.

A foreclosure is a formal legal process. Lenders begin the process when home owners fail to live up to their mortgage obligations. As a result, the lenders want the property back and, depending on the state, file a law suit or a notice of default.

A pre-foreclosure sale is one that takes place between the date when the lender files suit and when the property is scheduled to be sold at a public foreclosure action or a trustee’s sale. A pre-foreclosure is not a formal legal process; it’s an opportunity for you to help beleaguered home owners out.

Before I discuss the benefits of pre-foreclosures for you as an investor, let’s step back a moment and look at the reasons for foreclosures.

Beyond the recent “mortgage meltdown” due to the recession, there are many reasons that foreclosures occur. Often, people tend to think that foreclosures occur because of poor financial management by home owners and others.


While this certainly can be true, there are really many different reasons why foreclosures take place – personal problems (divorce, illness, etc.), the tendency of first-time buyers to overextend themselves, etc. Also, before the recession, foreclosures were caused by predatory lenders, lenient terms by all lenders, and low interest rates.

Now, let’s look at the benefits of making a living as an investor in the pre-foreclosure market.

What Are the Pros of Working in the Pre-Foreclosure Market?

If you’re a careful investor, the pre-foreclosure offers you many benefits:

- The ability to buy properties at a deep discount

- The opportunity for personal and financial freedom (you can set your own hours, rules, etc. as an independent investor)

Now, as you know, every field has its disadvantages as well as advantages. So, let’s look at the cons next.

What Are the Cons of Working in the Pre-Foreclosure Market?

Perhaps the number one disadvantage is dealing with the owners of the properties. They’re not in a good situation, and, most of the time, they’re not happy about it.

That means you need to deal with their anger and frustration in a diplomatic manner and have a thick skin at the same time. The best way to do this is to approach the situation as a problem-solver; that is, you’re there to help them make the best of a bad situation and to help them avoid the embarrassment of foreclosure.

A second disadvantage is that there’s a lot of courthouse work to do to ensure any pre-foreclosure deal is profitable; for example, making sure there aren’t liens or other legal entanglements. You’ll definitely need to pay attention to all the details in these records.

The final disadvantage is that you’ll face some stiff competition in this market. So, you’ll have to stay on top of it at all times!

Of course, there’s a lot more to learn about the pre-foreclosure market, and you can find out what that is by going right now to http://davebulava.com/gold_distress.asp

And if you have any questions or topics you'd like to discuss, contact me at 847.670.1060 or email me at dave@DaveBulava.com.

David Bulava
Re/Max Central
Top 20 Team - Re/Max Northern Illinois
Office: 630-529-0022
Office: 847-670-1060
Fax: 630-390-2333
Email: Dave@DaveBulava.com
Web Site: www.DaveBulava.com

...well, only if it were that simple. Here is another option:

A “short sale” is a handy term for a situation in which a homeowner’s debt on his or her property is greater than the amount for which the property can be sold.

Here’s an example: Assume a homeowner has an unpaid loan balance of $110,000, but the property will only sell for $100,000. The unhappy lender accepts that $100,000 as full payment from you or another investor. This is obviously “short” of the full $110,000 amount, thus the name “short sale.”

Let’s be clear – lenders don’t like short sales and often will go through them only as a last resort. After all, they’re not in business to lose money! In many cases, they’ll prefer the option of foreclosure since that choice makes more financial sense.

However, there are instances in which lenders accept short sales and, if you’re “Johnny-on-the-spot,” you can make a very good profit – if you’re willing to brave a complicated process!

Why Is a Short Sale More Complicated Than a Normal Real Estate Transaction?

Simply put, it’s complicated because there are so many factors involved:

- the loan mitigation policies of the lender and third-party investors
- the financial condition of the lender and third-party investors
- financial condition of the borrower
- the property’s as-is value
- the cost to “repair” the property to put it into saleable condition and market it, etc.

On top of these factors, approval for short sale has to come from the investor who actually owns the loan. And then, if the lender is a government-sponsored institution like Fannie Mae or Freddie Mac,approval can eat up a lot of time. After all, you’re dealing with government bureaucracies!

When Will Lenders Accept a Short Sale?

There are a variety of situations in which lenders accept short sales. For example, homeowners experience a devastating illness that eats up all their financial resources. Or they may be military personnel called up to active duty for extended periods of time, and they lack the income to continue mortgage payments.

Other examples include anyone who falls into the “hardship” category—disabling, permanent injuries; financial insolvency; convictions; lack of employment due to economic conditions beyond the homeowner’s control, etc.
In these instances, lenders are willing to consider a short sale.

How Do I Find Out If A Property Qualifies for a Short Sale?

You’ll have to do some digging and gain knowledge about the lenders in your area. In order to acquire that knowledge, complete the following tasks:

Task 1: Talk to the lender and find out their loss mitigation policy. If they seldom or never do short sales, don’t bother with them. Find another lender with a better record in this area.

Task 2: Find out the number of liens recorded against the property title and the total amount of money in those liens.

Task 3: Know the borrower’s present financial condition.

Task 4: Know the type of loan that’s in default and its current status.

Task 5: Know both the property’s as-is market value and its as-repaired value.

Task 6: Be aware of the state of the local economy and the current real estate market conditions. Analyze all this information to determine if a short sale is worth pursuing.

Okay, let’s assume you’ve completed all those tasks and know the short sale is worth pursuing. What’s next?

How to Pursue a Short Sale

First, have the homeowner sign an authorization to release the loan information. Next – and this is very important! - you must have cash on hand. Why? Because all short sales are cash transactions! What’s more, you also need verifiable proof that you possess the money!

Also very important - short sales can’t be made to relatives, family members, or close friends of the homeowner. In real estate, this is called an “arm’s length transaction.” What happens if you do this and the lender discovers that you’ve done an arm’s length deal? The lender can file a lawsuit to have the sale overturned!

As you might expect, the property owners themselves can complicate the process. After all, they can’t receive any of the money from a short payoff sale. That means not much of an incentive for them to do a short sale. 

And one last negative - the debt that’s canceled by the short sale payoff of a mortgage or deed of trust is subject to federal income tax as ordinary earned income. This is not true of a bankruptcy or insolvency.

How to Start the Short Sale Process

Follow these steps (yes, there are many):

- Get in touch with the homeowner who’s in foreclosure.
- Determine the homeowner’s financial condition.
- Analyze the condition of the property.
- If both the financial and property condition are suitable, ask the homeowner for written authorization to communicate with the loan loss mitigation department of the lender.
- Get in touch with the decision-maker in the loan loss mitigation department of the lender and provide them with a copy of the written authorization.
- Contact the decision-maker to discuss the short sale and request that the decision-maker send the appropriate short-sale documents to the homeowner.
- Ask the homeowner gather all documentation to provide support for financial hardship case.
- Get repair cost estimates from a minimum of three licensed home improvement contractors.
 - Do a comparable value study by assessing the value of three similar neighborhood properties sold in the last six months.
- Return the short sale proposal to the lender’s decision-maker. It should include a signed purchase agreement for a percentage less than the amount owed to the lender; e.g., 20%, 30%, 40% less, etc. Include a HUD 1 Settlement Statement in your proposal. You can download the statement in PDF form here.
- The lender’s decision-maker reviews your proposal and orders a BPO to determine the property’s as-is and as-repaired values.
- The decision-maker either accepts your proposal or rejects it.
- If the decision-maker feels a short sale is appropriate, they’ll make a counteroffer.
- You then accept or reject the counteroffer.
- If you accept the counteroffer, you close on the transaction within 30 days.

I hope this brief introduction to short sales gave you enough information to decide whether or not you want to pursue this type of transaction. If you have more questions, please contact me today at 847.670.1060 and we can discuss this topic or any other area of real estate.

Due to the nature of the current real estate market, I have gone through extensive training, have been certified in negotiating Short Sales and put together a system that gets Short Sale approved quickly and with little hassle for my clients.

There are many questions regarding Short Sales. Hopefully this FAQ sheet will help answer some of those questions. Please feel free to call or email me with any questions that you may have. Your inquiry will be kept completely confidential.

What is a Short Sale?
In the world of Real Estate, a short sale refers to the sale of real property for an amount less than the amount owed on the property. In the short sale scenario, the bank agrees to accept less than the full balance due on the debt, and usually ‘forgives’ all or a large portion of the difference.

How will the Short Sale affect my credit?
Short Sales are still a relatively new concept. Banks have the option of submitting the short sale to the credit bureau as "Paid in Full" or "Settled for less than full balance". As far as your credit score is concerned, there is no evidence whatsoever to support that a short sale will lower your credit score. Some have the idea that this is like a bankruptcy or a foreclosure. That's far from the truth! In a short sale, the lender is simply allowing you to pay less than you owe!

If you are currently behind on your mortgage or facing foreclosure, the short sale will actually help your credit! How? Because once you are approved for the short sale, all collection activity will STOP and you will avoid foreclosure! 

Who benefits from the Short Sale?
Short sales are a win-win situation. Lenders, Mortgagees and Realtors all benefit from the successful short sale. Mortgagors get the majority of their money back, Mortgagees get the relief they need and are able to sell their property and avoid foreclosure, and Realtors can facilitate the transaction and receive compensation (commission) from the sale of the property.

Why would banks forgive the difference?
To mitigate their losses, banks often accept a settlement of less than what is owed on the property. When faced with the option of getting the property ‘back’ through foreclosure, a short sale often makes a much wiser business decision for the bank.

This sounds too good to be true!?
Not really. Things that are ‘too good to be true’ usually don’t make good economic sense. The short sale makes good common and financial sense for the banks that grant them. The fact of the matter is, Mortgage companies and banks are NOT in the real estate business. They are in the LENDING business. The last thing they want is that property back.

Can FHA, Conventional or VA loans receive a short sale?
Yes! I have successfully negotiated short sales for each of these loan types.

Why does my property have negative equity?
Here are a few common reasons:

1. Person bought at the height of the market and the market has now declined or the person paid more than the property was worth.
2. The area has become less desirable for any number of reasons, so property values have declined.
3. Person purchased the home with little or no money down and wants to sell within a few years of purchase… and the property value has not increased during that time. Therefore, costs associated with selling the property may create a balance due at closing,
4. Person refinanced the home (with a high appraisal value) and now has little or no equity.
5. Person bought in a brand new subdivision or recently developed area that has not been fully developed or has not appreciated (or has depreciated) in value
6. The market is soft because there is too much builder (new home) inventory or too many existing homes on the market (buyer’s market)

What is Negative Equity?
Also known as being "upside down", negative equity is the difference between the value of an asset and the outstanding portion of the loan taken out to pay for the asset, when the latter exceeds the former. For example, if your car is worth $10,000 and you owe $15,000 on it, you would have a negative equity of $5,000.  Negative equity can result from a decline in the value of an asset after it is purchased.

Some areas decline in value. In other areas, prices may remain flat so that the properties in that area do not appreciate. If a seller wants to sell within 2-3 years of purchasing their property, they may be in a situation where they have negative equity.

What if I owe exactly what my home is worth?
Even if you owe exactly what your home is worth, you may still need to do a short sale in order to pay for the costs of the sale (Realtor fees, Title Policy and other seller closing costs).

Why not just let my lender foreclose?
NO! What is the first thing a bank does when they foreclose on a property? Hand it over to a real estate agent to get rid of it quick! The foreclosure process is a legal process. It involves attorneys and it costs MONEY. Once they get the property back via foreclosure they must often sell it for MUCH LESS than market value and pay Realtor commissions and all customary closing costs. Doesn’t it make more sense for them to take at or a little below fair market value before foreclosing?

And, even when they do sell it through foreclosure... this does NOT remove your obligation to repay the remaining balance! It is not wiped away!!!

What if I'm not behind on my payments?
Short sales work – even if you’ve never missed a payment! Yes, I know… short sales have gotten a stigma of being only available for folks who are in foreclosure. But I have successfully negotiated short sales for folks who have never missed a mortgage payment! They just happen to be in a negative equity position and need the short sale in order to sell their home.

How long does it take?
Short sale approval can take 60 days or longer.

What if my home is already in foreclosure?
Your foreclosure sale will usually be suspended during the short sale process. That's why it's imperative that you contact us right away!!!

Will my lender send me a 1099 on the debt forgiven?
In 2007 the U.S. Congress passed the Mortgage Debt Forgiveness Relief Act and it is in effect until 2012. As a result of that act, borrowers no longer pay taxes on the debt forgiven on their primary residence. So if the property is your primary residence, then no, you should not receive a 1099 for the debt forgiven or have to pay any taxes on the forgive debt.

For investment property, the lender does have the right to report to the IRS the amount they have ‘forgiven’ in a Short Sale transaction, the amount of the resulting tax will be far less than the debt forgiven. Also, if the property is in foreclosure, the foreclosure would have a much more devastating affect on you than the amount of the 1099.

For more information go here: http://www.irs.gov/individuals/article/0,,id=179414,00.html

How much will the short sale cost me?
We do charge an upfront, fully refundable fee of $499. Short Sales are very labor intensive transactions. This fee allows us to assign one of our highly trained processors to your account, helping to insure success. This fee can be paid via PayPal, credit/debit card or check. If after reviewing your initial paperwork, we feel that we cannot get a short sale approval, the fee will be refunded to you.

The real estate commission will be paid by your lender.

What kind of marketing will you do on my property?

On our regular listings, we do employ an extensive marketing plan, however we have found that traditional marketing mediums (flyers, virtual tours, open houses, showing feedback surveys, etc) are not effective at generating offers on short sale listings.

What generates success on our short sale listings is over 90% dependent on the property’s PRICE. We typically review the pricing and make adjustments every week or so until an offer is generated.

In addition to pricing, we employ a strong internet marketing presence. We have teamed up with REALTOR.com and hundreds of other web sites to market your property.

If there are very few calls or lookers, then we will need to adjust the price until we get an offer. We typically generate an offer within 30 days, unless the property is very unique.

Do you think I should just do a loan modification instead of a Short Sale? 

If you desire to keep your home and can afford to make the monthly payments, then YES you should keep it! In order to qualify for a loan modification, you will need to demonstrate to the bank that you are generating more income than your current monthly expenses.

Is this the case? You will need to call your lender and let them know you want to do a loan modification, and see if they will qualify you for their loan modification program. If you aren’t approved, we can then move forward with a short sale. We CANNOT work the short sale at the same time you are working with your bank on a loan modification.

Can I lease out my house while we’re waiting on the short sale?

We don’t recommend that you lease your home while waiting on the short sale to be finalized. Lenders will not be sympathetic to sellers who are collecting rent payments and not making their mortgage payment. Also, homes with tenants are subject to legal rules (tenant rights) and much more difficult to show and to sell.

How will you decide on the list price of my home?

Initially we will set the price based on an extensive market analysis. Once we have an offer we will submit that to the bank. Once we convince the bank to agree to do a short sale on your home, they will hire their own independent appraiser who will come out and view your home, and set a valuation, based on its condition.

In order to get the process going quickly, we will need to send you OUR short sale package and get all of the necessary information we need back from you first, before one of our team members goes out to put up the sign and lockbox.

Who will let me know what I need to do to the home to get it ready for sale?

We won’t be recommending that you do anything to the home that will cost you money. The truth is, since you won’t be netting anything from the sale, the last thing you probably want to do is spend more money on a home you no longer can afford. For that reason, we will be selling your home as-is. Our only suggestion is to clear out as much clutter as you can. Other than that you’re OK. The lender will price your home according to its condition.

David Bulava
Re/Max Central
Top 20 Team - Re/Max Northern Illinois
Office: 630-529-0022
Office: 847-670-1060
Fax: 630-390-2333
Email: Dave@DaveBulava.com
Web Site: www.DaveBulava.com

The $8,000 TAX CREDIT for first-time homebuyers has been Extended through JUNE 30, 2010.

Also, The tax credit is now available to CURRENT HOMEOWNERS as well. Up to $6,500.

Read the information below and if you have any questions regarding this or any other real estate need, please don't hesitate to contact us directly via phone or email.

Sincerely,
 
David Bulava
The Bulava/Gillespie Team
Re/Max Central
Top 20 Team - Re/Max Northern Illinois
Top 100 Team - Re/Max International
Office: 630-529-0022
Office: 847-670-1060
Direct: 630-372-6856
Fax: 630-390-2333
Email: Dave@DaveBulava.com
Web Site: www.DaveBulava.com

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First Time Homebuyer Tax Credit Extended Into 2010!
Plus...A New Tax Credit for Certain Existing Home Owners!

It's official. President Obama has signed a bill that extends the tax credit for first-time homebuyers (FTHBs) into the first half of 2010. This program had been scheduled to expire on November 30, 2009.

In addition to extending the tax credit of up to $8,000 through June 30, 2010, the extension measure also opens up opportunities for others who are not buying a home for the first time.

So Who Gets What?
The program that has existed for FTHBs remains intact with the one exception that more people are now eligible based on an increase in the amount of income someone may now earn.

Additionally, the program now gives those who already own a residence some additional reasons to move to a new home. This incentive comes in the form of a tax credit of up to $6,500 for qualified purchasers who have owned and occupied a primary residence for a period of five consecutive years during the last eight years.

Deadlines
In order to qualify for the credit, all contracts need to be in effect no later than April 30, 2010 and close no later than June 30, 2010.

Higher Income Caps in Effect
The amount of income someone can earn and qualify for the full amount of the credit has been increased.

Single tax filers who earn up to $125,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, single filers who earn $145,000 and above are ineligible.

Joint filers who earn up to $225,000 are eligible for the total credit amount. Those who earn more than this cap can receive a partial credit. However, joint filers who earn $245,000 and above are ineligible.

Maximum Purchase Price
Qualifying buyers may purchase a property with a maximum sales price of $800,000.

First-Time Homebuyer Tax Credit – Frequently Asked Questions
Here are answers to some commonly asked questions about the tax credit.

What is a tax credit?
A tax credit is a direct reduction in tax liability owed by an individual to the Internal Revenue Service (IRS). In the event no taxes are owed, the IRS will issue a check for the amount of the tax credit an individual is owed. Unlike the tax credit that existed in 2008, this credit does not require repayment unless the home, at any time in the first 36 months of ownership, is no longer an individual's primary residence.

What is the tax credit for first-time homebuyers (FTHBs)?
An eligible homebuyer may request from the IRS a tax credit of up to $8,000 or 10% of the purchase price for a home. If the amount of the home purchased is $75,000, the maximum amount the credit can be is $7,500. If the amount of the home purchased is $100,000, the amount of the credit may not exceed $8,000.

Who is eligible for the FTHB tax credit?
Anyone who has not owned a primary residence in the previous 36 months, prior to closing and the transfer of title, is eligible. This applies both to single taxpayers and married couples. In the case where there is a married couple, if either spouse has owned a primary residence in the last 36 months, neither would qualify. In the case where an individual has owned property that has not been a primary residence, such as a second home or investment property, that individual would be eligible.

As mentioned above, the tax credit has been expanded so that existing homeowners who have owned and occupied a primary residence for a period of five consecutive years during the last eight years are now eligible for a tax credit of up to $6,500.

How do I claim the credit?
For those taking advantage of the tax credit in 2009, you may choose to either apply for the credit with your 2009 tax return or you may apply for the credit sooner by filing an amended 2008 tax return with Form 5405 (http://www.irs.gov/pub/irs-pdf/f5405.pdf).

Can you claim the tax credit in advance of purchasing a property?
No. The IRS has recently begun prosecuting people who have claimed credits where a purchase had not taken place.

Can a taxpayer claim a credit if the property is purchased from a seller with seller financing and the seller retains title to the property?
Yes. In situations where the buyer purchases the property, even though the seller retains legal title, the taxpayer may file for the credit. Examples of this would include a land contract, contract for deed, etc. According to the IRS, factors that would demonstrate the ownership of the property would include: 1. the right of possession, 2. the right to obtain legal title upon full payment of the purchase price, 3. the right to construct improvements, 4. the obligation to pay property taxes, 5. the risk of loss, 6. the responsibility to insure the property and 7. the duty to maintain the property.

Are there other restrictions to taking the credit?
Yes. According to the IRS, if any of the following describe your situation, a credit would not be due.

You buy your home from a close relative. This includes your spouse, parent, grandparent, child or grandchild.
You do not use the home as your principal residence.
You sell your home before the end of the year.
You are a nonresident alien.
You are, or were, eligible to claim the District of Columbia first-time homebuyer credit for any taxable year. (This does not apply for a home purchased in 2009.)
Your home financing comes from tax-exempt mortgage revenue bonds. (This does not apply for a home purchased in 2009.)
You owned a principal residence at any time during the three years prior to the date of purchase of your new home. For example, if you bought a home on July 1, 2009, you cannot take the credit for that home if you owned, or had an ownership interest in, another principal residence at any time from July 2, 2006, through July 1, 2009.
Can you buy a home from a step-relative and be eligible for the credit?
Yes. Provided the person you are buying a home from is not a direct blood relative, the purchase would be allowed.

Can parent(s) who will not live in the property cosign for a mortgage for their child and the child that is a qualifying FTHB still be eligible for the credit?
Yes.

Can a separated spouse who has not owned a home for four years qualify for the FTHB tax credit if the spouse has owned a property anytime in the last three years?
No. However, the spouse may be eligible for the repeat buyer credit. The best path to take in any situation regarding income taxes is to speak with a professional tax preparer or CPA.

If you have any questions that fall outside the situations here, give me a call and if you do not have an accountant to speak with, I can refer you to one.

Sincerely,
 
David Bulava
The Bulava/Gillespie Team
Re/Max Central
Top 20 Team - Re/Max Northern Illinois
Top 100 Team - Re/Max International
Office: 630-529-0022
Office: 847-670-1060
Direct: 630-372-6856
Fax: 630-390-2333
Email: Dave@DaveBulava.com
Web Site: www.DaveBulava.com



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