because he or she will carry the financing. The seller may also want to provide financing because he or she earn a favorable rate of return as well as favorable tax treatment.

If all the stars align and both buyer and seller agree to seller financing, here are some do’s and don’ts to consider. As the seller, you should require a reasonable down payment, usually a minimum of 20 percent. Less is risky: if the buyer (borrower) misses the first payment and you need to foreclose, you will lose money by the time the foreclosure is done. Foreclosures take time and money, and at the end you still have a property to sell. Depending on the situation, you may need to spend time and money repairing the property, as well as marketing it for sale and paying brokerage fees to do so—all this time you’re losing interest income. So, get 20 percent up front. The more specialized the property, the more important a large down payment is. While it’s relatively easy to sell an office building, selling a church, school, or hospital, for example, is significantly harder.

As a seller, you should also be cautious about a buyer who plans to do major work renovating the property. At first, it may sound great. But if the buyer doesn’t know what he’s doing, you may end up with a mess. Unfortunately, I speak from experience. I sold a property and carried the financing; six months later, after the buyer gutted the buildings (down to the concrete walls), the buyer ran out of funds. I foreclosed and had to complete the renovations at my expense.

As with most agreements, things work best when both parties get what they need. The loan’s interest rate should work for both buyer and seller, and the payment schedule should be realistic for both. The buyer needs to be able to afford the monthly payments, (mortgage payment, taxes and insurance) and the seller needs to receive enough income. Be aware that the new Dodd Frank Act, may pertain to your transaction. In most cases, seller financing is exempt, but talk to your realtor to be sure you’re following the rules.

The overall term or length of the loan may need to correspond with other expenses, like sending a child to college. If the seller carrying the loan suddenly needs cash, all is not lost. The loan (or mortgage-backed note) can be sold on the open market. The value of the note depends on the loan terms, the value of the property, and the borrower’s payment record. Having carried financing, I highly recommend title insurance on the note. It reduces your risk by protecting you against buyer fraud. If you’re carrying the financing, I also recommend that you make sure property taxes are paid, the property is covered by hazard insurance, and that you report interest income to the government so the buyer can deduct the interest paid. That keeps everyone happy including the IRS.

If you have questions about real estate or property management, feel free to contact me at rselzer@selzerrealty.com or visit our website at www.realtyworldselzer.com. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.

Short Sales and SEOs

You may have heard about people being “upside down” on their mortgage. When people owe more than the value of their home it can lead to a short sale. If they cannot afford their mortgage payments anymore, it can lead to an REO (Real Estate Owned) sale.

A short sale occurs when a home is sold for less than is owed on it – for example, if the buyer owes $275,000, but the home will only sell for $250,000. An REO occurs when the property is already foreclosed on, and the lender (who now owns the property) is the seller. A short sale is preferable to a foreclosure for several reasons. I’ll explain both sales in more detail, and I think you’ll see why.

If you’re a seller, a short sale is better because it’s less damaging to your credit (and your privacy) than a foreclosure. Clearly, you won’t be too motivated to sell your home since you’re not making any money on the deal, but at least you’re not digging a deeper hole financially. Be aware that this must be an “arm’s length” sale – you can’t sell to your sister or son or best friend.

Another word of advice, don’t try to make an under-the-table deal with the buyer to get some cash. It’s called fraud, and it can get you in big trouble. Recently, a buyer agreed to buy an heirloom oriental rug for $60,000 (one that was worth about $500). The buyer and seller got caught and sent to jail.  Sometimes the bank will allow the seller to get some cash out of the sale—as long as all parties agree, you’re good to go.

REOs are the end product of a foreclosure, which is a public process (must be published in the newspaper), and they are devastating to a person’s credit. If you’re a seller, try to avoid foreclosure if at all possible. Adding insult to injury, a foreclosure can result in a deficiency judgment against the seller, where they not only take your house but require you to pay the unpaid portion of the loan. Rough deal.

As a buyer, short sales are also preferable to REOs, generally speaking. In a short sale, the seller is obligated to complete a Transfer Disclosure Statement (TDS). This document discloses physical problems with the property as well as other known problems (e.g., a neighbor’s dog has bitten several people or a neighbor has been cited for several noise violations as a result of his garage band jamming until the wee hours of the night). In an REO, the bank isn’t expected to know about these issues and is exempt from the TDS requirement.

Again, looking at this from the buyer’s perspective, a significant downside to REOs is that buyers frequently must work with the lender’s escrow company and use the lender’s sales contract. Many of the lenders that have found themselves stuck with properties to sell are banks or federal lenders like the Federal National Mortgage Association, referred to as Fannie Mae. As a rule, these are bureaucratic organizations that are not customer-centric The process can get burdened with intractable inspection time frames, and doesn’t allow for contingencies.

Really, the only advantage to the REO is that anything that was going to get taken from the house has already been taken. Sometimes, when a buyer views a home before a short sale, they are horribly surprised later to find that everything that could be removed from the house has been.

Short sales and REOs often involve emotional trauma for the person who lost his or her home. As a result, I’ve seen houses with the following things removed – no exaggeration: wood stoves, “built-in” hot tubs, kitchen cabinets, wall-to-wall carpet, toilets, light fixtures and more. This goes way beyond taking the light bulbs to be frugal. This is an emotional response to the loss of a treasured home.

Apart from that, short sales are definitely preferable—whether you’re a buyer or a seller. Either way, I’d highly recommend going through the process with a Realtor by your side. In REOs, banks know the value of listing with a broker. They want to work with a competent Realtor that’s familiar with state and local real estate law. You should have a similar expert on your team.

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By Way of Introduction, I’m Dick Selzer…

By way of introduction, I’m Dick Selzer and I’ve been in Real Estate in the Ukiah Valley since the 1970s. After more than 35 years in the industry, I thought I’d share a few facts and opinions about buying, selling, renting, and leasing property. I hope you find the information useful.

The question most often asked of Real Estate agents anytime they’re out and about is, “How’s the market?” So that’s the question I’ll be answering in all kinds of ways.

Right now, the market is in transition. Housing prices have pretty much bottomed out and are just starting to go up, but rates remain incredibly low and there’s not much for sale. So, while this is a great time to buy, two obstacles are in the way: finding a property that meets your needs and getting qualified for a loan.

So, how can you overcome those obstacles? I’d recommend finding a Real Estate agent you trust and can relate to. Here’s why: it’s in their best interest to help you meet your goals, and they know a lot about Real Estate.

If you commit to one agent, and it doesn’t have to be one of mine, that agent will commit to you. (If they won’t, find a new one.) Once you’ve got a good agent, here’s what you can expect.

  • They’ll carefully listen to your needs and actively look for properties that meet those needs, so you won’t waste your time looking at houses, land, or commercial properties that don’t work for you.
  • They’ll arrange to get you pre-qualified for a loan so you’re ready when the right property becomes available.
  • They’ll stay up-to-date on the latest market information (like inventory and mortgage rates), so they can make recommendations to save you money or share opportunities that you might not have been aware of.
  • They’ll work in a manner that’s consistent with your lifestyle. Let your agent know how and when you like to communicate (phone call, text, email, mornings, evenings, etc.), and they’ll work with you so you get information the way you want it.

So now you’ve got an agent and the first thing they recommend is getting pre-qualified. Huh?

There are basically two levels of loan qualification – “pre-qualified” and “pre-approved.” Pre-qualified consists of sitting down with an agent and doing some simple calculations to figure out how much house you can afford. To become “pre-approved” for a loan means working with your agent to find a loan broker who will review all your assets, liabilities, tax returns, W-2s, credit history, and any other relevant financial information to begin the process of applying for a loan.

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