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Think twice before selling real estate at a loss

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POSTED April 12, 2012 5:51 p.m.

DEAR BENNY: We own two houses, both of which have been on the market for approximately two years. One is our primary home, and one is a second home on the lake. Due to personal issues, we want to sell. Should we take a loss and sell, or hang tight? --Joyce

DEAR JOYCE: If you really must sell for personal reasons, then why ask the question? Get the best possible price that you can.

However, if you are still in doubt and uncertain about selling now, then I can try to provide you with some guidance. But this is your decision to make. All that the pundits and the fortune tellers can do is make suggestions; we cannot see into the future.

The economy is moving forward albeit slowly. Mortgage interest rates remain extremely low, which means that people can buy or refinance as long as they can qualify for loans under the current strict mortgage lending policies.

Why do you want to sell? If you sell your primary house, where will you live? Have you considered the alternatives? Will you have a profit on either or both houses or are both "underwater"? That makes a big difference.

Can you afford to hang in there for perhaps another year, or is the cost of the two properties (mortgage, taxes, insurance and upkeep) hurting you financially?

All these are questions you should consider before taking the plunge. I cannot guarantee anything, but I really believe that within the next year or two, the real estate market will rebound.

I have been telling my clients and my readers for years that buying a house should not be considered an investment but rather a place to live and call your "home." Obviously, if you make money by appreciation, more power to you.

DEAR BENNY: In 2009 my father died. My sister and I needed to sell his property as soon as possible, as neither of us wants to move away from our own properties.

It was a challenging farm property to sell. We wanted to sell it outright, but that was so open-ended that we decided to finance the loan for the buyers. The escrow closed in February 2011.

We have been in contract for a year, and want to check their credit score to see if they can apply for a bank loan in the near future. Can we legally check their credit rating one year into the contract? We don't want to "shoot ourselves" in the foot and make a wrong move. --Christina

DEAR CHRISTINA: I am confused. Did you sell the property to the buyers, where they received a deed to the property and the buyers signed a promissory note and a deed of trust (or mortgage in some states)? Or did you just enter into what is known as a land sales contract, whereby you keep the deed until they are able to make a substantial payment or get their own loan and pay you off in full.

For this column, I will assume the former. I hope you had an attorney assist you to make sure your loan is secured. This means the buyers sign a deed of trust (or mortgage), which is recorded among the land records in the jurisdiction where the property is located. Such recording puts the world on notice that you have a lien (a security) against the house.

So, you really are not "in contract"; you have sold the house and taken back financing. It is perfectly proper for you, as a lender, to be concerned about the buyers' financial ability. Have you asked them if they have started the loan process? However, what is the term of your arrangement? How long do they have before they have to pay you the full amount?

I would just flat out ask them: "What's the status? Either give me your Social Security numbers so that I can obtain a credit report on you, or alternatively, get me a credit report within the next 10 days." For your information, everyone has the right to get one free credit report each and every year.

DEAR BENNY: My sister and I recently became eligible for distribution of assets as part of the inheritance of my mom's estate; however, she is disabled and has an adult disabled son so both of them are currently on government assistance for certain things, including their ongoing health care needs. No one has guardianship over her, and she is his legal guardian. She holds a job and manages to get by, but only with a lot of assistance and support from the rest of our brothers and sisters.

If she were to actually inherit these assets, she would not have a clue as to what to do, how to handle it, how to protect it, etc. She lives for today and never plans for anything in the future.

We are all very concerned and wonder if there is a legal way that she can disclaim her inheritance. Of course, being an adult under her own guardianship, this would have to be explained to her, and she would have to fully agree to do this. Is this possible? If so, do we need to see an attorney to draw up some paperwork? --Ruth

DEAR RUTH: I have to give you general advice because state laws differ in this area. However, if the funds your sister is receiving from the government are based on asset/income eligibility, there is a strong possibility that the government will terminate her benefits if she inherits the money. The personal representative of your mother's estate should talk to an attorney who practices "elder law" or "trusts and estates" about setting up a special needs (or supplemental needs) trust. That attorney can then advise on how to do this as well as other options, including possible disclaimer so that the remaining beneficiaries can then set up that special needs trust.

TAX NOTE TO READERS

Did you buy your home back in 2008 and take advantage of the first-time homebuyer tax credit? If so, remember that it was not a real credit, but an interest-free loan from the government that had to be paid off over a 15-year period. Subsequent legislation made it a real credit, but it was not retroactive to 2008.

The IRS has just announced that it will no longer mail letters to remind you that (if you still own the house that you bought in 2008) you have to make your annual payment. This payment is usually in the neighborhood of $500 a year.

However, the IRS will continue to monitor and track your tax return to make sure you make that payment. You have to use IRS Form 5405. For more information, go to the IRS website (IRS.gov) and search "first-time home buyer credit."

DEAR BENNY: In a recent column, you wrote that 10 states have laws that have been enacted that specifically prohibit a lender from suing for the deficiency. Is Illinois one of those states?

We have a situation in our family that falls into this category. The area is Chicago. What kind of attorney handles these situations? Any information that you might have or leads you may be able to give us would be greatly appreciated.

The original loan was a subprime loan that was taken out around 2005. The subprime lender did not foreclose on the property. The home has been demolished by the city of Chicago and the lender is going after the loan. --Phil

DEAR PHIL: Get yourself a lawyer immediately. The Chicago area has a lot of real estate attorneys, and if you don't know anyone, contact the Chicago Bar Association for a referral.

I generally do not answer specific question about state law, as I practice law only in Maryland and the District of Columbia. But because you quoted me -- and because this information can be found on the Web (deficiency judgments by state), the answer is that Illinois does not prohibit such actions.

For the benefit of my readers, a deficiency judgment is entered into by a judge. Let's say the outstanding balance of your mortgage was $250,000, and the property was sold at a foreclosure sale for $200,000. The $50,000 difference -- called a deficiency -- can be collected by the lender in most states. All the lender had to do in the past was go to court and ask.

However, in recent years, with all the scandals involving robo-signing, and missing and forged mortgage documents, most judges are now carefully reviewing each and every mortgage related complaint.

You indicated that the city of Chicago demolished your house? Why? Was it condemned, in which case you may have been at fault? Or was it taken by the city for a public purpose, called "eminent domain"? If so, did the city pay for the taking, and did those funds go to the lender?

Perhaps I am reading between the lines, but I suspect that the lender received some payment from the city but it was not enough to pay off your loan.

That's an interesting legal question that I have to research: If property is taken by eminent domain, but the existing loan was not paid off with the moneys from the city, does the lender have the right to go after the homeowner for the deficiency? My guess (not a legal opinion, however,) is yes.

But these are questions that your lawyer should address.

DEAR BENNY: I have heard the concept "business judgment rule." Can you explain? --Sam

DEAR SAM: It is primarily applicable to boards of directors of corporations as well as community associations. The courts have said: "We will not second guess a director -- especially those who volunteer for no pay -- even if they make a mistake. However, if the board is doing something nefarious, illegal or fraudulently, then of course we, the courts, will intervene."

This is a strong protection for community association directors. However, some states -- even the District of Columbia -- have specifically abolished that concept, and have substituted a "reasonableness test." Is the action taken by the board reasonable under the circumstances? If so, we won't chastise or penalize the board.

Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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