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As posted on the Deeb Law Firm's The Real Estate and Business Blog, a Florida Law Talk Blog on September 29, 2009

When in Foreclosure, Don't Strip Home of Appliances and Fixtures posted by Kevin L. Deeb

There have been recent reports about property owners in foreclosure that are stripping down or vandalizing their homes just before the sheriff’s sale. Appliances, including air conditioning units and pool pumps, are being sold for pennies on the Dollar. A television news reporter recently interviewed a woman that was actually selling her toilets. She felt that she should get every penny out of her home before losing it to the lender. Whether the housed is stripped for profit or otherwise intentionally vandalized, the wrong-doer might just later learn to regret it.

When the lender forecloses on real property, it obtains a final judgment for the total amount due on the mortgage, including interest, costs and attorney’s fees. When the property is worth less than the judgment, it is very unlikely that an investor third party will bid on and buy the property at the public auction. When there are no bidders, the lender then takes title to it.

Lender owned property (also known as “Real Estate Owned” or “REO’s”) will later be listed with a real estate agent and sold at market value which, during these times, will most likely be less than the final foreclosure judgment. In addition to the real estate agent’s commission, the lender will also incur closing costs which will reduce the amount of money they will receive at closing. The difference between the final judgment and the amount of money the lender recovers when it sells the property is referred to as the “deficiency.” And the lender is then free to seek a “deficiency judgment” against the borrower (the party that lost the property in foreclosure).

Should the lender be required to remodel, repair or purchase appliances in order to sell the property, the deficiency will only grow and therefore the deficiency judgment will be greater. The same is true when the selling price reflects the property’s poor condition.

Aside from the ethical issues raised when one destroys or strips the home before losing the property at public auction, it is, or can be, financially detrimental to do so. Currently, it seems, most lenders are so inundated with foreclosures that they have yet to pursue deficiency judgments against those they have foreclosed upon. It is only a matter of time, however, before the number of foreclosures is reduced to the point where the lenders can then focus on collecting on these deficiency judgments.

As an attorney, I have yet to see lenders pursue these judgments. Indeed, no one has come to me for help for protection under these circumstances. But I believe that it is all a matter of time before it happens. Obviously, there are other alternatives to allowing the property to be sold at public auction. In previous posts, I have discussed other options such as short sales and deed-in-lieu as possible alternatives to foreclosure. Albeit, the lenders are not always agreeable to forgiving the deficiency when accepting a short sale or deed-in-lieu, but when they do, this is the best course of action for the property owner to take when in foreclosure.

Property owners that ignore or neglect a foreclosure will only face deficiency judgments later on, when they incorrectly assume that the public auction is the end of the road for the lender. There could be no bigger mistake for the property owner assuming that stripping or vandalizing the home is a way to get the last “jab” in against the lender. They could, more likely than not, be faced with a judgment that includes amounts for the items stripped or damaged – much more than what they were able to get during the fire sale or the short-lived and misguided satisfaction they received in damaging the home in the first place.

 

As posted on the Deeb Law Firm's The Real Estate and Business Blog, a Florida Law Talk Blog on September 26, 2009

When Mortgage Modification Not Viable, Short Sale Deemed Most Practical for All Involved in Foreclosure Case posted by Kevin L. Deeb

Our country’s real estate market has been in a state of stagnancy, if not decline. It is no secret that the current economy has been the cause of frequent unemployment and the reduction of income; consequently, property is being sold at lower prices to a seemingly empty lot of buyers. Although property today is being sold at such exceptionally low prices, lenders maintain their usual mortgage rates, while homeowners begin to recognize that their mortgage balances are actually higher than their property value. Thus, homeowners now face foreclosure more often than not – since 2007, millions of foreclosure filings have flooded courthouses throughout the country, particularly here in Florida. In response to the real estate market’s current state, homeowners facing foreclosure have turned to a simpler, more beneficial solution to their property dilemmas: modifications or short sales. If would be great to hear the foreclosure issues being faced by my readers, so feel free to post your personal experiences in the comments section here.

In addition to defending the foreclosure lawsuit, property owners should seek a modification of the mortgage or, when a modification is not viable, short sale of the property before the foreclosure sale takes place. A short sale, also called a short payoff, occurs when a mortgage lender, usually a nationally chartered bank, accepts less than the actual mortgage balance due in order to avoid taking title to the property through foreclosure – essentially taking on the responsibility of selling the property along with the negative affect it has on their balance sheets. Through a short sale, lenders avoid carrying costs and maintenance fees while receiving a substantial portion of their money.

Although the procedure to complete a short sale is complicated and time-consuming, a short sale benefits the property owner as well. The property owner is not allowed to receive any money at closing, but they do escape, in most cases, the remaining loan payments (in other words, the deficiency, which a deed-in-lieu of foreclosure or a foreclosure judgment does not avoid) and also reduce the extent of the damage made to their credit (although a short sale still harms one’s credit score). While the lender will issue a 1099-S to the property owner for the portion of the loan that has been forgiven, the Internal Revenue Service considers this a non-taxable event when the property is homestead. This is not necessarily the case with investment or commercial property. The property owner may still avoid taxation when a 1099-S is issued on non-homestead property by being deemed “insolvent.” Regardless of the circumstances, it is highly recommended that one seek the advice of a Certified Public Accountant regarding tax liability before commencing with a short sale.

The process of completing a short sale requires much communication with the mortgage lender detailing the reasons the mortgage cannot be completely paid off, for example; therefore seeking a professional may be beneficial. During the short sale process, an experienced attorney has the ability to provide the lender with a proper and legal explanation for the hardship and provide the necessary documentation to prove it – while still protecting the interest of the property owner. And at NO COST to the property owner as the lender picks up the tab. An attorney will also have the capacity to find a suitable real estate agent to manage the marketing of the property in a way that is acceptable to the lender. The presence of an attorney throughout the short sale will provide legal guidance and security, resultantly making the short sale transaction as smooth and as simple as possible for the property owner at no expense. While I see no disadvantage in hiring an attorney to assist you in a short sale (after all, an attorney has a duty to protect his or her client’s best interests, while real estate agents and other professionals do not), I welcome feedback should you feel any apprehension in hiring one.

Finally, the homeowner should consider the fact that a short sale transaction will come at little, if no, cost to them. At a time when cash flow is scarce, and a modification of the loan is not viable, this option is best. Avoiding the foreclosure sale and any deficiency judgment is tantamount. The short sale accomplishes this and more.