Duplex Chick

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If you’re a Minneapolis duplex owner who is losing his investment property to foreclosure, did you may be able to sell it for a profit?

In Minnesota, when a duplex owner is delinquent on mortgage payments, the lender on their property will schedule a sheriff’s sale.

At that sale, which is usually held in the county sheriff’s office, a representative for the bank will, in essence, bid for the right to redeem the mortgage six months later and take control of the duplex.

From that date, the duplex owner has six months to come up the money to pay off, in full, the amount bid at the sheriff’s sale.

Most of the time, that figure is equal to the amount of the mortgage on the property.

Sometimes it’s less.

Why would the bank representative ask for less that what the duplex owner owes?

Because believe it or not, banks are not interested in owning more real estate. This seems especially true if the duplex is located in an area that has experienced a number of foreclosures.

When this happens, the duplex owner may, in essence, sell either pay that amount, or sell their rights to redeem the loan.

Failure to do so means the first lien holder (usally the bank with the first mortgage) is next in line, followed by the second mortgage holder (if there is one) and anybody holding any other kind of lien on the property.

And if that duplex owner happens to sell the property for more than the amount that was bid at the sheriff’s sale, he or she is entitled to pocket the difference (less any additional penalites, interest, fees and commissions).

For some duplex owners there’s an even better outcome. Many buyers are willing to let them stay on as tenants.

For many distressed duplex owners, this is the happy ending they’ve been hoping for.

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RealtyTrac, the nation’s leading authority on short sales and foreclosures, announced yesterday they have spotted a shift toward short sales in the distressed property market.

In January 2012, there were more than 35,000 short sales nationally; a number which puts us on pace for 105,000 short sales in the first quarter. That total would be the highest since the first quarter of 2009.

January’s short sale total reflects a 33 percent increase over January of 2011.

Here’s where things get interesting. In the past, sales of bank-owned (REO) properties always outnumbered the number of short sales.

And, yes. That’s still true.

However, the gap is narrowing, with just 2600 more bank-owned properties selling than short-sales nationwide in January.

The average price of a short sale in January was $174,120; a figure which is 10 percent lower than the average in January 2011.

The average sold price of a bank-owned property during the month was $145,597– almost $30,000 less than a short sale.

This should be important to banks, because the troubling news is that while March foreclosure starts were down 11 percent from a year ago, it was, nonetheless, the third consecutive month where foreclosure starts increased from the previous month.

This trend is not limited to a handful of states. In all, 31 states reported monthly increases in foreclosure starts in January.

Nationwide, there are more than 1.4 million duplex and home owners 90 days or more late on their mortgage payments, 587,629 60 days late, and 1.471 million 30 to 60 days late.

In other words, all the duplex, triplex and apartment building owners who’ve been behind on their payments but had a foreclosure delayed due to the bank’s 11 month long robo-signing foreclosure freeze, are beginning to move through the pipeline now that there’s been a settlement.

If you’re a duplex owner facing foreclosure, remember, while a short sale may be a hassle, the damage it inflicts on your credit, and your life is far less than those of foreclosure.

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If you’re considering doing a short sale on your Minneapolis duplex, waiting too much longer could increase your taxes.

Under the Morgage Debt Relief Act of 2007, debt forgiven that was incurred to buy, build or substantially improve an owner-occupied duplex may be excluded from taxable income if the duplex owner meets specific criteria.

This exclusion expries December 31, 2012, unless the bill gets extended. With improving economic news, this may not be as likely as it once was.

In order to meet the December 31 deadline, a duplex seller must have received, accepted, and negotiated an offer with a buyer that the lender or lenders agreed to.

As this process and take 4-6 months, duplex sellers will need to have their properties listed for sale no later than the middle of May.

Whi

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If you’re considering selling your duplex as a short sale, if you don’t act soon, further delay may result in your owing taxes.

Historically, if a lender forgives some or all of your debt, with certain exceptions, the borrower must pay tax on the forgiven amount.

Thanks to the Mortgage Debt Relief Act, however, a borrower can be excused from paying taxes on forgiven mortgage debt on a principal residence. (In other words, the debt and tax forgiveness applies only to owner occupants.)

And this applies in the event you’re able to stay in the duplex thanks to a principal reduction , taxes on the amount of the reduction will be forgiven.

Here’s the problem. The current law for this tax forgiveness expires on December 31, 2012.

While there’s always the possibility Congress will extend this deadline, encouraging economic news may spell the end of some of the government’s recent incentives.

Stay tuned.

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Until now, it’s been difficult for upside down duplex investors to get the government-backed loan modifications available to owned-occupied duplexes and single family homes.

In late January, however, the Obama administration announced an expansion of the HAMP program to allow investors to qualify.

According to a report in Bloomberg News, Timothy Massad, the Treasury’s assistant secretary for financial security said starting in May, landlords can use the Home Affordable Modification Program (HAMP)  for up to four loan workouts, as long as they rent out each property or have plans to fill them.

The federally-subsidized program pays banks to cut interest rates, lengthen the terms or forgive some of the mortgage principal.

The theory behind the change in policy is keeping current owners in place prevents tenants from being evicted. Massad said, “Vacant properties are a problem no matter how they became vacant.”

Almost one in every four home purchases in January were investment or vacation properties.

It is estimated that about 700,000 landlords will be eligible to modify their mortgages.

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Many duplex investors who are upside down on their property believe a short sale isn’t an option for them.

Nothing could be further from the truth.

So I asked Morgan Kavanaugh, an attorney with Wilkerson & Hegna P.L.L.P, who specializes in negotiating short sales for duplex owners, to write the following guest blog.

Often you will hear people say, “You won’t qualify for a short sale, so don’t bother.”

Is that sound advice?

Unless that person is the bank president or investor on that particular loan, I’m not sure that advice is based on any facts whatsoever.

There isn’t a uniform, mathematical formula to determine if someone qualifies for a short sale. Every short sale is different, given the circumstances of the property owner and the particular investor or lender on the loan.

In the investment property context, rental properties may be underwater with negative cash flow. The owner of the duplex may be in sound financial shape, but the annual loss on the property is starting to take its toll.

Could that investor do a short sale on their duplex?

The answer is almost always “maybe”.

It’s important to understand there is no legal right to do a short sale. You agreed to repay the debt, regardless of the value of the property, and the bank did not promise your duplex would increase in value.

However, when it comes to making a sound business decision, it might make sense to do a short sale on an investment property.

Lawyers have been doing what are known as “loan workouts” on large commercial deals for decades. Short sale is simply another term for a smaller scale ”loan workout”.

A bank will certainly take a hard look at a sound buyer for a duplex, and it is possible they will consider settling the accounts with the duplex investor-seller. If the duplex owner has some available cash, or is willing to sign a promissory note for a percentage of the deficiency balance on the loan, there is a greater likelihood the bank and seller will come to terms.

How will you know if your lender will work with you?

First, you have to start the process by listing the duplex and letting your Realtor market it to find a good buyer.

Given the complex nature of these deals, getting an attorney and law firm on your side is always a good idea too.

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One of the most common phrases I hear when I visit with prospective Minneapolis duplex sellers is they “want to wait until the market comes back” to sell.

The trouble is, in our heads, most of us like to think that’s going to be in the next year or two.

There’s a flaw in our thinking.

According to the latest Case-Shiller housing report, Twin Cities real estate experienced a 5 percent loss in value between 2010 and 2011.

This brings our grand total, according to Case-Shiller, to a 31.35 percent loss in value since 2005. (It’s important to note there are some differences of opinion on this. A recent University Of St Thomas report suggests the decline in value is closer to 18.06 percent.)

In either case, we would need to see an immediate and dramatic turn-around in the housing market to start up the appreciation ladder again.

In fact, in 2012 alone, momentum would need to swing from a 5 percent loss to a 5 percent gain. After that, we would need to see anywhere from three to six years of steady, 5 percent annual appreciation just to get back to 2005 duplex values.

And that’s a big “if”.

For many of the Minneapolis duplex sellers I speak with, hanging on to their duplex means years of juggling young children, a full time job and landlord duties.

And that’s the optimist’s interpretation of the housing market.

With a rumoured 5-6 million more homes and duplexes in the foreclosure pipeline nationally, a more realistic forecast for full recovery of duplex values might be closer to a decade.

For some Minneapolis duplex owners, that might be too long.

If you would love to sell your duplex because your life has changed, call or email me. You have more options than you think.

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Amidst the noise of the holidays, Lender Processing Services (LPS) somewhat quietly issued a news release detailing performance statistics about the 40 million mortgage loans their company helps service.

Perhaps they did so deliberately, as much of the data their report contained wasn’t necessarily cause for celebration.

A full 8.15 percent of their 40 million loans, which represents 3,260,000 mortgages were 30 days or more past due, but not yet in foreclosure.

This figure, while down 9.6 percent from the year before, nonetheless represented an increase of 2.7 percent over November.

According to LPS, they have mortgages on 4,144,000 properties that are 30 or more days past due, but not in foreclosure. Of these, 1,809,000 are actually 90 or more days delinquent, but not yet in foreclosure.

Their inventory of properties in foreclosure but still in the pre-sale process, stands at 2,116,000.

In all, they report they have 6,260,000 properties with mortgages that are 30 days or more delinquent or in foreclosure.

The states with the highest number of contributers to this mess are Florida, Nevada, Mississippi, New Jersey and Illinois. Those with the least are Alaska, Montana, North Dakota, South Dakota and Wyoming.

Minnesota foreclosure numbers actually appear to be improving according the report. In fact, the number of non-current mortgages they service in Minnesota dropped 12.9 percent year-over-year, with 7.9 percent in all not being current.

Looks like we have a ways to go before this is all over.

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In an effort to show a bit of holiday goodwill, Fannie Mae and Freddie Mac announced they will not foreclosue on delinquent duplex and single family home owners during the holidays.

The moratorium will run from December 19 to January 2. 

Apparently, this freeze applies only to the eviction of homeowners and tenants at the end of the redemption period, as they did warn that the legal and administrative proceedings for the evictions may continue.

Not wanting to look like Scrooge himself, Bank of America, Chase and Wells Fargo said they would follow suit.

It’s important to note this policy only applies to loans the banks actually own, not those they service for other investors.

For example, if your loan is managed by Wells Fargo, but the folks borrowers actually owe the money. This may be a group of investors or yet another bank, who want to go forward with the eviction.

Bah humbug.

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One of the most common misunderstandings among prospective duplex sellers in today’s market is in order to qualify for a short sale, you must be behind on your payments and facing foreclosure.

Nothing is further from the truth.

Being “short” simply means you owe more on your property than it’s worth.

And, while I’ve gone over this before, it’s probably a good idea to look at it again.

In order to qualify for a “short sale”, a duplex seller needs to have one of the following hardships:

1. Payment Increase or Mortgage Adjustment- If your adjustable rate mortgage suddenly increases dramatically, it can result in a loss of cash flow, and make mortgage payments difficult to come up with.
2. Loss of Job – If a duplex owner is laid off and suddenly finds she must tap into the duplex’s cash flow simply to survive, a short sale is justified.
3. Business Failure – In a down economy, many duplex investors find themselves on the hook for expenses associated with that endeavor, and become spread too thin financially to continue owning the property.
4. Damage to Property – Contrary to belief, insurance doesn’t cover every disaster or even all of the damage inflicted by the accidents and forces of nature it does. For example, a duplex owner may find the cost to replace his roof that was blown off in a storm is covered, but not the flooding in the basement that resulted from the storm. The out-of-pocket cost to repair this damage can be prohibitive, and until the repair is made, the property may be uninhabitable, causing an additional loss in revenue. Read the rest of this entry »