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VOL. 36 | NO. 31 | Friday, August 3, 2012

‘Short sales’ finally living up to their name

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The running joke among Realtors for the past five years is that short sales are a misnomer and could be more accurately described as long sales based on the amount of time required to process the transaction.

Many so-called short sales have had birthdays, even after having an accepted contract, while most buyers lose their patience during the months between contract acceptance and closing. They fear interest rates will climb or have concerns about the condition of the vacant property and its ability to withstand the elements with no humans on the premises to care for the house.

Suzi Minor, one of the area’s leading foreclosure/short sales specialists, has witnessed a dramatic improvement in the process in recent months. In fact, she says, her last few short sales have taken less than two months from contract to close.

“The banks have really stepped up their short sale process with improved processes and better communication, which has helped more homeowners avoid foreclosure and allows buyers to get the deal they want,” she says.

Short sales are sales in which the bank allows the owner to sell the property for an amount lower than the amount owed the bank. For example, a person might owe the bank $150,000, and the short sale may allow the seller to sell for $100,000. It also allows for selling expenses to be deducted.

Many would question why a bank would enter into such an arrangement. The answer is foreclosure can be a costly process for lenders and, with property prices plummeting from 2007 through 2012, there is the likelihood that the property would fetch less than the loan amount, anyway.

The short sale process allows the seller to remain on the property, although many vacate anyway fearing foreclosure is imminent. And, at least until the end of the year, the loss experienced by the bank is not taxed. Before the recession, if the bank “forgave” debt, the borrower received an IRS 1099 from the lending institution for the difference between what the bank received and what was owed.

In the example above, if the house sold for $100,000 and there were $20,000 in expenses at the closing such as delinquent property taxes, title insurance, closing costs, real estate commissions, etc., the bank would net $80,000 on a $150,000 debt. In this case, the $70,000 shortfall would be treated as income, and the lender would issue a 1099 for the $70,000.

To complicate matters for the financially strapped seller, the $70,000 of income is income, not debt. Consequently, bankruptcy is not an option. While the bank could sue for the deficiency after a foreclosure, the seller could bankrupt on that obligation.

When the volume of foreclosures skyrocketed, causing and enduring the recession, millions of homeowners, also known as constituents, faced financial catastrophe if the existing laws had remained in place. In order to avoid another Great Depression, Congress passed legislation allowing the losses in short sales to be untaxed.

Now with banks returning to profitability, they are able to assign resources to short sale and foreclosure departments, restoring a bit of order into the chaos.

As Minor notes: “There continues to be a mix of buyers from first-time buyers to investors looking for their next investment and, believe it or not, there are still opportunities out there to convert a distressed property into a money maker.”

She says the current environment in distressed properties is no different than the traditional market, stating the process is the same: “Locate, negotiate, close.” If she says so, why not give it whirl?

Real Estate News

Don Klein, the chief executive officer of the Greater Nashville of Realtors, turned 60 last week and decided that he would forego the receipt of gifts. Instead, he turned the event into a fundraiser for Habitat for Humanity.

Klein’s mastery of the culinary art of pancake making is well noted in GNAR annals as he provides a pancake breakfast for the staff and executive committee each year during the holiday season.

For his birthday, Klein donned cap and apron and cooked for the masses, including U.S. Rep. Marsha Blackburn, Ted Feldman, Tennessee Housing and Development Agency executive director, Phil Ryan, executive director of the Metropolitan Housing and Development Agency, Habitat for Humanity President Danny Herron, Ed Cole, who serves as executive director of the Transit Alliance of Middle Tennessee, and GNAR President Kendra Cooke, as well group of GNAR past presidents including Dan Jordan, Jack Dugger, Tommy Patterson, Mike Nichols, Mandy Wachtler and Lucy Smith.

The event was an enormous success, raising a considerable amount of money for Habitat and reuniting scores of Don Klein fans.

Sale of the Week

Speaking of banks and foreclosures, the banks and some developers have to be scratching their collective head on the current real estate market, especially as it pertains to high-rise condos.

For example, after exhibiting extreme patience, the bank and the developer parted ways on the Rhythm on Music Row, and the bank took ownership in September of 2011. This was after massive marketing campaigns, sales incentives and tremendous activity.

On Sept. 29, an individual bought unit number 901 from the bank for $237,600, and the bank was, no doubt, glad to sell as the unit had been on the market for more than four years, albeit some of that time in pre-construction.

Then, last week, the buyer sold the property for $289,900 after being on the market for only a day or two. Aaron Armstrong of Keller Williams represented the buyer, who got a good deal at $289,900 for 1,009 square feet with two bedrooms and two baths. A couple of blocks away at the Icon, similar units are going for as much as $400,000.

Scott Cornett of Village Real Estate Services represented the seller, who had the insight to allow the owner to profit while some continue to scoff at the downtown developments, viewing them as failures.

As in comedy, the most important aspect in real estate investing is timing.

Richard Courtney is a real estate broker with French, Christianson, Patterson and Associates and the co-author of Come Together:The Business Wisdom of the Beatles. He can be reached at Richard@richardcourtney.com

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