It’s The Paperwork That Scares Me

May 17th, 2010

When I conduct my lease option workshop the thing I always hear from folksis that the paperwork scares me. I hear that all the time from real estate professionals because the standard purchase and sale contract they normally use cannot be used in a lease option transaction.

I understand why some buyers and sellers become concerned. It’s because of the generic contracts they are planning to use. Lease option deals for the most part are pretty much straight forward. As long as you use specific forms and contracts that are meant to be used in a lease option transaction. And I always recommend using a real estate attorney to review the paperwork to ensure that the buyers and sellers rights and interests, in the transaction, are properly served and protected.

I know you can find forms and contracts on the internet. There are some really cool looking web sites that offer forms and contracts for all kinds of real estate transactions, including lease option. I offer lease option specific forms on my web site. And I personally use these forms. However, I always recommend that before using any of my forms and contracts have your attorney review them before you use them to put a lease option transaction together.

I want to stress having your attorney review the forms and contracts before using them. It is much more economical to have your attorney review the forms and contracts you plan to use than asking s/he to prepare the paperwork from scratch. That’s just good common sense

Depending on your level of experience, it’s also wise to have your attorney review your paperwork before signing. It doesn’t matter if you are the buyer or the seller; before signing have your attorney review the paper work to ensure your rights and interest are properly served and protected. As one of my attorney friends is fond of saying – a couple of hundred bucks up front sure is better then thousands after the fact, if it has to go to court.

In a lease option deal you always want to use two documents. One is a lease agreement and the other is an option agreement. The option agreement should indicate that if the tenant buyer isn’t in compliance with the lease agreement the option agreement is voidable.

Another important document to a buyer or investor is to record a memorandum of option. Once the memorandum of option is recorded it clouds the title. What that means is the seller cannot remortgage or sell the property to anyone else. In other words the seller would not be able to pass clear title. For a fee I would be willing to clear the title by removing my interest in the property by means of the memorandum of option.

Wishing you continued real estate success,

Ulrich Leinhase,

Licensed Florida Real Estate Broker

P.S. If you are interested in forms and contracts concerning contract for deed or lease option use the link below.

http://ulrichleinhase.com/products.php

Short Sale Problems

May 16th, 2010

Yesterday I had lunch with my Russian friend Gregory. He got his real estate broker license through my school, and since then we have developed a great friendship. He’s not only a real estate broker but he’s also one of the best mortgage brokers I’ve come across. I often seek his counsel on mortgage related issues.

Gregory’s background is really interesting.  He had an engineering degree in Russia and was a deputy plant manager of a Fiat plant in Russia.

After immigrating to the US he went back to college and got a degree in accounting. I should also ad that his son is a lieutenant in the US army serving in Afghanistan. I always tell Gregory my prayers are for the safe return of his son. Gregory’s plight reminds me of what my parents went through while I was serving in Viet Nam. Needless to say when we get together we have some really great discussions. And yesterday’s lunch was a marathon session.

When two real estate cronies get together for lunch what do you suppose their discussion would be focused on considering today’s market? If you guessed short sales you’re right on target. Gregory began our discussion by detailing the problems he and his sales associates were encountering. He talked about how last year’s short sales were a major money maker for his office. He had great success with negotiations with his customer’s mortgage companies.

However, this year he was telling me that second mortgage holders are not willing to consider a penny less then X.  And first mortgage holders were even more difficult to deal with. Negotiating with lenders doesn’t work the way it used to. And topping everything he said they all indicate that the brokerage fee is too high.

Most buyers aren’t properly educated by their sales associates and have unrealistic expectations in a short sale transaction. These buyers live in a world of sound bites. All they’ve heard on the news is that short sales are real bargains. They never heard the part about how long it may take or that the lender may not even consider accepting the short sale they submitted a number of months ago. All they want to know is when are we closing – and why is it taking so long.

The last thing he said was that with the amount of time his office has to devote to just one short sale – just to get a short sale package to the first mortgage company and the second mortgage lender; it makes short sales in today’s market unprofitable.

He and I agreed that short sales will be with us for another couple of years. However, he believes that if the short sale market continues the way it has he will not be able to conduct his business. He said that he is instructing his sales associates to educate the sellers they are working with; especially those that aren’t financially strapped. For those who have limited options we will proceed with a short sale. For those sellers who have choices we will educate them about considering a contract for deed or land contract and Lease option.

I had to refrain myself from screaming halleluiah. With an ear to ear smile on my face I said that according to the National Association of Realtors® approximately 50% of all home owners have traditional conventional financing and 35% own their house free and clear and that’s a large pool of sellers to work with.

I have to take care of business myself. I’ve got two short sale deals in my office and neither one is going anywhere – fast. The reality is we’re waiting on the mortgage company to get off of the, you know what – the sad thing is that neither one of these sellers would be eligible for a contract for deed or lease option. But trust me on this – there are a lot of sellers that will consider a contract for deed or lease option, and in today’s market it’s worth the effort to find them. After all, a contract for deed and or a lease option deal is a win-win strategy.

Wishing you continued real estate success,

Ulrich Leinhase,

Licensed Florida Real Estate Broker

P.S.    If you are interested in forms and contracts concerning contract for deed or lease option use the link below.

            http://ulrichleinhase.com/products.php

Lease Option Win-Win Deals

May 13th, 2010

Here’s a question I’m asked by both buyers and sellers who are thinking about negotiating a lease option deal. What’s in it for me?

The first thing I tell them is that a lease option deal is a win-win transaction. Done correctly both sides get exactly what they want. The seller sells his house for the price they want and the buyer purchases the house of their dreams for a price they are willing to pay.

Here is a quick overview of the main items a buyer and seller can expect in a typical lease option transaction.

What the seller / Landlord can expect:

  • Top sale price (large available market of buyers at all times);
  • Maintenance can be delegated (minimum management headaches);
  • You remain on the deed (you retain tax shelter and tax advantages); and
  •  Cash flow – cash up front – cash every month – cash at closing.

What the Buyer / Tenant can expect:

  • Low down payment (minimum out of pocket cash requirements);
  • Rent money and option consideration work for you (leverage);
  • No conventional upfront loan application (time to repair your credit); and
  • Time to obtain the best financing (and save for your down payment).

Here’s why lease option is going to become an even bigger deal maker in the future. In today’s economy many good homeowners are struggling to make their mortgage payments because one or possibly both bread winners have lost their job. We all know that is a real possibility.

The worst case scenario is homeowners loosing their home through foreclosure. They now must move into an apartment or move in with mom and dad. These are good people that have come into hard times that they didn’t create. And because of what has happened in the past, the foreclosure their credit score has tanked.

Thereafter they get back on their feet. They are both now working again. And they want to buy a house in a nice neighborhood with good schools for their kids. They start looking and find exactly what they want. They begin dreaming about reestablish themselves. The only problem, their credit score – they have a foreclosure on their record and lenders aren’t willing to grant them a mortgage.

Here is an opportunity for a win-win lease option deal to come to the rescue. If the seller / landlord feels this couple would in a year or two of paying rent as agreed be able to qualify for a mortgage the seller / landlord will do a lease option deal with these tenant / buyers. 

Not all tenant / buyers will qualify. The qualifying criteria are established by the seller / landlord and if the seller / landlord isn’t satisfied with the tenant / buyer’s financial credentials or any other issue the seller / landlord won’t do the deal.

This is just a very quick overview. I’ll chunk the entire process down one step at a time in future blogs.

Now its time for me to get away from the computer and into the field and start talking with buyers and sellers about negotiating win-win lease option deals because there’s a lot of real estate that needs to be sold. Wishing you continued success. 

Best regards

 Ulrich,

Florida licensed real estate broker

 P.S. For lease option forms and contracts click the link below.

 http://ulrichleinhase.com/products.php#Lease_Option_Strategies

Lease Option / Rent to Own

May 11th, 2010

What I hear most often from sellers is the only way I can sell my house in today’s market is by short sale. I always ask them how they came to that conclusion. They say that’s all you hear in the news and buyers expect a short sale. Sellers also tell me that their salesperson said that would be the only way their house will sell.

 If this is your thinking I’ve got good news for you. However, this news isn’t for everyone. If you are behind in your mortgage payments, or you need a large down payment to purchase another house this news may not be for you.

 On the other hand if one or two years of help with your mortgage payment and maintenance sounds good and you don’t need a chunk of change to purchase or rent another home this information is meant for you.

 Here is what I’m taking about. It’s called Lease Option. With lease option the buyer gets what they want: the house of their dreams, the school they want their children to attend, a house at a price they can afford, their monthly rent working for them (rent credits), and most importantly time to find the best financing in today’s volatile market.

 Here is what the seller can expect: Sell your house for the highest possible price, in the shorts possible time, with a tenant buyer that is a stake holder. What that means to you is that they will take care of the property because when they exercise their option they own the house (They don’t want to loose their rent credits that’s why they want to close.), and most importantly your tenant buyer will help you with the mortgage payment and make required ancillary maintenance that’s like putting your house on auto pilot.

 Most buyers and sellers who have consulted with me find that they can do a lease option deal on their own without paying a real estate commission. I always recommend consulting a real estate attorney even if the buyer and seller do the deal themselves. 

 I’ve also consulted with sellers that have put together a lease option on their house and turned around and lease option their next house. Here is how it works, when the seller’s tenant buyer exercised their option the seller received their cash and then the seller exercised their option on the house they were buying a win–win deal.

If you want to know how it’s done just follow my bog and I’ll tell you how. Lease option is the only issue I will deal with in this blog. You should also read PlanetEarth’s web site because it contains a lot of information about lease option.  I’ll try to post again shortly.

 Best regards

Ulrich,

Florida licensed real estate broker

September 22nd, 2009

and invest in short sale properties avoding foreclosure lease option lease purchase memorandum of option passive income phantom income rent to own sell Short sales What you need to know to buy

Short Sale Paperwork

July 7th, 2009

Greetings fellow earthlings from PlanetEarth Realty,

1. Permission for use of each article is given for a one-time printing only. For multiple reprints, please ask for permission first (uleinhase@ulrichleinhase.com) which will almost certainly be given. 

2. Maximum Success, Incorporated retains all copyrights. 

3. If your publication prints photos of other writers and contributors you must use a photo of Ulrich Leinhase with his articles. A publicity photo can be obtained by contacting uleinhase@ulrichleinhase.com

 

4. In all cases, the article reprint must include a tag at the end indicating copyright, contact information, and noting that the article has been excerpted from a certain book, workshop, or seminar. That tag is printed at the end of each article here on this web site.

 

5. After you reprint the article, send one copy of the periodical in which it is included to: Maximum Success, Incorporated PO Box 600794, St. Johns, FL  32260

 

In this final installment of a three-part series on short sales, I’ll explore the mechanics of putting a short sale package – the paperwork – together for a seller. Many sales associates believe this to be the most difficult part of a short sale. The only difficulty is the old military adage, “hurry-up … and wait.”

The reason short sales are considered to be so difficult is because there are no set rules. Some lenders require their own forms to be submitted in the short sale package. Some lenders use Freddie Mac’s Form – 1126. And some lenders have no set procedures and simply state, “send in the offer and we’ll review it and make our decision”.

That’s why I always remind sales associates at my workshops that short sales are not regular real estate transactions. If a seller is uncooperative or ask you to do something unethical or unlawful you don’t want their listing. Don’t walk away from these sellers – run as fast as you can. The pickier you become when choosing with whom to work will result in making more money in today’s market.

Pricing a short sale property correctly is critical. The price should always be established by a comparative market analysis. The listed price should be better (lower) than comparable listings in the neighborhood. This is not to say the property should be listed below the market. However, the seller has to sell as quickly as possible to get out from under their financial burden. The down side when we first list the property is that we have no idea if the seller’s lender(s) will consider a short sale.

The first thing after the seller signs the listing agreement is having the seller contact their lender(s). Have the seller call them before you leave their house. The information you want the seller to obtain is the lender’s loss mitigator’s name, telephone number, fax number, and their mailing address.

Then have the seller contact the loss mitigator and inquire about; 1) will the lender consider a short sale; 2) does the lender require the use of specific forms or paperwork; 3) will the lender provide an adjusted acceptable payoff; and 4) what other requirements does the lender have concerning short sales.

The first short sale package sent to the lender(s) should be sent right after listing the house. This package would include local marketing information; local market conditions; information about the seller’s financial predicaments; a preliminary HUD-1 indicating the listed price as the sale price and all expenses that will be incurred including the brokerage fee; and most importantly line 603 cash to seller must indicate zero funds going to the seller at closing.

The response from the lender(s) could be “yes” we will consider a short sale; “yes” we will accept a short sale at the stated price; “yes” we will accept a short sale but we require the use of our forms and paperwork; or “no” we will not consider a short sale.

With the information we now have from the lender(s) you can proceed with marketing the property or canceling the listing if the lender will not consider a short sale. In today’s market you will not be able to help all sellers that want to list with you. Brutal honesty, as harsh as it may be, is sometimes the only way to deal with short sale sellers you are unable to help.

When a buyer makes an offer on a short sale property, the Purchase and Sale Agreement should include a contingency, “This offer contingent upon the existing lien holder(s)/lender(s)/court accepting a payoff of less than the full amount owed that is acceptable to the lien holder(s)/ lenders(s) buyer(s) and seller(s).”

After the seller accepts the offer (contingent on the lien holder(s)/lender(s) approval) another short sale package is prepared. This package should be much more detailed then the first package. It should include a cover letter indicating all of the enclosures, including seller’s hardship letter; seller’s financials (two years tax returns, last two months pay stubs, last two months bank statement); another preliminary HUD-1 indicating the offering price as the sale price and all expenses that will be incurred including the brokerage fee; and line 603 cash to seller must indicate zero funds going to the seller.

The seller’s hardship letter should be written by the seller. It should indicate what led to the sellers problem; he/she/both lost their job; death of one of the wage earners; divorce; medical/catastrophic illness; bankruptcy; mortgage payment issues (never tell a seller to stop making mortgage payments); and property repair issues.

I’ve talked with lenders that indicated that they have heard it all: “Everybody’s child has been diagnosed with cancer; everybody’s grandmother has died; everybody is losing their job.” Lenders want the truth. If the truth is that the seller mismanaged their finances, that statement should be included in the seller’s hardship letter.

Now comes the toughest part of the entire process, the wait. The purchaser should be counseled about the wait. Some purchasers decide after only a few weeks that the wait just isn’t worth it. Sometimes it’s more difficult dealing with buyers in a short sale transaction then it is with the seller.

At this stage, salespeople learn some words used as a threesome: follow-up – follow-up – follow-up. This is where you will hear things like: “The loss mitagator you have been working with is no longer handling this case.” (Oh no, we are back to square one.) “The offering price is too low.” Don’t get mad just be prepared.

Never talk about how hard you worked to put a deal together. Talk about current market conditions. As tempting as it may be never tell the lender’s employees how unprofessional their performance is unless you’re not concerned about having your deal approved until next year.

The buyer’s contingencies should be taken care of as quickly as possible. Once the lender(s) approve the short sale they will provide a very small window for closing. Once they approve the short sale there are no more negotiations. The contract cannot be assigned. And if the lender determines that there is any collusion between the buyer and seller, the short sale shall be voided.

The property is sold as is. The seller has no money to make repairs and the lender is accepting less then they are owed and usually unwilling to make any repairs. The buyer should have inspections made and be satisfied with the condition of the property. Sometimes, depending on the buyer’s lender and the property appraisal, the lender may loan enough to cover repairs.

Prior to closing as the listing agent, you should get written pay off approval from the seller’s lender(s) and inquire if they will issue a Satisfaction of Mortgage or Release of Lien. The satisfaction of mortgage may state the payoff was reduced. The lender also has the right to require the seller to sign an unsecured note. The seller should have this information before closing so the closing will go as smoothly as possible.

Short sales are not for the weak and timid. A successful shot sale strategy is, get the facts get all the facts. Solve people’s problems and they will want to do business with you. With a solid understanding of laws and ethics you can make good decisions and make money listing and selling overleveraged and short sale houses.

Wishing you continued real estate success.

Ulrich Leinhase, GRI

Educating Successful Real Estate Professionals™ 

 

 

 

 

Short Sales and Ethics

July 2nd, 2009

1. Permission for use of each article is given for a one-time printing only. For multiple reprints, please ask for permission first (uleinhase@ulrichleinhase.com) which will almost certainly be given. 

2. Maximum Success, Incorporated retains all copyrights. 

3. If your publication prints photos of other writers and contributors you must use a photo of Ulrich Leinhase with his articles. A publicity photo can be obtained by contacting  uleinhase@ulrichleinhase.com

 

4. In all cases, the article reprint must include a tag at the end indicating copyright, contact information, and noting that the article has been excerpted from a certain book, workshop, or seminar. That tag is printed at the end of each article here on this web site.

 

5. After you reprint the article, send one copy of the periodical in which it is included to: Maximum Success, Incorporated PO Box 600794, St. Johns, FL  32260

 

When a Realtor lists or sells a short sale house, careful consideration must be given to state and federal laws, in addition to the National Association of Realtors Code of Ethics. A short sale in today’s environment is a political hot button. For that reason, greater attention than usual must be focused on exactly what we, as Realtors do.

There is no tolerance for misinformation, errors, or lack of professionalism when listing and selling short sale properties. More and more state and federal regulatory agencies are looking into these issues. A seller believing their salesperson has taken advantage of them in a short sale or pre-foreclosure will file and ethics complaint.

In this article, I’m covering the Code of Ethics Articles 1, 4, 5, 11, 13, and 17. Please note these are not the only Articles that can be violated in a short sale transaction. A careless, uninformed, or unprofessional salesperson could potentially violate all of the 17 Articles.

Article 1 … Protect and promote your clients interests, but be honest with all parties.

To understand our responsibilities under this article, we should review Standard of Practice 1-9. “The obligation of Realtors to preserve confidential information (as defined by state law) provided by their clients in the course of any agency relationship…”

Let me assure you that we are not only dealing with state, but also federal laws. Part of the information we obtain from our customers when listing a short sale property includes the seller’s Social Security Number. Without that, and additional personal information, the seller’s mortgage lender will not discuss with us our customer’s financial issues.

Federal and state laws have very strict requirements concerning personal information. Article 1 mirrors these laws. If you are careless with a customer’s personal information you not only violate state and federal laws but are also in violation of Article 1.

Article 4…When buying or selling, make your position in the transaction or interests known.

When Article 4 is discussed at my short sale workshops, I always start by asking if anyone buys properties that they have listed. There usually is a number of salespeople that answer ‘yes’.

When we first talk with a seller about a short sale, we have to make a decisions right at the beginning either. I am acting in the capacity of a Realtor and will list your house as a short sale; or I am an investor and plan to purchase your house if I can make the numbers work.

Under Florida License Law, we can start as a listing agent then transition to an investor as long as proper agency disclosures are made. However, I believe that a salesperson that lists a short sale property would be hard pressed to defend their position.

Picture a tearful seller in front of a judge, “Your honor, this salesperson did not try to market my house. He knew my position and caused me to loose valuable marketing time because all along he planed to buy my house. And now he has put my family into a position that caused us to loose our home and all our equity.”

Remember, even though a salesperson complies with Florida License Law, a short sale is a political hot button. I don’t think anyone wants to defend themselves in court or in front of a Professional Standards Panel on accusations that they profited and the seller lost their home.

Article 5…Disclose present or contemplated interests in any property to all parties.

When I discuss Article 5 at my short sale workshops, I always ask if anyone is working with an investor. I then ask if they are going to list or manage the property as a rental after the investor has purchased it. Again, salespeople often answer ‘yes’. That positive answer indicates that the salesperson has an interest or potential interest in the transaction and that interest should be disclosed.

Article 11…Be knowledgeable and competent in the fields of practice in which you ordinarily engage. Obtain assistance or disclose lack of experience if necessary.

Brokers, when your sales associates list or sell a short sale property without specific knowledge of what they are doing, there are two words with which you must become familiar – WALKING LAWSUIT. You should insist your sales associates attend a short sale workshop.

Article 13…Do not engage in the unauthorized practice of Law.

When Article 13 is discussed at my workshop, salespeople firmly state they would never violate Article 13, so I provide a little story. We are sitting on our tearful seller’s couch. They hold up there mortgage and ask a question about their mortgage.

Like all good salespeople we would be able to rip through the verbiage and provide our seller the answer. My next question is, “What is a mortgage?” At first I usually don’t get the right answer. The correct answer is, “A mortgage is a contract.” I follow that with; “Who is authorized to interpret a contract for another.” Only attorneys have the authority to interpret a party’s rights and interests in a contract.

Salespeople provide the answers because they believe they are helping their customer.

Article 17…Arbitrate contractual and specific non-contractual disputes with other Realtors and with your clients.

The reason Article 17 is included is because of the way short sale offers are accepted and approved. The seller starts the process by accepting the offer contingent upon the seller’s mortgage holder(s) approval of the short sale offer.

A listing broker offering a set percent or dollar amount as a brokerage fee in the Multiple Listing Service must pay that amount to the selling broker. Unfortunately, the seller’s mortgage holder(s) and in some cases a court may ‘cram down’ the brokerage fee when they approve the short sale offer.

If the listing broker did not indicate in the Multiple Listing Service offering that the brokerage fee was subject to change at the time the short sale offer is approved by the seller’s lender(s), the selling broker could file an arbitration case demanding the advertised amount. When listing short sale properties make it clear that the brokerage fee may be changed by the seller’s mortgage holder(s) or possibly a court.

The last issue that needs to be addressed is listing agents who offer huge brokerage fees on short sale listings knowing that the seller’s mortgage holder(s) will cram down the brokerage fee. Not only could this be an ethics violation, it could also be a licensing law violation concerning false advertising.

I’ll say it again. Short sales and pre-foreclosure properties are political hot buttons. Just tune into the evening news and you’ll hear about these issues. As Realtors we don’t want to be part of those headlines. The headlines we want to hear about Realtors are how we help distressed homeowners overcome these negative issues and sell their house.

In the final article of this series, I’ll write about the actual mechanics of how to put the paperwork together and send a professional short sale package to the lender.

Wishing you continued real estate success.

Ulrich Leinhase, GRI

Educating Successful Real Estate Professionals™

What is a Short Sale?

June 29th, 2009

 

 

My first posting is part one of a three part series of articles I wrote and were published by many Realtor® Associations. The information presents the mechanics about short sales and the opportunities and roadblocks for sales professionals, investors, buyers, and sellers. 

Greetings fellow earthlings from PlanetEarth Realty,

 

 

Each of these articles may be reprinted without charge by any magazine or newsletter, or quoted from freely in any book. There are only a few conditions:

 

1. Permission for use of each is given for one-time printing only. For multiple reprints, please ask for permission first (uleinhase@ulrichleinhase.com) which will almost certainly be given.

 

2. Maximum Success, Incorporated retains all copyrights.

 

3. If your publication prints photos of other writers and contributors you must use a photo of Ulrich Leinhase with his articles. A publicity photo can be obtained by contacting uleinhase@ulrichleinhase.com

 

4. In all cases, the article reprint must include a tag at the end indicating copyright, contact information, and noting that the article has been excerpted from a certain book, workshop, or seminar. That tag is printed at the end of each article here on this web site.

 

 

5. After you reprint the article, send one copy of the periodical in which it is included to: Maximum Success, Incorporated PO Box 600794, St. Johns, FL  32260

 

 

What is a Short Sale?

 

In today’s real estate market many licensees are frustrated by the hurdles they have to navigate to help their customer’s sell their house. And most of these hurdles have nothing to do with the buyer. 

 

As real estate values started a downward spiral many sellers found themselves upside down – meaning that their mortgage is greater than the value of their house.   

 

The best advice for many of these sellers is to hang tight. Wait until the market turns. Unfortunately, many sellers with adjustable rate mortgages (ARMs) that are resetting at much higher rates cannot wait. They can no longer afford their house payment. These sellers want relief and they want it now.

 

The relief many of these sellers are considering is known as a short sale. A short sale is when a mortgage lender accepts less then the amount required to pay off the existing mortgage. The process is called loss mitigation.

 

When a mortgage lender considers a short sale, they are considering the lesser of two evils. The first is how much money they will lose if they have to foreclosure on the property, including the extra expenses they will incur to hold and maintain the property. They also consider how much they will have to reduce the selling price of the property before it sells. A lender considers the total amount they will lose (write-off) if they have to foreclose.

 

The second alternative is a short sale. In this scenario, the lender knows how much money they are going to lose (write-off) if they accept a short sale. It is usually the short sale offering price minus a real estate brokerage fee and closing costs. The rest of the proceeds are used to pay off a portion of the mortgage. That’s why a lender has a pretty accurate idea of their total loss.  In theory, lenders accept the option offering the smallest loss.

 

The paperwork that is sent to the lender’s loss mitigation department for a short sale approval and the many ethics issues will be covered in future articles. Right now, I believe we need to be able to clearly explain to our customer-the seller-what they need to know about the financial aspects of a short sale, as well as the consequences they may face.

 

Many sellers have heard about the Mortgage Forgiveness Debt Relief Act of 2007. It applies to debts discharged between Jan. 1, 2007 – Dec. 31, 2009. In summary, a taxpayer does not have to pay federal income tax on a debt forgiven for a loan on a principal residence. For the full text, visit www.govtrack.us and look at bill number H.R. 3648.

 

This act address what is known as: “Phantom Income?” It sounds like all debt (phantom income) is forgiven. Unfortunately, that’s not true. Investment properties are not eligible. Only purchase money mortgages for principle residences are eligible. Equity line of credit or home-equity loans may be eligible if used to build, buy, or improve the home. If the home line of credit or home equity was used to buy an investment property, pay off credit cards, buy a car, go on vacation, or send a child to college, the phantom income remains taxable. 

  

Here is how phantom income is determined.

 

Purchase Price:

$400,000

Down Payment:

– 40,000

Mortgage Debt:

$360,000

Mortgagee Recovers:

–275,000

Phantom Income:

$85,000

 

The $85,000 write off by the mortgage lender is the phantom income. This is the amount the seller is short on paying off their mortgage. The lender sends a 1099c to the mortgagor for that amount. The mortgagor is responsible for any taxes due on the $85,000. 

To avoid paying any taxes on the phantom income the mortgagor must include IRS Form 982 when they file their income taxes. Go to www.IRS.gov then click on forms and select Form 982.    

There is one last issue that needs to be addressed. The $125,000 that is the sum of the $40,000 down payment and the $85,000 phantom income are both nondeductible events. As the IRS rules say … too bad so sad. Loss on a personal residence is a nondeductible expense. 

Some sellers believe that they will not receive a 1099c if the lender forecloses on their property. You must let your customers know that a 1099c will be sent to a mortgagor if the lender forecloses, the borrower walks away from their mortgage, or the lender accepts a short sale. The best advice is to always recommend your seller consult legal and financial experts before making a decision about a short sale.

 

Wishing you continued real estate success.

Signing off from ground control at PlanetEarth Realty,

 

Ulrich Leinhase, GRI

Florida Licensed Real Estate Broker

For additional information: www.RealEstateClassesFlorida.com

 

 

Educating Successful Real Estate Professionals™

Greetings fellow earthlings from PlanetEarth Realty

June 28th, 2009

Greetings fellow earthlings from PlanetEarth Realty,

Last night June 27, 2009 was the official dedication of PlanetEarth Realty. The party was well attended and fun was had by all. Interestingly when I announced that PlanetEarth Realty was up and running everyone was excited. However, when I described our new business model just about everyone was taken aback. You see, they were all thinking the old fashioned real estate business model: Listing and selling.

I explained that PlanetEarth Realty would not be listing properties the old fashion way. Real estate as practiced in the past is slow and cumbersome. It pits buyers and sellers against each other. The seller wants more money when selling while the buyer demands a lower purchase price. That’s why it’s such an adversarial process.

PlanetEarth Realty is not going to list properties the way other real estate companies do. What we are going to do is provide information so a buyer or a seller can take advantage of lease option, lease purchase, or also know as rent-to-own opportunities.

The first question I was asked: Traditional real estate brokers are paid a percentage of the selling price or charge a flat fee when selling a property. If PlanetEarth Realty isn’t listing any properties how do you plan to getting paid?

PlanetEarth Realty, for a nominal consultation fee, will provide sellers the information they will use to successfully market their house using lease option strategies. We will also provide buyers for the same nominal consultation fee, the information they will use to successfully structure a lease option deal with a seller. These consultations are designed to be win-win strategies that will be used by both buyers and sellers to successfully negotiate a lease option deal.

After the initial consolation a buyer or seller will have the information they will use to successfully structure a lease option transaction. If either requires additional consultations: The same nominal fee applies. A consultation session by telephone or in person is approximately 30 to 40 minutes. For that small consultation fee a buyer or seller will acquire the knowledge to put a successful lease option deal together.  

At PlanetEarth Realty we also know that some buyers and sellers will want us to do more for them than just provide consultations. We will provide traditional real estate services by using the Multiple Listing Service and also offer enhanced lease option services which will include advertising a property for lease option; monthly rental collections along with property management services for absentee sellers.

We are focused on only one thing and that is lease option transactions. The reason is, lease option in today’s volatile market, is the only win-win strategy. Unfortunately, many sellers have painted themselves into a corner. They are now faced with major decisions; do I have enough time to list and sell my house? Should I consider a short sale? Or, do I let my house go into foreclosure?

These are serious concerns for many sellers. That’s why my next posting will deal with ‘What is a Short Sale’. The article was actually written for real estate professionals and has been published by real estate associations. However, it covers exactly what a seller should consider before committing themselves to a short sale. It’s also an eye opener for a buyer thinking about buying a short sale property.    

Signing off from ground control at PlanetEarth Realty,

Ulrich Leinhase, GRI

Florida Licensed Real Estate Broker

For additional information: www.RealEstateClassesFlorida.com