Real Scottsdale Living » Personal Finances

Will I Owe Taxes After a Short Sale?

Jon Griffith — Mon, 05 Dec 2011 21:32:15 +0000

(Please note that I am not a tax professional and you should seek the advice of a tax professional to answer tax questions.)

Here’s what I do know, and I learned this when I was a teenager working for tips at the local Pizza Hut.

When you make money, you’re responsible to report it to the IRS if your employer does not. That’s right. When they tip you, you’re supposed to report it.

When you borrow money, as in the purchase of a home or a car, a financial institution writes a check to pay for the asset and then retains the deed or title on that asset until you pay it off. If you don’t pay off the entire note, then the part that you don’t pay off, if forgiven, is viewed as income, even if it’s retro-active.

Since short sales involve such large dollar amounts, there’s no way to skirt the issue. If your lender doesn’t issue you a 1099-C (Cancellation of Debt) then you are just as responsible to report the forgiveness as income as the pizza delivery guys is responsible to report his or her tips.

Now, we all know that tips are taxable income, but what about when the bank approves a short sale?

The only answer I can actually give you is that you might be responsible for the income tax based on the forgiveness. You also might be able to write it off in accordance with the Tax Relief Act of 2007, which is expiring, by the way.

All of these are valid questions that you need to consult with your tax guy about, and make sure that you find the right tax advisor as there are plenty of “professionals” out there that don’t operate in the realm of real estate.

Am I Liable for the Balance or Difference in a Short Sale?

Jon Griffith — Mon, 21 Feb 2011 20:18:34 +0000

You’re thinking about selling your home, and you know it’s worth less than the amount you owe. You’ve heard from many people who have done it that you can simply get out of your house free and clear with no repercussions or financial consequence. You’re tempted to move forward, but you’re just not sure whether or not you should.

Some people are in a financial position that gives them no option but to move forward. Others could fulfill their obligation over time. One of the questions everyone is asking is whether or not they’ll be liable for the difference if their bank forgives them of the debt above and beyond what they can bring at sale.

This can all get a bit confusing, and there are many circumstances involved, but before I continue, I must make clear to you that some of these questions need the advice of an attorney and/or CPA, of which I am neither, and I don’t claim to know anything about the law. What I do know is what I’ve seen happen on others’ lives.

There is no simple answer, but let’s do some math and explain some of the potential consequences. Let’s make it simple. You owe $100,000.00 on a house that’s worth $80,000.00. You put it on the market, and find a buyer who is willing to pay your list price of $80,000.00. The bank agrees to the sale, and receives a net payment at close of escrow for $80,000 minus closing costs and broker commissions. For the sake of ease, let’s round it out to $5,000.

So you’ve managed to sell your home and bring a net payment of $75,000 to your lender leaving an outstanding balance of $25,000 on the original loan.

Potential Scenarios

These are some of the potential scenarios that you’ll face in the future, depending upon the conditions of your original purchase of the home, and the conditions on your lender’s agreement to sell short:

(note: In ALL cases, debt forgiveness or “cancelation” is taking place, which according to the IRS becomes reportable income [not necessarily taxable] to you.)

Your lender agrees to release the lien AND forgive you of the balance in full. They report “Paid in full for less than the amount owed” or something of that nature on your credit report, and send you a 1099-C for $25,000.00.
Your lender agrees to release the lien and leaves out any agreement to forgive the difference. The note remains, and you continue to pay it down until it’s satisfied.
Your lender agrees to release the lien and leaves out any agreement to forgive the difference, requiring you sign a promissory note for the amount owed and you pay it down over time.

These are a few of the possible scenarios on a single loan. If there are multiple loans on the property, then you’ll have varying combinations of potential outcomes. It’s key that you understand that there are 3 different issues that most people consider when going through a short sale:

a) are you liable for the difference.

b) will the debt cancellation become taxable income.

c) how will your debt history be affected (I loathe the term credit.)

Are You Liable for the Difference

I don’t know. You need to talk with an attorney to determine whether or not your lender will win if they pursue you in a lawsuit for the difference. The easy answer is, be prepared for it, cause it’s possible, even in a state with Anti-Deficiency Statutes like Arizona.

Will the Debt Cancellation become Taxable Income?

Maybe. It’s possible. But you also may be able to write it off in accordance with the Tax Relief Act of 2007. Consult your CPA.

How Will Your Debt History (Credit History) be Affected?

Let’s be real about this. Nobody in any financial sector has come to an agreement upon the standards regarding credit reporting. Everyone has their own opinion about how much it will be affected and how long it takes to heal. If you’re concerned about your credit report, consider studying a bit more about what it really means to your life, building wealth, and the future of your family’s financial tree. Credit does not define you.

Right Of Passage: Why Don’t We Celebrate More?

Jon Griffith — Mon, 21 Feb 2011 19:20:09 +0000

My philosophy on money is strongly rooted in the laws of mathematics. I can form metaphors to help describe how I see money moving around in our lives, but the bottom line is this: one builds wealth by spending less than they make. It doesn’t matter if you make $10.00/hour or $200.00/hour. If you spend less than you make, you will grow your nest egg. The focus of your financial wealth is to build a nest egg that can grow itself in the amount of time you anticipate having left on this planet.

The first step one can take towards thwarting this goal is borrowing money. The largest loan that most of us ever experience is the home mortgage. The crisis that our nation has experienced over the past few years wouldn’t exist if we didn’t borrow money.

So why is it that we nurture our youth in the ways of borrowing? Why is it that parents have good intentions but seem to miss the mark more often than not when it comes to saving for our kids’ futures.

There are so many lies that we are told every day by the people around us who believe the lies themselves:

I’ll always have a car payment.
You can’t go to college without a student loan.
It’s impractical to buy a house without a mortgage.
You need a credit card to rent a car.
You need to be worried about your credit score.

Lies.

I am not under the illusion that I can change a culture with one single blog post, but I sure would like to treat homeownership differently in this country. In fact, what if…

…what if owning a home was a right of passage from youth to adult-hood? What if we didn’t encourage our children to enter into contracts with banks, and instead, taught them the power of building wealth with their income by saving, so they were able to purchase their home with cash? What if we were to teach them that it’s okay not to over-extend our wallets just because everyone else is doing it too so that they will have money when it comes time to make that big move? What if we showed them that we don’t have to have it now!

I believe that owning a home free and clear is a goal that everyone can achieve, if they simply reduce their lifestyle and stop behaving badly. A single man out of college who lands his first job earning $30,000 would be better off living way below his means while he builds up enough savings to purchase his first home without borrowing a single penny from the bank, regardless of what his friends are doing. Not realistic? Well, if you believe that, then you believe other lies about money too.

Imagine the celebration that a family could have as they push their son or daughter from the nest into a paid for house! It would be something that would become a blessing, not a curse.

But, unfortunately, people don’t believe they can do it…so they won’t.

Tax The Ambitious at 3.8%

Jon Griffith — Mon, 29 Nov 2010 19:25:02 +0000

In a country where talk of obesity and rising health care costs seem to flood every news channel on a constant basis, our all knowing, all powerful government, in its infinite wisdom, is punishing the ambitious, hard-working entrepreneur in order to extend Medicare benefits and to cover the cost of the impending national health care program. Actually, only half the cost as they have forecast.

The idea is this. If you as an individual show a gross adjusted income of more than $200,000 ($250,000 for married couples), then the government will require you to pay a 3.8% tax on the capital gains above and beyond those limits.

The National Association of Realtors lobbied heavily against this legislation as it cropped up at the last minute to solve the obvious question: “Who’s going to pay for it?”

Well, if you’re “rich” as the government defines, then YOU are going to pay for it. The more you make, the more you pay, which perpetuates the continual problem of a vast majority of the nation NOT paying taxes.

Robin Hood

I used to equate Robin Hood’s “stealing from the rich, giving to the poor” to the government taxing hard working Americans and giving it to the lazy people. Now, I think of it more like this. Robin Hood steals the money BACK from the government who stole it from the people and gives it BACK to the rightful owners. Go go gadget archer.

3.8% Example

A quasi-confusing document was released by the NAR which offers a few examples of how this new legislation will actually affect the home owner. While some have blown the tax out of proportion, not knowing the actual details of the law, assuming that everyone who owns a home is going to be taxed, that is simply not true. It’s just those of us who make “enough” money doing it.

Example 1: Suppose your adjusted gross income (AGI) for the year hits the $150,000 mark, and you sell some of your stocks and bonds for a net gain of an additional $150,000. That puts your new AGI at $300,000, or $100,000 above the $200,000 limit. $100K * 3.8% = $3,800.00

Your Tax Liability: $3,800.00

Example 2: You and your wife have a combined income of $190,000. You sell some stocks and bonds which net a capital gain of $60,000. In addition to that, you sell your residence which you purchased for $600,000 for $1.2Million for a gain of $600,000. Since you gained over $500,000 on the home, everything over $500,000 is added to your AGI and becomes taxable. So, $190,000 + $60,000 + $100,000 = $350,000. Again, you’re over by $100,000.

Your Tax Liability: $3,800.00

Example 3: This one blew me away. I’ll add this one as it’s written in the NAR brochure with no modifications.

In 2010, Ethan inherited a four-plex investment property from his great aunt. She had used it for many years as an investment rental property in San Francisco. At the time of her death, the adjusted cost basis of the property was $10,000. During her period of ownership, she had taken $240,000 worth of depreciation deductions on it. Its fair market value was $900,000 when she died. Because there was no estate tax for 2010 and because the carryover basis was in effect, Ethan’s basis in the inherited property is also $10,000. The prior depreciation allowances carry over to him, as well. He continues to use the property as an investment rental property.

Ethan later sells the property for $1.2 Million. He is single, and reports Schedule C self-employment income of $180,000.

Ouch. That hurts. That’s additional tax that Ethan is required to pay because of the health care program. What if we assumed that Ethan lived a rather responsible life, since he obviously knows how to make money ($180,000/year before any inheritance). We could assume he’s healthy, eats well, exercises, doesn’t smoke, isn’t an addict of sorts, etc. I think you may be able to figure out where this argument could lead.

When does this legislation go into effect?

January 1st, 2013.

I’m curious to know what you think about this plan, and what the effect of the cause will be. How creative are those of us who make an income that the government deems “too much” going to be?

Leave your comments below.

Planning Prevents

Jon Griffith — Mon, 08 Nov 2010 19:57:06 +0000

Following a good model of financial planning will make the difference between future success, and future failure. While there is no guarantee of success, however you may define it, there is certainly a guarantee of failure if you don’t take the time to plan according to your end goal. Of course, if you have no end goal, making a plan might be a bit more difficult than you imagined. Most people who succeed in life do so because they have a goal in mind, and they take the steps they need to take to reach that goal.

A majority of the valley is in turmoil when it comes to housing. There’s no need to explain what has happened over the past few years. More focus needs to be placed on how you’ve learned from it, and what you intend to do about it.

Just Start

The first step to planning your future is to be aware of where you are. I would bet that most of your financial stress is due to not knowing, and not knowing is due to a fear of finding out the truth. This circle of thought will prevent your from reaching your goals. Take inventory of your money. Figure out what’s going where, how much you actually make, and where you want it to go.

A Healthy Cash Flow Budget

In this order, 1) Feed Yourself, 2) Clothe yourself, 3) Keep a roof over your head, 4) Keep the lights on, and 5) maintain your transportation, whether it be a car, a scooter, or your walking shoes. Beyond that, you have room to solve your problems, or invest in your future.

If you have structured your life to give, spend and save appropriately (and I’ll define that next) then you cannot lose, and the degree to which you win will only be dependent upon the amount of income you can generate.

An appropriate method to live by goes as follows:

Give 10% of your pay away as soon as you get it. Don’t care where, but support something you believe in.
Keep your rent or house payment at or below 25% of your take-home pay.
Never borrow money.
Save 15% of your income FOREVER so it grows, and don’t choose to do anything that would jeopardize it.
Save 15% of your income for your kids’ college educations so they don’t end up in debt.
Invest, Give, and Spend the rest.

House Poor

The big one here that I’ll touch on is the housing expense. In our current market state, where our dollar has lost value, we have nearly 10% unemployment, and our homes are worth half of what we borrowed, it’s time to look at the above formula to see if our current spending matches our ideal spending plan. If you find that you are spending more than 30% of your income ( I know, I said 25% above, but the banks approve on 30% ) on your house payment, then you are robbing yourself of the future freedom to choose whatever you want to do. You’re blowing your future away, and your current level of comfort, and in many cases, your fears, are preventing you from taking action to solve the problem.

You have people around you, who aren’t qualified to make these decisions for you, pulling you in all directions with their opinions about what you should or shouldn’t do. Here’s a tip, and a hard truth: Taking advice from someone who is broke about how not to be broke, will keep you broke, so smile, and thank them for their opinion, and then get professional advice.

If you’re house poor, and you have come to the realization that it’s time to do something about it, and your house is worth less than you owe, then your solution is to sell the house. That will most likely involve a short sale. If you need more information about this topic, or you need to speak with me about how you can solve this monumental future financial problem, please call me and we can talk about it. Knowing the facts will give you peace of mind.

Should We Stop Paying Our Mortgage?

Jon Griffith — Mon, 09 Aug 2010 12:00:56 +0000

That’s really not a question that I can answer for you. But, what I can tell you is that there are investors who hold notes on homes who will absolutely refuse to consider you for a short sale unless you’re past due by at least 30 days.

My initial response to this is complete rejection. Logically, there’s not going to be much of a difference between a seller who has decided not to pay who presents a short sale offer, and a seller who has actually stopped paying who presents the same offer. The only difference is 30 days.

Most creditors are NOT going to negotiate with someone who is actively paying their bill. It doesn’t matter if it’s a home mortgage, a credit card, or a personal debt. Short Sales, however, often have been an exception to this rule, as many investors see the value of cashing out as soon as they can before the values continue to fall, if in fact they fall. But recently, they’ve started to tighten the reigns.

If I loan you $100.00, and you agree to pay me $10.00/month for 10 months, and you continue to pay, I’m probably not going to be likely to agree to accept a settlement until it’s proven to me that you aren’t going to pay me anymore. If you pay me $50.00, and then stop paying me, then you approach me a few months later offering an additional $20.00 to settle the entire debt, I may be likely to simply take it and write off the remainder because I’ll want to get what I can when I can, rather than gamble losing it all in the end.

So, I cannot advise you to stop paying your mortgage, because I’m acting on behalf of your best interests, and your best interests include anything and everything that is non-destructive. When you stop paying, it will affect your credit negatively. What I can tell you that if you do stop paying, it will show your lender that you’re serious. Of course, if THEY tell you to stop, that’s a different story, and in my opinion, loony on their part.

The Debate Continues: One User’s Opinion on Renting vs. Buying

Jon Griffith — Wed, 23 Sep 2009 21:29:23 +0000

As with anything, there are pros and cons that change with every complicated variable involved. The concept of buying being better than renting is relative to the context of each side of the equation at any given time. No two situations are the same, but generally speaking, assuming certain conditions are already met, owning a home is MUCH BETTER for long term wealth building than renting.

In an article that I wrote back in 2008 on the SonoranHouse.com blog, I illustrated the financial benefits of renting vs. buying. Here’s what one user had to say, along with my thoughts on the response:

WRONG… Renting is FAR better and Cheaper than buying a house.

Not so fast. There are too many variables involved, and each situation is different, but the principle cannot be disputed. Owning is a long term prospect. Not short term. In order to conclude that owning is better, one must assume that the property will be held for as long as possible.

1. The down payment is $20,000 OUT OF YOUR POCKET on day one. SO by purchasing a house you are immediately $20,000 POORER the day you buy your house. In contrast, you can RENT and only pay a SMALL deposit equal to 1 months rent and keep the rest of your $19,000 to use as a safety net to pay the rent with and live an easy STRESS FREE life knowing you have the rent covered for 19 months if it’s a $1K a month rental.

When you pay a deposit to a landlord, it is a fee that can never be recovered. When you put money down on a house, you are instantly investing your hard-earned cash in an appreciating asset. You are not spending the money. Again, if your investment mindset is short term and you sell your home too quickly, you will certainly cut into your initial down-payment unless your property experiences unheard of appreciation in a short time period. Not likely to happen again. Buying real estate is a long term wealth building investment.

A rule of thumb for an emergency fund is 3 to 6 months worth of living expenses. If your rent is $1000.00/month, you have 19 months of rent paid for, but that doesn’t take into account the rest of your expenses. If a down payment on a house depletes your living expenses, they you are not ready to buy. Your down payment should be above and beyond your 3 to 6 months. So, if your expenses are $2000/month, you should sock away about $12,000. The rest can be used towards your future down payment. This all assumes that you are completely out of debt. If you aren’t, then you shouldn’t be buying a house in the first place. Most renters do not have this much money saved up and they live paycheck to paycheck, so they feel they NEED to have some sort of financial buffer to buy them time.

The problem with this is that they never get OUT of the rat race by behaving this way, and they never put their money to work for them. They will live the rest of their lives working for their money. What would be the difference between having 19 months of STRESS FREE living in a home that is appreciating in value versus apartment living with the same amount of a safety net? The difference is that part of your monthly payment is being added to the home’s equity. Some of that payment will be recovered. NONE of the rent will.

2. The Tax Deduction is nonsense… You spend $1.00 in Mortgage Interest to deduct .10 cents off your tax bill. HARDLY a “savings” at all. Your still LOOSING .90 CENTS in interest!! WAKE UP PEOPLE!!

Tax Deductions are a poor excuse for people who are poor to continue to be poor. The argument here is that it makes sense to pay the bank $1.00 in interest to avoid paying the government ten cents. Obviously that is flawed thinking. Spending 90 cents to save 10 is absolutely ridiculous. That is why the largest mortgage anyone should be financing is a 15-Year fixed. Obviously paying cash is the best way to buy a house.

3. When you own a house you pay PROPERTY TAXES each and every year. These taxes are about 1.5% of the value of your home or around $3000 a year. That’s $3K a year your LOOSING if you own a house.

Hmmm…let’s see. Property taxes at $3000/annually, deductible at your tax bracket rate, or $12,000 wasted on rent. Personally, I’d rather put the remaining $9,000 in growth stock mutual funds to offset the perceived loss, because by the time my $9,000 per year is invested over 30 years, it will pay the property taxes a few thousand times over.

4. When you own a house you pay Property INSURANCE on your house each year. This will be about 1% of the value of the home so figure $2000 a year on a $200K house.

I own a $200K home. Taxes and insurance annually do not exceed $3000.00. In fact, they don’t exceed $2000.00. This has everything to do with location and tax rates. Again, I’d rather cough up $2000/year for insurance than blow $12,000/year on rent. So based on points 3 and 4, which add up to $5000.00, I’m still ahead with $7,000 invested annually in growth stock mutual funds. Come to think of it, my down payment of $19,000 as used in this example will be reimbursed fairly quickly.

5. When you own a house you pay for ALL MAINTENANCE/REPAIRS/REMODELS. This means spending about 1.5% of the value of your home EACH YEAR to keep it in livable condition so figure another $3000 a year on maintenance/upkeep.

Nobody forces remodeling, so we’re going to remove that from the equation. Deferred maintenance is a price that everyone has to pay for, whether you own, or you rent. As the king of your castle, you determine what’s used on your property to improve and maintain it and you have a choice over the cost/savings realized from it. By renting, you have no control over these things, and the cost of rent is at the discretion of the landlord, who can easily raise it high enough to force you out to make room for someone else as a result of increased management costs. Owning your own home offers greater long-term housing security.

6. In order to “get your money back” out of your house you will need to SELL your house. This means FINDING SOMEONE ELSE TO BUY IT. You’ll have to pay Closing Cost, Real Estate fees, etc. and it can take a LONG TIME to find a buyer. THEN even if you sell, you will have to live somewhere so you would have to turn around and buy ANOTHER house or do what most smart people do in the first place… RENT.

False. As a long term investment, the asset appreciates and the value of the loan decreases over time. If you paid cash, you have an instant money making machine creating passive income. If you didn’t, you’ll eventually reach a point at which renting your home to someone else will generate positive income above what you owe on the mortgage payment. The tone of point number six seems to emphasize the dependence upon cash in the bank to provide a safety net. Obviously if you’ve been able to save $19,000, you’re making more than you’re spending, so the time that it takes to sell should be irrelevant unless you’re forced to move via relocation or other circumstance beyond your control. It’s true that if you sell too early, you’ll erase your gains because you didn’t have a long term mentality. There is so much more risk to buying a home when you borrow, but if you are able to pay cash for a home, then I’d say you’re living well financially. One’s intelligence is not a factor determined by the decision to rent or buy. One’s wealth, however, is. If you want to get rich and live free like nobody else, then you’ll invest wisely. Renting is not investing.

Owning a house ONLY makes sense IF you could pay CASH for it. Even then, your still going to “Throw money away” on Taxes, Insurance, Maintenance, and the excess bills that come from owning a house when if you RENTED many of those bills are included in the rent.

Paying cash for a home ISN’T THE ONLY time it makes sense to buy a home. It is the BEST practice for sure, but you’re not throwing money away on taxes because your home is appreciating in value, and in theory, you’re renting that home out, collecting $1000.00/month rather than spending it. Can you imagine how nice it would be to be able to put $12,000.00 less a few expenses every year without having to work for it?

The fact that there are additional bills when you own versus renting is also a false assumption. Do the math over a long period of time. Take the appreciation of real estate and the potential passive income from owning a rental and see where it would be in 30 years if invested wisely, long term. Compare it to the real costs of owning. Remember, we’re talking about ownership versus renting. We’re not talking about owning a high cost property that has no potential to generate future income. That would not be a wise investment. Of course, you could just keep on throwing your hard-earned money away. In fact…

…I’ll look forward to renting one of my properties to you because you sound like the perfect tenant.

Cash For Clunkers, The Final Deathblow

Jon Griffith — Thu, 20 Aug 2009 06:55:44 +0000

My recent article entitled Cash For Clunkers Is Absolute Ultra Stupidity was the most viewed article on my site on the day that I released my August newsletter, probably because of how provocative the title was. I recently caught Blake Thompson’s @ramseyshow tweet which turned me on to the following video by Dave Ramsey, author of the #1 best seller The Total Money Makeover: A Proven Plan for Financial Fitness.

I read this book, well, I actually purchased the audio book and listened to it 7 or 8 times after listening to Dave’s radio program for about a year, and the book solidified all of the callers’ answers that Dave offered during that time by teaching me the theory behind what Dave teaches. I highly recommend reading it if you intend to build wealth and become financially independent.

Have a look at Dave’s view on cash for clunkers:

There Is No Secret To Getting Rich

Jon Griffith — Thu, 13 Aug 2009 20:54:41 +0000

Think about it. There are thousands of millionaires. Some of them fell into it; some of them worked hard to earn it. Those who worked hard, probably still have it. The most powerful wealth building tool that you have is your income.

When you fill a bathtub, you plug the drain. If you don’t, all the hard work of pumping that water from the well is wasted as the water simply slips away through the plumbing.

There are two ways to change this situation. Increase your income, or decrease your expenses. You have far more control over a decrease in expenses than you do an increase in income, so don’t hope for a raise to get you on track.

So what does the cash flow of a wealthy person look like? That all depends on how you define wealth. Before you can be “rich” you need to adjust your lifestyle so your expenses are less than your income, and you need a clear, written plan.

This isn’t rocket science. In fact, here’s a little chart that I created that outlines a pretty good plan that will place you on the highway to wealth.

Assumptions

You give to your church.
You give as little as possible to the IRS every paycheck and save your annual taxes in your own interest bearing market rate account.
You have ZERO debt, except for your mortgage.
You have 3 to 6 months total expenses saved up for emergencies.
Your salary is around the national average of $50,000.00
Your mortgage payment is no more than 25% of your take home pay and is a 15-year fixed mortgage.

Based on the assumed $50,000 annual income, your monthly gross income is $4166.66. You make enough to land you in the 25% tax bracket. Your tax bill for the year at $50,000 will be about $8,688 or $724.00/month.

So, after taxes, you’re left with $3442.66 every month. What are you going to do with it?

The key to following this model is applying it to whatever income situation you are in. Whether you make $25,000 or $90,000. Granted, your tax bracket will change the calculations, but the model should remain the same. If you are unable to do this, then you may have an income crisis, or you’re spending WAY too much money on things you don’t need to be spending money on.

This model is obviously a guideline, and can be modified to suit your particular situation. I’d love to hear your thoughts on this and why you may agree or disagree with the structure. Spending in this country is out of control, and there’s a serious lack of financial discipline being exercised in our lives. Writing out a plan for your money, such as this, will help open your eyes to what you really can and cannot afford.

It’s a Bottom Line Issue

Jon Griffith — Fri, 19 Jun 2009 08:40:11 +0000

A recent post on raincityguide.com got me going about the bottom line when it comes to short sales.

The article, written by Ardell, touches on the apparent importance of the assets that a property owner may have that could affect the bank’s decision regarding whether or not a short sale will be approved.

At present, there’s no guarantee that any lender will approve a short sale, ever.

Just because the value of a property is obviously less than the amount owed, that does not mean that the seller’s lienholder is going to approve the short sale.

Consider this. If a property owner has a net worth of $1,000,000.00 and they decide to quit paying their mortgage, what happens? The bank forecloses. It doesn’t matter if the seller has money or not. They have made a decision to walk away, and one thing is certain…if you have a home with a mortgage and you quit paying it, the bank will foreclose.

So, when this seller, who arguably is walking away from a moral obligation, decides to attempt to sell the property to reduce their potential deficiency liability and potential income tax liability for current market value, which may be less than what they owe, would it, or would it not be in the bank’s best interest to allow the short sale? If they don’t allow it, will they waste money on the foreclosure process, and lose money when they list it for sale for less than market value? They will.

Ardell’s Auto Metaphor

You lend your friend $10,000 to buy a car. He decides to sell it when he still owes you $8,000. He tells you someone is willing to pay $5,000 for the car and he wants you to take $5,000 as payment in full. You look at his offer, you find out he he has $15,000 in a savings account. You find out the blue book value for the car is $6,500. The person who wants to buy the car for $5,000 is getting impatient wating for an answer. What would you do?

My answer? It doesn’t matter to me whether or not my friend has money in the bank. The only thing that matters to me is how much the car is worth on the open market, and how much is being offered.

The what you may be missing about this example is the fact that my friend has made a decision to eliminate a debt, and he’s going to do it one of two ways…he’ll either a) let the car get reposessed, or b) try to sell it for as much as he can and ask for a forgiveness of the remaining debt. True, he may no longer be a friend, but that’s what he’s doing.

So, what do I do? Well, in this case, the car should sell for $6500.00 based on Kelly Blue Book private sale. I as the lender now have a few options. I can a) take the car back, or b) agree to sell it for the offering price, or c) require that my friend find a buyer willing to pay market value.

Perhaps the cost of repossessing the car, reconditioning the car, licensing and registering the car, and re-marketing the car will exceed $1500.00, the difference of market value and the current offer. In that case, I would be an idiot not to take the offer. I as the lender, will make smart decisions in mitigating my loss, which means that I would in fact approve the sale.

If all of my costs to resell that car are less than $1500.00, then I would deny the sale and require a higher price.

Should you just take the car and try to sell it for the $6,500 or better, so that you can still collect the amount your friend owes you after you sell the car?

This is a classic example of the tug of war that we face with lenders between the concept of Loss Mitigation and Collections. At this point, I’m not interested in collecting. I’m interested in preventing further loss, because I know that my friend is not going to pay. So, I want to get the car OFF of my books as quickly as possible for as much as I can possibly salvage with as little time invested as possible.

If I am concerned with collecting, knowing that my friend has the money to satisfy the debt, I will surely become bitter at him for not paying, and then I will do something stupid, like refuse to agree to mitigate my loss, which in the end will eat up time and energy, and money. Give me my $5000.00, get the headache out of my life, and let me put that money somewhere it can begin earning again.

Is it possible to short sell more than one home of the same owner who has plenty of money in the bank but has chosen to walk away from their obligation? Yes. Is it right for them to walk away? That becomes a moral question that the seller would have to ask of his self.

Bank executives understand loss mitigation, and they don’t care about each person’s personal financial situation. They care about 3 things and 3 things only.

Is the owner walking away from the property?
What is the market value of the property?
What is the current offer?

Anything else has zero bearing, from the bean-counter’s perspective.

Some second lenders (junior lien holders) will hold up the sale of a property because they just want to get back at the seller for not paying. This is a ludicrous path to follow, because it gains them nothing. If the senior lien holders were to behave the same way, then ultimately they lose more than if they allow the short sale.

Do lenders have to approve short sales? No, they do not. Would it be better if they did? Yes, but only if it means avoiding foreclosing on the property, which is something that the bank cannot prove the owner has actually decided to allow.

The Effects of a Short Sale

Jon Griffith — Wed, 17 Jun 2009 05:53:32 +0000

There is speculation across the industry when it comes to the real effects of a short sale. The truth be told, there is no one right answer to the question, “What are the effects of a short sale.”

So, you say, “What are the effects of a short sale?”

Firstly, as a REALTOR it is my responsibility to understand as much about the legal implications as I can, but I can assure you that I am not an expert in legal issues, and I am not a CPA, so take what I write with a grain of salt and come to your own conclusion between your attorney and your tax advisor before making any extreme financial decisions relating to your real estate.

My job is to effectively market your home and successfully negotiate with the lender’s and/or lien holders on your property to work towards selling it in a timely manner to help you avoid foreclosure.

What are the effects of a Short Sale?

The list could go on, but basically, at the core, the first and most obvious effect of a short sale is that you’ll be selling your house for less than you owe, which leaves a deficiency. Your income taxes can be affected, the neighborhood values will be affected, etc., etc. For now, I’ll just answer some common personal questions regarding the results of a short sale.

What is a Deficiency?

That’s how much more you still owe the bank when you sell your home. For example, if you sell your home for $100,000 and you owe $150,000 then you have a $50,000 deficiency.

Can the Bank pursue that Deficiency?

Yes. The bank can do whatever they want. Whether or not they succeed will depend on the governing laws in your state. Be sure that you check with a qualified attorney to determine if the bank can successfully pursue a judgment against you. Contrary to what people have told you, this is not a black and white issue and each situation, each lender, and each transaction is unique.

Whether or not the bank can pursue a judgment against you involves many different factors. For example, if you borrowed against your home on a HELOC, you probably didn’t know that you personally guaranteed that loan. So, when you sell short, or when you walk away and foreclose, the bank will pursue you, and they’ll probably win. If, however, you took out cash to upgrade the kitchen, you may not have that liability on your hands. Again, it depends on each situation.

How does a Short Sale affect my credit?

I’ve heard so many responses to this question. The easiest answer is, negatively. Prior to selling your home short of what you owe, if you have kept up your payments on time, you will probably not have affected your credit score. If you think your score has been affected, please refer to AnnualCreditReport.com, where you can truly obtain your free credit report (unlike the misrepresented freecreditreport.com which I will not link to.)

How does a Foreclosure affect my credit?

Again, the easiest answer is, negatively. The difference between a short sale and a foreclosure is the verbiage that is used by the bank on your credit report. Each lender reports differently. Basically, on average, someone who has a foreclosure will expect to wait from 5 to 7 years before they will qualify for conventional financing under Fannie Mae guidelines. Someone who sells short will be more likely to qualify sooner than someone who forecloses.

How does a Short Sale benefit me vs. a Foreclosure?

When you have a deficiency, the bank will write it off as a loss. They do this with a 1099-C. On your end, a 1099-C is considered income. Depending on the nature of your financial situation (whether it was a HELOC, refinance, non-purchase money, etc.) it is possible that this deficiency will be recognized as income by the IRS when you file your taxes, and that you’ll owe income tax on it. If this is the case, whether you walked away or sold short, reducing the deficiency is the best way to go, because it means that you will have a smaller deficiency and therefore, less reported income, and thus, a lower tax bill. Some people are protected for a limited time under the Tax Relief Act of 2007. Please research this topic if it is of concern.

Why does credit matter?

In my opinion, credit is the financial worlds way of scoring how successfully you’ve carried debt, and we all trust the financial world, right? We know they’re working towards our best interest, right? Credit scores are pointless. In fact, someone with a zero credit score can just as easily obtain financing as someone with a stellar credit score. It’s the middle score that screws you. Besides, the only reason a credit score is of any value is to become slave to your lender. I personally don’t give a rip about my credit score. Does that mean I don’t follow through with my obligations? Absolutely not. It just means that I prefer not to borrow money, so a credit score holds no value for me, whatsoever.

Lenders who base their decision solely on a credit score are to be avoided. Find a good lender who will weigh your situation, look at all of the pieces of the puzzle, and make a lending decision based on that information. Not a blanket score.

So Why Should I Sell Short?

Maybe you shouldn’t. But, if you are considering foreclosure, at least afford the opportunity to your local REALTOR to feed his family instead of you feeding the IRS and the banks attorneys. We do work hard to get these deals done for you.

If you have any questions about the effects of a short sale on you and your property, please feel free to comment here or contact me directly so we can discuss your situation.

Low-Ball Appraisals Cause Problems

Jon Griffith — Fri, 05 Jun 2009 20:23:34 +0000

The original article was posted on the NAR website and I have re-posted it here. I don’t typically copy others’ articles since I enjoy writing my own, but for the sake of getting the word out, because I am in the middle of this problem right now, I thought I’d pass it along:

Real estate practitioners in Nevada, one of the areas hit hardest by foreclosures, say low-ball appraisals are slowing sales and preventing recovery.

Mark Stark, CEO of Prudential Americana Group in Las Vegas, says he thinks appraisers are too focused on projecting how much prices could fall rather than reflecting what values really are.

“The appraisers are being very conservative,” Stark says. “They are trying to cover themselves.”

Mark Madsen, communications director for Raintree Mortgage Services, says appraisers are just doing what they’ve been told. “I think appraisers are scared to get blacklisted,” he explains. “If the appraisals are too high, then banks may no longer accept appraisals from that person.”

Source: Brian Wargo, Las Vegas Sun (06/05/09)

My recent experience involved Bank of America on a beautiful home well worth the offering price in Gilbert, Arizona. Bank of America’s appraiser came in $20,000 short on a property that was worth every penny of the offering price based on comps and upgrades. There’s no doubt about it. As a result, we have been forced into a tailspin of events that have caused everyone grief due to the affect that the appraisal had on the loan to value ratio and the ability for my buyer to obtain conventional financing at that ratio. It’s a nightmare, to say the least.

The lenders, in conjunction with government regulation, seem to be causing the real estate practitioners to bang their heads against the wall as they attempt to put good buyers into properties that they CAN afford.

Is There A Benefit to Foreclosure vs. Short Sale?

Jon Griffith — Thu, 04 Jun 2009 05:25:39 +0000

When you consider the fact that whether or not you are able to sell your home before the bank forecloses, the bank will eventually foreclose if you don’t pay your mortgage, it would be beneficial to you to at least attempt to sell the home before that happens.

It’s really not Foreclosure vs. Short Sale

There’s no competition here. There’s no “one way is the right way” scenario. The bottom line is, once a homeowner stops paying their mortgage, they are headed for foreclosure. A short sale can be conducted at any time prior to foreclosure. You do NOT have to be behind on your mortgage payment for a competent real estate agent to negotiate with the bank to allow you to sell your home for less than you owe. If you are headed for foreclosure, there’s absolutely NO disadvantage to attempting a short sale. In fact, there is a benefit.

Banks Pay Big Bucks to Foreclose

That’s right. When the bank reposesses your home, they spend money to do so. The hire attorneys to handle mountains of paperwork and they have costs associated with conducting a trustee sale. Then, when all is said and done, they have to hire a real estate broker to list the home for sale, which will cost them additional fees.

Who Makes Up The Difference

Let’s say you purchased your home for $150,000 and over a year’s time it increased in value to $200,000 and you decided to take out a $50,000 equity loan based on the current value. The market values fall and now you find that the house is worth $160,000 and you’re upside down by $40,000.00. You fall on hard times and can no longer afford payments on your combined mortgages of $200,000.

When you owe $200,000 on your home, and the bank forecloses and sells the home for $160,000 it is you who are responsible for the difference. Since Arizona is a non-deficiency state, the bank will probably write it off. However, and keep in mind that I am not a tax expert, if the $50,000 you pulled out of your house was not used to invest in that house, and instead it was used to invest in something else, like another house, or a vacation, or a car, then you’re in a sticky situation. The bank may come after you, because that loan was probably tied to you with a personal guarantee.

Whenever a bank writes off a deficiency from a foreclosure or a short sale, they issue a 1099-C so they can show the IRS that they have a loss. This 1099-C is an income statement for you and it must be reported to the IRS. If your financial situation meets certain criteria, then you may be able to deduct that same amount from your tax return and thus not owe any taxes on it. If, however, you do NOT qualify, you may find yourself paying income tax on the deficiency. So it would make sense to reduce the liability as much as possible.

Sell It Short

The best way to reduce your potential liability is to give your local real estate expert an opportunity to sell your property BEFORE it forecloses. Look, the property is headed for foreclosure anyway. The banks know that it costs them a fortune to reposess homes and sell them at auction, so they are much more likely in economic times such as these, to allow you to sell it BEFORE they incur those expenses. Rather than pay the attorneys, the bank agrees to pay the real estate expert, and saves a bunch of money. Bank owned properties sell for less than properties that are selling short, and that translates to a smaller deficiency, and less reported income, saving you potential tax dollars.

Don’t simply walk away without giving your local real estate expert the opportunity to help both you and the bank save some money. And guess what, it helps them out too, because that’s how they feed their families.

Before Baby Step One: Getting Current

Jon Griffith — Tue, 14 Apr 2009 05:30:50 +0000

I’m a Dave Ramsey convert. Over the past “fill in the blank” years, many of us, including myself, have thought ourselves to be masterful in our money management, trading higher interest rates for lower, moving money back and forth, leveraging other people’s money to get ahead, etc. In speaking with many people about money and money “philosophies,” the one common denominator in the conversation is the feeling that it’s “easier said than done.”

That is truth. As Dave illustrates, money management is 20% knowledge and 80% behavior. When I first read his book “The Total Money Makeover: A Proven Plan for Financial Fitness” all of the hours of listening to Dave on the air sort of “gelled” together.

I purchased a new car at the beginning of 2008. To date, it has been the worst purchase I’ve made in the past 15 years because of the financial burden it has placed on my budget. Not a smart move. At the time, I thought I had a pretty good handle on money. What I actually had was a very refined ability to manipulate money to get what I wanted now, not later, with every justification I can think of to make it okay. I’m still paying for my washer and dryer that I purchased at Home Depot on a Home Depot credit card with “no payments” for 12 months. What a joke!

Although the financial burden of purchasing a new car has been significant, buying the car is the reason I listen to Dave Ramsey every day. The car came with a satellite radio subscription for six months. On that XM Radio, I was introduced to Dave Ramsey. How could that be? How could I possibly say that buying the car was a bad move if it led to meeting Dave Ramsey and his Total Money Makeover? Trust me, buying a new car is never a good move, unless you’re a millionaire already. Millionaires didn’t get to be millionaires by buying new cars. Dave typically says, “hope you liked the car!!!” This after describing how much money you would have if you invested the payments in a Growth Stock Mutual Fund over a long term.

Dave’s TMMO has a simple 7 step process that he calls the baby steps, but there is one pre-requisite that you must meet prior to starting that first baby step. You must get current with everyone to whom you owe money, from your credit cards, home mortgage, car payments, credit cards, electric bill, etc. Everything you owe on must be completely current before you can start that first baby step.

Once you have this preliminary step out of the way, you can move to step 1. I’ll be posting about the rest of the baby steps and my thoughts on them over the next few weeks. Make sure you subscribe so you never miss a post.

Should I Buy a New Or Used Car?

Jon Griffith — Sat, 14 Mar 2009 22:57:18 +0000

Used. Always used. Buying a new car is one of the worst financial decisions I have ever made.

Monthly Payment

The monthly payment is the first thing that everyone looks at when they finance a car. Why? Because they live in a cash flow mentality. In this economy, cash is king. If you don’t have it, you can’t spend it. If you can’t spend it, you can’t make it. If you can’t make it, you won’t have it, and the circle continues.

If you’re thinking about a monthly payment, and any portion of that payment is going to be paid to anyone other than yourself (in other words, the bank), then you’ve already lost the battle, because you’re headed into debt. There may be a reasonable explanation for why you’re seeking financing for something you don’t have enough cash to purchase up front, but my advice to you is to completely avoid it altogether. In order to succeed at this, you will have to radically change your idea of what you should be driving. One of the mistakes people make when they consider their monthly payment on a new or used car is how much it really is going to cost them every month. The monthly payment every month is only the financed amount, and it hides all of the other expenses you’ll incur throughout the life of the car.

Since I’m such a nice guy, I’ll go ahead and lay out my stupidity (Dave Ramsey calls what I’m about to explain a “stupid tax”) for all to see, with no holds barred.

My Stupid New Car Buying Experience

In March of 2008, I purchased a new Honda CR-V, loaded. The only feature I didn’t buy was the All Wheel Drive. Big deal. So what did my car cost? The sticker price was $27,895. Divide this by 72 and you have a monthly payment of $387.00, right? Wrong.

When you buy a new car, you have to add to it the document fee, which in my case was $368.00, sales tax, which was $2259.50, and title and registration, which was another $514.71. These are just the up front fees. Then there’s the finance charge. My loan was at 7.9%, which over a period of 72 months is $8162.47.

Add all of these up, and the price of the car goes up to $39139.68. Divide that by 72 and you have a monthly payment of $544.00. But is that the total cost of owning the car? No.

In the first year, the car depreciates roughly $4200.00, so for the first year, you’re paying $544 per month plus $4200.00 divided by the first year (12 months) or $350.00. Color me stupid, but that’s $894.00/month. Add insurance at $1200/year and that’s another $100/month. Now we’re up to $994.00/month. Fuel for me last year, as a REALTOR, was $2937.00. That’s $244.00/month.

My vehicle, which appears to be costing me only $544/month (which by the way, is ridiculous and I should be stabbed through the eye with the very pen I signed with) is actually costing me $1238/month in real money!

The following is from Edmunds.com. It shows what you can expect to be the real cost of owning a 2009 Honda CR-V.


.		Year 1	Year 2	Year 3	Year 4	Year 5	5-Year Total
.	Depreciation	$4277	$2729	$2402	$2130	$1911	$13449
.	Financing	$1801	$1455	$1082	$680	$247	$5265
.	Insurance	$1258	$1302	$1348	$1395	$1416	$6719
.	Taxes & Fees	$2439	$374	$313	$262	$220	$3608
.	Fuel	$1996	$2056	$2118	$2182	$2247	$10599
.	Maintenance	$93	$546	$359	$872	$1108	$2978
.	Repairs	$0	$0	$105	$254	$373	$732
.
.	Yearly Totals	$11864	$8462	$7727	$7775	$7522	$43350

The Used Car Buying Experience

Let’s assume that I decided way back at the beginning, that I would be satisfied with driving the half-way okay car that I had which was completely paid off and only representive a small amount of “inconvenience” in my life. No NAV, no fancy leather, no sun-roof…etc. Big deal right? Right. Now, with a paid for car, the bank is getting nothing.

At the time, my truck was worth $8000.00. That actually means that I could have moved from the truck into a car that was more conducive to showing property for the same price, or perhaps a bit less. But, I would have been able to set my sights on that newer car without losing $1238/month.

Here’s how it starts. For 10 months, I would sock away $544.00 every month in my own savings account. Hey, I was willing to pay it to the bank, so why not just pay myself? After 10 months, I have $5440.00. Now I trade my $8000.00 truck, which would still have been holding its value, in to a used car dealer for a car that costs $13,440.00 (That’s $8000.00 + $5440.00.) Not bad. Yet again, I save for 10 months an additional $5440.00 and I trade my most recent car in for another car at the price of $18,880.00. 20 months into the process I’m driving a fairly nice used car. Keep in mind, I’m never buying new cars through this process and I’m always upgrading to cars that are holding their value, like a Honda or Toyota. For another 10 months, I save an additional $5440.00 and I trade my $18,880.00 car in for a used $24,320.00 car. 30 months have gone by and I haven’t paid the bank a red cent, and every 10 months I get to upgrade to a newer car, and not only that, but the $24,000 car I’m in now, was purchased by someone else NEW just 3 years earlier for a whole lot more than $24,320. Let the first owner take the depreciation. Let’s do it again. 10 more months of saving $544/month for another $5440.00 and I’m now able to trade in for a $29,760.00 car, paid for, IN FULL!

If you’ll recall, the price of my new Honda CR-V was $27,895.00. It’s been 40 months or 3.3 years, it’s 2011, and I can actually now purchase that 2008, loaded CR-V with miles on it, for much less than its original sticker price. In fact, that car that I had to have last year, would probably cost me under $20,000 in 2011, and would have all of the same features!

This is an absolute no brainer. When you buy a new car, you lose, no matter what. If you’re in a financial position to be able to take that loss, in other words, if you have the money to blow, then you can buy a new car, but you lose. It’s a mathematical fact. Most of us do not have that money because we jump in before we look at the facts. So here’s where I am now, as a result of my impatience. I have a one-year-old car with 20K miles that’s worth about $22,000. My monthly payment is $544, but as we’ve seen, the actual cost of ownership this first year has been over $1200/month. I still owe $27,000 on the car, which is a hair under the sticker price, and the only way out is to sell it and take a note for the difference.

Instead of having a paid for Honda CR-V in 40 months, I have to get rid of it and take an $8000.00 loss, which means I’ll be paying off nothing for a while. Are you as stupid as me?

Real Scottsdale Living » Personal Finances

Will I Owe Taxes After a Short Sale?

Other articles of interest:

Am I Liable for the Balance or Difference in a Short Sale?

Potential Scenarios

Are You Liable for the Difference

Will the Debt Cancellation become Taxable Income?

How Will Your Debt History (Credit History) be Affected?

Other articles of interest:

Right Of Passage: Why Don’t We Celebrate More?

Other articles of interest:

Tax The Ambitious at 3.8%

Robin Hood

3.8% Example

When does this legislation go into effect?

Other articles of interest:

Planning Prevents

Just Start

A Healthy Cash Flow Budget

House Poor

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Should We Stop Paying Our Mortgage?

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The Debate Continues: One User’s Opinion on Renting vs. Buying

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Cash For Clunkers, The Final Deathblow

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There Is No Secret To Getting Rich

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It’s a Bottom Line Issue

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The Effects of a Short Sale

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Low-Ball Appraisals Cause Problems

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Is There A Benefit to Foreclosure vs. Short Sale?

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Before Baby Step One: Getting Current

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Should I Buy a New Or Used Car?

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