3 paths to take when facing foreclosure

DEAR BOB: I’m behind on my mortgage payments and probablywill be foreclosed. People have told me to (1) do a “short sale” ofthe property, (2) give it back to the lender with a deed in lieu offoreclosure, or (3) proceed to foreclosure and then file bankruptcy. Pleaseexplain the pros and cons of each. Do I have to have a short sale before I cando 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 theproperty for less than the mortgage balance at its market value and the mortgagelender agrees, in advance, to accept the net amount as payment in full tosatisfy the mortgage.

Purchase Bob Bruss reports online.

Lenders can be very difficult about agreeing to a shortsale. You need a listing agent experienced with short sales who can deal withyour lender and who will insist you receive absolutely nothing from the sale.

Most mortgage lenders will not accept a deed in lieu offoreclosure. The reason is the lender then takes title “subject to”any liens or encumbrances you might have incurred during ownership. However, ifyou can prove to the lender there are no junior mortgages or other liensaffecting title, such as unpaid property taxes, your lender might accept thisalternative, which is cheaper for the lender than foreclosure.

If you let the property go to foreclosure sale, why filebankruptcy? That makes no sense unless you have other extensive debts such ascredit cards you just can’t afford to pay. Should you file bankruptcy while theforeclosure is pending, that delays foreclosure but doesn’t prevent it.

Filing bankruptcy can be a major mistake, which will hauntyou for years. Before you can file bankruptcy, federal law now requires you toget credit counseling.

If you sell the property at market value but that’s notenough to pay off the mortgage and other costs of the sale, you can pay thedeficit out of your pocket and walk away happy that you don’t have aforeclosure, 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 “lifeestate.” What is that? –Mary D.

DEAR MARY: A life estate creates a legal right for a personto occupy but not own a property for the lifetime of that life tenant. Lifeestates are often created, for example, to provide a place to live for asurviving spouse, child or other person after the property owner dies.

For example, if a husband owns a house in his name alone ashis separate property he might provide in his will or living trust the title tohis house shall pass to his daughter — but subject to a life estate for hiswife 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 propertyand not commit “waste.” The life tenant must also pay the propertytaxes and the mortgage interest if there is a mortgage (but the remaindermanpays the mortgage principal portion of each payment). For more details, pleaseconsult 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 inAugust 2004 at a very reasonable price. Now we want to sell it to our oldestson and hold the mortgage. What is the best way for us to avoid capital gainstax? –Rose Mary W.

DEAR ROSE MARY: Carrying back an installment-sale mortgageis a very smart way to minimize your capital gain tax by spreading the tax outover the years you receive payments from your son. You will be earning interestincome and helping your son to buy his home with easy financing.

The only way to fully avoid the capital gain tax on such asale would be to sell at the same price you paid for the property, which youprobably don’t want to do.

Or, you can carry back an “interest only”installment-sale mortgage with no principal payments required, resulting in nocapital gain tax until the balance comes due, perhaps in 10 or 20 years. Forfull details, please consult your tax adviser.

The new Robert Bruss special report, “The 10 KeyQuestions Smart Home Buyers Ask to Avoid Getting Ripped Off,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010, or bycredit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2007 Inman News

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