San Diego Short Sale Expert/Specialist Realtor

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FAQs
Frequently Asked Questions.  This information is provided for general reference only and is not to be construed as tax or legal advice.  Consult your income tax preparer and/or attorney for specific details on your individual situation.
 
THE BASICS
Q3: When should I move out?
A: We recommend you take advantage of as much free housing as is legally available to you.  You are actually helping your lender by not moving out because a vacant home is subject to vandalism which further increases the lender's loss.  We'll let you know when time is getting short and, at the end, will give you 4 week's notice to move out.  Most short sale homeowners are able to continue living in the home 2-4 months longer than a no-short-sale foreclosure homeowner could, saving the short sale homeowner 2-4 months of rent.  If you move out too soon, and the home gets foreclosed, you will not be able to take advantage of the money (cash for keys) your lender will offer you to move out quickly.
Q4: Is my personal property insured?
A: If your homeowner’s insurance premiums are paid by your lender thru an ‘escrow’ or ‘impound’ account, check with your insurance company at the annual renewal to ensure your lender has not converted the policy to a ‘fire’ policy which would not cover the stuff inside your home.
Q5: What is a nonrecourse loan?
A: Any loan that is purchase-money (has not been refinanced) on an owner-occupied 1-4 unit dwelling.  This definition applies to both 1st Trust Deeds and 2nd (junior) Trust Deeds such as a 'piggy-back' loan.  A nonrecourse loan is very favorable because the lender's only recourse, in case of default, is the property itself.  The lender cannot pursue the borrower for a deficiency judgement or attempt to collect money or any other asset from the borrower. 
Q6: What is a recourse loan?
A: Any loan that is not nonrecourse, including all refinanced loans and loans used to purchase rental property.  This includes rate & terms refinances where no cash was taken out.  In California, any recourse loan that is foreclosed on non-judicially through a Trustee Sale, becomes nonrecourse.  Virtually all foreclosures are via Trustee Sale.  Judicial foreclosures by a 1st Trust Deed to allow a deficiency judgment against the borrower are almost unheard of.
 
THREE POSSIBLE SCENARIOS
Q7: (SCENARIO #1) What if all of the loans on my property are nonrecourse?
A: You do not have to pay anything to short sell your home, unless there is a Home Owners Association, which should be kept current.  You do not have to pay property taxes, commissions, closing costs, repairs or the mortgage.  The debt will be permanently eliminated without declaring bankruptcy.  No IRS ordinary income tax is due on the forgiven debt.  If a short sale is successful, you'll keep foreclosure off your credit.  Homeowners with all nonrecourse loans should do a short sale without exception.
Q8: (SCENARIO #2) What if there is only one loan on my property and that loan is recourse?
A: You do not have to pay anything to short sell your home, unless there is a Home Owners Association, which should be kept current.  You do not have to pay property taxes, commissions, closing costs, repairs or the mortgage.  The debt will be permanently eliminated without declaring bankruptcy.  You may need to pay capital gain tax if there is a low cost basis and insufficient exemptions.  You will owe IRS ordinary income tax on the forgiven debt unless you are 'insolvent' or declare bankruptcy because the federal Mortgage Debt Relief Act of 2007 does not apply to a recourse loan.  If a short sale is successful, you'll keep foreclosure off your credit.  You should do a short sale if your income tax preparer says you are 'insolvent' per the IRS definition.
Q9: (SCENARIO #3) What if there is more than one loan on my property and the junior loan is recourse?
A: If your 1st loan forecloses, the entire principal balance of your 2nd loan converts to unsecured debt, just like credit card debt.  The debt from the recourse 2nd loan is NOT eliminated!  You will still owe the full amount of the 2nd loan even though you no longer live in the home.  This junior lender can, and probably will, pursue aggressive collection action against you including a deficiency judgment in court with subsequent liens and wage garnishment.  You may need to pay capital gain tax if there is a low cost basis and insufficient exemptions.  If, in the face of a deficiency judgment for the full amount of the junior loan, you would realistically declare bankruptcy, you should do this prior to the foreclosure to get a couple more months of rent-free living and increase the likelihood of short sale success.  A short sale is an excellent test to find out if bankruptcy is needed or not.  If the junior loan approves the short sale, no bankruptcy is needed, but you will have to pay IRS ordinary income tax on the forgiven debt unless your income tax preparer says you are 'insolvent' because the federal Mortgage Debt Relief Act of 2007 does not apply to a recourse loan.  If the junior loan rejects the short sale, you should declare bankruptcy and live rent-free longer.  All loans included in the bankruptcy convert to favorable nonrecourse (SCENARIO #1) status.  If you're facing a large capital gain, bankruptcy may be an excellent way to increase short sale likelihood which would minimize the capital gain tax.
Q10: Who do you recommend for bankruptcy?
A: Deborah Raymond, Consumer Protection Attorney, at 858-481-9559 or draymond@lawinfo.com.  In addition to being a competent bankruptcy attorney, Deborah specializes in litigating against lenders of owner-occupied, refinanced loans created during the past 3 years which may have violated federal lending laws.  If you have an unfavorable junior recourse loan (SCENARIO #3), perhaps Deborah can help you sue your lender.
 
REALTOR LIMITATIONS
Q11: Can you help me if the Trustee Sale (aka 'foreclosure') has already been scheduled?
A: We cannot help you if your lender has already recorded a Notice of Trustee Sale and scheduled the actual foreclosure auction.  At this point, there is not enough time to find a high-price buyer for your home and negotiate with your lender.  You need to list with us within two (2) months of the Notice of Default being recorded.  If you've already missed 3-4 payments, it's time to start the short sale process.
Q12: What geographies do you cover?
A: We can help homeowners in San Diego County and Riverside County, California only.
Q13: Can I do a short sale without missing any payments to minimize the damage to my credit?
A: Yes, it can be done.  However, a short sale with no missed payments may be just as bad on your credit as a short sale with many missed payments.  Most homeowners will probably want to stop making their payments and take advantage of 7-12 months of free housing during the short sale process.
 
HOMEOWNER EXPECTATIONS
Q14: What do I need to do?
A: We'll help you write a short hardship letter, complete a monthly budget, and fill out the Realtor mandated disclosure forms.  You'll need to give us permission to communicate with your lenders.  You'll need to provide us with 2 recent months bank statements and pay stubs plus last years IRS form 1040 from your income tax return.  You'll need to allow buyers to enter your home, sometimes on short notice.  You do NOT need to clean or organize your home for these buyers; just live your life as normal.  When your lender's appraiser visits, you'll need your home to be as unattractive as possible.  After short sale approval, you'll need to sign a Grant Deed in front of a notary transferring ownership to the new buyer.
Q15: Do I have to have a sign in my yard?
A: No.  We prefer you do, though, in case the best buyer for your home happens to drive by.
Q16: Do I have to have a lockbox on my door?
A: No.  We prefer you do, though, to make showings fast and convenient for today's demanding buyers.
 
UNUSUAL SITUATIONS
Q17: What if I have a purchase-money, owner-occupant loan, but I never moved in?
A: Your lender will probably treat the debt as nonrecourse if they do not find out that you never moved in.  Assume that the IRS will consider the debt as recourse, meaning that you will have to pay ordinary income tax on the forgiven debt unless your income tax preparer says you're 'insolvent'.  If you don't know whether you got an owner-occupant loan or not, contact us.  Your publically recorded Trust Deed has the answer.
Q18: Can I have a relative or friend purchase my short sale home and rent it back to me so I don't have to move?
A: Yes, if you have the good fortune to know someone willing to put their credit on the line for you, and they can qualify for a loan.  Some lenders require the buyer and seller to sign a document at short sale closing affirming that the sale is a arms-length transaction where the buyer and seller do not know each other.  If you or the buyer would be unwilling to sign such a document, you would not want to pursue this strategy.
Q19: Is it legal for me to collect rent from a tenant if I'm not making the mortgage payment?
A: Yes, if you've owned the home for more than 12 months.  If you've owned the home for less than 12 months, collecting rent without paying the underlying mortgage is rent-skimming, a misdemeanor.
 
AFTERWARD
Q20: Will I have trouble finding a rental with a short sale or foreclosure on my credit?
A: No.  In today's market, any landlord or property manager that refuses to rent to tenants with a foreclosure or short sale on their credit will have great difficulty keeping their homes occupied.
Q21: How can I tell if a rental has a 'toxic' loan that could 'explode' on my landlord, causing me to move before my lease is up?
A: Contact us with the address of the home you want to rent, and we'll check the home's public Trust Deed for toxic loan terms.
Q22: How long until I can purchase another home?
A: FHA guidelines allow borrowers to get a home loan 3 years after a foreclosure or short sale.  The interest rate will be higher for those with lower credit scores, and the industry consensus is credit scores are higher with a short sale than with a foreclosure.  Since San Diego prices probably won't bottom until 2011 or 2012, it's smart to rent during the interim 3 years anyway.  If you sign up for our monthly market update email, you will know when it's time to start buying property to take advantage of San Diego's next real estate boom.