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Tips for Your Short Sale Hardship Letter
When I originally wrote How to Write a Hardship Letter, I did so as a link that I could use to send to my clients as well as creating a useful article for others contemplating a short sale. Whenever I find myself repeating a scenario, I figure it’s probably worth writing an article about. That way I no longer repeat it, and I can just send my clients a link to read.
A seller emailed that she laughed and laughed when she read my article. I was snuggling into bed with my husband, about to read an eBook on my iPad when I noticed the email, so I clicked to read my hardship letter piece. It is rather amusing, I suppose; I was focused. Especially the part about not getting waylaid and fooled into writing that things will get better. Not only will they most likely not improve for sellers who are severely upside down, but the bank doesn’t want to hear that they will improve. If the bank thinks a seller’s situation is temporary, the bank will not approve the short sale.
Another seller called to say she could afford to make her mortgage payments, and her lender, upon review of her financial statements, most likely would also agree that she could afford to make her mortgage payments. This seller apparently enjoys disposable income and makes a good living. She’s just tired of her home being upside down. That’s not enough of a reason to do a short sale through her particular lender.
There are a few lenders that will let a seller do a short sale without a hardship, but most of them want a documented hardship through a hardship letter. This doesn’t mean you make up crap, but there are ways to prove a hardship, which a seller might not be aware about. For example, if you’re retiring and moving away, that’s a hardship. On the other hand, paying for your daughter’s ballet classes and French lessons are not valid hardships.
If you want to know if you qualify for a short sale, call an experienced Sacramento short sale agent to discuss it. I always offer a free consultation to potential short sale clients. You can call Elizabeth Weintraub at 916 233 6759. But don’t call me to pick my brain and then hire another agent. That’s not cool.
Sacramento Short Sales Mortgage Debt Relief IRS Letter
Sacramento sellers who expect to close on a short sale in 2014 have a very good reason to send flowers to Sen. Barbara Boxer and, while they’re at it, maybe C.A.R. as well. I received the best news this morning, which I can’t wait to share with everyone because it’s about mortgage debt relief. Taxation on mortgage debt relief has been on the tongue of every single short sale seller I have talked to who might have to close escrow next year.
In a nutshell, we have no worries about federal taxation on mortgage debt relief resulting from most closed short sales in California from here on out. Other states, they probably have cause for concern, but not California. What makes California so special apart from our sunny weather, smog-hidden mountains and polluted oceans, and let’s not forget Cal Worthington? We’ve got California Civil Code 580e, resulting from the passing several years ago of SB 458.
Under ordinary circumstances, the federal tax code says if a person has had debt canceled, the amount that was forgiven is subject to taxation. However, in 2007, the Mortgage Debt Forgiveness Act passed that says taxation on canceled debt does not apply to a short sale, subject to certain criteria. Every year, the mortgage debt relief protection has expired and every year the federal government has extended it. This year, it’s not yet been extended because our lovely legislators continue to wrap in the mortgage debt relief extension with other legislation that won’t get passed even if they lined up every legislator against the wall, blindfolded them and threatened to shoot them all at will.
This political game has caused short sale sellers in Sacramento extraordinary grief and stress. Many of my sellers have called to say they don’t know what they will do if we can’t close their short sale by December 31st, 2013, when the federal mortgage debt relief protection expires.
However, the argument brought forth to the I.R.S. by Sen. Barbara Boxer, with C.A.R.’s assistance, is that sellers are released from personal liability in a short sale under California Civil Code 580e, and that makes short sales non-recourse, so why should a seller be subject to federal taxation on top of it? The I.R.S. agreed and issued a letter that said California short sales protected by our California Civil Code 580e are not subject to federal taxation for mortgage debt relief. This is huge!
C.A.R. and Sen. Barbara Boxer are working on a similar letter from the state of California, which is expected to follow suit.
Is the Third Time a Charm in a Sacramento Short Sale?
There is a saying in the Sacramento short sale business that the third time is a charm. Agents who sell a lot of short sales might chuckle over this statement because it’s absolutely true. We don’t want to sell a home more than once, but sometimes, there is no way around it, no matter what we do. Apart from forcing a buyer we’ve tied to a chair in an empty warehouse to listen to Stuck in the Middle With You, we can’t really interrogate them.
OK, that was just a sick joke. But when you sell a home a third time, that’s where your mind goes and the sellers follow that thought process, too.
As the seller’s listing agent, I do comb through the supporting documentation sent by the buyer’s agents and try to make sense of an offer for my sellers. For example, I recently received a cash offer from an investor with proof of funds attached. In the proof of funds — which was outdated by more than 30 days rendering it unacceptable to a short sale bank — were a series of checks drawn in the sum of $1,000. The funds in the account were barely enough to buy more than one house. What does that tell you? Yeah, they promise they aren’t making other offers, and it’s possible they have a sick relative somewhere they’re routinely sending $1,000 checks to, but I kinda doubt it.
We closed an escrow last week that had been in the works since spring. This was a home in Antelope that was a short sale with two loans, one of which had been discharged, and then a third lien popped up during a title search. This was a judgment against the seller, so the home could not be sold without its release, and the short sale bank sure as heck wasn’t gonna allow payment of that. But I’m used to the tough deals.
We sold the home the first time to a buyer who appeared qualified. After we received short sale approval from both the first, Ocwen, and the second lender, GMAC, the buyers’ lender re-evaluated their financial situation. Somehow, that situation had changed, and the buyers no longer qualified.
We sold the home a second time to a cash buyer who was very eager to close. Somewhere along the line this buyer decided she was paying too much for the home because, after all, she had a sister who bought a home nearby who paid less. Didn’t matter to her that the homes were not comparable to each other, she canceled. Cash buyers can be fickle.
By the third time we sold the home, GMAC, the second lender, had sold the worthless piece of paper to a collection agency, so we had to get a new third party authorization, wait for a new account number to be assigned, and then submit to the new second lender. Plus, the seller had long ago vacated. We figured the judgment creditor would probably now want additional interest, but they were happy just to get paid, thank goodness. We received approval and closed last month, just after we discovered a water leak in the laundry room.
Like I said, the third time is a charm. If you want an agent who will sell that house again and again if need be, call Elizabeth Weintraub at 916.233.6759. As a top Sacramento short sale agent, I possess a lot of patience.
Not Every Sacramento Home Buyer is a Buyer
Every Sacramento home buyer should enjoy the luxury — and it is a luxury — of working with a buyer’s agent who will check out the property records before writing a purchase offer for that buyer. A Sacramento buyer’s agent at the very least should examine basic details but so many do not. When a buyer wants to write an offer, a lot of agents will just write it without giving much thought to the possible consequences for a buyer. I suppose they might think it’s not their job or maybe they don’t know how.
An agent has many sources at her or his disposal to find this data. At minimum, even if an agent doesn’t run the comparable sales for the Sacramento home buyer — which for my team members would be inexcusable — the agent should check to see who owns the property. Is it one person? Is it a trust? Does the owner’s address match the property address or are the owners living out of state? A quick call to the listing agent would confirm whether two people are on title or if one of them is deceased. You know, just stuff that makes the entire transaction run smoother and gives the buyer enough information to make an intelligent decision.
A potential Sacramento home buyer called yesterday about wanting to buy a home along the river that is a short sale. He asked if moi, his newly found Sacramento real estate agent, would be willing to write a purchase offer for him. As an experienced short sale agent, the first thing I did was look at the tax rolls. I see that this is an investment property for the seller. The second thing I notice is his second loan is a gigantic refinance for many thousands of dollars, and the lender is National City.
National City is now owned by PNC. This makes it a PNC short sale. A second loan held by PNC, especially a hard-money loan that carries recourse in California, is a difficult short sale to negotiate. That’s because PNC knows it can go after the seller personally and try to collect the full amount of the loan should the home go to foreclosure. When the security for that second loan is wiped out, because it’s a cash-out refinance, that lender, you can bet, will pursue it.
If the seller is not willing to negotiate with PNC upfront in this type of short sale, well, the odds are it will not get approved as a short sale. If PNC approved the short sale, by law it must release the seller from liability, but it is not required to approve a short sale.
Not only that, but there is a trustee’s sale pending shortly. It is very possible that a seller who waits until the last possible minute to put a home on the market as a short sale prior to a pending trustee’s sale is not a seller who is willing to negotiate upfront, but you never know. Weird things happen in real estate every day.
Armed with this information, the buyer chose to move forward and write an offer because he decided that he had little to lose. He was prepared to be disappointed. I asked a team member on the Elizabeth Weintraub Team to prepare an offer for him. My team member explained that we need a preapproval letter to accompany the offer because the way to postpone a trustee’s sale is to submit a purchase offer. The bank will not allow submission of a purchase offer without a preapproval letter. An offer without a preapproval letter is not an offer. It is an incomplete offer and considered insufficient to postpone a trustee’s auction.
The buyer could not produce a preapproval letter. He was irritated about my team member’s insistence on it, too. You see, he had sold his own home as a short sale a few months back.
The buyer said fine, he’d find another Sacramento real estate agent to write his purchase offer. That was actually a very good idea on his part, but a wasted effort.
New Twist for Sacramento Short Sales With a Second Mortgage
Before I get started, let me say that I know agents in Sacramento who will refuse to work on short sales with a second mortgage. Yeah, that’s ridiculous. Sure, it’ s a little bit more work with two loans, and second mortgages on a short sale can throw a monkey wrench into negotiations if they are hard-money loans, but that’s the job of a Sacramento short sale agent, to make it work.
I used to believe that only a lawyer could negotiate certain types of Sacramento short sales but after doing them for almost 8 years, I don’t believe that anymore. In fact, many lawyers hire an assistant or clerk to actually process the short sale. There seems to be little hands-on involvement. Because of the volume I do, and my personal interaction, I hear new developments often before they become mainstream. That’s a benefit to hiring an experienced Sacramento short sale agent to do your short sale and not some recently licensed agent who sat through an online class or a lawyer who pawns off the work.
The new development with the second mortgages secured to underwater homes is some of them are vanishing. Yes, poof, gone. The seller no longer owes the debt. This is done without the seller’s approval, too. The bank simply releases the loan and forgives the debt.
At first I thought maybe they were releasing the loan but not reconveying the mortgage, as what happens in a bankruptcy before a short sale. In a bankruptcy, the debt is discharged and the seller is released from personal liability. However, the loan remains secured to the property in a bankruptcy and the seller remains in title. Some sellers end up filing a Chapter 7 thinking this will get rid of the house, and it doesn’t. Not only that, but some sellers might be better off just doing a short sale and forgetting about a Chapter 7, especially if their only debt is the house.
This is a good place to acknowledge that I have never heard a bankruptcy lawyer say to a qualifying client: don’t do a bankruptcy. That’s like asking a Sacramento real estate agent if you should sell your house or asking a hairdresser if you should cut your hair.
Why would a bank release a second mortgage? Partly due to the National Mortgage Settlement Act and a few other lawsuit settlements. You might wonder why do they care about hanging on to a worthless piece of paper that has no security anyway? So investors can question their assets? Yet, I’m still a bit amazed that banks are issuing reconveyances and letting sellers go.
In some cases, it might mean that the seller won’t even have to resort to a short sale if prices continue to go up. That’s pretty good news for Sacramento sellers. It also makes negotiating the short sale quite a bit easier when there’s only one lender. But it’s still not impossible to work on short sales with a second mortgage, and I do it all the time.
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