DEAR BOB: I’m behind on my mortgage payments and probably will be foreclosed. People have told me to (1) do a “short sale” of the property, (2) give it back to the lender with a deed in lieu of foreclosure, or (3) proceed to foreclosure and then file bankruptcy. Please explain the pros and cons of each. Do I have to have a short sale before I can do a deed in lieu of foreclosure? What if I sell the property at market value, but that’s not enough to pay all the debts? –Napin E.
DEAR NAPIN: A “short sale” means you sell the property for less than the mortgage balance at its market value and the mortgage lender agrees, in advance, to accept the net amount as payment in full to satisfy the mortgage.
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Lenders can be very difficult about agreeing to a short sale. You need a listing agent experienced with short sales who can deal with your lender and who will insist you receive absolutely nothing from the sale.
Most mortgage lenders will not accept a deed in lieu of foreclosure. The reason is the lender then takes title “subject to” any liens or encumbrances you might have incurred during ownership. However, if you can prove to the lender there are no junior mortgages or other liens affecting title, such as unpaid property taxes, your lender might accept this alternative, which is cheaper for the lender than foreclosure.
If you let the property go to foreclosure sale, why file bankruptcy? That makes no sense unless you have other extensive debts such as credit cards you just can’t afford to pay. Should you file bankruptcy while the foreclosure is pending, that delays foreclosure but doesn’t prevent it.
Filing bankruptcy can be a major mistake, which will haunt you for years. Before you can file bankruptcy, federal law now requires you to get credit counseling.
If you sell the property at market value but that’s not enough to pay off the mortgage and other costs of the sale, you can pay the deficit out of your pocket and walk away happy that you don’t have a foreclosure, short sale or deed in lieu of foreclosure on your credit reports. Talk to your lender now to work out the best solution for both parties.
WHAT IS A LIFE ESTATE?
DEAR BOB: Several times recently you mentioned a “life estate.” What is that? –Mary D.
DEAR MARY: A life estate creates a legal right for a person to occupy but not own a property for the lifetime of that life tenant. Life estates are often created, for example, to provide a place to live for a surviving spouse, child or other person after the property owner dies.
For example, if a husband owns a house in his name alone as his separate property he might provide in his will or living trust the title to his house shall pass to his daughter — but subject to a life estate for his wife if she survives him. The daughter is called a “remainderman” (probably a remainderperson to be politically correct). Until the widow dies, the remainderman daughter owns an “expectancy.”
A life-estate tenant has the duty to maintain the property and not commit “waste.” The life tenant must also pay the property taxes and the mortgage interest if there is a mortgage (but the remainderman pays the mortgage principal portion of each payment). For more details, please consult a local real estate attorney.
AN INSTALLMENT SALE IS GREAT WAY TO MINIMIZE TAX
DEAR BOB: We bought a rental house at a distress sale in August 2004 at a very reasonable price. Now we want to sell it to our oldest son and hold the mortgage. What is the best way for us to avoid capital gains tax? –Rose Mary W.
DEAR ROSE MARY: Carrying back an installment-sale mortgage is a very smart way to minimize your capital gain tax by spreading the tax out over the years you receive payments from your son. You will be earning interest income and helping your son to buy his home with easy financing.
The only way to fully avoid the capital gain tax on such a sale would be to sell at the same price you paid for the property, which you probably don’t want to do.
Or, you can carry back an “interest only” installment-sale mortgage with no principal payments required, resulting in no capital gain tax until the balance comes due, perhaps in 10 or 20 years. For full details, please consult your tax adviser.
The new Robert Bruss special report, “The 10 Key Questions Smart Home Buyers Ask to Avoid Getting Ripped Off,” 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 delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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