DEAR BOB: Our house is in the foreclosure process. Due to my husband’s unemployment and disability, we can’t afford the mortgage payments and are now two months behind. We have received several offers from investors who want to buy our house. And we want to sell because chances of finding a good paying job in our area are slim to none. My brother has offered my husband a good job in a distant city but first we have to deal with our house. The problem is it is worth less than the mortgage balance. The result is nobody will buy it until after the bank forecloses. We talked with a Realtor about listing it for sale, but when he found out our mortgage balance, he said “No way.” His estimate of our market value is about $10,000 below our mortgage balance. He suggests a “short sale” and insists on the lender’s approval before he will accept our listing. What is a “short sale” and is it good or bad for us? – Kathryn H.
DEAR KATHRYN: A “short sale” is when you ask the lender to accept less than the full mortgage balance for a loan payoff without personal recourse deficiency against you.
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In your situation, most mortgage lenders will accept a $10,000 loss on your mortgage rather than to go through the foreclosure procedure and probably incur a larger loss.
But mortgage lenders, usually correctly, don’t trust borrowers who ask for a “short sale.” The reason is a prospective buyer might be trying to get a bargain purchase price at the expense of the mortgage lender.
I suggest you obtain some indication from the lender that a short sale will be accepted so that Realtor can list your home for sale at its market value with a reasonable probability the lender will accept a short sale at market value but below the mortgage balance.
You should be aware of the tax consequences of a short sale. The mortgage lender will probably notify the IRS of your short sale debt relief which will be taxable to you. For full details, please consult your tax adviser.
PROS AND CONS OF PROPERTY PARTNERS
DEAR BOB: I would like to get started investing in real estate. My specialty is carpentry where I make a very good income as a “finish carpenter” on new houses and remodeling. I have a close friend who has too much money and he suggested we invest in fixer-upper “handyman special” houses for our mutual benefit. Is it a good idea to invest with a partner? – Ron S.
DEAR RON: By the way, there’s a new real estate term for fixer-upper or handyman special houses. “Designer ready” sounds much better, doesn’t it?
Real estate partnerships can work out great. Or they can be disasters.
My one and only real estate partnership resulted in my buying out my partner when we disagreed over whether or not to fix up our slum property. Fortunately, he needed cash (which I borrowed from my parents) and I lived happily ever after without partners. Last I heard, my ex-partner was in jail (on another matter not related to me).
You and your money friend can be a great combination. I suggest you enter into a partnership contract which will protect you both in case of disagreement. With a firm contract, the partnership is likely to be very successful.
IS NEGATIVE CASH FLOW BAD?
DEAR BOB: I recently read several books recommending investing in single-family rental houses. From having studied your articles for several years, I know you also recommend such investments. However, in my area I can’t find any house in a decent area that can be purchased with a 20 percent cash down payment that will produce a positive cash flow. Is a negative cash flow from rentals bad? – Jen U.
DEAR JEN: Negative cash flow means the rental income is less than the property expenses. Let’s put it this way: negative cash flow from a property is not advantageous.
However, I hasten to explain I have owned many negative cash flow rental houses, which turned out very profitable when I eventually sold. The profit reason was rising market value.
If you can afford a small negative cash flow, which is less than the market value appreciation of the house, it could be a great investment.
For example, if you have a $100 per month negative cash flow, but that rental house is rising in market value by $500 per month, that is a good investment if you can afford to pay the negative cash flow from your other income until you eventually sell or refinance that rental house.
The new Robert Bruss special report “Foreclosure and Distress Property Profit Secrets” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF delivery at www.bobbruss.com. Questions for this column are welcome at either address.
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