You signed a document a few years ago called a note and a mortgage.  You thought that you could pay the lender.  Everything was booming – you made good money at your job.  Raises were good.  All of a sudden there is a crash.  The Dow Jones Industrial Average was down over 50% of its value. 

Wall Street needed to please its investors, so there were layoffs and restructuring of companies.  It seems as though everyone felt the belt tightening. 

You lost your job, you lost income, your investments went sour, or whatever the reason, you cannot make a payment to the lender.  You get the document that you never thought you would ever get – the summons and complaint.  The bank is suing you in a foreclosure action.  You feel embarrassed about your situation and you do not know what to do.  You are beyond the point of borrowing money from a family member or friend because you have already done this for the previous six months.  Most certainly, you are stressed beyond belief and you need help.   So, what are your options?

Refinance

There are three (of what I call) “obstacles” that someone must overcome in order to refinance:  Number 1: you must have good credit; Number 2: your house must appraise; Number 3: you must be able to have good substantiated income.  If any of the above “obstacles” fail, you are probably not going to be able to refinance.  

Foreclosure

Foreclosure is the legal proceeding in which a mortgagee, or other lien holder, usually a lender, obtains a court ordered termination of a borrower’s interest.  A lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan.  If the borrower defaults, the lender may have the right to repossess the property through this legal proceeding.

If you let the foreclosure procedure take its course and do nothing, the lender’s remedy for your failure to pay is ultimately to repossess the home.  One of the pitfalls is that if a lender forecloses and the value of the home does not satisfy the mortgage debt, the lender can sue you for a deficiency judgment.  In other words, if you have additional assets, the lender can attempt to satisfy a shortfall, if any, by obtaining a judgment against you personally.

Sale/Short sale

You attempt to sell your house.  If you owe more than what your house is worth it is called a short sale.

A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage. 

You may request from your lender that it accepts less money than what is owed in the hopes that your debt obligation will be satisfied.  This can be a lengthy negotiation and can take several months to accomplish.  

There are instances where some lenders request notes (an additional personal obligation to pay) for the balance owed on the debt.  Additionally, tax laws on the forgiveness of debt may not be so favorable for you. 

Your ultimate goal is to unload the property with debt forgiveness. 

Deed in Lieu of Foreclosure

Simply put, a deed in lieu of foreclosure is the transfer of the deed of your home from you to the lender.  This option must be accepted by the lender.  Many lenders prefer that you attempt a short sale of the property prior to fulfilling this request.  One of the obvious reasons for the short sale preference is that lenders are not in the position of maintaining properties or managing the day-to-day operations of owning a property.

Bankruptcy

Bankruptcy is a legal proceeding where an individual or organization has declared its inability to pay its debt obligations to creditors. 

There are two types of bankruptcy protection that a homeowner can file for in order to stop a foreclosure proceeding or absolve himself/herself of debts: 1) Chapter 7 filing which permits the discharge of personal debt obligations, and 2) Chapter 13 which permits the reorganization of debt.    

Modification

A lender works out an agreement with you for a lesser payment such that you will be able to stay in your home and repay the loan back to the lender.  If you want to keep your home, this may be your best option, as some lenders are willing to renegotiate the terms of your loan to make it more affordable to you.  This, too, may be a time consuming process and usually involves a trial period for you to make payments.

Litigate

Perhaps, there is a defense to your default, i.e., your loan may be voidable due to a violation of a federal or state law.

The best option for you depends on your specific factual scenario.  Please consult with your tax advisor and/or attorney to determine the best option for you.

The scenario usually plays out like this: you sign the contract of sale (of course, you are ecstatic).  You give the mortgage broker or loan officer everything he/she requests, i.e., bank statements, credit report, tax returns, pay stubs, letters of explanation, etc.  Suddenly, there is a stop in the process: the appraisal falls short of the contract price; you have insufficient income; you have lost your job; the condominium building or project is not FHA approved; or for whatever reason the lender gives you.  You get the dreaded phone call from your mortgage company that you have been denied.  You are nervous because the realtor, the seller, or someone you know tells you that you will lose your down payment if you do not buy the house.  What is even worse is that you tendered your life savings as a down payment.  You scream, I want my money back!  Well, can you get it back?  The answer is: it depends. 

Is your contract contingent upon mortgage financing?  If it is, the answer is: yes, but provided that you have satisfied the terms of the contract. 

A mortgage contingency is a contractual provision that gives a purchaser a chance to secure mortgage financing.  If the contingency fails, the contract is terminated. 

However, in order for you to recover your down payment, you must comply with the terms of the contract, including, the mortgage contingency.  In other words, if you have promptly and diligently applied for a mortgage timely and in good faith within the specified time period for the same loan amount listed in the contract, you will get your money back.

Obviously, like all other contracts, the terms and provisions of a contract vary and your specific factual circumstances may dictate a different outcome.  A carefully drafted mortgage contingency clause in your favor is extremely important and may determine whether or not you will receive a return of your down payment.

In most cases, a seller does not want to retain your down payment.  The ultimate goal for a seller is to sell the house to you and not litigate with you over a down payment.  Unfortunately, a seller may feel that he/she is justified in retaining your down payment for your failure to obtain financing.  In this situation, you cannot do anything, but commence a lawsuit to recover your down payment. 

So, how do I get my money back?  Your attorney notifies the seller or seller’s attorney of the mortgage denial.  This letter is usually accompanied by a denial letter from the lending insitution setting forth the reason for the denial.

A mortgage commitment is a bank’s willingness to lend monies to you based on certain conditions.   Once a mortgage commitment is issued, a contract becomes firm (meaning that the contract is no longer subject to mortgage financing – in essence, an all cash deal).   Once a mortgage commitment is issued, most contracts provide that you must close title to the property even if the lender fails to fund the loan for any reason.

On March 1, 2002, the New York legislature enacted the Property Condition Disclosure Act.  In essence, the legislature found a compromise to the growing pressure for a seller to disclose defect within the knowledge of the seller and the common law rule of “buyer beware”.  Under the common law rule, a seller is not obligated to disclose any defects relating to the property. 

Under the new law, at the option of the seller, the seller could complete the property condition disclosure form or in the alternative, offer $500 credit toward the purchase price.  If the form is completed, any type of false statements or misrepresentation could lead to a potential lawsuit against a seller, even after the deed has been delivered to the purchaser.

The form has 48 questions that a seller must answer pertaining to the property.  The law applies only to one to four family homes and does NOT apply to sales involving cooperatives, condominiums, vacant land, new construction, spouses, co-owners, government entities, and estates.

The form can be located at the New York Department of State website:

http://www.dos.state.ny.us/forms/licensing/1614-a.pdf

What does “as is” mean?

“As Is” means the seller is transferring the property to you exactly in the state that you see it in and the seller is not willing to do any repairs. 

If the Seller completes the disclosure form, do I still need to get a home inspection?

A completed property condition disclosure form is not a substitute for a home inspection, so be sure to obtain a home inspection.  A home inspection, prior to the execution of the contract of sale, gives purchasers the information necessary to fully evaluate the property to determine whether the property is suitable.

The seller refuses to complete the disclosure form, what should I do?

Just because a seller has not completed the form or refuses to do so, does not necessarily mean that there is something wrong with the home or that the seller is lying about the condition of the home.   Remember, it is at the seller’s election to complete the disclosure form.

The seller completed the disclosure form and there is something wrong with the septic tank, do I have any recourse?

The answer is maybe.  If the seller failed to disclose any known defects or concealed any defects at the time of completing the form, the purchaser may have a cause of action, even after the closing.

The seller did NOT complete the disclosure form and there is something wrong with the septic tank, do I have any recourse?

It depends on whether the seller willfully misrepresented any known defects which representations were incorporated into the contract of sale.

Finally, you found a house you really like.  Preliminarily, everything looks fine with the house.  Do I really need to pay an extra fee to someone to evaluate my home?  

A home inspector is an independent, qualified, licensed individual who evaluates or comments about defects or areas of concerns for the structural components and mechanical systems for the home you are about to purchase. 

A home inspection is a useful informational tool that will permit you to make an informed decision about purchasing your home. .  A home inspection is the last chance you have to negotiate your contract price or request repairs of the seller.     

Some of my clients tell me that they do not want to spend the money on a home inspection or have a family member that is in the business and attempt to waive the home inspection in order to save money.  For a few hundred dollars, you can save thousands of dollars based upon the information given by the inspector.  Even more importantly, you may not want to purchase a home after you read an inspector’s report.  In some cases, you may want to renegotiate the price of the home after the home inspection reveals defects.

Like any person you hire, you want to make sure that the home inspector is qualified and licensed. The home inspector should comment on the structural integrity of the building, operability of appliances, roof, and major mechanical systems, including the plumbing, electrical, and heating and air conditioning systems.  Your inspector’s comments about the condition of a home are not usually something that is known by the prospective buyer, sometimes the homeowner, or the realtor. 

Home inspectors also make observations of the useful life of the appliances, roof, and mechanical systems.  All visible defects should be noted in the report.  There should also be comments or recommendations for repairs, including, imminent repairs.  Some inspectors also comment on aesthetic related repairs.

Some defects a home inspector checks, include, among others:

• Cracked foundations
• Hidden building sections with little support
• Termite damage
• Defective heating and air conditioning systems
• Leaky roofs and leaks through walls
• Environmental hazards, i.e., mold
• Hazardous electrical aluminum and lead wiring
• Inadequate water pressure
• Drainage problems
• Fire hazards
• Asbestos
• Radon
• Carbon monoxide and smoke detector placement
• Energy efficiency
• Code violations

Home inspectors will try to limit the scope of the inspection to those defects that are visual.  Obviously, home inspectors, no matter how qualified cannot see behind the painted walls or above the ceilings, and thus, will limit their opinion to those items that can be seen.

You absolutely should be present during a home inspection.  During a home inspection, you can ask the inspector any questions. The typical time for a home inspection is about two hours.

One of the misconceptions for some sellers is that once the contact of sale is signed this has “sealed the deal”.  Obviously, this is not the case.  A seller seems to always be holding the bag when a buyer backs out.  If I am selling my house in this current economic environment, the last thing I would want to do is try to find a new buyer.  So, how do I choose the right a buyer and keep him/her bound to the contract?  

Let me begin with this: no seller can prevent a situation where a buyer wishes to default.  However, there are things that you can do to preserve your deal or protect your rights under the contract of sale.

Do Your Part 

Make sure that you have fulfilled all obligations in the contract such that a buyer will not have reason to back out of the contract of sale.  The following scenarios usually cause a buyer to back out of a deal:

1. Failure to make repairs;
2. Failure to clear title;
3. Failure to timely close title;
4. Failure to evict a tenant; or
5. Failure to obtain short sale approval.

To the extent any of the above are within your control, complete your obligations timely, such that a buyer will not have a reason to cancel the contract of sale.

Large down payment

A larger down payment is an incentive for a buyer to complete a transaction.  What can be better than having the buyer lose money if they decide to back out of a deal? A standard real estate contract in New York provides for liquidated damages for a default by a buyer – meaning that if a buyer were to default, the seller would retain the down payment. 

Well, how much money is the right amount?  A seller would want it to “sting” or “hurt the pockets” a little for the buyer to back out of a deal.  A buyer is usually reluctant to back out of a deal for fear of losing the down payment, and thus, is more inclined to complete a transaction.  So, the rule is: The larger the down payment, the stronger the deal.  The stronger the deal, the likelier that the deal will be completed – meaning the ultimate goal is achieved: you sold your home.

The custom of the industry is for 10% of the purchase price to be held as a down payment. For example, for a home selling for $500,000, a down payment of $50,000 would be in jeopardy if a buyer were to back out of a deal.  Let’s say, a buyer only has a $5,000 down payment. What recourse would you have against the buyer?   A lawsuit to recover the down payment may cost in excess of $10,000.  Under this scenario, I would recommend to my client to try to negotiate the down payment.  But, realistically, why even bother with a lawsuit to recover $5,000?

Obviously, in a situation where a buyer cannot give a 10% down payment or refuses to tender a 10% down payment, the seller is faced with a dilemma.  In that situation, I advise the client that a decision has to be made of signing the contract of sale.  A seller should be weighing all other factors in the transaction, i.e., how much financing will be obtained, the lender who issued the preapproval letter, the type of financing (FHA or conventional, no income loan or a full doc loan), the likelihood of the buyer obtaining the loan, etc.

One thing must be understood here, just because the buyer defaults, does not necessarily mean that the down payment is tendered to you automatically.  So, in all practicality, a contract is just as good as a hand shake.  It is usually when circumstances change that the parties look to the terms and provisions of the agreement.  No one is going to just let their monies go without a fight no matter what the amount of the down payment.  The seller will notify the buyer of a default and demand the release of the deposit.  Somehow, a buyer will argue about his/her justification in backing out of a contract of sale and the seller, naturally, will deem the buyer’s actions as a default.  You must sue to enforce the provisions of a contract. 

Choose Qualified Buyers Based Upon Financing

Obviously, an all cash transaction would be ideal.  Under that scenario, there would be no financing contingency.  But, these deals are not the norm as it is difficult to find a buyer who will tender the balance of the purchase price at the closing of title. 

If you are lucky enough to have two offers on your home, evaluate the offers based upon the percentage of financing – meaning the mortgage amount divided by the purchase price.  If this amount is 80% or less, then the buyer has a better chance of securing financing through conventional means.  An issue arises, however, where you have a buyer who requests FHA financing or financing more than 80% of the purchase price.  A down payment of 10%, or more, may not even be possible because the buyer simply does not have the ability to pay this amount. 

I will not insult your intelligence by suggesting that you would not know the premise that the higher the loan amount, the less likely a buyer would be qualifying for a loan.  But, assume there are two offers, an all cash buyer and a buyer who offers more money than the all cash buyer with a loan amount of 90% percent of the purchase price.  Under that scenario, you may consider the all cash deal.  Why?  Stability and certainty in your deal is a premium to you and you may be willing to discount the purchase price for the certainty of selling your home.  

Shorter Contract Period

Generally, the longer the executory period (the time period between the contract execution and the closing of title where the parties are completing their obligations) the less likely a deal will be completed.  This means that you would, especially in a buyer’s market, not want a buyer to change his/her mind because of a change in market conditions.

For example, I once had a deal in 2006 (at the beginning of the collapse of the real estate market) where my client, the seller of home, wished to sell her home about nine months from the date of the initial contact signing.  The purchase price was $1,425,000.  The market conditions changed such that the buyer weighed the options of defaulting versus completing the transaction.  Unfortunately, the buyer opted to intentionally default and lose the down payment.  Luckily for my client, the buyer tendered a 10% down payment.  Unluckily, however, the seller, due to the market conditions, eventually sold her house for $1,050,000.  Instead of requesting at nine months between the contract execution and the proposed closing date, my clients should have simply closed within the 45 to 90 day, which is the typical time frame for a transaction.  Market conditions are less likely to change in the short run than in the long run.

Contract drafting

Insert in the contract, that you, as seller, preserve the right in a default by buyer to retain the down payment for liquidated damages, or in the alternative, the seller reserves the right to sue the buyer for additional damages in excess of the down payment if buyer defaults, including, specific performance (demand that the buyer purchase your home).  This provision, however, is negotiated out of the contract of sale at the request of the buyer’s attorney because the damages are far too excessive for the buyer.   However, if permitted to remain in the contract of sale, the seller would have the right to sue for all damages in a default situation.

In summary, I am going to tell you there really is no way to keep the buyer bound to a contract.  There are certainly ways that you can attempt to keep a buyer bound to a contract of sale, but there are no guarantees that the buyer will complete the transaction.  Ultimately, you must remember it is the buyer’s willingness to purchase your home that will prevail.

In New York State, pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 253-a imposes an additional tax to the borrowers of lending transactions for (the privilege of) borrowing monies against real property.  How does that affect me?  Here is an example, you love a beautiful two family home in New York City (it does not matter where), you offer $500,000 and you apply for a $400,000 mortgage amount.  New York City and New York State has the right to impose a mortgage tax for monies borrowed.  So, your closing costs just when up by $7,170 ($400,000 multiplied by 1.8% minus $30.00). 

These closing costs are not often anticipated by your lender (if located out-of-state) and are substantial enough that it should not be overlooked.  Some lenders do not disclose this amount properly as it varies in each county in New York State.

It should be noted that mortgage taxes cannot be collected on cooperative units because cooperative units are not real property.

How do I calculate the mortgage tax?

1. Mortgage tax varies from county to county, so determine the correct percentage applicable to your county.
2. Multiply the percentage by the loan amount.
3. Factor in nuances for the county that the property is located in, i.e., New York City imposes an increase of 0.125 % in the tax rate for transactions over $500,000 and depending on the type of property (vacant land, 1-2 family, commercial), the tax rate changes. 

For certain transactions, lenders also pay mortgage tax in the amount of 0.25%

Mortgage Tax Savings

If you want to refinance your home and you want to keep your closing costs down, you may wish to take advantage of a tax exemption.  In order to avoid having to pay mortgage tax twice, an exemption exists in accordance pursuant to Title 11, Chapter 26, Administrative Code, Tax Law Section 255, which allows borrowers to pay mortgage tax on the difference between the new loan amount and the principal amount of the old loan.  This amounts to huge mortgage tax saving, which reduces your closing costs.

How does this work? To put it in more simple terms in the form of an example, JPMorgan Chase Bank (Chase) currently holds a loan with the borrower.  Borrower wants to refinance with Wells Fargo Bank, NA (Wells Fargo).  My office contacts Chase to arrange for Chase to assign its mortgage to Wells Fargo.  At the closing, Chase is paid with the funds from Wells Fargo refinance.  The mortgage is NOT satisfied of record; essentially giving the appearance that Wells Fargo bought the loan from Chase.

Additional documents will be signed at the closing to effectuate the tax savings.  For example, the difference between the existing principal balance and the new loan amount is called the “new money”.  If new money is borrowed, the borrower must sign a gap note and gap mortgage.  The new money is taxed in accordance with the tax rate applicable to your county.

REMEMBER – The new money is the only amount that is taxable.  If there is no new money, there is no mortgage tax.

An agreement is also executed between the new lender and borrower called a “Consolidation, Extension and Modification Agreement” or “CEMA”, which consolidates the old loan with the new loan, extends the term of the loan and modifies the terms of the old loan. 

Are there are any fees other than the mortgage tax?

Yes.  Due to the additional documentation that has to be signed and obtained from the old lender, your attorney or the lender’s attorney may charge for the additional services of procuring the necessary documentation.  The old lender charges processing fees, which range from $1,000.00 to in excess of $2,000.00. 

Why not do CEMAs all the time?

There are certain instances where the costs to obtain the assignment of mortgage outweighs the savings.  Additionally, there is a time factor that is involved.  In some cases, the old lender may take a long time to locate the documentation.  In the meanwhile, rate lock fees may have expired and lenders may charge for extensions of the rate lock.

How long does the process take?

Each lender handles the process differently and has different turn-around times.  Generally, each lender says 4 to 6 weeks for processing time.  Some lenders’ processing times are better than others. 

Are there any up front fees or documentation required?

Every lender is different.  Some fees are charged up front and some are charged at closing by the lender.  These fees are generally not-refundable. Additionally, some lenders require a borrower’s authorization and mortgage schedule from a title commitment to start the process.

Do all lenders assign its loans upon request?

No.  A lender has no obligation to assign it loan to your new lender at your request.  It is really a privilege and not your right to request an assignment of mortgage.    Most of the well-known lenders will assign its loans upon request.  Some lenders, unfortunately, do not assign its loans under any circumstances.

If you are a lender, mortgage broker or borrower in a refinance or purchase transaction and are having trouble with these calculations or need assistance in procuring an assignment, feel free to contact my office.

How did this happen?

The real estate market runs in cycles. Presently, we are in an economic period, which mortgage delinquencies are on the rise.  Some of the causes of the increased foreclosure rates are higher interest rates on mortgages making payment unaffordable and the declining value of homes.  Some homeowners with adjustable interest rates are particularly stressed as their payment amounts increase, stretching their budgets to the limit.  Others see the value of their homes are less than the amount owed on the mortgage and make a business decision to not make payments.  The information herein will help you understand the short sale and how you can prepare for a short sale transaction.

What is a mortgage foreclosure?

Foreclosure is the legal proceeding in which a mortgagee, or other lienholder, usually a lender, obtains a court ordered termination of a borrower’s interest.  A lender obtains a security interest from a borrower who mortgages or pledges an asset like a house to secure the loan.  If the borrower defaults, the lender may has the right to repossess the property through this legal proceeding.

What is a short sale?

A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage.

Why would a lender allow a short sale?

Lenders benefit because it can avoid the substantial expense and time of a foreclosure proceeding.  Most lenders do not want to own the properties used as collateral for its loans, because the maintenance costs and taxes add to their cost and decrease profitability.  Additionally, it will have instant liquidity once the sale occurs.

Do I need a realtor?

Although a realtor does not have to be involved in this transaction (remember it is the borrower that is requesting that the bank accepts less than the amount of the mortgage payoff), lenders usually want a realtor involved in the transaction.  The existence of a realtor gives the appearance that this is a bona fide transaction.

What is the process of a short sale?

Step1

Typically, an attorney or authorized representative of the seller may start the process by obtaining a borrower’s authorization to request information from the lender, which allows the authorized agent to act on behalf of the seller in order to discuss terms with the mortgage company.

Step2

The lender will usually require a laundry list of items that must be presented to it such that it may make a decision. The following items are generally required:

1. Signed listing agreement;
2. Sales contract and pre-approval letter or proof of funds to close;
3. Preliminary HUD 1 (net sheet) of proposed sale (this should include all fees, transfer taxes, outstanding water and sewer charges, attorneys fees, realtor’s commissions, outstanding real property taxes);
4. Hardship letter from seller explaining why payments have not been made;
5. Proof of income of seller;
6. Three months’ bank statements of seller;
7. Two years’ tax returns of seller;
8. List of all monthly expenses of seller;
9. Contractor’s proposal of needed repairs;
10. Title work on property; and
11. Signed short sale request document provided by lender

Step3

The lending institution usually orders a BPO (a broker’s price opinion) and/or an appraisal.  Depending on whether the lender accepts the offer, the lender may then counter offer the purchase price listed in the contract of sale.  The realtor or attorney will then need to negotiate with the buyer to see if the buyer is willing to pay an increase purchased price.  Obviously, there is no obligation on the part of the purchaser to increase his/her offer.

Step 4

Wait for the decision. This can generally take up to 30-90 days after all of the above have been provided to the mortgage company.  You may have to update the information you gave to the bank.

Why start a short sale versus allowing the bank to take the house in a foreclosure sale?

The borrower does no longer have to deal with the long drawn out process and generally can walk away from the home without owing any more monies.

Remember that in a foreclosure if the amount of monies secured at the auction are less that the amount owed, the lender could seek and attempt to enforce a deficiency judgment against the borrower. If a borrower defaults he/she runs risk of loss of his property by foreclosure and possibility of deficiency judgment if the value of land at time of sale is less than amount of obligation.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect the shortfall.  As a condition of the short sale the lender may require borrowers to sign a note to repay the shortfall. It may also file a collection or a judgment for the amount of the shortage.  Usually, debt forgiveness is granted.

Are there any tax consequences?

The answer may be yes depending on whether the home is an investment property or a principal residence and the amount of the shortfall.  The IRS recognizes capital gains on the forgiveness of debt the Mortgage Debt Relief Act of 2007 (which applies to debt forgiven in calendar years 2007 through 2012).

What if there are multiple lenders or judgments?

Short sale approval is required from each lender and judgment creditor (which judgment has been docketed against the property).  The first lien holder usually offers the subsequent lien holders as little money as possible in order to obtain a release of the property to achieve the sale.  Typically, subordinate mortgage holders do not have much leverage to negotiate with the borrower and accept much less monies from the first lien holder in the short sale process.  Some lenders request a deficiency note from the borrower.  Do not forget that depending on the value of the property, subordinate lien holders’ interests may be wiped out in a foreclosure sale and these lien holders may receive nothing.

Creditor judgments do not become liens until the judgment is docketed in county clerk’s office where the property is situated.  Judgment creditors can block a short sale of a home (in the same way a subordinate mortgage holder can).  Therefore, an additional negotiation must be had with the judgment creditors.

Despite the prospect of foreclosure, some subordinate lien holders will refuse to negotiate.

Why are buyers hesitant in a short sale transaction?

One of the biggest hesitations that a buyer has is entering into an agreement that is contingent on the approval from the seller’s lending institution.  The expenses of a home inspection, lender application fees and appraisals, and attorney’s fees generally turn people away from the process.  Additionally, time is a major factor as the decision to purchase a short sale home is usually a time consuming process.  It is very difficult to coordinate a purchase of a home with a purchaser who has already contracted to sell his/her home.

Important considerations for short sale transactions?

1. Try to gather all the necessary information, including, how many mortgages exist against the house; are there any additional judgments or liens;
2. Can the seller make payment arrangements (or work it out with the bank in a modification).
3. Assess the value of the home.  Lenders will not just accept any offer that is presented.  The value being offered should be reasonable.
4. It is really important to understand that the lender will not allow the seller to make any money from the sale of the home.
5. A seller should seek the advice from an accountant to see if there are any tax consequences.
6. There may be legal consequences.  Some lenders require that the seller sign a deficiency note.
7. What are the assets of the the seller?  If the borrower owns multiple properties, just because one is a bad investment, does not mean that they can simply get rid of the property in a short sale.  Remember the lender will ask for a financial breakdown of assets and may seek the recovery of the deficiency from the other assets.

In an effort to stabilize the declining housing market, the federal government has offered a tax credit to qualified first-time home buyers of up to $8,000 and Repeat Buyers of up to $6,500.

First off, please seek the services of an accountant to see whether you qualify for the First-Time Home Buyer Credit.

Some useful facts to know for the First-Time Home Buyer Credit and Repeat Home Buyers (Long-time Residents) are as follows:

For First-Time Home Buyers

Definition of first-time home buyers – First-Time home buyer is defined by the IRS as someone who has not owned a principal residence during the three-year period prior to the purchase.

• Qualified home buyers receive up to $8,000 tax credit.
• The tax credit is equal to 10 percent of the contract sales price up to $8,000
• The purchase price must be $800,000 or less to qualify
• The income limitations for homes purchase on or after January 1, 2009 and on or before November 6, 2009:
  • single taxpayers with incomes up to $75,00
  • married couples with incomes up to $150,000 qualify for the full tax credit
• The income limitations for homes purchase on or after November 7, 2009 and on or before April 30, 2010 are:
  • single taxpayers with incomes up to $125,000
  • married couples with incomes up to $225,000 qualify for the full tax credit
• The deadline for 2010 for receiving the credit must pass a two prong test: 1) a contract of sale must be signed on or before April 30, 2010, and 2) the closing of title must be completed by June 30, 2010.

For Repeat Home Buyers

Definition of long-time resident – A long-time resident is defined by the IRS as an individual (and that individual’s spouse if married) who has owned and used the same home as that individual’s main home for any 5-consecutive-year period during the 8-year period ending on the purchase date of the new main home.

• Qualified home buyers receive up to $8,000 tax credit.
• The above qualifications for First-Time Home Buyers still apply.

Repayment of Credit

You must repay the credit if during the 36-month period beginning on the purchase date and after the year for which you claim the credit you dispose of the home or it ceases to be your main home.

Important Notes to Remember:

• You can take the credit earlier than the 2010 tax year (waiting until your 2010 taxes must be filed) by reducing your federal tax withholdings amount.
• The IRS has excluded certain transactions for those who have attempted to circumvent the rules for the tax credit, for example, purchase of a home from a family member excludes you from claiming the tax credit.
• If you exceed the income limitations, you may still qualify for the credit based upon your modified adjusted gross income.  Meaning that you can earn a partial tax credit so long as your income does not exceed $20,000 of the income limitations listed above.  In the alternative, you do not qualify for any tax credit if your income is as follows:
  • $95,000 or more ($170,000 or more if married filing jointly) and you purchased your home before November 7, 2009,
  • $145,000 or more ($245,000 or more if married filing jointly) and you purchased your home after November 6, 2009.
• The First-Time Home Buyer credit only applies to primary residences.
• Short term loans are permissible as advances from an FHA lender and may be used to pay for your downpayment and closing costs in the form of secondary financing (second mortgage). (click on this link for further information, which was presented by the National Association of Home Builders: http://www.federalhousingtaxcredit.com/pdf/FHA_Mortgagee_Monetization_Explanation.pdf.
• The National Association of Home Builders has also laid out some useful FAQs on its website.  I have listed them here for your review:

For First-time Home Buyer Credit – http://www.federalhousingtaxcredit.com/faq1.php

For Repeat Buyer – http://www.federalhousingtaxcredit.com/faq2.php

To see whether you qualify for the credit I would suggest looking at the form, which, in my opinion, is self explanatory.  The form can be found on the IRS website at http://www.irs.gov/pub/irs-pdf/f5405.pdf.  The instructions for completing this form can also be found on the IRS website at http://www.irs.gov/pub/irs-pdf/i5405.pdf?portlet=3.

The IRS website also gives some information about the credit, including, how to apply for the credit, which you should read.  I have attached the link here: http://www.irs.gov/newsroom/article/0,,id=204671,00.html.

This is information is accurate based on information available as of February 28, 2010. As with any tax law change or tax question, you should consult with your tax advisor.

A survey is defined as a horizontal projection of the premises showing the physical facts of possession with reference to the perimeter lines (see Law of Title in New York and Compendium of Real Property Title by William C. Hart). What does that mean?  Put more simply, a survey is a map of the property, as determined by the opinion of a surveyor, at a moment in time, which discloses where improvements lie in comparison to the property lines.

What is the importance of a survey?

A survey will give you information about the property you own or about to own.   Without the survey, you would never know how the buildings, garages, sheds, pools, fences, easements, street widening, retaining walls, etc. relate to the boundary lines of your property or where these improvements or rights of others are situated on the property.

For example, you are about to purchase a home, and the survey shows that the neighbor’s shed protrudes onto your property or the property you are about to purchase by two feet.  You think to yourself, but it is only two feet, who cares?  The answer is you should care and most certainly DO NOT close title because you may have potentially lost the two feet by some claim of right by the person who owns the property with the shed (by adverse possession or otherwise).   (Adverse possession is defined by www.law.com as a means to acquire title to land through obvious occupancy of the land, while claiming ownership for the period of years set by the law of the state where the property exists).  Once you buy the property, this becomes your problem.

Had you not purchased this survey, how would you know where the shed was positioned versus the property line?  What if it were five feet?  How upset would you be if you could have prevented this problem had you simply purchased a survey?  Thankfully, you purchased that survey.  Depending on how your contract reads, you may have the option of opting out of your contract because title may be unmarketable or uninsurable.  Most certainly, this is not what you had bargained for, which is a property that may be missing two feet and litigating to defend the property that you thought was yours.  Of course, you may be successful in a potential lawsuit, but why would you want to spend the money on a lawsuit?  Let the seller deal with this issue because it is the seller’s problem.

But, wait one minute, I have title insurance policy, which protects me.  No, it does not.  The title company will not insure this type of encroachment onto the property (with or without your purchase of the survey).  Assuming you purchased this property with this defect, if your neighbor makes a claim for the two feet of property, you will not be insured and have to defend a lawsuit for a claim of property that is yours.  Your remedy is to not close title until title can be delivered clear of any right by the neighbor.

I am getting pressure from my mortgage broker or real estate broker who tells me I do not need a new survey.  They want to close title and so do I, what do I do?

The answer is: you wait for the survey.  Once your closing is completed, you are the owner of the home and any survey related issues become your problem.  Rest assured, your mortgage broker or real estate broker will not be donating monies toward the defense or initiation of any of your legal suits.

How much does the survey cost?

It depends on the size of your property and the surveyor that you choose.  Like any other vendor you can choose any surveyor of your liking.  Obviously, some are better than others.  For residential properties, the fee ranges from $500 to $900.  The cost of the survey usually increases once the size of the land increases.

New survey versus an old survey.

In some cases, an old survey from the seller may be acceptable to remove a title exception provided that an inspection of the property is performed.  While this is a standard practice among title insurance companies, I do not normally recommend this because only a visual inspection of the property is performed and it is performed without any measuring equipment.  This will save you some money, but it is not a substitute for a new survey.

What if the surveyor is wrong about the determination?

Human error is possible.  If there were an error, the surveyor could be sued.  The reason why I recommend new surveys for my clients is because the survey will be guaranteed to the homeowner, the bank, and title company underwriter, so, if an issue does arise, the surveyor may be liable for damages.  This right is unavailable to you if you did not purchase a survey or relied on an old survey.

Please note that the information here is limited in scope and is for informational purposes only.  You should never substitute the advice you have read from any blog, including this one, for the advice of an attorney.  Every case is unique, so please seek an attorney for your specific scenario.

Selling your home is a time consuming process and can be an unnerving experience.  Everyone wants to sell their home for the highest price possible, and for the most part, want to sell their house as soon as possible.  In some cases, selling your home becomes even more complicated when you try to coordinate your sale with a purchase of a home.

So, where do you begin? 

Gather your paper work.

The following documents are useful in gathering prior to selling your home:

1. The deed – the deed is the evidence of ownership for your home.  You should have kept this document in a safe place.  If you have lost the deed, you can obtain a copy of your deed at the county clerk’s office in the county which the property is located.
2. Survey – the survey is diagram or map of your property which discloses the state of facts of the property at a moment in time (usually when you purchased your home).  The facts that are usually disclosed are encroachments, improvements (such as garages and sheds decks, etc.), and easements.  The purchaser, in some cases, may be able to save money by relying on the survey you purchased at your last closing.  This can be a savings of up to $800.00.
3. Certificate of occupancy – a certificate of occupancy is a document which evidences compliance with building code with your local municipality.
4. Mortgage statement – the mortgage statement is useful to your attorney and your realtor to determine the amount of your existing loans in comparison to your sale price.  Additionally, the useful information on a mortgage statement is the principal balance of your loan, contact information, and escrow information.

Some of the information that you need to obtain is public information and can be obtained online.   For example, Brooklyn, Queens, Bronx, and New York counties make deeds and mortgages available for viewing online for free (see http://a836-acris.nyc.gov/Scripts/Coverpage.dll/index). Some counties in New Jersey also allow free public records.  Additionally, you may be able to obtain your certificate of occupancy for free in New York City by visiting http://www.nyc.gov/html/dob/html/home/home.shtml.

Choose your attorney in anticipation of your sale. 

Your attorney will be able to explain the process of selling your home and what fees are involved in the transaction. 

The Process in a Nutshell

In New York, sign the binder – a binder is, in essence, a document prepared by the realtor, which contains the terms of the transaction and is an intent to purchase.  The binder by itself, generally (of course, there are exceptions with case law), does not create a contract of sale and amounts to nothing more than a term sheet.

Draft the contract

• In New York, your attorney will draft the contract of sale and advise you of the negotiations. 
• In certain areas of New Jersey, if a realtor is involved in the transaction, your attorney will have three days to review the contract of sale (also called the attorney review period) that was drafted by a realtor.   If no realtor is involved in the transaction, usually, attorneys draft the contract of sale.

Permit the buyer to perform the home inspection

• In New York, home inspections are performed prior to the buyer and seller entering into a contract of sale.
• In New Jersey, the custom is that a home inspection contingency clause in the contract of sale allows for a buyer to perform an inspection after the parties have entered into a contract. 

Executory period – this is the time period between the contract signing and the closing of title where the parties are fulfilling their obligations pursuant to the contract of sale.  For example, the buyer is securing financing and the seller is clearing title issues.

The closing of title is the time and place where a buyer tenders the balance of the purchase price and the seller, in turn, tenders the deed to the property.

Helpful Hints

Make your attorney aware of any issues that relate to the property prior to selling.  Some of these issues will delay your closing if not dealt with in advance:

1. Excessive water bills
2. Unpaid real property taxes
3. Title issues, including, open prior owner mortgages
4. Encroachments of structures on your property or beyond your property lines
5. Improvements made to your property without securing a proper permits or certificate of occupancy, including, illegal decks or pools
6. Violations against the property
7. A tenant who will not leave
8. Judgments or liens affecting your name or property
9. Your mortgage amount exceeds the market value of your home (also known as a short sale)
10. You have received a notice regarding a lawsuit against you, including, foreclosure and creditor suits
11. You have filed for bankruptcy

Additionally, your attorney may be able to assist you with gathering the information to remove the issues above and assisting you to choose a qualified realtor, if you choose to do so.

Realtors offer an additional source to buyers, which is buyers that can visit your home by listing your home on the multiple listing service (MLS).  The MLS allows all subscribers (usually all realtors) the right to sell your home.  This exposure to a set of buyers may be unavailable to you when you sell your home on your own.

Contact your realtor and interview them about ideas of selling your home.  Ask a realtor about their approach.  Perhaps, some realtors have recommendations about how your home should be presented when you sell your home, for example, paint your house or make some repairs.

If you have any questions, please contact my firm to discuss your options in selling your home.