Facing Foreclosure: The Selling Option

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At some point, you might find yourself up against a rock and a hard place.  Been there, done that, I can tell you all about it.  The most important thing to remember is that creativity always trumps conventional thinking in times of need.  Especially when a deadline is looming.  The bank, debt collectors, almost anyone you have ever done business with, is now filling your mailbox mailing with letters,  phone calls fill up your voice mail, text messages blow up your phone – it never stops!  If you find yourself in this situation these are IMMEDIATE SOLUTIONS that can put you in a better situation, (depending on your exact situation):

  1.  CASH OFFER – This is your FASTEST path to cash.  Selling your house to a buyer that offers cash will allow you to sell your home in a no-nonsense way.  The buyer just wants to know, after paying off the loan on the home, that they will get free and clear title.  As fast as the title company can clear title, the deal will close.  If you are upside down with your loan, meaning your house is worth less than what you owe it is strongly recommended that you request a cash-for-keys condition in counter-offer to the buyers offer.  In this situation, the bank is agreeing to accept less money than what is owed on the home, but it is reasonable for a seller to be allowed “walking money” when the deal closes.  That “walking money” is what the seller will use as a security deposit and moving money towards their next residence.
  2. STAY IN YOUR HOUSE – A sale/leaseback is the most common way for a seller to sell their property today, lease the property back from a new buyer, and then purchase the same property back in the future.  The seller can either sell the property at a discount to the buyer so that the seller can purchase the property back at today’s value, or sell the property at today’s value and purchase the property back at a higher price in the future that is agreed to by the seller and buyer.  The advantage a sale/leaseback offers is that it allows a seller to geographically stay put and enjoy the benefit of their present location.  Examples would be a seller that needs to stay in a specific school district, a seller that receives medical services from a specific medical professional and military personnel that have pending orders to ship out, but have not yet been assigned a new base location.  The buyer must be an investor who has no intention of ever moving into the property whose primary goal is to rent the house for income.  Additionally, the seller should consult their agent how to draft the paperwork to ensure the future purchase date is specific and agreed to by both parties.  Contracts that state the “…seller can buy back the property in the future…” is too generic and must state a specific price, date, any extensions of time agreed to and how those extensions will be communicated by both parties.  For a seller that is resistant to moving or leaving, this method can be their best selling solution!
  3. LIST WITH A REALTOR – This method, while not as fast as accepting a cash offer, wastes minimal time because the realtor will market the property on the MLS system, giving the property maximum exposure to the market.  Additionally, an agent will work with the seller to sell the property for the highest and best offer based on the terms, conditions and price offered by the buyer that the agent feels has the highest probability of closing the deal.  Nothing can be worse than entering in to an escrow that doesn’t result in a sale.  Agents work very diligently with buyers and buyers agents to only do business with buyers that offer the highest probability to close.  A fee is paid to the agents to negotiate through all the offers and potential buyers, a process that allows the cream to rise to the top, to ensure a sale happens to the satisfaction of the seller.  Any seller who does not want to waste time with their property sitting on the market will list with a realtor to give the property the maximum exposure to draw qualified offers in the shortest period of time.
  4. FOR SALE BY OWNER – A solution where the seller representing themselves and the property that is being sold in order to work directly with buyers.  Although this process will eliminate the fee’s associated with listing with a realtor this method from my experience wastes more time on the market, unless the price, terms and conditions are highly favorable to buyers.  Rarely do I see sellers price or give favorable terms to buyers in their self-made-home-marketing.   A for sale by owner sale can generate an immediate buyer but the owner who is the seller now must open the escrow and ensure all of the deadlines are met according to the terms and conditions outlined in the purchase and sale agreement.  They must also be familiar with how to read the terms and conditions or hire a lawyer to explain the contract to them to ensure contingencies are removed according to the contract terms.  The advantage owners see in this solution is in not paying agent fees.  The disadvantage is that the property will not be marketed on the MLS for agents to show buyers eager home buyers.  This could make the buyer pool for the property significantly smaller for the property.
  5. HOUSE TRADE –  This is the SLOWEST path to cash and potentially a non-cash transaction where the seller is trading one property for another property.  Although a trade can take longer to match sellers of different cities and states together, this is a method of disposing a property where Seller A can assume the debt payments of Seller B and vice-versa in order to keep all financing in place and require neither seller to apply for a new loan.   A trade can also get creative in the event one property is valued much higher than the other property.  An example of this might be where a California seller with a property valued at $500,000 wants to trade a property with a North Carolina resident who is selling a property for $200,000, and wants to buy a property in California.  Since the California seller’s property is much greater in value, the California seller can offer to trade her property for $450,000 where the North Caroline seller sells at $200,000 and then owes the California seller another $250,000.  That difference can be turned into a promise to pay by the North Carolina seller.  In this scenario the California Seller moves into the North Carolina property for no money down, collects $250,000 of payments over ten years, and traded the property at near asking price.  The North Carolina seller moves into the California property with no money down, traded their property for $200,000 (full asking price) and makes the additional $250,000 payments over ten years.  In this scenario there is no upfront money exchanged by either party.  This can be a very clean transaction but it is strongly encouraged that legal counsel for both parties before entering in to the agreement.
  6. REFINANCE YOUR LOAN – This is a non-cash option.  This can be the most obvious solution, but, is not relies on the borrower’s creditworthiness.  With this solution a borrower that is still creditworthy might be able to get the property refinanced with little difficulty.  But . . . in the case of defaulted borrowers, my experience has shown me this solution has the least success.  Again the creditworthiness of the borrower is critical with this solution!

These are just a few of the options available to owners that are facing the possibility of foreclosure.  Like all solutions it depends on a borrowers situation at that time.  There are no guarantees with any of these solutions.  It is also strongly recommended that none of these solutions be executed until a borrower seeks the advice of legal counsel and a realtor in the event a realtor will be hired to represent a seller.

Any questions or requests feel free to direct your messages to krauseandco@hotmail.com.

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Food Detox, Week 2

Bike

I have to admit I didn’t realize my detox updates weren’t posting to my blog so I wanted to catch up with you on our progress!

FOOD DETOX – Week 2, Day 2. So kicking the sugar habit and removing breakfast cereals for daughter has worked great! She remarked how she lost a pound and feels more energetic. I’m so proud of her!❤️ She’s riding her bike 🚲 every day now, which she had zero interest over the past year. There are tough moments with this eating program – I’m glad we are doing it over several months. She has experienced a few mood swings that caused her to snap at times😫, but I reassured her its a healthy part of the process. She doesn’t realize it but she’s going to bed and waking more easily, then before😴. I’m waking at strange hours, like WIDE awake 😳. She’s listening to more music 🎶 and watching less YouTube. 🤔 This week we are reducing our protein and carb intake to palm size portions and adding more veggies, salads specifically🥙. I’M DONE with the bagged salads! The dressings and toppings taste gross🤮 Back to buying heads of lettuce and spinach –> going raw🥦! She had a hard time with dinner last night – “Dad this sucks I don’t want to do it anymore!!!” 😡 But I reassured her she was doing great and we just brainstormed 20 or 30 ideas till we found something in the refrigerator. She is SOOOO missing peanuts🥜! Her favorite peanut brand are sprayed with canola oil, so we banned them🚫. I’m not enjoying fruit at all. If I have 3 grapes I’m done. The sugar in fruit just isn’t palatable. Bummer cause I used to love fruit . . . I’m amazed but she has taken to eating grapes, cherries and berries 🍒 so it’s much better than snacking on a bowl of cheerios at ten o’clock at night🌙. Last, my energy levels feel better 💪, I haven’t had a food coma bloating session yet, except when I went for Thai food last week, but hey, it was some REALLY great Thai food! #fooddetoxprogramsforlife

Feeling Tired All the Time

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It’s not ok to feel tired all of the time. So my daughter really wanted to do a food detox with me….and…today is day 2. I agreed to do it over 90 days, not 7 like I used to. My body used to feel so mangled up inside doing the really short ones and caused too much inner chaos. In the first week the only adjustment to our food program we will be making is to cut out sugar from snacking and eliminating breakfast cereals. Goodbye pancakes 🥞. She is going to miss that Saturday morning ritual. We replaced both with non-dairy yogurt, fruit and raw almonds. 🍐 No honey or agave either. Stevia is ok. Lunch and dinner for week 1 will be the same except except white starch foods will be replaced with a salad or vegetable soup made from vegetable stock and raw veggies. Honestly easing my way out of sugar sounds easy but it really does require the discipline of drinking more water and resting more. The adrenal glands and kidneys need time to adjust to the change otherwise anything from dizziness and light headedness is likely to occur, for me at least. In week 2 we will be changing our dinner program to cut back on animal protein and cut dairy from the meal entirely. Lunch will stay the same. My daughter doesn’t know it yet but starting in week 2 we also CHANGE the dressing used on our salads and ranch dressings and other pre-made dressings will be replaced by simple Apple Cider Vinegar and olive oil. She can always opt out and have soup but the point is to move away from the store bought dressings that contain canola oil. Last but not least will be an increase in our exercise program. We have agreed to a minimum of a 30 minute walk together, even though i will do more. I want to get back to doing 20 pullups 💪 in a row! That’s a goal to work up to. To our health!😃🍇🍌🥑 #fooddetoxprogramsforlife

Foreclosure with Equity?

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It’s hard to imagine in this day and age with the amount of information available on the internet about how homeowners can avoid foreclosure that they still happen.  But they do.  Although the foreclosure process ends with the possession of the home (the collateral for the mortgage loan) returned back to the bank that is servicing the mortgage, what some people still don’t realize is this:  foreclosures with equity can be just as common a foreclosures without.  What is a foreclosure with equity?  It’s a foreclosure of a home that is worth more than what is owed on the outstanding mortgage.  Banks that service the mortgage loan for homeowners will use a Trustee to handle the business of sending notices and ultimately the sale of the property at auction if a mortgage is in default (has not been paid in full and on time).  In some cases, a property that is sold above what is owed on the original mortgage+interest+legal fees is classified as an Equity Foreclosure, meaning, the amount over what is owed to the bank is equity, the borrower’s equity.  BUT the borrower must makes a demand to the Trustee for the equity portion to be returned!  Although the bank does not get to keep this “overage” the borrower must make a demand to receive it.  The foreclosing Trustee will almost never make an effort to find the borrower if the borrower is still owed money from the sale of the property.  It is very important to understand that a borrower who has equity in their home can still experience a death, divorce, disability, loss of employment or income source or a variety of other “life events” that can cause a borrower to get behind on their payments.  If the payments continue to remain unpaid the bank who is servicing the loan can still move to foreclose the home, even if the home has equity.  One strategy to avoid foreclosure of a home with equity is the sale lease-back.  As a true win-win strategy it allows the borrower to lease back their home from a new buyer with a promise that they will be able to purchase the property back after a certain period of time has passed.  After the borrower repairs the financial damage that caused them to get behind on their payments, the borrower (who will temporarily become a tenant) will have the option to purchase the house back in the future at an agreed upon price.   The new buyer and the borrower will negotiate how the equity in the property is split before either party enters into the sale of the house and after reviewing the contract with qualified legal counsel.  The equity in this scenario is used by the borrower as a bargaining chip with the buyer and in turn offers the opportunity for a buyer to earn a return on dormant cash that might be earning a meager 1% or less in a savings account.  In my next article I will discuss ways to avoid foreclosure of homes that have no equity.  To your prosperity!

Building a Portfolio versus Building Equity

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“My portfolio is growing!  I just closed on my fourth house and I just got a promotion at work – things couldn’t be better!”  On the outset this sounds great.  Until you ask, “do you have any debt on those properties?”  The eager up-and-comer quickly responds “well, yes, but I have renters, so I’m building equity!”  As the onion peels away we start understanding the situation much better.  “I took advantage of a low down payment loan program to buy the houses so my renters (as they pay their monthly rent) are paying down my mortgage for me.  These houses will be my retirement portfolio one day.”  If this sounds familiar, then I agree with you.  I am learning about more and more “investors” who are buying homes at or near market price, adding some fresh paint and carpet, replace a few kitchen cabinets and toilets and then rent their properties out.  This strategy is only one paycheck (of the renter) away from becoming a disaster for the owner.  Simply put, the only viable reason to rent out a single family house is because either (a) you are using your own money, and (b) the rental rate is so far above your holding costs that your net profit is better than any other investment alternative on a return-on-cash basis.  Otherwise, if you are buying a house near or at market price, one missed rental payment (and usually will at the wrong time) can spell disaster for the owner.  The cost of eviction and missed payments will eat up any “discount” you bought the property for.  So now you have to ask yourself, DID YOU GET INTO REAL ESTATE TO BUILD A PORTFOLIO OR TO BUILD EQUITY?  The purchase of a rental home should made at a steep enough discount that lost rents, non-paying tenants, and expensive repairs do no cut significantly into PROFITS.  Remember profits are why you got into real estate investing to begin with!  Four home purchases made at or near market price with a low to zero down payment is speculation.  The buyer is speculating that the renter will not default, that the house will not need repairs, that economic circumstances won’t change, that a host of factors will not cut into profits.  Homes in several hot markets during 2007-2012 including Las Vegas, Phoenix and Tucson went through a boom/bust cycle that wiped out half the value of the residential market.  Short sale properties were so common few people wanted to buy them and so many more couldn’t because the banks were barely lending to even the top tier borrowers in the country!  Build a portfolio Yes, if you bought equity on the day of closing.  But, depending on a series of factors that are not under your control No.  Equity is bought on day one.  Having a strategy to cash in on that equity will be in my next article!  To your prosperity!

Value Add, Wholesaling and Speculating

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The seller doesn’t get it!  I’m reading from the end of an email chain in which the seller is blasting me for not taking his counter offer on a single family house.  A few email messages ago he discussed ad-nauseum why I  ” . . . really need to reset my expectations in this market.”   The truth is that I’m not buying the deal for one simple reason:  the deal has been stripped of it’s equity.  I have no issues with a person wanting to make a profit.  That’s par for the course.  But if a property is not in Turn Key condition (requiring no work or upgrades) paying market price leaves me no upside potential in the property.  NEXT!  I’ve been around single family deals long enough to know when a seller has priced a property for a fast sale and when they are speculating.  What’s a speculator.  Here’s an example:  A brand new remodeled home recently sells in your neighborhood for $500,000.  The house was move in condition, no upgrades or repairs needed with all the latest shiny features, materials, etc.  The seller has priced his outdated house with none of the latest features for $485,000.  Yet when I look around the neighborhood the price for comparable quality and features is more like $450,000.  As a contractor I determine that is would take a $25,000 investment to bring the outdated home to date with the $500,000 remodeled home.  If I pay $485,000 I’m speculating that an extra investment of $25,000 will fetch an even greater price than the $500,000 newly remodeled home.  However, if I pay $415,000 the $25,000 investment should bring me a $500,000 home for the cost of $440,000.  This is a value-add strategy because I have “built in” $60,000 of equity by doing the upgrades.  If I decided not to do the upgrades but still purchased the house for $415,000 another strategy is to sell the house for $450,000 (the value for similar outdated homes).  This is the wholesaling strategy which would net a profit of $35,000 minus my costs to quickly sell the property.  And as you can see from this example, if you can get an offer accepted at a discount you will have more options available should your plans ever change.  Food for thought.

Will Your House Sale Trigger a BIG Tax? GO Installment Sale!

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Picture twenty years from now.  You and you’re families needs have changed.  Maybe you had children that are grown and out of the house now.  Maybe you and your significant other are quickly nearing retirement.  That four bedroom house is really “a lot” of house to clean, maintain and pay the property taxes.  And maybe you made other investments in real estate and those properties have appreciated as well.  You bought the house at a time when real estate was considered cheap, realizing now that your house IS your nest egg and has grown three to five times the price you originally paid!  If you considered downsizing your lifestyle the prospect of having to pay the tax on the gains you earned makes the idea seem impossible, right?  I mean why would anyone pay so much in taxes on the sale of the home to downsize right before retiring and your dependable income disappears?  The tax will deplete a large amount of money that you could have gone towards your retirement!  For this reason it is a MUST to learn about selling your home using the Installment Sale method.  Before I go too far, please remember that I am not licensed tax professional and I am not giving tax advice.  I am a real estate professional and like you I get my tax advice from a licensed tax professional and pay them a fee for that advice.  So if you need tax advice please see your tax professional BEFORE taking any action that could trigger a taxable event!  That said, an Installment Sale is a method of selling your house now, and spreading out the taxable consequence over time.  For example if you purchased your house for $100,000 and it is now worth $500,000 you have a basis in your house of $100,000 so any amount that you sell your house over and above that amount will have a taxable consequence.  And the tax would be paid for the current year’s tax filing.  However, if I offered to purchase your home for $700,000 with a $100,000 down payment and then pay you the remaining $600,000 over the next 30 years, we now have an installment sale.  You may have hear of the term a “carry-back” which it is similar.  In this example the seller is taking back an income stream for the next 30 years instead of all the money up front.  The seller gets to spread out the taxable consequence over the next 30 years and the house is sold.  What binds the buyer to pay this balance due?  The purchase and sale agreement (which is the executed contract), the promise to pay secured by a promissory note and a deed of trust against the property.  The deed of trust is the 1st position lien holder with rights to foreclose and take back possession of the property if the buyer fails to pay the remaining balance due.

Here are some additional resources to understand how the sale of you’re house can qualify for an installment sale.  As always feel free to send me a message if you have questions about how this strategy can help you sell your home!

https://www.irs.gov/forms-pubs/about-publication-537

https://www.irs.gov/taxtopics/tc701

https://www.ftb.ca.gov/individuals/wsc/real-estate-installment-sales.shtml

https://www.thetaxadviser.com/issues/2008/sep/installmentsalesallocationofinstallmentpayments.html

https://turbotax.intuit.com/tax-tips/investments-and-taxes/what-is-irs-form-6252-installment-sale-income/L3R2EHSQU

https://www.ccim.com/cire-magazine/articles/irs-guides-taxpayers-repeal-installment-sales-repeal/?gmSsoPc=1