President Bush signed into law the Mortgage Forgiveness Debt Relief Act of 2007, which is designed to relieve the stress many current home owners/sellers are feeling at the prospects of owing taxes on the "Phantom Income" earned when their debt is forgiven.  Whether through a foreclosure or a short sale, lenders usually end up forgiving the mortgage debt that was not repaid.  Under previous tax codes, this unpaid loan amount was considered a "gain" to the borrower and thus taxable "Phantom Income" at the tax payer's ordinary income tax rate.

The Debt Relief Act eliminates all or part of the tax consequences of forgiven mortgage debt for borrowers under very specific situations.  These rules must be met in order for the forgiven debt not to be a taxable event:

1. The debt must be discharged (forgiven) between January 1^st, 2007 and January 1^st, 2010. 
2. The property sold/foreclosed on must be the borrower's principal residence under the tax code, meaning the borrower must have lived in the home for a minimum of 2 of the previous 5 years.
3. The debt canceled must be "Qualified Principal Residence Indebtedness" which means that it is a loan that was used to acquire, construct or substantially improve a property. 

Thus, loans used to purchase 2^nd homes, investment real estate, etc do not qualify under this new provision. 

In addition, refinances usually only qualify up to the original amount borrowed to purchase the home.  For example, a borrower buys a principal residence for $450,000 by securing a loan for $400,000.  Later the home's value drops to $300,000 and is sold through a short sale for this amount.  Ignoring expenses, penalties, and any principle that may have been paid down, the lender has forgiven $100,000 in debt.  Under this scenario, the debt would not be taxable. 

However, assume this same principal residence was originally purchased for $300,000 with an original loan of $250,000.  The home appreciated to $450,000 and the homeowner refinanced for $400,000.  The value then drops back down to $300,000 and is sold for that amount with the lender forgiving $100,000 in debt.  Since the amount owed of $400,000 was greater than the original loan amount of $250,000, the first $150,000 in forgiven debt is taxable. 

There are other complicated rules governing the taxation (or not) of forgiven debt, so anyone finding themselves in this situation should consult their tax advisor or attorney for clarification in their specific situation.

Prospective homeowners and investors are looking to snatch up bargains at auctions being held to sell lots of homes that have been foreclosed on by banks.  As you drive around many towns, you'll see the ‘auction' signs directing you to homes that are up for auction and when you get to the homes, there will usually be additional information on when and where the auction will be held.  Are there really bargains to be had?  Sometimes. 

At the auctions I've attended, auction companies will auction anywhere from 1 or 2 homes to literally hundreds of homes over a couple of days.  At the auctions, every home receives a ‘winning bid' which represented the highest amount offered that day.  However, these bids do not have to be accepted by the banks who are the sellers.

I always thought the highest bidder is the winner.  Well not quite.  There are different types of auctions.  An ‘absolute' auction is what I was thinking of.  These are where there is no minimum bid required and the highest bid price is what the home will sell for.  However, most auctions of bank owned homes are not ‘absolute' auctions, but rather, subject to the seller's (bank's) approval.  This means the bank will review the offer and let the winning bidder know in a week or two if they'll accept the offer.

The most recent auction I watched was last month and an agent friend of mine did successfully buy a home for $329,000 (including the buyer's premium, which I'll explain  below) in Brentwood that I feel is currently worth about $400,000.  So my friend bought this home for about $70,000 under market value, or around an 18% discount.  A good deal indeed, and he plans on renting it out.

At that same auction, I represented a client in an attempt to purchase a home in Antioch for $280,000 (including buyer's premium).  With my estimate of the home's value being $390,000, this represented a very nice discount of approximately 28%.  However, the bank declined that offer, asking if my buyer would consider increasing the offer to the mid-$300,000's.  That would make no sense for most investors.  We turned down their counter-offer.

Offer?  Counter-offer?  Doesn't sound like an auction, but more like traditional real estate sales where a buyer makes an offer and the seller responds to the offer.  And since most auction buyers are investors looking for the ‘screaming good deal' and the banks are trying to recoup as much of their loan losses as possible, I understand why most deals do not come together.

Of the 20+ homes that I tracked at that November 2007 auction, banks have only accepted about 15% of the highest bids to date, with most being declined.  I'd be surprised if more than 20% end up selling.  The auction company's literature states that over 90% of high bids are accepted by the banks.  This was definitely not the case at this auction, however, a few deals were successfully worked out.

There are many things to be aware of when buying auction properties. 

• The homes are sold ‘as-is', meaning that you are not allowed to ask for any repairs to be made.  The banks usually do not have any inspections completed, so it is up to the buyer to inspect the property as thoroughly as possible, including having professional inspectors look at the home if they want.  There are usually one to three dates within a couple of weeks of the auction date where you can preview the home.
• Most auctions require that you put down from 5-10% of the winning bid as a down payment.  Usually a portion needs to be in a cashier's check with the balance in the form of a personal check.  You can get traditional loans to purchase auction properties (unlike buying at trustee sales on the courthouse steps where you need the full amount in cashier's checks at the time of purchase).  However, at some auctions there is no contingency for financing, meaning that you have to know that you can get the loan.  If your bid is accepted by the seller, your deposit is at risk if you end up not getting your loan. 
• The auction companies make their money by either charging the sellers a commission to auction the homes or by charging the buyers a "buyer's premium".  Buyer's premiums are common in the auction industry, but somewhat foreign to the real estate industry.  A buyer's premium is a percentage of the winning bid that is added onto the bid amount to establish the final purchase price.  Buyer's premiums usually range from 5-10% of the bid price.  In the case of my friend, the winning bid was $313,000 and the buyer's premium was 5%.  This made the final price $328,650.  Make sure you take the buyer's premium into account when determining what to bid for auction homes.

While the best deals may often be turned down by the banks, there will be some deals for investors.  If a buyer is looking for a home to purchase and live in, this is a fantastic way to buy a home for 10-20% below its current fair market value.  If you'd like to be notified of upcoming auctions, please feel free to call or email me and I'll add you to my "Auction Notification List".

There are many reasons for wanting to buy a smaller home.  The kids have moved out and 5 bedrooms are no longer needed.  The current home or yard have become too much to clean & maintain.  Baby-boomers are preparing for retirement. 

Regardless of why you are considering buying a smaller home, how should you approach this situation in the current market?  It depends upon your timing, relative home prices and what home values are doing where you next wish to live.

If you know you are going to sell & buy in the next year or two and the current value of your desired new home is considerably less than your current home, then you should sell as soon as is feasible for you.  This is because as prices decline, the values of the homes become closer which results in a net loss in equity. 

If everything drops 10% in value over the next year, then the value of a current $600,000 home drops to $540,000 and the new smaller home that is today worth $400,000 drops to $360,000.  The difference in prices changed from $200,000 to $180,000 and that $20,000 change in the spread is a net loss to the seller.

The situation can be far more dramatic for home owners who are considering selling and moving to an area of the country where prices are flat or perhaps even rising.  Say you want to retire in beautiful Charlotte, North Carolina where you can buy your dream home today for $300,000.  If homes there continue to appreciate over the next year, say 5% or $15,000, while the home here depreciates by $60,000, the real loss in net worth is $75,000 for waiting one year to retire & sell. 

This can be a huge hit to a baby-boomer's retirement nest egg.  Thus, if you are considering selling your current home & buying a less expensive home in a depreciating market, it is best to do so sooner than later. 

However, if your dream smaller home happens to be more expensive than your current home, and is located in an area which is also experiencing declining prices, then you do not need to be in a rush to sell & buy quickly.  There are two benefits to taking your time.  Firstly, the price difference between the homes would be narrowing, meaning that ‘net loss' discussed above becomes a ‘net gain'.  Secondly, waiting will allow buyers to purchase at a lower price which will result in slightly lower buying expenses and lower property taxes. 

Record numbers of home owners in East Contra Costa County, as well as the country, are struggling to make their monthly mortgage payments with most of them owing more than their homes are currently worth.  Many of them are on the brink of not being able to make their payments and fall into the foreclosure process.  I've had several owners ask me if they should ask relatives to help bail them out of their predicament. 

In most cases, the answer is no.  In most cases owners would be throwing good money after bad and feeling even worse because now they owe money to their family members as well as the bank.  The bottom line is that if a relative's loan only postpones the inevitable loss of the home, they should not ask for or accept generous bailout offers.  The owner is not only going to lose the home, but feel horrible for accepting money from relatives that they cannot repay. 

Owners in this situation must honestly evaluate why they're in the situation of not being able to afford their homes.  For most people stuck in this situation, it is because they borrowed more than they should have using low adjustable rate loans.  With interest rates adjusting upwards, their payments have increased from uncomfortable to unmanageable.  If accepting a loan or gift from a family member does not eliminate the cause of the problem, the owners are likely to find themselves in the same situation once the borrowed amount is spent.

There are a few cases where, in my opinion, it actually does make sense to accept an offer of financial assistance from family members.  If the owners are in this situation due to a temporary set-back, such as a loss of job, medical expenses, etc, then it would be logical to accept the loan as a ‘bridge' solution until the owners get back on their feet financially and can resume making their house payments and pay back the borrowed funds.

Another case where borrowing money makes sense is when owners who have equity in their homes, but cannot afford the monthly payments and are at risk of losing the home in foreclosure.  If they sell their home, they'll walk away with cash and save their credit scores.  Before borrowing the funds, get a reality check from a trusted real estate agent on how much the home would sell for and how much would be netted after sales expenses and existing liens against the home.  If the sale nets enough to repay the borrowed money and have cash left over, then it makes sense to borrow the money, keep the home from being foreclosed on, then sell the home. 

Lastly, if you have an obscenely rich relative who will never need the money back and can really bail you out with a large sum of money, (enough that you can payoff your loan sufficiently to be able to afford a new lower payment) then go for it and be thankful.

As a final comment, regardless of the home owners reason for the predicament and believe they'll be able to recover, it is never wise to borrow a family member's money if it is going to create a financial hardship on the kind relative. 

Congratulations!  You've been recognized for your talents as a valuable employee and offered a promotion within your company.  You'll soon be tackling exciting new responsibilities.  One of the first challenges is that your employer wants you across country in 2-3 weeks and you have a family, kids in school, pets, a home to sell, etc.

Most employers realize that a job change which requires a move at the same time can be quite stressful.  In order to make the transition as smooth and stress-free as possible, many employers offer relocation packages to their employees.  These packages are designed to reduce many of the headaches associated with a sudden move as well as pay many of the expenses. 

The services they offer vary widely from employer to employer as well as the type of position you're moving up to within your company.  Typical packages are coordinated through relocation companies and include travel & temporary housing allowances, moving services and real estate services on the selling and buying end.

The wonderful thing about most relocation deals is that they pay the typical expenses associated with selling and buying your homes.  These costs include inspections, title & escrow fees, loan fees, real estate commissions, etc.  These expenses typically equal 7-8% of the selling price of a home and 2-3% of the purchase price of the new home.  This savings of $50,000+ allows most relocated employees to transfer all of their equity into their new home.

Relocation companies have relationships with real estate brokers and are going to request that you get written bids from 2 to 3 agents.  It is important to understand that you usually have the right to interview and hire any agent you think will be best for you, so long as the agent/broker agrees to the relocation company's terms.  So if you have a preferred agent, who is familiar with you and your home, make sure you interview that agent as one of the 2 or 3 agents.

Many sellers wonder what their responsibilities are when they turn over possession of the home they just sold to the new owners.  How clean should the home be, where do they leave the keys and remotes, when do they turn off the power, etc.  I feel the Golden Rule sets a terrific guideline here:  "Leave the home as you would like to receive it if you were the new owners."

Would you like to move in to find out that the water was already shut off, the carpets need cleaning before you bring your furniture in and there are bags of garbage on the side yard?  Of course not.

Here are my basic recommendations in these areas.  Arrange in advance with your real estate agent an appropriate place to leave your keys (house, mail box, pool, etc), remote controls, paperwork, alarm codes, etc.  The paperwork should include original builder manuals and warranties as well as those from any improvements such as a pool or new appliances. 

Schedule the phone, tv/cable, mail service and any other non-essential services to be transferred to your new home or turned off as of your last day in your old home. 

Schedule the PG&E and water services to be turned off 2-3 days after you give possession to the new owners.  Keep the garbage service in your name until the garbage is picked up after you move out.  Communicate this timing to the new owners, through your agent, so they will know when to make sure these items are set up in their names, ensuring uninterrupted service.

It is a great idea to leave the new owners a note detailing what you've left them, basic instructions on the systems of the home (alarm, spa, sprinklers, etc), the names and numbers of service providers such as gardeners, and simple stuff like your mailbox # and garbage pickup day.  Your buyers will appreciate your extra effort, just as you would if you were moving in.

Every seller has a different view on how clean they should leave their home for the new owners, just as each buyer has different expectations on how clean it should be when they move in.  Most sellers are very conscientious about how clean they leave the home, while a few do not seem to care.

So how clean should you leave your home when you move out?  Contractually you are usually obligated to a minimum standard of maintaining your home in "substantially the same condition as on the date of acceptance" of the buyer's offer.  This means that if your home was filthy when the offer was made, you may leave your home dirty and if your home was immaculately clean when you accepted your offer, you're obligated to leave it very clean.

In addition, the standard California Association of Realtors® Purchase Agreement states that "all debris and personal property shall be removed" unless agreed upon otherwise.  So you may not leave your old car parts, unwanted furniture or bags of garbage when you move out.

Beyond these minimal contractual obligations, many agents will tell their sellers that after moving out, they should do a final ‘wipe down' of all surfaces and leave the home and garage ‘broom swept'.

Since the buyers of your home likely just paid more than a half a million dollars for your home, why not have a professional home cleaner do a ‘move-out' cleaning, have the carpets steam cleaned and have a yard care service maintain the yard for a week or two after you move out.  All of this will cost you less than 1/10^th of 1% of what you sold your home for in most cases. 

If you decide to clean your home yourself, make sure you leave enough time to do the job properly.  Remember that you've just moved most of your worldly possessions, which often takes longer than you think it should and you'll be tired.

For many reasons, home sellers often find themselves in the position of selling a home that is vacant.  Job changes, family emergencies, or simply buying another home prior to selling an existing home will result in the need to sell a vacant home. 

Homes that look like ‘model homes' typically sell more quickly, and for more money (even though the beautiful furnishings and décor are not staying with the home).  Buyers easily envision themselves living with comparable surroundings, making the purchase decision easier as well.  So what is the best way to sell a vacant home when the home will not have the benefit of beautiful decor?

The key is that the home must show bright, clean, open, airy and as perfect as possible.  When you move out of a home, it is amazing how many dust-bunnies have accumulated, how many spots on the walls need touch up paint, and you are reminded of the original color of your carpet where your couch used to sit.  The slightest flaws are emphasized when there is nothing else to look at in a room.  It is amazing how a broken outlet cover jumps out at you when there is nothing else to focus on in a room.

When possible, I suggest my clients have vacant homes painted, carpets cleaned or replaced, landscaping neatened up, and the home have a thorough professional cleaning.  One of my sellers earlier this year spent over $12,000 to have their vacant home painted inside, re-carpeted, cleaned, some electrical repairs completed, some light fixtures replaced and the landscaping touched up. 

Before completing these items, the home would have been viewed as a fixer-upper, with every issue being magnified.  Once these items were completed, the home showed beautifully.  The bottom line is that the home sold at a reasonable price that I am confident was $20,000 to $30,000 more than the seller would have received in the home's previous condition, making the cost of improvements a wise investment.  In addition, my client's home was one of the few to actually sell in their neighborhood during the past 6 months and now there are two of the same model priced $25,000 and $35,000 less than what my client's home sold for. 

A representative of the Contra Costa Mosquito & Vector Control District spoke at each of the local real estate agent tour meetings explaining how we as agents, as well as the general public, can help to prevent the spread of West Nile Virus.

First a little background:

West Nile Virus is a disease carried by birds and spread from bird to bird by infected mosquitoes.  People, and other animals, can be infected as well by mosquitoes.  Most people will never show symptoms or realize they were infected (1 in 150 infected people show symptoms according to the Mosquito & Vector Control District).  In rare cases though, people can become very ill or even die from the infection.  Other animals have a much higher death rate, such as horses where 1 in 3 affected horses will die.

So the key to preventing the spread of West Nile Virus lies in preventing the breeding of mosquitoes as well as the avoidance of being bitten by mosquitoes.  Mosquitoes breed in standing untreated water, and it does not have to be much water either.  Examples of prime breeding areas are neglected pools & spas, ponds, fountains, animal troughs and even items that capture & hold sprinkler or rain water such as old tires, Frisbees, etc.

Why did the District meet with local real estate agents?

The District uses many methods of communicating with the public.  In the current housing market, with such a high number of vacant homes, they realized that agents list, view and show these vacant homes and can be part of the front line of defense in reporting these potential mosquito habitats.  They also asked us to share with our clients this information so that our clients could eliminate potential breeding sources and report on other sources at vacant homes around them.

How to eliminate potential mosquito breeding areas:

The best way is to make sure all water sources are properly maintained.  Pools, spas, ponds, fountains etc that have filtered and chlorinated water will not be suitable breeding spots.  If you have a natural pond or other water feature, one of the best methods is to stock the water with mosquitofish.  The District will provide these fish to you free of charge.  These fish will eat up to 500 mosquito larvae per day and will repopulate your water feature to keep it mosquito free for years.

Dump and change water frequently.  If you have pets with outdoor water bowls, dump the water every day and replace with fresh water.  Any standing water, such as in old wheel barrows, coffee cans, tires, etc should be dumped out.

If the potential problem area is with another home, talk with the owner or report it to the district so that they can deal with the owner.

How to report areas of concern, or learn more:

If you suspect any home has standing & improperly maintained water, report it to the Contra Costa Mosquito & Vector Control District at either (925) 685-9301 or you can email them at ccmvcd@ccmvcd.net.

You can learn more about prevention at the District's website:  http://www.ccmvcd.dst.ca.us/.

Your property tax dollars at work:

The District is actually a public health agency, funded by the property taxes all property owners pay every year. 

One of the most common questions I am asked is "Can you really buy houses on the courthouse steps and how does it work?"  Especially now, with all of the news of home owners losing their homes to foreclosure in record numbers, investors and home owners alike want to buy homes and make huge profits or pick up instant equity.  If you go to the courthouse steps in Martinez any Monday through Friday at 10:00 am or 1:30 pm, you'll see that it is possible.  The trustee sales are held at the top of the steps, just across the street from McDonalds.

How it works is relatively simple.  The auctioneer opens up the bidding by placing an initial bid on behalf of the lender for the amount owed the lender plus penalties and fees.  If anyone else present wishes to buy the home, they may bid on it and the highest bid wins.  Well over 95% of the homes are purchased by the lenders at the initial bid price.  This is because there is very little or no equity in the homes, making it pointless for other potential buyers to bid on the properties.

I attended an auction in January where 20 homes were to be sold.  Eight of them were postponed or canceled for various reasons and of the remaining twelve, eleven were bought by the banks at the initial bid prices.  The one home that was bid up was the one that I was there to try to buy.  I estimated its value conservatively at $360,000.  The opening bid was around $150,000 and it was bid up by six bidders to $291,000 and was ultimately bought by a friend of mine who's a real estate agent as well.  This was more than I was willing to pay, but probably still a good deal. 

She ended up listing the home for $369,000 and selling it very quickly for $350,000.  The home was in good shape, which is unusual in foreclosed on homes, only needing a fresh coat of paint to be ready to sell.  After fix-up costs, selling expenses, and carrying costs, my friend had profits of around $45,000 before income taxes. 

There are many challenges and risks involved in purchasing homes at trustee sales.  The major challenge for most people is that you have to pay in full for the home at the time you purchase it.  This means bringing cashiers checks totaling as much or more than the purchase price.  Some people may have $200,000 to $500,000 sitting in a bank account, but for many investors, that means drawing equity out of other real estate to buy foreclosures.  Thus, they are shifting some of the risk onto their current home.

Another major risk includes unknowingly assuming other liabilities.  When a home is sold at foreclosure, junior liens to the lien initiating the foreclosure are wiped out.  So if a home has two mortgages, and the first mortgagor forecloses, the second loan is removed from the property.  (Junior lien holders will know of the foreclosure, and if they feel there's sufficient equity to recoup part or all of their loan, they can bid to buy the home as well)  However, if the second mortgagor initiates the foreclosure, the home is sold to the buyer subject to the first mortgage.  There can be other instances where the buyer will be responsible for other debts on the home as well, such as certain types of taxes the former owner may have owed.

A third significant risk is that unlike buying most resale homes, you typically do not get a chance to preview the home prior to buying it.  You are buying a home that sellers lost due to their financial inability to make the house payments, so their motivation (or ability) to maintain the home has understandably dropped as well.  Thus, quite often buyers end up with fixer-upper homes.  So foreclosure investors end up with unknown fix-up expenses and time for repairs. 

However, if you have the stomach to face the risks, and do enough investigating prior to making an offer, then there are definitely a few homes that will be sold on the court house steps to investors who'll make a tidy profit.

Congratulations!  You got the keys to your new home.  You're very excited until reality hits:  now you have to pack and move everything you own. 

The simplest way to move is to hire professional movers.  They will come out, pack everything you did not pack (even your dirty dishes).  They supply all of the packing materials, moving equipment, labor, vehicles and even insure everything they pack in the event of damage.  They will load all of your possessions, transport them, and then unload them into the designated rooms of your new home.

They will provide clients with a list of helpful hints to make your move smooth as well as items they are not permitted to move such as chemicals and flammable items.  For local moves, fees will often be based on time (you will save $$$ by packing your items) while long distance moves fees will be charged based on weight & miles (you will save $$$ by disposing of the 10 year collection of Car & Driver! magazine).

Another way of moving is to hire a service that drops a large container on your driveway a few days prior to the move date.  You would then have a few days to pack & load all of your items into the containers.  The service would then transport the containers to your new driveway where you would have a few days to unload everything.  While this method may save you some money, it does not normally insure your property and you provide nearly all of the packing, loading & unloading labor. 

The least expensive method is the ‘food & drinks' method of calling all family & friends over for the pleasure of helping you move, during which you'll provide a delicious take-out meal.  You'll want to make sure you do all you can in advance of your crew arriving.  Buy a bunch of moving boxes & packing tape.  Borrow or rent a 2 wheel dolly, a 4 wheel dolly, a refrigerator dolly if needed and a bunch of moving blankets to pad your stuff.  You can find most of these items at your local moving company store and most rental facilities.

Box & label your belongings before your friends show up to make the best use of your friends' time, and so that items are protected the way you want them protected.  Otherwise your best friend may very well help you pack your cd collection with your fishing lure collection using your grandmother's antique doilies to protect one from the other.   Always keep in mind that there is no insurance for your items when paying with pizza & beer.