All Forum Posts by: Andrew Hoek

Ten years ago, the real estate market was on its way to all time highs. Anyone who was not investing in real estate was a fool. Along with all of the excitement came the infamous 10 year, interest only loan. Fast forward 10 years and the real estate market is slowly recovering from one of the largest crashes of all time.

While the market has somewhat recovered, millions of property owners remain underwater on their real estate investments. Moreover, the term of their interest only loan is suddenly coming to an end. In the blink of an eye, mortgage payments can increase 30, 40, even 50 percent. In the wake of increased payments, many rental properties will become sinking ships for landlords, and many homeowners who are barely keeping up with payments will be forced to either re-finance, modify, or walk away from their homes.

There are options available to those who are now forced to pay principal in addition to the interest on their loans. The first option is to re-finance. For those lucky enough to be able to re-finance, this will be the best case scenario. Please note, however, that a re-finance does include closing costs and obtaining new title insurance for your lender. For others, if the property is underwater, refinancing may not be an option and they will need to look to a mortgage modification. A mortgage modification can be in the form or a principal reduction, or adjustment to the monthly payment. Modifications require a balancing act where the borrower makes enough money to afford the loan, but also suffer a hardship that prevents them from making the original monthly payment. A final option for those who simply cannot keep up with their payment, is a short sale. A short sale is the sale of property for an amount that is less than what is owed to the bank. The sale requires bank approval and can be several month process.

Following the housing bubble of 2006-2007, Florida experienced a surge of foreclosures and short sales. A short sale is the sale of real property for less than the amount owed the mortgage. Short sales are subject to approval from the bank, but have been a saving grace for millions of homeowners stuck in “underwater homes”.

For many years, short sales were the preferred method of loss mitigation. Banks liked short sales because they were not forced to take on the inventory and manage the home. Borrowers liked short sales because banks were quick to waive the deficiency with short sales. A deficiency is the amount of money remaining due on the promissory note after the sale of the property. In Florida, banks are provided a statutory right to pursue borrowers for deficiency judgments. Accordingly, obtaining a waiver of the deficiency is a huge benefit to the borrower.

There are some downsides to the deficiency waiver, however. Unfortunately, the IRS treats forgiven debt as taxable income. This is largely unfair, because the IRS is taking a form of “phantom” income. In other words, individuals are taxed on income that they never really saw. This comes into play with distressed property, because any time the bank releases a borrower from the deficiency, the borrower is taxed on the amount of forgiven debt.

In the past, there was a tax forgiveness program issued by the federal government in 2007 that waived taxation on this “phantom” income. The tax forgiveness program sunsetted in December 2013, and to date, has not been revived. Last week, however, Congress re-addressed the tax forgiveness program, and the House of Representatives passed a bill to extend the tax forgiveness through 2014. While many of the details of the bill are unclear, the outlook appears positive for those who completed a short sale in 2014.

If the bill passes both houses and becomes law, we expect there to be another uptick in short sales through 2015. The tax forgiveness program allows borrowers an excellent opportunity to get out from under a home and get a fresh start. Now is the time to take advantage of short sales while tax forgiveness is on the horizon; it will not be around forever.

To learn more about short sales visit:  www.flapropertylaw.com