News for People on the Move

The ABCs of “Strategic” Mortgage Defaults

Did you know that 26% of all mortgage defaults (nationwide) are “strategic” – where the homeowner can afford the mortgage but chooses to walk away? Strategic defaults happen most often because of negative equity (when the homeowner owes more on the mortgage than the home is worth). That’s why the percentage of all mortgage defaults that are strategic is likely higher in Arizona than the national average of 26% – because the over-inflation of home prices was particularly dramatic here.

Before I go any further, I should say that I’m neither condemning nor condoning strategic defaults. I’m simply reporting on a real estate trend – what I always do. And, I should say that I’m not an attorney and none of the information I’ve presented here should be construed as legal advice. If you have questions about foreclosure or “strategic defaults” or are thinking about defaulting on your mortgage, consult with a legal professional.

Okay, disclosures out of the way, the relatively high rate of “strategic” defaults might suggest that it’s a no-lose way out of an upside-down mortgage. But that it is most certainly not. Like all decisions in life, there are implications associated with strategic defaults that can follow you for years. Read on to learn all about them.

Credit score implications

• Most mortgage lenders won’t lend to people who have had a foreclosure within the last 4 years; so if you do a “strategic default” plan on renting for 4 years.

• While you may be able to get a mortgage in 4 years, the foreclosure stays on your credit report for 7 years.

• Interestingly, it’s not the foreclosure or short sale that does the most damage to your credit report – it’s all the late payments you rack up as you move toward foreclosure or a short sale.

• Fortunately, those late payments will be off your credit report in 2 years.

Legal implications

• In Arizona, there are two “anti-deficiency” statutes that protect the homeowner’s wages and other assets from the bank. In other words, if you default on your mortgage loan, the bank can take the collateral for that loan (the house) but has no other recourse. Not every state has those anti-deficiency statutes.

• If you have a second mortgage, as long as it was used as “purchase money” – to buy the home (as in an 80/20 mortgage) – the bank cannot come after your wages or other assets if you default on that loan.

• If you default, the bank has two options: 1) it can sue you in court; or 2) it can foreclose through a trustee sale. The second, as the cheaper and faster option, is the most common.

• If you decide to do a strategic default, you’ll probably have about 6 months from when you stop paying until the home is foreclosed. 10 months is not uncommon. But the only time guarantee is that the bank is required to notify you 91 days in advance of the trustee sale (the date the home will actually be foreclosed).

Tax implications

• There is a “forgiveness of debt tax” but it doesn’t apply as long as you’ve lived in your home for at least 2 of the last 5 years and the mortgage was used entirely as “purchase money” – to buy the house.

• There is an additional form you’ll have to submit to the IRS. Talk to your accountant.

Other options

If you make the decision to do a “strategic default” you should be sure that you’re comfortable with foreclosure as a possible end result. That said, there are some other options you could pursue with the lender.

• One alternative to foreclosure is a short sale. You sell your home as you normally would, but the bank has to agree to the purchase price – which will be some amount less than what you owe on the home. The bank takes a loss on the difference between what you owe and the proceeds of the sale.

• A short sale will still be a negative mark on your credit, but not as negative as a foreclosure.

• In some cases, you could negotiate with the bank not to report the late payments (those payments you miss between the time you default on the loan and when the short sale goes through) to the credit bureaus.

• Another option is to negotiate down your mortgage principle. If you’ve decided already that you’re willing to accept a foreclosure, if that’s the end result, you could call the bank and ask them to reduce the principle you owe on your mortgage to the market value (or close to). If you no longer have negative equity (or as much negative equity), that should eliminate the reason you decided to do a “strategic default” in the first place.

When I blogged about strategic defaults online at ActiveRain, I received a flurry of comments. It’s obviously a topic about which people are very impassioned. Are you? Send me a note and let me know what you think!

Selling? Follow These 3 Steps to Success – Step 1: Market your home. Step 2: Market your home. Step 3: Market your home.

No, my “paste” function didn’t get stuck on repeat. The fact is that marketing your home is the most critical factor that will determine whether, when, and for how much you sell your home. It should be steps 1, 2, and 3 when you’re listing a home for sale.

The other day a very prepared prospective client asked me, “Bob, as a real estate agent, how do you market your listings? Do you a) place a newspaper ad; b) set up a single listing website; c) feature my home on your website; or d) do something else?”

My answer: “All of the above!”

Just as successful businesses don’t use one single marketing strategy to the exclusion of all others, so is it with real estate. Successful real estate agents use a number of marketing tools to market their clients’ homes.

That said, some are more popular than others.

Listing online

Once the mainstay of real estate marketing, newspaper ads have become dramatically less popular. With the rise of searchable home listing sites like REALTOR.com, Zillow.com, Trulia.com, and others, flipping through the pages of a physical newspaper is, for most buyers, so 1999.

And that’s the key in successfully marketing your home to sell – going where the buyers are. Sure, you can get a killer deal on a 1/4 page ad in the newspaper, but if very few buyers read it, what’s the point?

Another benefit of advertising your listing online is the ease of measurability. You can easily measure the number of impressions your ad or listing received (how many times it appeared on a page that a web visitor was looking at), the number of clicks on that ad or listing, and more. That way, you can see what’s working – and what isn’t – and make smart changes in response.

A picture is worth. . . well, you know

It’s so cliché that I hate to say it, but a picture is worth a thousand words. And a video is worth a thousand pictures. That’s why I often create virtual home tours for my clients’ listings and then post those virtual tours online (on the same sites where I post the listing).

How often have you caught yourself whiling away the afternoon viewing virtual tours on the web? (Admit it!) Therein lies the success of this strategy.

It’s all (or partly, at least) about who you know

They say that most real estate transactions are the result of connections. That’s why the best real estate agents have extensive networks of other buyers’ agents and sellers’ agents – across the country – who act as one big referral network. That way, I can target my clients’ listings to buyers’ agents who help buyers in that particular neighborhood, for example.

Market, then market some more

At the end of the day, marketing – online, offline, through connections, with a yard sign, whatever – is how you’ll get the word out about your home for sale.

When interviewing real estate agents to help you sell your home, ask about their marketing strategies. Ask how much they spend on advertising and where they advertise. (How much money a real estate agent spends on marketing is not nearly as important as how he spends it.) Ask what kind of innovative technologies they use to market your home. And perhaps most importantly, ask to see the proof.

Have an article idea? A question you’d like answered? An issue you think would be worthwhile for us to explore? Send your ideas, questions, and comments to bob@myphoenixmls.com. We look forward to hearing from you!