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Is There A Benefit to Foreclosure vs. Short Sale?

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.

Real Estate Trends, Market Update

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As of April 3rd, the number of available Single Family Detached homes in the Valley dropped by 4%, which is a significant change over previous months, to a recent record low of roughly 35,000 homes.  The number of closings increased to nearly 7500 over the past month bringing the current inventory on hand to roughly 4.5 months.  This is indicative of a Seller’s Market, not a buyer’s market.

The most amazing statistic of recent is the 10% increase in the number of pending sales on the market.  People are buying, and it’s not the media.  The media is still at least 2 months behind the curve, so if you depend on the media to make your decisions, you’re losing ground.  Talk to a professional, or subscribe to my blog to stay on top of what’s happening NOW, not two months from now.

In Phoenix and the West Valley, we’re at a 3.25 months supply.  Houses are selling like hot-cakes again.  Does this mean it’s time to panic and make a poor financial decision about purchasing a home when you may not be able to afford it?  Nope.  It means that if you have the means to purchase a home, now is the time to do it.

The Scottsdale market, which has been extremely stagnant in the under $1Million market actually doubled the number of pendings.  Paradise Valley, the pinnacle of ownership in Phoenix, is still holding at a 7 year inventory.  Own a home in PV?  You may own it for a while.  Drop your price if you absolutely must sell.  Closings should increase as pendings have increased, but those are the facts.

While it may be a good thing to hear the media spouting off about the improving market, most of what they tell you is outdated, and not represented well.  Many statistics are taken out of context, and the underlying truths about what they’re telling you are never revealed.

Karl Stauffer reports the following statistics:

Overall Market. Inventories are down 4% from last week. Total of 35394 active listings with 7461 closings in the last month. About a 4 3/4 month supply.

Phoenix. Inventories are down 5% from last week. Total of 7880 active listings with 2140 closings in the last month. About a 3 3/4 month supply.

West Valley. Inventories are down 6% from last week. Total of 8482 active listings with 2218 closings in the last month. About a 3 3/4 month supply.
NE Valley.
Inventories are down 2% from last week. Total of 5510 active listings with 354 closings in the last month. About a 15 1/2 month supply.

SE Valley. Inventories are down 3% from last week. Total of 8048 active listings with 1848 closings in the last month. About a 4 1/4 month supply.

Scottsdale over $1m. Inventories are down 2% from last week. Total of 1423 active listings with 36 closings in the last month. About a 39 1/2 month supply.

Scottsdale under $1m. Inventories are down 2% from last week. Total of 2419 active listings with 225 closes in the last month. About a 10 3/4 month supply.

ParadiseValley. Inventories are down 1% from last week. Total of 574 active listings wih 6 closes in the last month. About a 96 month supply.

Should I Buy a New Or Used Car?

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?