Duplex Chick

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The other day a duplex owner facing a short sale confessed he didn’t think he’d be able to continue to make his mortgage payment.

He then asked if he couldn’t make the mortgage, did he need to bother with the insurance payment?

The answer, according to Frank Culbertson at Farmer’s Union Insurance, is yes.

While many duplex owners have their premiums escrowed as part of their monthly payment, some pay the insurance company directly.

According to Culbertson, several missed payments result in the insurance company notifying the lender. Guess what happens then?

Since the lender has a stake in the property, namely the money they lent toward its purchase, they would like their asset protected. And, by law, they have the right to buy insurance on the property, and they will.

These insurance premiums are typically at a rate three to four times higher than the rates the property owner was paying. And the cost of them is then passed on to the duplex owner.

So what does it matter if you can’t pay them back anyway?

Well, unless your Minneapolis duplex or duplexes are vacant, you still have tenants. Now let’s imagine there’s a fire where one or more of them is seriously injured while payments aren’t being made.

Do you think the tenant or his family will not pursue legal recourse simply because you were in the foreclosure process?

Personally? I’m not that optimistic.

And even though it’s possible you may not ultimately have any liability, your attorney will charge you to prove just that. Even if you’re broke.

Had you maintained your insurance policy, odds are, your policy would have covered the costs of attorney’s fees.

Just something to think about.

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I subscribe to a web site that tells me which duplexes in the Twin Cities are facing a Sheriff’s Sale.

Every now and then, I see a property listed where the Sheriff’s Sale has been delayed because the property owner is filing for bankruptcy.

I don’t know if the duplex home owners are doing this with the hope of avoiding foreclosure or not. But if they are, it won’t work.

Declaring bankruptcy may temporarily halt foreclosure proceedings, giving the property owner an opportunity to reorganize debt. However, it will not stop the foreclosure process.

Both bankruptcy and foreclosure stay on your credit report for a minimum of 7 years. Imagine giving yourself the double whammy of both.

For many property owners, mortgage payments are the biggest portion of their debt.  So when considering filing for bankruptcy, it may be useful to consider whether or not the financial strain would be eliminated or reduced if it were eliminated or reduced.

Duplex owners who can demonstrate a monthly financial shortfall may qualify for a short sale. While this too has some impact to credit, it is nowhere near as damaging or enduring as a foreclosure.

If you’re considering bankruptcy because of overwhelming debt, including your mortgage payments, give me a call. As a CDPE agent, I can help you explore your financial options.

You may discover bankruptcy isn’t inevitable after all.

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If you’re a duplex home owner facing a short sale or foreclosure, one of the most important items to consider in your decision-making process is whether your state is a recourse or non-recourse loan state.

A recourse loan is one in which the bank can obtain a deficiency judgement for any amount they can’t recuperate through a short sale or foreclosure.

For example, if you sell your duplex and are $25,000 shy of what you owe the lender, they can pursue you for the difference. Of course, if you lose the property to foreclosure, they can come after you for the total loan balance.

Sadly, most states are recourse loan states.

However, Minnesota, California, Mississippi, Montana, North Dakota and West Virgina are what’s known as non-recourse loan states. There, the property is the only collateral the bank can come after. Once it’s sold or foreclosed upon, they can’t pursue further judgements.

Of course, for duplex owners, that may not mitigate tax liabilities and it’s important that you consult with your accountant before making any decisions.

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I looked at a familiar fourplex this morning.

I knew the building because I showed it to a client two or three years ago when the owner was trying to sell it herself.  At that time, my client liked it well enough to write an offer.

The offer was for $260,000.

The building is now on the market as a foreclosure for $135,000.

Sadly, I had another buyer for the building last summer. I’d called the owner and she never called me back.

She chose to be foreclosed upon. She had the option of a short sale. The latter would have greatly reduced her tax liabilities and alleviated many long-term credit issues.

But pride got in her way.

If you’re upside down in a duplex, triplex, or fourplex, remember you do have options. And almost all of them are better than foreclosure.

If you’d like help finding a way out, call me. As a Certified Distressed Property Expert, I can present you with options you may not have considered.

And remember, you’re not alone. We’re all in this housing crisis together.

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Do you always have to pay depreciation recapture and capital gains tax when you sell your duplex via a short sale or lose it to foreclosure?

I spoke with three accountants last week and the answer, as always, is circumstance dependent.

If a duplex home owner can prove insolvency, the tax obligations may be avoided.

What’s insolvency?

Basically, it’s when all of your assets don’t outweigh all of your liabilities. With a home mortgage, a duplex mortgage and credit card debt, for many that may be easy to prove.

However, as explained to me, you have to be able to prove you were not only insolvent before you sold or lost the duplex investment, but after as well.

For example, if you have a $100,000 in equity in your home, with a $50,000 mortgage, and no equity in your duplex that has a $200,000 mortgage on it, you owe $250,000 and only have $100,000 in assets. Therefore, you’re insolvent.

But, after you sell the duplex via short sale or lose it in foreclosure, you now have $100,000 in equity in your home and owe $50,000 on the note. In other words, you’re worth $50,000 more than you owe.

As always, be sure to speak with your tax chick for specific advice.

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">/0.jpg" alt="YouTube Preview Image" />When my alarm went off this morning, NPR informed me RealtyTrac released its Midyear 2010 U.S. Foreclosure Market Report.

And I wanted, with evey fiber of my being, to get out of bed, open my window, and make like Howard Beale in the movie, “Network” and shout, “I’m mad as hell and I’m not going to take this anymore!”

But outside of letting off steam, I don’t know what good that would have done.

It seems that in the first six months of this year, there were 8 percent more notices of defaults, sheriff’s sales and foreclosures than there was in the first six months of 2009. The good news, however, is the rate was 5 percent lower than it had been in the last six months of last year.

What does that mean in real numbers? Well, somewhere near 1.7 million homeowners received a warning related to foreclosure between January and June. That’s one out of every 78 homes in the U.S.

During the month of June, 3140 Minnesotans received a foreclosure-related notice. That’s one in every 743 households; far behind the national average, but staggering nonetheless.

While the report doesn’t specify the number of duplex, triplex and fourplex owners, it would be surprising to find many differences in percentages. After all, countless smaller multi-family properties are owner occupied.

If you’re one of those who received a notice, please know you’re not alone. There are literally millions of people all over the country facing the same stress, the same obstacles, the same sadness and frustration.

While it is my hope that each and every one of you receives a loan modification, if you don’t, remember, there are alternatives to foreclosure. And if you ever need help, as a Certified Distressed Property Expert, I’d be happy to point you toward resources or solutions that may help ease your load.

In the end, helping you through that would probably be a whole lot more productive than yelling out my window.

 Then again, maybe we all open our windows at the same time…

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The name of this blog is Duplex Chick.

Not Accountant Chick.

To that end, please heed the following disclaimer: if you’re a duplex home owner facing a short sale or foreclosure, please consult with an accounting chick when you’re considering your course of action.

Don’t worry. She’ll be in a good mood. She’s going to have plenty of business.

See, even though Minnesota is a non-recourse loan state, meaning the mortgage is collateralized by the property; the bank can’t come after you for the amount of the loan you’re forgiven through a short sale or that’s lost on a foreclosure.

However, if you’re an investor, the IRS may perceive that forgiveness as a “capital gain”, and therefore might pursue you for capital gains tax. Oh, and remember how you depreciated the heck out of the place on your taxes? Depreciation recapture tax still exists; even if you didn’t sell the property for a profit.

On the other hand, if you lived in the duplex, the Mortgage Debt Relief Act of 2007 allows you to exclude up to $250,000 of gain if the property was your principal residence for at least two of the last five years. Whether or not this exception applies to the half you didn’t live in is a question for that accountant.

But just like the investor, you depreciated the heck out of the side you didn’t live in too, right? After all, that’s one of the many advantages of duplex ownership.

Guess what. Depreciation recapture probably applies to you too.

Depressing, yes. But remember, insofar as the capital gains tax, it pertains only to the amount of debt you were forgiven. So if you owed $150,000 and sold the duplex house for $100,000, you’d be taxed on the $50,000 you didn’t pay.

However, if you lost the duplex to foreclosure, you’d be taxed on the entire $150,000.

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So if you’re facing foreclosure because you don’t have the money to pay your mortgage, how are you going to pay a Realtor to get the duplex sold as a short sale?

Simple.

You don’t have to.

Just as with any duplex home sale, Realtor’s commissions are paid out of the proceeds of the transaction. Typically, the seller agrees to pay the listing agent’s broker a percentage if the property sells successfully. That broker, in return, agrees to share a portion of the commission with the buyer’s agent’s broker.

And even though the duplex owner being foreclosed upon or conducting a short sale retains all the rights to the property up until six months after the Sheriff’s Sale, she isn’t responsible for the commission. After all, she’s not taking any proceeds from the sale.

But the bank is.

The Realtor’s commissions come out of the funds the bank will receive.

Short sales are among the most lengthy, labor-intensive transactions Realtors face; Realtors who, for all intents and purposes, work for the seller for free!

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When I was a kid, my Uncle Jerry like to play the board game Risk with my brother and me.

He was a banker. A former Navy man. An adult.

We were maybe 11 and 13 years-old.

He had a strategy. I’m not sure we even fully comprehended what the word strategy meant.

As such, our countries and armies always got run over, crushed.

Lately there have been media stories that claim a “strategic default” on a duplex mortgage can be a wise financial move in response to being “under water” on your investment property.

What the media doesn’t say, however, is that playing with the banks is a bit like playing board games with my uncle. There can only be one outcome;  crushing defeat.

In a strategic default, a duplex home owner decides to walk away from the mortgage; to simply stop paying even though he may be fully capable of making them. Most of the time this happens when the property owner has concluded he owes more on the duplex than it’s worth, making it a bad investment.

What most of these people don’t understand, however, is doing this exposes them to foreclosure and all its consequences including; credit issues, employment challenges, and possible capital gains tax and debt collection.

Believe it or not, banks don’t like the foreclosure process any more than property owners do.  Foreclosures ultimately cost them more money than a short sale, and I am increasingly hearing of some lenders who have developed even more options to help people avoid foreclosure.

If you want or need to get out of duplex ownership, call me. As a Certified Distressed Property Expert I can help you find more constructive solutions to your issues than those available by simply giving up.

And when you give up, just like in war games with Uncle Jerry, you could get crushed.

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In today’s real estate market, many duplex home owners feel like Sisyphus: doomed to roll the boulder of their property up a hill over and over again only to watch it roll back down.

Many are realizing they either owe more on their rental property than it’s worth or, for reasons of unemployment or mortgage resets, can no longer afford the payments.

As a result, they often discover they may be facing  a short sale.

Of course, with anything that’s new and unfamiliar, there are a number of misconceptions and myths about the process. According to the Distressed Property Institute, these include:

Myth #1- The Bank Would Rather Foreclose Than Bother With A Short Sale

The truth is banks nearly always lose more money on a foreclosure than a short sale.  This myth is so pervasive that many banks, investors and even the federal government have stated that if someone is qualified for a short sale, the deal must be considered.

To qualify, the duplex seller must be able to demonstrate financial hardship, monthly income shortfall or insolvency.

Myth #2 – You Must Be Behind On Your Mortgage to Negotiate A Short Sale

While this may have been true in the past, lenders today are looking for a pending shortfall, insolvency, monthly cash flow shortfall or a verifiable hardship.

Myth #3 – There Is Not Enough Time To Negotiate A Short Sale Before My Foreclosure

Foreclosure is a process. In Minnesota, it can take up to a year; with six of those months occuring after the sheriff’s sale.

The foreclosing bank or home owner’s association can stall a foreclosure up to the last day of the redemption period.

Myth #4 – Listing My Home As A Short Sale Is An Embarrassment

It is understandable to have reservations about telling the world you owe more on your duplex than it’s worth. But you’re not alone. In fact, it’s estimated that one out of every eight homeowners in the U.S. is in the same situation. What’s more, forecasts predict that in the next few years, 40-60 percent of all U.S. sales will be short sales or foreclosures.

Myth #5 – Short Sales Are Impossible And Never Get Approved

Are short sales more difficult? Yes. Is there a learning curve for the property owner? Yes. Are they impossible? Nope. Agents who have earned the Certified Distressed Property Expert (CDPE) Designation are getting thousands of short sale approvals every month. These Realtors have undergone extensive training in methods to help distressed duplex owners and process short sales.

Myth #6 – Banks Are Waiting On A Bailout and Not Accepting Short Sales

OK, can any of us count on Congress to pass legislation? Probably not. And banks know this too. Consequently, banks are becoming more aggressive in pursuing short sales and working with Realtors who know how to process them. In fact, Freddie Mac recently stated the organizational goal of “eliminating distressed assets through modification or short sale.”

Myth #7 – Buyers Are Not Interested In Short Sale Properties

For Minneapolis and St Paul duplex home buyers, short sales and foreclosures are synonymous with “good deal”. In fact, in the last year, many of the rental properties in the Twin Cities that have been the best value for the price have been found in the short sale category. Listings with an experienced agent educated in the short sale process ensure a greater chance of a contract being successfully negotiated on a property.

If you’re wondering whether a short sale might be the right move for you, please call or email me. As a Certified Distressed Property Expert, I’d be happy to explain your options.