Although the settlement is only expected to help a fraction of homeowners who owe more their properties are worth — perhaps one in 20, according to one estimate — it will also help bring certainty back to housing markets by removing some of the obstacles that have been keeping homes stuck in the foreclosure pipeline.

Announced last month, detailed terms of the agreement between mortgage servicers and a coalition of state attorneys general and federal agencies were filed today.

Broadly, the settlement calls for mortgage servicers to pay $5 billion in fines and commit to a minimum of $17 billion in homeowner relief, including principal reductions. Another $3 billion is earmarked for helping underwater borrowers refinance.

“We will see an increase in short sales, because lenders and loan servicers will get the same credit for doing a short sale, as if they did a loan modification or principal reduction,” said Rick Sharga, executive vice president of Carrington Mortgage Holdings LLC.

The Wall Street Journal reported Sunday that the structure of mortgage write-downs was a major point of contention in the year-long negotiations leading to the settlement.

Allowing debt forgiveness on approved short sales to count against the required $17 billion in principal reductions helped secure a settlement that will reach more borrowers, the paper said. Loan servicers will also get partial credit even when it’s investors, rather than the banks themselves, taking the loss, the Journal said.

A researcher at the Brookings Institution told the Journal that the settlement could help about 5 percent of underwater borrowers, or about 500,000 homeowners.

“We will probably see a short-term increase in forcelosure activity, because the servicers and lenders at last have a sense of certainty about what they can and cant do,” Sharga told Inman News. Part of that increase will also be among loans that don’t meet the criteria of the agreement.

For loan servicers to get credit for a principal reduction, a loan must be at least 30 days delinquent, have a pre-modification loan-to-value (LTV) ratio of at least 100 percent, satisfy specified debt-to-income ratios (DTIs), according to an analysis of the settlement by the lawfirm K&L Gates. At least 85 of occupied properties must have had an outstanding principal balance at or below the highest Fannie Mae and Fanni Freddie conforming loan limit cap as of January 1, 2010.

Because servicers won’t get 100 percent credit for all types of relief that are provided, the actual amount of relief provided could total as much as 32 billion, state attorneys general said in announcing the settlement.

“In terms of the overall housing market , our position is this will have very little effect on anything,” Sharga said. “Consumer advocates don’t think it went far enough, and people who look at housing markets realize that the number of properties and the amount of money involved won’t have a measurable effect on markets.”

Federal housing officials addressed those and other concerns today.

“This agreement does not — and is not intended to — solve or resolve all the issues and abuses related to the housing crisis,”  officials with the Department of Housing and Urban Development blogged today. “This agreement is very narrow as to what it releases banks from.  This settlement is intended to address the servicing aspect of the crisis, which did not cause the housing crisis.”

The settlement doesn’t prevent the government from punishing wrongful securitization conduct that will be the focus of the new Residential Mortgage-Backed Securities Working Group, HUD noted. State and federal authorities can also pursue criminal enforcement actions related to conduct by servicers, including civil rights, fair housing, fair lending and other violations.

Also, if the remaining six to 14 loan servicers sign on to the settlement, it would grow to about $30 billion with more than $45 billion in benefit to homeowners, HUD said.

Cade Holleman, executive director of the Irvine, Calif.-based National Association of Women REO Brokerages, said the day is fast approaching when brokers and agents who have concentrated heavily in real-estate owned properties will have to diversify.

Short sales, refinancings, and loan modifications are each “pulling REO inventory out of the game,” he said.

“You’ve got to keep your eye on that process,” Holleman said.”You can no longer be 80 percent REO,” but must diversify into short sales and property management.

If you’re fortunate enough to have a basement in your home, you may have the potential for a substantial amount of additional living space right below your feet. But if you’re thinking of converting that cold and unappealing area to a warm and cozy new space, there are several things you’ll want to take into consideration first.

Is it safe?

One of the very first things you want to look at with any basement conversion is safety, and that can take a lot of different forms.

Is there convenient and safe access from inside the house in the form of a stairway that meets current building codes, or is there an exterior entrance that works for what you want to use the space for? Is there a sufficient amount of headroom? Would structural supports for the upper floors be in the way, and if so, can they be moved or altered to allow for the necessary space? If you’ll be creating a sleeping room, is there safe and legal egress?

Is it dry?

Now we get down to what’s a big issue in a lot of basements, and that’s moisture. Newer homes are often designed with the proper drainage systems and exterior waterproofing to keep the basement areas dry and ready for building, but many older homes had basements — “cellars” — that were designed for cool storage and were never really intended to be occupied.

If you have a basement with ongoing or seasonal moisture issues, you need to consult with an experienced excavation contractor before you get started on a conversion project. See what it would take to have a drain installed and have the exterior walls properly waterproofed, and perhaps have the exterior grade adjusted to change the flow of water runoff around the exterior of the home.

In some cases, you may need to change gutters and downspouts to channel roof water to a different location, or possibly install a sump pump to handle seasonal water issues.

No matter what, be sure that your basement moisture issues are handled before you start closing things up.

What will the space be used for?

Once you’ve determined that you have a space that’s safe and dry, decide what you want to use the converted basement area for. That will make a big difference in your design, and also in your construction costs.

For example, it may be a big game room, in which case you need little more than wall, floor and ceiling finishes. On the other hand, you may be looking at a bedroom or two, perhaps for guests, with a full bathroom and maybe even small kitchen facilities. In that case, you’ve got plumbing issues to consider, as well as a lot more electrical wiring, and also ventilation.

Some basement spaces are even used as rentals in order to generate a little additional income. If that’s your intention, you’ll need to take into consideration what the access will be for your tenants, so as to provide privacy for them and for yourselves. You’ll need to talk with your plumber and electrician about how the electrical and plumbing services will be split and metered to the spaces.

And, of course, you’ll need to confirm with your local jurisdictions that having renters is a legal use of the space.

Finishing the space

Options abound for the actual finishing of the space itself. One of the first considerations is insulating it, so that it’s warm and energy efficient, as well as quieter.

The preferred insulation method used by many of today’s builders and remodelers is extruded polystyrene insulation. Extruded polystyrene is a high-density, water-resistant, closed-cell foam available in sheets, typically blue or pink, as opposed to the expanded polystyrene — commonly known as beadboard — which is white and is comprised of small round foam pellets fused together. Expanded polystyrene has a lower R-value, and is not approved for moisture contact applications.

You can apply 1 1/2-inch polystyrene (R-value of 7.5) or 2-inch (R-10) directly to the walls with adhesive. The sheets are 2 feet by 8 feet, and the long edges are notched to accept furring strips every 2 feet.

You can then install drywall or other wall finish materials directly to the furring or, depending on the level of insulation you want to achieve, you can add a second layer of rigid foam to the furring, then add your wall finish. Conduit can be attached to the walls first for electrical wiring, and the polystyrene is easy to route out as needed over the conduit.

Obstacles such as posts or other structural supports can be framed around using two-by-fours. Horizontal duct runs and large horizontal plumbing runs can be framed into overhead soffits. If there’s a sufficient amount of headroom, a suspended ceiling allows for the installation of decorative, sound-deadening tiles that are easily removable to allow access to overhead utilities.

Basement conversions can be a very rewarding use of existing space, and they can add a lot of resale value to your home — but only if they’re done right. If you have any questions about moisture control, insulation, structural issues, zoning or anything else, be sure to get them answered by the pros before you get started!

Yes, and it’s no joke. To pull it off, though, you need to change the way you think about the property right outside your home’s walls. Rather than seeing it as leftover land to be prettied up with a few flower beds, consider it an integral, functioning extension of your home’s interior.

The ground outside every house offers tremendous potential living space — often several times the total square footage of the house itself. Yet more often than not, this valuable real estate is drastically underutilized. Even when a property is nominally “landscaped,” it’s usually treated as a static showpiece filled with cutely shaped planting beds, meandering plots of grass, and other two-dimensional treatments, none of which improve its usefulness as living space.

It’s understandable why so few people make full use of their outdoor area. For one, many older homes provide only a minimal connection to the outside — often nothing more than a front door and a back door.

Because the floors in older houses also tend to be raised off the ground a few feet, access to outdoor areas can be awkward even when more exterior doors are present. Yet even in newer homes, with more generous access to the outdoors, the surrounding property is seldom treated as a true extension of the indoor living area.

So how can you better utilize the land outside your own house?

First, conduct a survey of every ground-floor room that has the potential to access the outdoors. When I make this suggestion to clients, I’m always amazed at how few of them have ever considered converting windows to doors, even when the potential gain was staring them right in the face.

Often, this simple swap will completely transform a house, improving the traffic flow, making the rooms feel larger, bringing in more light and better views, and most importantly, enabling the full use of your outdoor areas.

Improving access to the outdoors is also among the simplest and most cost effective of remodeling projects. As long as the new door (or doors) aren’t any wider than the existing window opening, no structural changes are necessary. The section of wall below the window is simply removed and a door unit installed in its place.

If you’re worried about the security of glass doors, note that they’re typically more burglar resistant than the windows they replace, as building codes require the glass in doors to be tempered.

Another common objection — the loss of wall space for furniture — is a very modest price to pay for a vast improvement in livability.

Once you’ve decided on where the doors will be, consider how you’ll make the transition to the garden. If the floor of your house is considerably higher than the ground outside, a deck or terrace with a number of descending levels will bring you gracefully down to ground level. If this transitional space can serve exterior doors from more than one room, all the better.

Many of these people have raced to take part-time employment, and baseball spring-training facilities are a prime example. There were seniors selling tickets, programs, hot dogs and popcorn, plus acting as ushers and parking lot directors in nearly all of the recently completed Cactus and Grapefruit League games.
The goal of this age cohort is to supplement their Social Security payments and portfolio securities (such as 401(k) and individual retirement accounts) so that they won’t run out of money before they die. What other sources might be available?

Barry H. Sachs, a real estate tax attorney in San Francisco, and Stephen R. Sachs, professor emeritus in economics at the University of Connecticut, researched ways to further enhance a senior’s finances by adding home equity via a reverse mortgage. In a recently published study, the authors found that a reverse mortgage can be powerful tool when used within a coordinated strategy rather than a “last resort” after exhausting the securities portfolio.

The model shows that the retiree’s residual net worth (portfolio plus home equity) after 30 years is about twice as likely to be greater when an active strategy is used than when a conventional strategy is used.
“It’s so important that financial planners have begun to ask the question about what’s possible with reverse mortgages,” said Martin J. Taylor, president of Bellevue, Wash.-based Stay In-Home, a reverse mortgage lender. “While they have often been known for solving desperate situations, they have a variety of uses in long-term financial planning.”

What Sachs and Sachs have done is to compare three strategies for the use of home equity via a reverse mortgage to increase the safe maximum initial rate of retirement income withdrawals. The commonly accepted “safemax” begins with a first year’s withdrawal equal to 4-4.25 percent of the initial portfolio value. Subsequent years’ withdrawals then continue at the same dollar amount each year, adjusted only for inflation. Since many retirees have found the safemax uncomfortably limiting, Sachs and Sachs calculated greater percentages in some examples.

The strategies:
(1) The conventional, passive strategy of using the reverse mortgage as a last resort after exhausting the securities portfolio.

(2) A coordinated strategy under which the credit line is drawn upon according to a formula designed to maximize portfolio recovery after negative investment returns.

(3) Drawing upon the reverse mortgage credit line first, until exhausted.
The authors found “substantial increases” in the cash flow survival probability when the active strategies are used as compared with the results when the conventional strategy is used. For example, the 30-year cash flow survival probability for an initial withdrawal rate of 6 percent is only 55 percent when the conventional strategy is used, but is close to 90 percent when the coordinated strategy is used.

So, how is the reverse mortgage best blended together with other investments? In a nutshell, it’s a basic algorithm:

At the end of each year, the investment performance of the account during that year is determined. If the performance was positive, the next year’s income withdrawal is from the account. If the performance was negative, the next year’s income withdrawal is from the reverse mortgage credit line.

According to the study, this spares the account any drain when it is down because of its investment performance. It also leaves the account more assets to recover in subsequent up years. This is done in the early years of retirement, so the account grows before the reverse mortgage credit line is exhausted.

The authors emphasize that a reverse mortgage is not necessarily a useful vehicle for every retiree who has substantial home equity. A retiree whose primary source of retirement income is a securities portfolio and who also has substantial home equity must decide early in retirement whether to live within the safemax limit set by his or her portfolio. This decision is a fundamental component of overall retirement planning.

And, while home offices have become more popular because of convenience and the downturn in the economy, many homeowners may be better off not taking the deduction because of the depreciation recapture upon sale.

Both the mortgage interest and home office topics need to be double-checked before the April 17 deadline. Why April 17 this year instead of April 15? According to the Internal Revenue Service, taxpayers will have until Tuesday, April 17, to file their 2011 tax returns and pay any tax due because April 15 falls on a Sunday.

In addition, Emancipation Day, a holiday observed in Washington, D.C., falls this year on Monday, April 16. According to federal law, Washington, D.C., holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have two extra days to file this year.

Taxpayers requesting an extension will have until Oct. 15 to file their 2012 tax returns. Remember that an extension of time to file is not an extension of time to pay. You will owe interest on any past-due tax and you may be subject to a late-payment penalty if timely payment is not made.

In a recent column, we discussed the benchmark for the mortgage interest deduction is set at acquisition debt, which is the amount of debt in place when the home is acquired. For example, if you buy a $200,000 home with a $50,000 down payment, your acquisition debt is $150,000.

Many consumers stay in their homes for years, accumulate appreciation and then refinance to put a child through school, mom into a nursing home or attend a much anticipated family reunion. The new debt on the refinance will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing.

For example, let’s assume your home is now worth $300,000 and you need to take cash out for college tuition. The balance of your loan before you refinance is $135,000 and you take $100,000 “cash back” for a new loan balance of $235,000.

However, the maximum allowable mortgage interest deduction remains $135,000 — the acquisition debt, not the bigger number from the refinance.

Another popular deduction that is often taken yet needs additional consideration is the home office deduction. It’s relatively easy for taxpayers to deduct the cost of a home office. To qualify for a deduction, the space must be used exclusively and on a regular basis for either the entire business or its administrative and management activities.

If you are an employee, additional rules apply for claiming the home office deduction. For example, the regular and exclusive business use must be “for the convenience of your employer.”

A home office deduction is comprised mainly of depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the detached garage now deemed “the office” is 250 square feet, then 10 percent of the utilities and insurance are deductible.

The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to “residence” would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.

However, all these benefits do come at a price. The tax law originally stated that if you sell your home at a gain, any depreciation for a home office will have to be “recaptured.” That means that any profit on the business portion is taxable as capital gain.

On Dec. 23, 2002, the IRS issued new regulations concerning gain on home sales. As long as the home office was in the same structure and not separated from the home, only the depreciation taken for the home office after May 6, 1997, is subject to tax.

Still, that depreciation recapture amount could be a lot more than you expect. It may be worthwhile to simply work from home and not deem the space a “home office.”

Sandy… The only way to know with 100 percent certainty what your home is currently worth is, bizarrely enough, to sell it! In real estate, we define the value of a home at any given time as the price that a willing, qualified buyer is willing to pay for it, something you can’t know until you list and sell it. Without doing that, all you can do is estimate your home’s value, and obtain professional estimates of it, based on what other buyers have recently paid for similar, nearby homes.

As you are well aware, because homes vary, these estimates can and almost invariably do vary widely — they are essentially opinions, more or less qualified, and based more or less in fact. Additionally, most opinions of value will be expressed in a price range, rather than a particular number, because of the fuzzy nature of the whole exercise.

1. Online estimates and appraisals have their own issues. Online estimates can be a useful tool for a rough-and-dirty estimate, but they have a variety of issues, too. The computer simply cannot appreciate all the nuances of location, home style and home condition that a human being can, and they frequently fail to detect flat-out errors in the public record details about your home or the comparable properties it chooses to use. Some of the most popular automated estimate tools online actually acknowledge a very, very high error rate.

On the other hand, some would tell you to shell out a couple hundred bucks to get an appraisal. Fact is, an appraisal is simply one more form of opinion. And appraisers on today’s market are generally under pressure to be very, very conservative in their home estimates; one of the most common reasons home-sale transactions fall out of escrow today is because the appraiser’s opinion was lower than the price that the buyer and seller agreed upon!

So, if you’re simply looking for a higher number than what your agent is giving you, I’d hate to see you shell out good money trying to get that from an appraiser, as it’s very unlikely. (Also, in some states, a recent appraisal report would become a document you are required to disclose and pass on to a future buyer; if the appraiser does happen to give you a low appraisal that you think is wrong, you might just impair your own ability to sell it at a higher price.)

2. Agents don’t lowball to get listings. Generally speaking, I believe that one way to get to a closer idea of what your home might actually sell for is to ask multiple agents who are successfully selling homes in your neighborhood on today’s market. If you can get a relatively unanimous range or estimate of your home’s value from agents, it behooves you to take that number seriously.

But as a point of clarification, agents don’t lowball sellers to score listings. In fact, the opposite is true: Most sellers want to hear that their home is worth a lot, and many will actually choose to work with whatever agent gives them the highest estimate of its value.
There are some unscrupulous agents who specifically, intentionally overestimate the value of a home in their conversations with the seller to get the seller to sign their listing agreement. Then they let the overpriced home sit on the market until the seller becomes exasperated, desperate or more motivated and convince them to lower the price.

It’s not in an agent’s favor, in terms of scoring your listing, to give you a lowball estimate of your home. And I like to say that when a salesperson tells you something that is against his short-term best interests, that something he’s telling you is probably the truth. But let’s be clear: There is a long-term advantage for agents who dole out this painful flavor of honesty at the listing appointment, and it’s an advantage that is aligned with the best interests of their seller clients.

These agents who provide what seems to you to be a low value on the property are mostly motivated to get the place sold.

First, agents know this: They don’t make a commission on homes that don’t sell. And overpriced homes simply don’t sell. What these honest agents also know is that to get even a properly priced home to sell, it will take a fairly substantial investment of their own time, energy and money — these are resources they would rather not invest in a listing that will never sell because the seller is fixated on a too-high list price. So agents these days have doubled-down on a strategy that is hard in the short term, but pulls in favor of success on the horizon: brutal honesty.

Second, agents with thriving businesses in today’s market have them because they have a strong track record of getting their listings sold. Most would rather not list a home that is destined to lag on the market because of its price, because (a) the unhappy seller will likely not say good things, and (b) they’d rather be able to show future prospective seller clients a portfolio of homes that have recently sold, quickly and for a price near the list price.

3. Your list price is not only about worth, it’s also about marketing. On some level the lengths to which you go to obtain a firm and precise opinion of your home’s value should be driven by what your purpose is for the estimate. It sounds like you’re trying to evaluate the list price of your home. Keep in mind that the list price of your home is as much about marketing and competitively positioning it against other listings as it is about trying to approximate it’s true worth.

In fact, many agents start the list-price conversation at what you believe it’s worth, then take a tad bit off to entice buyers to come see and make offers on the home.

If you are priced right in line with other listings, that might make you feel like $225,000 is the right price. But I’d suggest that you look at how long those listings have been on the market. I used to advise my sellers to list competitively not with homes that are still on the market (because that’s not the result you want) but with the homes that have recently sold (because that’s what you’re trying to do).

In the same vein, if your home has been sitting on the market at $225,000 for longer than it takes the average home in your area to sell at $225,000, and hasn’t sold, you may need to do something different. And think of it this way: If you want to distinguish yourself from those listings and beat them at the competitive endeavor of luring a buyer in, you might need to be priced better than them.
If you were a buyer, you’d be much more interested in the listing that had all the same features and a lower price, wouldn’t you?

Home mortgage interest for a loan or loans totaling $1 million is deductible as an itemized deduction. Interest on a home equity loan — for a primary or second home — of up to $100,000 is also deductible. Thus, you can deduct the interest on a total of $1.1 million in home loans each year. If you borrow more than that, the additional interest is not deductible.

If a married couple own a home or homes and file a joint return, the $1.1 million limit applies to them both together. If they file separately, the limit is cut in half for each. So, either way, married couples are limited to deducting the interest on only $1.1 million.

But what about when unmarried couples purchase homes together and file separate returns — does the limit apply to them both together or to each separately?

Charles and Bruce, an unmarried couple, purchased a principal residence in Beverly Hills, Calif., and a second home in Rancho Mirage, Calif., as joint tenants. They each filed separate tax returns. Their total mortgage debt was more than $2.7 million.

Charles and Bruce each deducted on their separate returns the interest on $1.1 million of their loans. Thus, together they deducted the interest on $2.2 million.

The Internal Revenue Service said that Charles and Bruce together could deduct only the interest on $1.1 million. The couple argued that because they were not married, the limitations on married taxpayers don’t apply to them.

Instead, they claimed that when unmarried people co-own a house the $1.1 million limit applies to each individual taxpayer.

The Tax Court sided with the IRS. It held that the $1.1 million limit applies per residence, not per taxpayer, even where a home is co-owned by unmarried taxpayers.

Thus, even though they were unmarried and filed separate returns, Charles and Bruce could together deduct the interest on only $1.1 million of their mortgage debt.

Instead of deducting more than $76,000 in mortgage interest on their individual returns, they could each deduct only $38,000.

Unmarried people who purchase expensive homes should keep this limitation in mind.

Nate…I’m a proponent of listing with an agent with as deep a local knowledge and relationship base as possible. With buying, things can be a little bit different — especially if you are relocating and looking at a wide range of areas.

Unless you’re house hunting in a super-specialized neighborhood or for a unique property type, like a Manhattan co-op, any buyer’s agent from the general area can get familiar with a neighborhood in that region pretty quickly if he or she is up to speed on the basics of doing deals in an area.

When it comes to selling, though, it’s quite a bit tougher, especially on today’s tough-to-sell market where pricing and marketing nuances (along with vendor, lender and inspector relationships, and contacts with buyer’s brokers and buyers themselves) are crucial to get homes sold.

Before we get into the details of what a local specialist has that another agent might not, though, I do want to say this: I don’t know your local market, but in many areas of the country even the most local, smartest, most aggressive, best-marketing listing agent might not be able to move a home in five months or less. Frankly, the best agent cannot move an overpriced or poorly prepared home.

And the fact is that nonlocal, specialist agents do provide sound advice on pricing, preparation, marketing and strategy to sellers every single day across the country. So, while a local-area specialist might have a leg up on another agent based on relationships and insider knowledge, that is no guarantee that he or she will be superior to the agent you have right now.

So, before you go through the upheaval of finding another agent, ask yourself:

Do the challenges you have with your current agent actually have anything to do with her relative “outsider-dom”?
Has your current agent given you any advice on getting your home sold that you have failed to follow (i.e., cut the price, clear the clutter, hire a stager, etc.)?

If you are not following your current agent’s advice, then you should think twice before firing her because your home hasn’t sold. Hiring another agent will not resolve your problem if your home is still overpriced or underprepared.

So, assuming you are willing to do everything within your power to price and prepare your home fairly, here are some of the considerations that tilt my general opinion in favor of a local listing agent vs. an agent from outside the area:

1. Local agents may have insider marketing knowledge. In certain neighborhoods in my town, for example, the standard practice is to:
List a home midweek.
Hold it open for brokers only on Thursday — and advertise those on agent-only fliers.
Not allow it to be shown otherwise until the Sunday open house.
Hold it open for two Sundays.
Take offers the Tuesday or Wednesday following the second open house.

Agents from surrounding areas could probably guess at some but not all of these things, but often they don’t. And that lack of insider knowledge might actually prevent out-of-the-area agents from getting the fullest exposure for their listings.

For example, if you just took the first offer that came in, you might forgo the offer of a local buyer who was expecting to have two weekends to get to the place.

2. Local agents may have relationships outsiders don’t. They may know the other agents in town, and be able to market the property to them casually, as they run into them in the grocery store or at local meetings, in a way that (a) works and (b) an agent from outside the area cannot. They also will have the built-in marketing channel of being able to market to agents inside their own office — not to mention the buyers they represent.

Finally, local agents might know the inspectors, appraisers, even lenders (i.e., all the pros who have to work together to close a deal) and have a relationship of trust with them that a stranger does not.

And that includes being able to find contractors or other vendors who will do repair work at better prices or on better terms than they would offer to a stranger.

3. Local agents might have a leg up on pricing. Possibly the strongest argument for working with a local listing agent is that they know what local buyers want, care about and deprioritize. That means they understand local pricing nuances better, having worked with local buyers, and having viewed and/or sold recent homes nearby.

You don’t have to have been in the market long to understand that photos can be misleading and that location nuances weigh heavily on the prices that buyers are willing to pay, so the history of having actually been to and inside the comparable sold listings — rather than just having seen them online, can be critically important to understanding how comparable they are to your home, and how your home should be priced accordingly.
Homebuyers may be attracted to the big bargains that foreclosures and preforeclosures can offer. But distressed properties can involve tricky, lengthy transactions, and there’s a lot to think about before jumping in.

In fact, some home shoppers have shunned short sales altogether, preferring a more reliable process to a reduction in price. Getting all parties to agree to a short-sale price can be problematic, and lenders have been known to change their minds when more bidders surface.

Given the difficulty and uncertainty of negotiating a short-sale transaction, you would think lenders would bend over backward to make things easier for the consumer once the deal is finally done.

But it appears some lenders are seeking an additional pound of flesh long after the frustrated, exhausted and often financially drained seller has moved on.

Short sales occur when owners, often in distress, sell their homes for less than the amount they owe their lenders. The lender may then write off the remainder of the debt and receive tax benefits.

Some lenders, however, will also assign or sell the remaining debt obligation to third-party debt collectors, often for pennies on the dollar. The third-party debt collector can then use the legal system to continue to pursue the former homeowner for the balance owed.

This has become such an issue that legislators in Olympia, Wash., have taken action. Senate Bill 6337, proposed by David Frockt, D-Seattle, would protect short-sale sellers from being pursued by lenders or their assignees for the difference between the sale price and remaining loan balance.

“The banks will basically have to make a choice,” Frockt said, “to either write off the amount and take the tax benefit, or pursue the owner — but they cannot do both.”

When a lender agrees to a short sale, it can either retain the ability to collect from the short-sale seller the amount of mortgage debt owed by the seller that is not satisfied by the purchase price, or it can discharge all or a portion of the unsatisfied debt amount.

If a lender discharges debt, it reports this discharge of debt to the Internal Revenue Service on a 1099-C Cancellation of Debt Form. The issuance of the 1099-C allows the lender to take a tax deduction for the loss represented by the amount of debt discharged, and this same amount of debt discharged becomes taxable income to the short-sale seller.

After the taxpayers bailed out the mortgage industry, many borrowers are still unable to get a loan modification to stay in their homes. Now the industry has a sketchy-to-lousy national reputation, and more stringent qualifying standards are not helping their case.

In light of all this, how can some lenders knowingly seek both a tax deduction for the mortgage debt not paid while also seeking to collect that same mortgage debt?

“Yes, we have heard of this happening,” said Deborah Bortner, director of consumer services for the Washington state Department of Financial Institutions.

“I hear it mostly from attorneys or others who assist those in obtaining a short sale. I understand that the documentation provided by the institutions doesn’t always make it clear whether they will pursue a short sale or not. The consumer only finds out later when contacted by someone trying to collect the deficiency.”

In some instances, mortgage debt collection rights have been referred to third-party debt collection companies, even though short-sale sellers have paid income tax on the amount of this discharged debt.

“This is another step to help the short-sale process that is keeping many homeowners from the tragedy of foreclosure,” said Faye Nelson, president of the Washington Association of Realtors. “Nearly 40 percent of the inventory in the Puget Sound region right now is short sales. State legislators recognize that protecting this process is critical to homeownership and the housing market.”

While all home buyers need help with the short sale process, it’s especially challenging to address the needs and concerns of a first-time home buyer who has decided a short sale is the home for them. Here’s how to get answers to first-time home buyers’ top three questions about short sales.
1. How long does it take for a bank to approve a short sale?

This is the million-dollar question. While it takes an average of three to six months, the timeline – and the process – vary quite a bit from one bank to another.

Short sale approval timelines depend on the bank (some just take longer than others). While each bank has different short sale guidelines, the short sale has to make sense to the bank. The more sense the short sale offer makes to the bank, the faster the approval process.

Here are some things that slow down the process by several weeks or more – these usually involve more people or more factors:

Multiple liens on the property
A third party negotiating the short sale on behalf of a seller. Some states allow third parties to do this, for a fee; some states, like Virginia, limit this to real estate licensees, attorneys, and employees of attorneys.
Private Mortgage Insurance (PMI) on the property
Additional investors

Action: To make an accurate prediction about the short sale timeline for a particular property, research the bank’s general timelines, the property’s liens, and whether there is PMI before writing the offer.
2. Will the bank make repairs to the property?

The short answer is, probably not.  Here’s why:

The bank does not have possession of the property and has no authority to make repairs on behalf of the seller.
Many short-sale sellers do not have the financial means to make repairs.
Many banks require the short sale to be sold strictly “as-is” and do not allow the seller to pay for any repairs.

Why wouldn’t a bank allow the seller to make repairs? your buyer may ask. A short sale is a sticky situation for a bank, and that the bank wants to avoid potential liability. For example, if the bank allowed the seller to make repairs and the repairs proved to be faulty, the buyer might potentially hold the bank liable, since the seller doesn’t have money (which is how the short-sale situation came about in the first place).

Action: Find out how the bank and the seller feel about making possible repairs. A short-sale buyer needs to understand that the home will most likely be sold strictly “as-is” and all repairs will be at their expense.
3. How do other types of debt affect the short sale outcome?

Many short-sale sellers are more than just “house-poor.” Many have additional debts that place a cloud on title. These include tax liens – income and property, medical liens, mechanic’s liens, and child support judgments.

Depending on your state, some creditors can try to collect debt by going to civil court and getting a judgment lien placed on the property against the homeowner. These liens must be cleared before the short sale transaction can be closed.

Surprisingly, tax liens are probably the easiest to clear off the title. The IRS has several avenues to collect back taxes, and doesn’t want to become a real estate holding company. Removing a tax lien can take up to 120 days, so it is imperative that this process is started well in advance of the short sale.
Medical liens can usually be negotiated and a payment plan worked out. However, this is a time-consuming process and needs to be started as soon as possible.
Mechanic’s liens are a little harder to get removed. There is not much recourse for tradespeople and bad debts.
Child support judgments are also difficult to remove because they usually involve government agencies.

In short, additional debts can tie up the short sale process.

Action: Make sure to ask the listing agent if a preliminary title search has been performed on the property so you can advise your buyer about possible obstacles.

The more information you can offer your first-time home buyer, the more confident they can be about the transaction. The more confident they are about the transaction, the more likely they will see the transaction through to the closing table.