Short Sale Debt Forgiveness Deadline Extended Through 2013

For distressed homeowners who stressed and crammed to short sale their homes prior to Dec. 31, 2012, hoping to catch a major tax break on the difference owed to their lenders, y’all can take a collective sigh of relief.

That’s because the teacher, which in this case is the United States government, has given you one more full year — at a minimum — to get your financial affairs in order.

While most of us were doing our best to enjoy the 2012 holiday season, lawmakers on Capitol Hill were scurrying to ensure that the United States did not fly off the “fiscal cliff,” a complicated morass of tax cuts, tax hikes and tax breaks, which would have essentially curbed any and all progress made to restore the struggling national economy.

At the eleventh-hour (Jan. 1, 2013), Congress passed the “fiscal cliff bill” — “American Taxpayer Relief Act of 2012” (see .pdf here) — to avoid the potential disaster. The bill has many nuances, however, a key provision is the extension of the aforementioned Mortgage Debt Relief Act of 2007 through 2013.

Cash-strapped homeowners who are considering a short sale and/or loan modification will now remain eligible for tax relief, meaning that they will not be required to pay taxes on forgiven debt if they are involved in a short sale, foreclosure and/or loan modification prior to Dec. 31, 2013.

Inman News breaks it all down:

“Had Congress not acted, the tax code would have reverted to its pre-2007 treatment of mortgage principal reductions or cancellations by lenders, whether through loan modifications, short sales, deeds-in-lieu or foreclosures: All principal balances written off would be treated as ordinary income to the homeowners who received them. For illustration, if a lender wrote off $100,000 of debt to facilitate a short sale, the seller would be taxed on that $100,000 at regular marginal rates, just as if he or she had earned it as salary. A return to taxation of principal reductions would have disrupted short sales — a growing segment of the home real estate market — in 2013, and almost certainly would have encouraged more distressed owners to opt for foreclosure and bankruptcy.”

The message is simple: If you want to avoid “scary tax bills” in 2014 as a result of your current (or even potential) distressed housing situation, do everything you can to avoid it right now. Research online, contact your lender(s), reach out to a local real estate professional and understand your options … and consequences. You’ve been given a second chance — don’t squander it.

Other key housing-related matters that were included in the bill covered deduction of mortgage insurance premiums, tax credits for energy-efficiency home improvements and tax credits for new energy-efficient new houses.

For more on the Mortgage Debt Relief Act of 2007 be sure to hit up our complete archive right here.

Short Sale Scam: ‘Flopping’ Real Estate Report

Most homeowners who consider short-selling their properties are well intentioned, eager to unload them for personal or financial reasons beyond their control. Unemployment, divorce or even absurd inequity are all among the many reasons underwater water homeowners attempt to sell their homes for less than what is owed on the mortgage balances.

Unfortunately, opportunistic scammers who see dollar signs — or possibly even desperate underwater homeowners who feel the current system is convoluted, broken and/or unhelpful — have also set their sights on short sales.

The latter, dishonest group of folks are considered “floppers,” which is a creative spinoff of the “flippers” who actually follow the letter of the law to invest, rehab and re-sell short sales. “Floppers,” meanwhile, hatch schemes to devalue their homes as much as possible and then agree to sell them as cheap as possible to their like-minded crooked associates.

Les Christie on CNN (via breaks it down:

“Flopping is the latest in mortgage fraud, in which sellers actually want as low a price as possible. The scheme works if they are underwater on their mortgage, and their lender agrees to a short-sale, forgiving the difference between the sale price and the amount owed. The seller unloads the home for the sandbagged price to an accomplice, who can then clean it up and flip it for a quick gain.”

How exactly does a upside-down homeowner devalue or “sandbag” his or her home? As you would imagine, it’s pretty simple to create a mess or the illusion of costly disrepair. Banks and their appraisers are so overwhelmed with properties that pulling the wool over their eyes under the guise of distress isn’t such a tough trick to turn.

The report mentions a few of the endless possibilities:

  • Removing appliances
  • Taking cupboard doors off their hinges
  • Leaving dirty laundry lying around
  • Painting what looks like water damage on the ceiling
  • Invent plumbing or electrical problems
  • Colluding with local contractors to fake repair estimates

It seems like a huge effort to undertake, especially when there are no guarantees that banks will approve — much less consider — short sales, as well as when other variables and wildcards that could derail the purchase process are factored into the equation.

Then again, with an average 34 percent gain and average profit of $55,000, it’s perhaps too enticing for some (less than 2 percent of all short sale transactions, according to the report) — to pass up.

Anyone with information about illegal or suspicious short sale “flopping” is encouraged to call 1-800-4fraud8.

Short Sales, HOAs And Liens

Short sales are heating up thanks in large part to major lenders getting their systems up to snuff and a looming Mortgage Forgiveness Debt Relief Act deadline (Dec. 31, 2012) , which cancels/erases taxable debt on the difference owed on the mortgage.

For example, if a homeowner owes $300,000 on his or her mortgage, but the property is only worth $225,000, a $75,000 difference exists for which he or she is financially responsible. Rather than selling the home for a loss and cutting a $75,000 check to the bank, the homeowner, lender and buyer can negotiate a “short sale” that ensures the seller can avoid foreclosure, as well as a huge $75,000 tax liability (for now), while the seller gets a sweet deal on a new home.

The lender, meanwhile, actually saves money by not having to foreclose on the house and then attempt to preserve, market and re-sell it to a new buyer months — possibly even a year or more — down the road.

But, short sales are typically anything but “short.” The process has been streamlined and improvements have been made; however, there are several roadblocks that can and often do gum up the process.

Homeowners Associations (HOAs) are among the many culprits that can kill deals.

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Foreclosures Push Home Prices To Lowest Levels In A Decade

It’s official (if it wasn’t already): Homebuyers and real estate investors today are in the driver’s seat. And it’s probably not a stretch to say that they will be riding shotgun, too, for the foreseeable future.

S&P/Case-Shiller released its latest home price index of 20 major cities located throughout the United States, indicating that collective home prices have not been this low since Nov. 2002. Recent statistics from the National Association of REALTORS (NAR) bolster the report, suggesting that the national median existing-home price for all housing types is currently hovering at a very affordable $154,700.

“Affordable” when you consider that in 2007, at the height of the real estate boom, the national median existing-home price for all housing types was sitting at $219,000. In other words, homebuyers today are shaving an average of about $64,000 right off the top of their real estate investments when compared to just five years ago.

That’s not chump change. And we’re not even drilling down to the distressed market, which is where most of the larger savings — anywhere from 25 to 75 percent off retail — exist. In fact, foreclosure and short sale properties for sale are a major reason for the recent record-setting low prices.

Business Week has the details:

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Report: Short Sales Surpass Foreclosure Sales

More and more lenders are apparently looking to avoid the foreclosure process, opting instead to sell the distressed assets for less than their original loan amounts.

That’s the latest, at least, from Lender Processing Services Inc. (LPS), which revealed short sales accounted for nearly one-quarter (23.9 percent) of home purchases in Jan. 2012, which is more than the monthly foreclosure tally (19.7 percent). All told, based on these statistics, short sales and foreclosure sales accounted for more than 40 percent of all real estate purchases to start the New Year.

There are many reasons for the uptick, most notably the massive costs that lenders incur because of foreclosures, particularly at such a high volume. In fact, some lenders (Wells Fargo and JPMorgan Chase & Co.) are so eager to avoid the foreclosure process that they are offering distressed homeowners as much as $35,000 to accelerate their departures. In addition, streamlined short sale procedures have been introduced that compel loan servicers to respond to all short sale offers in 30 days or less.

So if a bank is willing to reduce the price on a desirable home, incentivize the homeowner who can no longer afford his or mortgage to relocate and get a “non-performing” asset of its books as soon as possible, it appears that everyone — all things considered — comes out a winner. Even neighborhoods, which have been scarred with the black marks of foreclosure and its deleterious effects, and in turn their collective property values, appear to benefit from short sales.

But you be the judge: Check out available short sale homes for sale in your neighborhood today at Yes, we have short sales — along with many other distressed property listings — available on our site, many of which are 30 to 50 percent less than market value.