Palm Beach Real Estate and Loans

Yesterday I started to talk about foreclosures and short sales - there is way too much confusion about them, so I'd like to simplify things a bit.

I finished up by mentioning the case of owing more on your real estate then it's actually worth or "Being Upside-down".  How could that happen?

Several ways:

• Regardless of your loan type, if you live in an area with extreme depreciation, the value of your home could be going down faster then you can pay down the loan.
• If you have an interest-only mortgage, ANY amount of depreciation would make the home worth less then the loan balance since the principle never gets paid off.
• If you have been using the minimum payment on an option-ARM you would be experiencing negative-amortization - you're making monthly payments, but they don't cover the amount of intrest owed each month.  This increases the outstanding balance.  So even if your home's value didn't go down, the amount owed would be increasing.  If you're one of the many that has that type of loan, I hope your Broker / Lender made that perfectly clear.

Of course, the lower the initial Loan-to-Value (LTV) the safer you would be, regardless of the loan type.

So what is FORECLOSURE?

Let's start with PRE-FORECLOSURE - you've stopped making your monthly mortgage payment, now you are in DEFAULT on the loan.  A red flag goes up at the bank and they let you know that you had better get back on track, quickly.  At this point, get in touch with the bank DO NOT just ignore the problem!  The bank isn't going to say "You seem like a good person -  don't worry about it!" - but you could possibly work something out with them before the worst happens.

You could go the route of the SHORT SALE - it's called that because by taking less then what they are actually owed, the bank is taking 'a short'.  Here's where it gets a little complicated.  You can't sell the house for what's owed so you list the property and any offers that come up go straight to the bank to approve or disapprove - you as the owner have no say in the matter. 

The banks really don't want to take your property from you, they already have more than enough and then they have to pay their lawyers for their work, re-list the property and try to sell it themselves (and pay more agents).  So, yes, they will take less then what is owed in many cases - but how much less?

You might as well roll the dice and take a guess because if there really is a hard and fast rule they're never going to tell you & me!

As an example, let's say that the loan balance is $500,000.

    Case 1:  An offer comes in for $480,000 - will the bank take it?  There is a reasonable chance, because they really aren't losing too much.

    Case 2:  An offer comes in at $350,000 - if the bank took that offer, they would have a considerable loss - but instead of just saying no, they won't say ANYTHING - for several weeks, while they wait for a better offer to come in.  The usual turn around time for offers/counteroffers does not apply here.  After all, it IS their money.

Currently, if the short-sale works, you will have to pay tax on the difference between what was owed and what the bank finally accepted.

Lastly there is Foreclosure - the bank takes your house. It is then referred to as 'Real Estate Owned' (REO) and they will they try to sell it -

You can always contact me at 561-282-7406, but if you think you're headed for any of the negative situations I've described it's very important that you contact your Accountant and/or Lawyer ASAP so that you find out as much as possible.