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Frustrated By Foreclosures

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Posted On: 10/21/2009

Q: There were three foreclosures that recently sold in my area. All were HUD homes. The owed mortgage on each ran from $89,000 to $125,000. Two sold for $10,000 and one for $19,000. How is this helping the economy? Who is paying the remainder of the mortgages? I can't believe that these houses couldn't each sell for more than they did. Other than being empty for a year they weren't in bad shape, but the heating and plumbing were fixed for the winter.

A: You have identified several issues. Let's take a look.

First, the homes were sold at ridiculously low prices because there were no better offers.

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Second, if these were HUD homes, then HUD did not want to continue to pay for the maintenance and upkeep. By selling they got rid of those costs.

Third, after being vacant for a year you can bet there's work to be done on each home.

A few years ago I was at a convention where it was possible to buy foreclosed homes for 30 cents on the dollar - but only if you bought at least 100 properties at a time.

Are homes at low price a good deal?

The real test is not what properties cost, but what they're worth. Buying a home for $19,000 is great if you can sell it for more after all costs, or if you can rent it on a basis that produces a positive cash flow and other benefits.

If the low HUD prices are a bargain, then you might want to consider purchasing one or more for yourself. However, before going further, consider the local marketplace, repair costs and rental values. Speak with real-estate brokers regarding local trends.

The good news is that the properties sold. As long as a huge inventory of foreclosed homes sits on local markets, it's not possible for property values to rise. Foreclosed homes are blight, a reason why buyers have little incentive to bid up prices. The more that are sold, the better.

Q: We've tried to get a loan modification, but it's been denied. We had an offer of $670,000 on a home that was previously worth $1.1 million. The lender waited six months to approve the short sale, but the buyer backed out after five months. We now have a $570,000 offer that's pending after three tries to get the lender to even acknowledge receipt of the offer from their local broker! Is it possible to be released from deficiency obligations and federal income taxes by doing a short sale, or should we just wait for foreclosure? I expect the lender to add stipulations that will essentially kill the short sale as too onerous.

A: You don't say how much was originally borrowed, but let's say it was $1 million. The first offer would have cost the lender $330,000, the second $430,000.

Now let's look at this differently. Imagine that the value of the home rose to $1.5 million. How much more than $1 million would the lender get?

It's simply not logical to believe that lenders should get nothing when home values rise but gleefully take losses when home prices fall.

While lenders cannot be compelled to accept a short sale, they might agree to such an arrangement if it's better than the result of a foreclosure.

Money not paid back to a lender has traditionally been regarded as "imputed" income, money that can be taxed. However, under the Mortgage Debt Relief Act of 2007, the federal rule was changed. Now up to $2 million can be sheltered for married couples ($1 million if married and filing separately). However, not every property qualifies. For details see IRS Form 982 and speak with a tax pro. Be sure to also ask about state rules.

Rules regarding deficiencies vary by jurisdiction; you'll need to speak with a local attorney for specifics.

Do you have the ability to carry a smaller loan or one with a lower monthly cost? If yes, then perhaps the best approach is a mortgage modification. This would prevent a foreclosure if successful, something not likely to be attractive to anyone. Also, do you have private mortgage insurance? MI companies may be able to help with a "claim advance" loan.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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