It's a rainy day in L.A. today. I love these days.
We just set the smoke detector off because we started a fire in the fireplace and forgot to open the flue. It smells like a charred campsite in here now. But the fire is lovely. And with the doors open you can feel the chill in the air, smell the fresh rain and hear the pitter patter and the occasional rumble of thunder.
So, gather round, pull up a chair or a cushion, pop a squat by the fire... it's time for some LITTOF Q & A.
Your questions have been so great. Really good. Thank you for asking them! I will do my best to answer.
Here we go...
*The first three questions are from a LITTOF reader who e-mailed us to say that they are in a similar situation (bought in 2006, fell behind in paying the mortgage due to loss of income, tried for a modification w/o success so far) and are wondering what to do next.
Have you spoken to a real estate lawyer at any point in all this?
No. We haven't. Because my mom is a Realtor and has been for 25 years, we felt pretty well-guided by her expertise. Additionally, she put us in touch with a short sale expert who was willing to talk to us about how to approach a short sale. His number one goal was to keep people OUT of foreclosure. We would have loved to have talked to a Real Estate lawyer, but we didn't have the money to spend. Some people say that it's worth spending that money, though. I think you just have to do what feels right for you and is within your means.
Have you considered bankruptcy at all? At least as a way of protecting yourself from getting possibly taxed on the loan/sale price difference later on down the line?
The possibility of being taxed for the amount forgiven in the short sale is a scary one. According to Suze Orman if it's your primary residence, you won't be taxed for the difference. I hope she's right. To be safe, we are actually talking to tax attorneys about this. Well, we were given a list of referrals from people we trust and need to follow up with them this week. We definitely feel like we need guidance in this regard. Once the short sale goes through (all appendages crossed for that!) we still have the rest of the debt to overcome. So we will be looking at the best path for us. We decided to do a short sale when it became clear that no matter how hard we tried, we weren't going to be able to sell the house for what it's worth in this market. It took us many months to finally accept that. Once we did, we chose to go the short sale route so as to lesson the blow to our credit. Foreclosure effects your credit for 7 years. Just like bankruptcy. Our goal has been to avoid that. Once we talk to a tax attorney, we'll know a lot more. Hopefully.
There's this business about a "deed in lieu of foreclosure." Don't really understand that. It seems too good to be true.
Great question! The CFO at my old job suggested we do a DIL. "Deed in Lieu" and I had NO idea what she was talking about. She invests in real estate and said it would be really easy. We could just, essentially, transfer the mortgage to an investor who would in turn rent us the house at a price we could afford. Sounded like a great alternative to short sale and foreclosure. But, it was a totally unknown territory and for that reason, we avoided it. Also because soon after she suggested it, we finally got an offer on the house. So, I'm in the dark about this too. But here's what I can offer.
Obama's MAKING HOME AFFORDABLE plan has been appended to include incentives for the banks to allow Deeds in Lieu of Foreclosures. From the MHA Fact Sheet:
To view the Making Home Affordable fact sheet as an HTML doc, click here.
Foreclosure Alternatives for Borrowers Eligible for MHA but Unable to Sustain a Modification:
For eligible borrowers unable to retain their homes through a Home Affordable Modification, MHA will provide incentives to borrowers, servicers and investors to encourage short sales and deeds-in-lieu. Both allow families and servicers to avoid the costly foreclosure process, and to minimize the negative impact of foreclosures on borrowers, financial institutions and communities.
Short Sales/Deeds-In-Lieu Program to Facilitate Foreclosure Alternatives
When a borrower meets the eligibility requirements for a Home Affordable Modification (HAMP) but does not qualify for a modification or cannot maintain payments during the trial period or modification, the servicer may consider a short sale, and if that is unsuccessful, a deed-in-lieu (DIL).
Both a short sale and a DIL provide an opportunity for borrowers and servicers to avoid the foreclosure process. In a short sale, a servicer allows the borrower to sell the property at its current value, even if the sale nets less than the total amount owed on the mortgage. Approval of a short sale requires the borrower to list and actively market the home at its fair value. The sale must be an arms length market transaction with all proceeds (after selling costs) applied to the discounted mortgage payoff. If the borrower actively markets the property but is unable to sell it within the agreed upon time period, a servicer may consider a DIL. With a DIL, the borrower voluntarily transfers ownership of the property to the servicer – provided the title is free and clear.
*This last question is from our friend and frequent LITTOF reader, Kim:
What is your opinion on owning property, in general? Lawrence and I talked about looking at places, but it's just too risky in my opinion. I have no interest in it right now. All that would have to happen is for me to lose my job and we'd be up shit creek. We're "safe" (relatively) where we are now. I can't see myself ever feeling in control of my anxiety enough to buy...but maybe I don't understand the whole "You gotta take a leap of faith" idea. Would you buy again down the road?
That's a big question. Gosh. Where do I begin? Well, in general my feelings on owning property have been changing a lot lately. We have friends who are trying to buy their first home right now in Los Angeles and I feel like they are buying at the right time for them. They're ready, they're buying in a climate where banks aren't approving you for more than you can afford. They're being smart. For them, I think it's a great thing and I hope they find a house they can stay in and love for a long time.
When we bought our condo we were very smart. Our mortgage was the same as our prior rent! We loved our condo. We loved the neighborhood and it is still today (even in this market) worth more than what we paid for it. It's hard to stop kicking ourselves. We sold it in 2 days for a big profit and took a big leap into this house. That "leap of faith" you speak of.... I regret including it in the equation. Our leap of faith was that the house would increase in value and we would just keep making more money. We relied on that. Naively. Even though we knew better. Even though that's the exact opposite of what we did while in the condo.
Would we own again down the road? I think yes. BUT. Not for a long time. Bob would say, "Only if we could pay cash and own the house outright." So, when would that be? Never, possibly. Unless we win the lottery.
I still look at Real Estate "porn" (MLS listings)... There's definitely something in me that thinks about owning again in the future. But I think, we'll own something like a duplex where we have income coming in to help us with the mortgage. Or, I remember reading a story several years ago about a couple in L.A. that bought a warehouse for a song, converted half of it to a living space and kept the other half as storage that they rented out to a company for enough money to pay their entire mortgage! So... yes, I think we would like to own again in the future. But we'd be so much smarter about it.
By the way, your anxiety about it is understandable. It's crazy out there. It's crazy in here! And there's nothing wrong with renting. We don't all have to own property to be complete human beings.... though sometimes it feels that way.
Great questions. Keep 'em coming! Send them in to: firstname.lastname@example.org