Saturday, July 9, 2011

Turning Back A Home...

Q. Who do you know who has legal knowledge on turning a home back to the bank and the legal repressions of the same when the owner lives out of state?
A. First of all, I'm not a lawyer, but regarding your real estate questions, I would gladly discuss them on the phone. In a nutshell, turning a home back to the bank comes with a couple of downsides, especially when it is NOT your principle residence. You may have heard that there may be some forgiveness for owner occupied dwellings that have become untenable for the homeowner to maintain and when these go “back to the bank”, the IRS may be more gentle, but it's likely that any accommodation the bank gives an investor would be taxable.
With investors the IRS considers any money the bank forgives as income. And so there is income tax due.
For example, if you owe $200K and today's market value is $100K and the bank "takes it back", and forgives the difference; you have come out even with the bank and the market, but the IRS will count that $100K that the bank forgave you, as income.
Secondly, while many banks are taking back real estate, the benefit to you might be questionable. Remember there is a “trail” in everything we do in our lives. This trail will affect your credit score, at least for the near term. I am surprised to read that some financial councilors are suggesting a walk-away as a strategy, and I must take offense at that advice. There is on the one hand the moral question of whether it is appropriate to turn your back on a promise you made, (to pay back the money you borrowed). While on the other hand there is the business dilemma which asks, should you continue to invest in a property that has significantly less “market” value than it did when you bought it?
The Chicken Little's of the world will tell you your credit will be ruined for life if you choose to default, but only time will tell if they are right--I suspect that in a few years credit lenders will discount one or two of these kind of blots--because essentially all their applicants will have the same issues, and if they want to make a loan, they will have to overlook an occasional foreclosure.

So “turning a house back to the bank” is what everyday Realtors and Lawyers call a "deed in lieu of foreclosure", where in the simplest terms you mail in your keys instead of your next mortgage payment. If this is what you want to do, call a lawyer in the same county as the home in question. The concept is that you are giving up ownership voluntarily so the bank does not have to go through the expense and time of a full foreclosure. The local lawyer will be your resource in this effort.

Around the USA, people at all economic levels are just stopping paying their mortgage. The banks only realize they have a “new” problem after about 90 days, and that's when they start sending letters, but really they don't do anything for about 6 months or so. My experience in Florida shows that on average, it takes them 19 months to handle a complete foreclosure, from the last payment made until they own and begin to try to resell the house. (This is expensive for the bank, and usually the condition of a vacant home is also in question. They may have expensive repairs to manage along the way, together with taxes and HOA fees—all of which add up and which is why they are willing to do short-sales.)

If the property in question is a residence, there might be a few other options. You should certainly keep it insured, even if you are not paying taxes, HOA's and the mortgage. So long as you still have the deed, you don't want to have a hurricane or fire do additional damage.

You may want to rent your unused dwelling, even for a low figure. But to avoid a legal issue with a tenant, I would suggest offering it without a lease. At the same time, try to negotiate a deal with the bank—if they will accept a “deed in lieu” then go that way, if not at least you will have tried as an honorable gentleman. At that point, and with no luck there, you might let it go to foreclosure, but you might as well keep collecting the rent as long as you can.

A better choice might be a short sale. This is a transaction in which we Realtors offer the home for sale usually for 10% to 20% less than the tax Assessor guesses it's worth. Once a buyer is found--and that can be quick--the deal is sent to the bank for their approval. This required step usually takes a long time, and often the buyer will get cold feet and drift away during the wait. But it's the way these things go--once we hear back from the bank as to the acceptable price, we can either sell to the buyer we already have—or if he has moved along, we set the “new” asking price to what we know the bank will accept and look for a new buyer.
As a condition of the sale, be sure to include that if the bank accepts this offer, you are not responsible for any difference between the amount still owed and the sale price. Good luck with the IRS.
Dane Hahn is a real estate professional with Tarpon Coast Realty in Boca Grande, Englewood and Sarasota. He will answer your questions. You can reach him at or by phone at 941-681-0312. See him on the web at

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