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Wednesday, November 7, 2012

Ignorance is Risk in Short Sales


In my real estate business I run into a lot of people who seem to fit the old saying, “Ignorance is bliss.” I’d probably put it a different way – Ignorance is risk. Because I run a web site called MIShortSales.net, I get to talk to a lot of people who have already made some bad decisions or who have had some bad turn of events in their lives that have left them in distress. We start out talking about the possibility of doing a short sale, but I usually am quick to try to educate them on some things that can only compound their problems and about which many people are blissfully ignorant.

 
Many times I find that the distressed homeowner has moved on, usually to pursue work somewhere else. Almost all of them are too far underwater to be able to sell at a market price that would cover what they owe. Some have rented out their homes and some have friends or relatives living there. Some have just locked the place up and are leaving it sit empty. Many of these people just rent somewhere else, but some have actually bought another house. What almost none of them understand are all of the risks that have come into play, based upon that decision.

 
For those who have actually established residency in another state or area, there are several issues that are raised about their old home. One issue that is most often overlooked is that fact that once the old place isn’t your primary residence anymore the Homestead Tax Exemption needs to be revoked. For most, I suspect that this is a decision that was made overtly and not a case of ignorance; the homeowner just doesn’t want the taxes to go up 30-40% based upon it now being viewed as an investment property. That is risky because it is illegal and there are fines and penalties involved if the local taxing authority finds out. In the past local Townships and cities didn’t have any focus on this issue, but now all are looking for any extra revenues that they can find; so don’t take the risk that, “they’ll never find out.”


Insurance is another thing that is often overlooked, mostly out of ignorance. Insurance companies write normal homeowner policies for owners who actually live in the house. If the house is now a rental a different policy is required (to cover the structure) and the tenant should be required to have their own policy to cover their possessions and their own liability. If the place is sitting empty, there is yet another,  different  insurance policy that can be written to cover that scenario. Vacant home policies are more expensive, but better than having no coverage, which is what ends up happening, if the insurance company finds out based upon a claim that the house was empty. Empty houses are still being targeted by copper thieves and vandals, neither of which would be covered for a vacant house under normal homeowner policies.
 

Another risk for homeowners who choose to lock the place up and let it set is that of plumbing damage in the winter, should the heating system fail. As a realtor, if I take on a vacant property in the winter, I require that the place be properly winterized. Michigan winters can be harsh and the amount of damage that can be caused by frozen and split pipes pales in comparison to the $200-$300 to have the house winterized. Winterization involves completely draining the plumbing system and putting anti-freeze in all elbows. Even if you have a brand new furnace, it isn’t worth the risk to just turn the heat down to 50° and hope that the power stays on. I’ve lived through too many multi-day power outages to be comfortable with that strategy.
 

Finally there is ignorance of the changing real estate landscape. A few years ago it was common practice for Realtors® and even lawyers to advise clients to stop making mortgage payments, in order to get the proper attention from the lender for a short sale attempt. The attitude of lenders has changed as the recession and housing bust have played out. Now they would much rather deal with clients who have, in good faith, tried to keep up with the mortgage, but who are just tapped-out now.  The lenders also have more refinance options and more latitude to use programs that encourage proper behavior on the part of the homeowner, rather than the vindictive and destructive behavior that has been displayed in the past. Lenders even have the ability to offer the distressed short seller a small amount of money to help with their move to somewhere else.
 

In Michigan, leaving a vacant house and getting behind bring up another risk – seizure. Lenders have the right to try to determine if the property has been abandoned. They hire people to do nothing more than travel around peering into windows to see if there is anyone still living in the property. If they don’t see furniture and people around they will normally post a notice on the front door that states that the owners should call the lender within 48-72 hours. If the lender doesn’t get that call (and they won’t if you’re not there to see the notice) they have the right to seize the property, change the locks and immediately foreclose on it.
 

One thing that most people are also complacently ignorant about is that the law that made it illegal to issue a 1099 Tax Form for the balance that was forgiven in a short sale is set to expire January 1, 2013. That 1099-Form treats the amount that was forgiven as if it were income that you earned but upon which you paid no taxes. The current Congress recessed without acting on bills that have been introduced to extend that law. There will be a “lame-duck” session before the end of the year in which this might be taken up and passed, but that is not assured. You should let your Congressman (woman) know that this is an important thing for them to renew. Otherwise, short sellers whose sale doesn’t close until sometime in 2013 could be facing the ugly surprise of a big tax liability.

 
So, now you aren’t ignorant on these issues anymore and hopefully you understand the risks involved. The choice to take the risks or to take action to mitigate these risks is still yours to make. In every case the cost to mitigate is far less than the cost if the risk is realized.

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