NO MERCY: The End of Tax-Free Mortgage Debt Forgiveness?

A recent online article brings to light some turbulence that may be ahead for homeowners who are underwater on their homes:

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The Mortgage Debt Relief Act of 2007 is scheduled to expire at the end of the year. The legislation allows borrowers to avoid paying income taxes on the amount of principal that is being forgiven as part of a loan modification or a short sale. If the law expires, homeowners will have to pay taxes on the debt reduction.

Consider: an individual buys a home for $150,000. The economy tanks, he loses his job and faces foreclosure. He manages a short sale of the home for $80,000. Unless the law is extended, he would be taxed on the $70,000 debt that is being forgiven, as if the value that doesn't exist were personal income.

The tax also would be imposed if the bank modified the loan, reducing the principal so that the homeowner could better manage payments.

Obviously, the expiration of this law is bad news for folks who are considering doing a short sale.  I remember working with homeowners on short sales prior to this law.  At that time, it was up to the particular bank whether they issued a 1099 to the owner or not for the debt forgiven in the short sale.  The whole premise of a short sale is the lack of money available by the owner.  Having the IRS tax that owner for "phantom" income is bad policy and simply ads insult to injury.  Let's hope that this law is not allowed to expire.  

JUST SOLD! Victorian Cottage Bargain

I just closed on this purchase for a client.  It is a 3 bed 1 bath victorian era cottage located at 777 27th St.  The home has had an interesting history.  In 2006 the home sold for $54,900 cash as a fixer upper.  Later, in 2008, the home sold for $109,900.

By 2010 the home was nearing foreclosure and was listed on the market as a short sale.  The short sale failed and in 2011 the home came on the market as an REO listing.  The property sold in May of 2011 for $33,000 cash.

In September 2012 the owner listed the property for sale at $56,800.  After two weeks the price was dropped to $53,500.  That is about when I began generating interest in the property from my client base.

After two failed contracts (there were some structural repairs needed), my third client committed to the project and we finally negotiated a sale at $49,500 with the seller paying $1,500 in closing costs.

The home is worth about $85K-$90K after repairs and needs an immediate $5,000 in repairs to begin renting.  New carpet, a new furnace, floor joist repair, and curb appeal are on the priority list.  The home will make an excellent rent-to-rehab-to-flip project.  It has a good floorplan and all the cute trimmings you would expect in a home of this vintage.

If you are looking for a fixer upper or rental home, CONTACT ME and let's find one that works for you.

JUST SOLD! Classic Bungalow

I just closed on this home for a seller.  This property was a 3 bed 1 bath bungalow built in 1913.  It had much of the original craftsmanship from its constructions including original windows, casing, doors, hardware, and more.

My seller rehabbed the home with a more convenient and conventional kitchen and bath setup.  With the home finished and ready for the market, we listed the home in June of 2011 for $84,900.

Unfortunately, the location of this property was problematic.  We had many showings but the tight quarters of the neighborhood and some neglected road surfaces turned many buyers away at our list price.  In September 2011 we reduced our price to $79,900.  We maintained that price through August 2012.  At that time we finally reduced the price to $74,900.  Within a couple weeks we had a buyer who made us a near full price offer.  Unfortunately, he was under qualified and had to excuse himself from the contract.

Shortly after that contract failed, we received a cash offer for $69,000 from a well-funded investor from outside the Ogden area.  We countered at $73,000 and they accepted and that is the price we closed at.

This home was an example of trying to flip a property in an adverse market.  Prices dropped so quickly and significantly that our resale price was not bearable by the market for almost a year.  To bide the time, my clients rented the home while we had it for sale.  As our price dropped, the market finally began to catch up to us and we consummated the sale.  The key to this transactions' success, I believe, was accounting for the location of the home and it's impact on value.  Any home will sell if it is priced right.

If you are thinking of selling your home, CONTACT ME, and let's find out what your home is worth.  

Perils of Landlording: Dance of the Deadbeats

I recently moved out two tenants who absconded on paying their rent.  Fortunately,  I didn't have to evict them.  Rather, I used the art of persuasion with one, and the other was "constructively" evicted by their own ineptness.

The first tenant seemed to be in a great situation when he applied in August.  He had work, he had no credit (rather than bad credit), and was just starting out in life.  Unfortunately, he did not have a good educational background and ended up being cut back at work by his employer.  Apparently, his job required a high school diploma and he only had a GED.

He was forthright about the situation.  I asked him to pay the last month's rent and I negotiated a lease break fee with him.  He agreed.

Unfortunately, his follow through was very poor.  Each week a payment was promised and each week a promise was broken.  After a month of non-payment I was fed up.  He was living there about one day a week or so.  I finally posted a 3-day notice to pay or quit and threatened further eviction action if he did not remove his things.  He finally came and retrieved them.

Tenant number two was more sly.  They also experienced work problems immediately upon moving in.  They were also a roomate situation and one roommate moved out quickly after the lease started.  That left the remaining two unable to pay all the bills.  Payments were slow, and then non-existent.  Promises to pay were made and broken.

Finally, a couple days before the next month's rent was due, they called and said they didn't like the place anymore and were moving.  I was fine with that since they hadn't paid and appeared unwilling to pay.

After they moved out I called the utility company to transfer service back into my name.  They indicated that the gas had been shut off and the power was scheduled to be turned off for non payment.  Interestingly, the day my tenant called to tell me they didn't want to live there anymore was the day the hot water was turned off.  It appears cold water is an excellent motivator to move.

Where I went wrong on both of these tenants was with the deposit.  Both of these tenants were higher risk due to their credit histories.  Given such, their deposits were higher to compesate.  Yet, I agreed to "work" with them on paying the necessary deposit in installments.  That didn't work out.  I received one deposit payment and then nothing afterwards.

So, the moral of the story is if a tenant doesn't have up front the required deposit to compensate for the risk of renting to them, move on to the next applicant.  

Deadline Drama: When Moments Count

I have been working on selling a difficult investment property to some buyers.  I placed the home under contract with my first buyer and after we determined half the floor joists were ruined, he excused himself from the transaction.  I placed the home under contract again a second time with another buyer.  This buyer obtained further bids on repairs and was uncomfortable with a settling crack in the foundation.   He excused himself from the transaction.

Undaunted, I presented the property to a third buyer.  I reviewed the property's known deficiencies with him and we proceed forward.  Our due diligence deadline was three weeks from our contract date.  We gave ourselves an extra week due to the Thanksgiving holiday.

We began getting repair bids for plumbing, HVAC, roofing, structural repairs, and landscaping.  One issue was that the gas was not turned on to the property.  We couldn't check out the furnace.  I contacted the property manager two weeks prior to our deadline and told him that we needed the furnace turned on so the pipes didn't freeze.  He concurred.

Well, it appears that conversation was forgotten because four days prior to our due diligence deadline the gas was still off...with the water still turned on to the property...in December.  Fortunately, our mild winter prevented any damage.  However, we still hadn't had the furnace checked.  All our other bids checked out and finally with three hours before our deadline left, our HVAC tech tells us that the furnace is at the end of its life and needs to be replaced.  That was unexpected.  My buyer asked for a $2k a price concession even though we had already negotiated the "rock bottom" price that the seller was willing to go.

We quickly submitted our request.  The listing agent said she would get back to me quickly.  An hour passed. Since my client's earnest money was on the line, I forwarded him a Contract Cancellation that we planned to submit 15 minutes prior to the contract due diligence deadline if we had not heard back from the seller.  At 15 minutes to our deadline I called the agent.  She still didn't have word.  I notified her of our intent to cancel if we didn't get a response.  With 10 minutes to our deadline I called her again, she said the seller agreed to the concession and would have the addendum signed and to us in a half hour.

My fear at this point was that with our backs up against the wall the seller would reconsider after our deadline had passed.  In our business we live and die by our paperwork.  So,  I suggested to her that a 30 minutes wasn't good enough.  I asked her to have it to me in five.  Three minutes later we had our signed addendum.

This experience was a good lesson in the importance of contract deadlines and the importance of paperwork.  Earnest money keeps the parties interested in the contract and acting in good faith to move the contract forward.  I am glad we were able work out the final wrinkles in our transaction and move forward...even if by the hair on our chin.  Now on to closing...

     

JUST SOLD! Washington Terrace Estate Sale

I just sold this home for a client at 543 W. 5350 S. in Washington Terrace.

This 1440 SQFT 3 Bed 1 and 3/4 Bath home was held in a trust for the original occupant.  Her children were charged with liquidating the estate and asked me to market the property.

Our first challenge was finding tri-level homes in the area to compare the home to.  There were many sales but this particular floorplan was difficult to find in the database.  The condition of the home was also a mixture of old and new.  To test the market, we started our price at $119,900.  My clients were eager to move the property.  After a few showings and market feedback, we reduced our price a couple weeks later to $109,900 and then again to $100,900.  The rapid reduction in price helped stir interest and showings began in earnest.

About a week later we received an offer of $93,000 and we accepted.  Unfortunately, this buyer was woefully under-qualified.  Their loan approval was dependent on receiving an inheritance.  When it became apparent that the money wasn't coming, they cancelled the contract.

About 10 days later we received another offer at $93,000 but this time asking for about $3,000 in closing costs.  We accepted this one as well.  The buyer was using a Utah Housing loan to purchase the property.

Unlike the previous contract though, the appraiser for this loan was much more rigorous than the prior one.  We were issued a laundry list of repairs.  One of those repairs included plumbing.  I coordinated vendors to get the repairs done.  In a nightmare scenario, the city turned the water back on to the property after our repairs were made but did not watch the meter to make sure it wasn't running.  Our upstairs bathroom had the tub faucet left open and the stopper plugging the tub.  D'oh!  It took our handyman quite some time to clean up the mess. 

The appraiser also required a roof review.  Our roof inspector indicated the roof had 2 years of life left in it.  That wasn't good enough for the bank.  We were compelled to agree to escrow $4,290 for the buyer to repair the roof.  After a few more underwriting delays on the buyer's part, we closed.

Congratulations to my clients on liquidating their estate.  Because this home was older and had some deferred maintenance, this created some additional hurdles for us.  However, with a little patience and an experienced agent, we were able to jump over them.

If you are needing help with your family real estate, CONTACT ME, and lets discuss some options that will work for you.