What is a Short Sale?

A short sale is the sale of real estate in which the sale proceeds fall short of the balance owed on the property.

It generally occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a loss is better than foreclosure.

Both parties must consent to the short sale process, it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrower. It is becoming a common practice as so many home owners owe more than their house is worth.

In a short sale without recourse, the lender does NOT pursue the home owner (borrower) for the forgiven debt.  Otherwise the lender may sue the home seller for the difference between the sales price of the home and the remaining loan balance.

Example Short Sale:

Steve bought a house for $320,000 and financed the property with an 80/20 loan.  He got a loan for 80% ($256,000) from one lender, and a second loan for 20% ($64,000) from another lender in order to 100% finance the property.

A year later Steve has lost his job and can no longer afford his house payments.  He’s 3 payments behind and is headed towards foreclosure.

Steve decides to sell his house and downsize.  Unfortunately, property values have fallen in his area and the real estate market is slow. He receives an offer for $205,000 to buy his home.

Since Steve still owes $320,000 on his house, he must either come up with the difference ($115,000) in order to sell the home, or request his lenders accept a short sale.

Because he is behind in his payments and the lender does not want to foreclose, the first lender (the 80% lien holder) might agree to discount their loan to $202,000 (a $54,000 discount) and the second lender  (the 20% lien holder) might agree to discount their loan to $3,000 (a $61,000 discount).  The second lien holder typically gives a much larger discount because if the first lender forecloses on the property, the second lender gets nothing, while the first lender gets the property.

With both lenders agreeing to discount their loans, the house is sold for $205,000 and foreclosure is avoided.  The home sellers will not receive any funds from the sale, and typically must prove a hardship (lost job, divorce, etc) for the lenders to agree to a short sale.

In general the IRS does not tax forgiven debt from a short sale (contrary to many reports).  See the IRS Home Foreclosure & Debt Cancellation site.

As long as the short sale is without recourse, the lender does not pursue the borrower for the difference between the original loan amount and the discount and the debt is forgiven.

Mayor Leppert says Dallas Entrepreneurship Day is November 19th

Mayor Tom Leppert has officially named November 19th as Entrepreneurship Day in Dallas!

On November 19th, Entrepreneurs’ Organization will be holding an event to celebrate EO24 and Global Entrepreneurship Week – to inspire entrepreneurial activity in Dallas and around the globe.

Our event will bring together prominent Dallas area business leaders and entrepreneurs for a panel discussion on entrepreneurial activity in Dallas, the economy and other topics of interest to business leaders.

Entrepreneurship Day

 

Extreme Home Makeover – For Sale

The Okvath family, recipients of an Extreme Home Makeover in 2005, have listed their mansion for $1.3 million. The 5,346 sq. ft. home is on a 1.07-acre lot, has 6 bedrooms, 5.5 baths, and a 3-car garage big enough for four cars and includes a home theater with seating for 12.

Unfortunately, it seems that it is growing more common for these Extreme Home Makeover houses to be foreclosed on, mortgaged to the hilt, or sold off to pay debts.  Many people, when presented with something for “free” don’t value it and tend to waste it.

Another problem for many of the recipients of Home Makeovers is the cost of upkeep.  Many of these new houses have high electricity bills, high taxes, and cost a lot to keep going.  Instead of building a $2m home that the new owners can’t afford to keep, perhaps ABC should focus on building smaller homes.

If they insist on building luxury homes (they do have to be Extreme don’t they?), they should be put them in a trust and provide for upkeep/taxes as part of the deal.

More info from AZ Republic, WSJ Blog, ABC15.

HomeFlux – Motivated Home Sellers Seeking Agents

Over the past few months we’ve been re-launching our Motivated Home Seller brand for real estate agents – HomeFlux.com.

It has been exciting to see how agents are rapidly growing their business through focusing on motivated home sellers – a segment of sellers that is rapidly growing, and is incredibly under-served by most real estate professionals.

With thousands of distressed home sellers contacting us each month, the success stories are pouring in from agents all over the United States and Canada who are listing and selling these properties in a very short period of time.

One agent called the other day and said the 3rd contact he received turned into a $1.4 million dollar listing and another broker has converted 46% of the motivated home sellers contacting him into listings!

If you are an agent or broker and not currently focused on the distressed property market, I encourage you to make it a part of your business plan.  This is a multi-billion dollar segment that is highly under-served and the agents that build expertise in this area will do very well over the next 5 years and beyond.

Entrepreneur Lessons from The Container Store co-Founder & CEO Kip Tindell

Recently I invited Kip Tindell, the Co-Founder, CEO and Chairman of The Container Store to speak to the Dallas Chapter of Entrepreneurs’ Organization.

They hosted our event at their corporate headquarters, including a tour of their amazing logistics facility, from which any item that is in one of their stores originates.

A true entrepreneurial story, Kip has grown The Container Store from a single 1,600 sqft location in Dallas to 43 locations throughout the country, that average 25,000 sqft in size.

The big take-away from his talk was over-communicate to your staff, your partners and your vendors.  If you put your employees first – revenue and profits will follow.

The Container Store philosophy is that 1 great employee = 3 good employees, and 1 good employee = 3 bad employees.  So only hire great employees and over-pay them compared to the market.

Kip also says he gives the same power-point presentation on the company’s status to his board of directors and his employees.  Employees feel they know what is going on in the business and won’t be surprised.

Maybe that is why Fortune has named them one of the 100 Best Companies to Work For – 10 years in a row.

Real Estate News – Who can you trust?

Recently I did an interview with a magazine devoted to residential real estate investing on the topic “Who can you trust in real estate news?

I highlighted my appearance on Larry King Live, where a supposed “real estate expert” made incorrect comments regarding the taxation of forgiven debt during a short sale.  Unfortunately, my interview segment had completed and I was unable to correct the error before the end of the show.

Once the show was over, I called the producers but there wasn’t much they could do at that point.  Hundreds of thousands of home owners got bad information from a reputable source!

Another problem we’ve seen recently is the “pay-for-play” system that many magazines and web sites are using.  Most people expect a trade magazine or web site to provide industry information and trends based on expertise.  The issue arises with magazines force advertising in exchange for “news” coverage.  I’ve heard this many times in so many words: “We’ll do a cover story on your company if you buy $10,000 worth of ads from us”.

This creates a situation where the content is not driven by the industry, but by who is willing to buy advertising.  This isn’t illegal, but is disingenuous.  Most readers would put much less weight on the articles and stories in a publication if they knew they were simply bought with ad dollars.  In the music industry this is called “payola” and IS illegal.

The lesson is: Always question everything you hear or read in the media!

Extreme Makeover Foreclosures – Why a free house isn’t good

It’s basic human psychology that if something is free, we tend to value it much less.  Take for example the rash of foreclosures on homes from the show “Extreme Makeover, Home Edition“.

Most of the people who participate in the show receive a brand new, high-end home that is mortgage free.

The problem is, many of the people who should be grateful for the opportunity to get back on their feet and own their home free and clear – instead act as though they’ve won the lottery and immediately take out a home equity loan to get at the cash in the property.

Extreme-makeover

Just a few of the Extreme Home Makeover foreclosure cases are in Atlanta (’08), Atlanta (’09), Idaho, Michigan, and Oregon.

This is a prime example of why “Foreclosure Bailouts” don’t work.  When people get “bailed out” they rarely value the help they’ve been given and tend to make the same mistakes over and over.  Case in point are the statistics on the re-default rates for loan modifications.  In a study by the Office of Thrift Supervision, over 55% of modified loans were back in default after 6 months.

If the government artificially props up housing prices by repricing loans and allowing “cram downs” they will just prolong the problem and we’ll still be dealing with unstable home prices 3 years from now.

How Entrepreneurs Beat Insomnia and get ROI from rest

The title is a little cheesy, but CNNMoney recently interviewed 8 entrepreneurs on how they cope with insomnia and ensure a good nights sleep.

My tips included writing everything down before you go to bed and doing something “mindless (watch TV, read a novel) that helps your brain wind down and disengage.  As an entrepreneur and business owner it is easy to let your mind go wild thinking of all the things that must be accomplished the next day, most of which nothing can be done about right now

Getting good sleep is critical to operating at your peak and being creative.  There are some great suggestions in this article and its a quick read.    Here is the link to the full story.