The thought of the day for 2006-08-02 is about “Soft Market Debris”.

This post is also a continuation of the “Saga of Sonnypage” an Atlanta based Realtor who posts on my board on the Motley Fool under that name.

I previously wrote about Sonnypage in Lights Out in Georgia posted on 2006-07-27.
I have another one from Sonnypage in the works.
In a quirk of fate they will be posted out of date sequence.
Stay tuned.

Here goes, from Sonnypage:

Sonnypage 2006-08-01

All of the regulars here on the Mishedlo board know by now that my wife and I are a husband and wife real estate team who live and work north of Atlanta, out in Roswell and Alpharetta.

We did not know Toni and Paul back in 2000 when they bought their home in Kensington Farms, north of Alpharetta, up in Cumming. That was the peak of the real estate boom here. We did forty four deals that year and that is a level we have never matched. Anyway, the home Toni and Paul bought that year was a great house but had an awful back yard. Actually, where the back yard should be was instead a reasonable facsimile of the Grand Canyon. I am sure at the time it was the best they could get and they probably thought, we will sell in a few years, nice profit, get something better.

This lets me introduce to you Sonnypage’s Third Rule of Real Estate:

“In a soft market, marginal listings become flotsam and debris”.

Toni and Paul paid $495,000 for their home in 2000. In the spring of 2005, they put it on the market with their first Realtor for $600,000 but had no offers. Then, three months later, they listed with their second Realtor at $575,000, again, no offers.

On December 1st we listed another home in the same neighborhood for $590,000 and by Christmas Day that house was under contract for $575,000. It closed in February. That is how we came to meet Toni and Paul; they were referred to us by their neighbor.

Surely, they thought, these Realtors can sell our lovely home also. We listed for $550,000 and got no offers, reduced to $535,000, and then got three offers over the next two months, but all for around $500,000. In their counteroffers, Toni and Paul barely budged, they made only minor concessions.

Were they, are they still, under financial pressure? They put their furniture up for sale too, with price tags on different pieces around the house. We suggested that might send the wrong signal to prospective buyers. One very hot day in July, as I was showing their home, the windows were open, the air conditioning off. At any rate, we could not get it sold, at least not for what they insisted they wanted. Our listing expired last week. They are back on the market today with Realtor number four. They will apparently continue to try to sell and continue to make their payments, for now. At least, that’s my take.

The other house sold, at only a small price reduction, because it was a perfect home on a perfect lot. They owners had updated it, maintained it, in the years they owned it, plus they had a spectacular view of the lake from their back deck. On the other hand, the feedback we received on Toni and Paul’s home was “it looked dated” plus the awful ravine in the back.

Sonnypage’s Third Rule of Real Estate, unfortunately, means that Toni and Paul will only be able to sell their home for a reduced price and not what I suspect they owe. It’s a tough spot to be in, especially in Georgia. We have what is called “non judicial foreclosure”, which means the lender does not need a court judgment to get the home back. Also, Georgia provides for “deficiency judgments”. This means, let’s say, you owe $400,000 but can’t sell for that. You hand the keys back to the lender. He sells your home, in a soft market, for $350,000. He goes to court and can get a “deficiency judgment” against you for the $50,000 difference and attach it to any other assets you may have. How many homeowners in America are currently “under water”? How many more will be if this soft market gets much softer. This is surely something our buddy Bernanke is contemplating as August 8th approaches.

But, silly me, after today my worries are over. For you see, earlier today Senator John B. Williams, esq., of Nigeria emailed me to thank me for my previous efforts on his behalf. Hmmm, I can’t remember him, isn’t that awful? Surely my mind is slipping under the stress of this real estate market. At any rate the good senator advises that in appreciation I need only contact his executive secretary, Vivian Obasi, and $475,000 U$ will be promptly wired into my account. Aren’t they the nicest folks? In fact, if you guys will excuse me, I think I will get right on that.

Stay cool if you can.

Sonnypage

Mish:

Thanks to Sonnypage, for today’s thought of the day.
I see that he is getting emails from Nigeria promising cash. I get one or two a week from various places, but typically somewhere in Africa. Is there anyone who is not getting them?

I also see that the real estate market is getting softer and softer and inventory keeps piling up. Most of it is debris.

I had to stop on the idea of putting “price tags on furniture around the house”.
That couple is most likely underwater on their home with no cash to bring to the table to clear what is known as a “short sale”. The 4th Realtor to take their listing did them no favors. Why take a listing that can not sell? It is a waste of time and expense for everyone involved.

Statutory Foreclosure vs. Judicial Foreclosure

Statutory foreclosure is no doubt one of the reason that Georgia leads the nation in foreclosures. Worse still is losing your home and still owing money on it. That is the last thing anyone needs.

Yet, unless otherwise prohibited by the loan agreement or by state law, mortgage lenders have the right to collect the full amount of their loan, even if the sale of the home doesn’t cover the loan amount. Georgia seems particularly tough in this regard.

Mortgage States vs. Trust Deed States

In “Mortgage States” the property is taken by Judicial Foreclosure. In “Trust Deed States” the Trustee, a neutral loan service company, is empowered to sell the property and evict the “Home Owner” when the “home owner” doesn’t meet their obligations to the Beneficiary (ie the lender).

Regardless of whether one lives in a “Mortgage State” or a “Trust Deed State”, the lender may seek a Deficiency Judgment for the amount of the loan not covered by the sale of the home, depending on various state laws.

Some states have “Anti-Deficiency Laws” and/or there may be an Anti-Deficiency clause in the loan agreement itself. Anti-Deficiency means the lender cannot try to collect the amount of their loan not paid off by the sale of the home. But there are quirks.

California has an anti-deficiency law which covers the original “purchase money loan” on an owner-occupied home. The original mortgage is covered by anti-deficiency law, but as soon as someone refinances the loan that anti-deficiency provision goes out the door. In states like California, refinancing might be the last thing one would want to do to get out of trouble.

In some states the lender may have to opt for Judicial Foreclosure instead of Statutory Foreclosure in order to receive a deficiency judgment. You should by now be able to see where this is headed: Each state is different – very different. Unless one knows the laws of a particular state, it is tough to make more than general comments.

Enotes has an excellent discussion of Defaults and Foreclosures, Anti-Deficiency Laws, and Statutory Foreclosure vs. Judicial Foreclosure.

There is still one more major “gotcha” to discuss.

Bankruptcy erases debts, but not taxes.

In federal tax law, if a lender agrees to forgive the difference between what someone owes on a house and what the lender eventually sells it for, that difference may be considered income and thus subject to federal income tax. This is a potential huge “gotcha” for many people who think they can just hand over the keys and walk away from their troubles. Please consider the article Beware of the IRS If Your Creditor Writes Off or Settles a Debt.

I suspect that the IRS would be extremely unlikely to forgive back taxes, especially for someone that has a job. The time to figure out all of this is before foreclosure or before attempting to “hand over the keys” not after. I am quite sure that there are other quirks that vary from state to state that I am not aware of.

I believe I have accurately stated the facts but perhaps I have not. The bottom line is simple: Anyone in trouble should run away from lenders promising to “save their home” via a pay option arm or other refinancing strategies. Instead they should be talking to an expert in bankruptcy and tax law for their state, and the sooner the better. Advice from lenders may be suspect, particularly in states like California where a lender might be tempted to give advice just to negate Anti-Deficiency laws.

Mike Shedlock / Mish/