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Slave to the Lender

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There’s a relational dynamic that many people neglect or aren’t even aware exists when they consider purchasing something with debt.  It’s the master/slave dynamic.  When you borrow money from someone, regardless of the time-frame you’ve agreed upon to re-pay that debt, the debt must be repaid, or there’s risk of bad things happening.

As a consumer, I have a say in what products or services are of value simply by choosing to do business with that company.  In other words, I vote with my wallet.  If I don’t agree with something a company does, I don’t have to use their services.

When you borrow money, something is usually used to secure the loan accompanied by an evaluation of your “debt score.”  In the case of a house, the house itself becomes the security instrument that the lender uses to ensure they’ll get paid.  That is why your rates can be so low.  In the case of consumer credit cards or personal loans, since there’s usually nothing put up for security, your rates will be much higher as the lender shifts the risk to you.  They make more money that way.

Collecting payments from you can be a costly process, depending on the type of loan you’ve taken.  When you buy a house, your payments are typically handled by a company you never chose to do business with.  In 2002, I purchased my home using a mortgage broker who promptly sold the note for my house to Countrywide Financial, who was acquired by Bank Of America who subsequently released the note to Greentree Servicing.

I had no say in the matter except that when I signed my closing docs, I gave consent to this phenomenon.  Perhaps I could have retained more control over who I was choosing to do business with had I refused to these terms, but at the same time, perhaps I would not have closed on my first home.

Now, as a debtor, indebted to repay a loan serviced by a company (Greentree) with whom I would never choose to do business, I am stuck with their garbage services and practices until I either pay off the note, or they release the servicing responsibilities to yet another collection company.

This is one example of how borrowing money can put you into a situation whereby you have no control over who you choose to do business with.  Thus, the borrower is slave to the lender.

Proverbs 22:7 – The rich rule over the poor and the borrower is slave to the lender.

 

How Do I Know if I’m a Millionaire?

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Let’s first define the term Millionaire.  The term millionaire defines someone who has a net worth of at least one million dollars.  To understand this further, one needs to know how to calculate personal net worth.  This is a simple calculation.  Add up everything you owe (liabilities) and subtract it from the value of everything you own (assets) and you have your personal net worth.

If this number is $1 Million, then some would say you are a Millionaire.

Let’s say your net worth is $1 Million dollars based on the following.  You own a home, for example, that would sell today for $4 Million and you only owe $3 Million on the mortgage.  After it sells, you would have $1 Million left over.  Many wouldn’t consider this being a true millionaire because you can’t get to the money without either selling your house, or borrowing against it.

You could have a net worth of $1 Million dollars and hardly have any cash in the bank.  This is not what is meant by being a millionaire.  Many also define being a millionaire as someone who is a “cash millionaire.”

A cash millionaire, after all debts and assets are calculated, has at least $1 Million in CASH in the bank that they could get to today.  If you’re a cash millionaire, then you know that you’re really a millionaire.

Now, get out there, kill it, and drag it home.

Realtor Questions: What To Do When the 2nd Requires a Personal Note

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Today I was asked a question by an agent who represented a buyer on a short sale listing that I negotiated recently. She is currently representing the seller, and was curious to know how to handle the following scenario.

The 1st has approved the sale of her client’s home short of what is owed, and the 2nd has also given the go-ahead under the condition that the owner pay the balance to the 2nd.  Here’s the question:

Q: I have a question that has just arisen with my current short sale. The 2nd guarantor loans lien-holder has approved the short sale; however, my client just got notified that she’ll still have to pay back the full balance. Is there any recourse or because it’s an “unsecured” debt, they have the right to request that. Please advise, thank you soo much.

Here’s my answer, and remember that I am not a CPA, nor am I a Tax Advisor, nor an Attorney:

The following objective information is based on my observations in the marketplace and cannot be considered tax or legal advice. Please consult an attorney or tax advisor if you are concerned about these very real details.

The second lien holder has a right to request whatever they want, however, since the property is headed towards foreclosure, and I assume that this is the case, the 2nd knows that they will get nothing out of the deal.

There are many variables that contribute to the expected requests of the 2nd. For instance, was the 2nd part of the original purchase on an 80/10/10 or other “creative” product? In other words, was it purchase money, or was the 2nd taken out later as a HELOC. In the case of a HELOC, it’s more likely that the 2nd will require the owner to sign a note for the balance of the loan in order to remove the lien.  A HELOC is not only tied to the property, but to the person, so it much more closely resembles an unsecured debt, because the money that can be drawn from that line of credit can be done so in the form of cash to be used on anything you choose.

Since the HELOC is tied to the person, even in the case of a foreclosure, there is a high likelihood that the lender will have legal recourse and will probably pursue you in the future for the balance.  In the case of unsecured credit extended to an individual such as a credit card, personal loan, or HELOC, it’s commonplace for lenders to settle for less than the balance, but only after exhausting all in-house and 3rd party efforts to collect on past due balances.  This is the key in settling for less than you owe.  The balance must be past due enough that the lender sees there’s no other option but to accept a fair settlement.

They’re basically saying, “hey, we will allow you to sell the house, we’ll release the lien, but you still owe us the money, so in order for us to release the lien, you need to sign a personal guarantee that you’ll repay the loan.”

There is a moral issue in this scenario.  If the money that is owed on the 2nd was not purchase money, and it was cash out of the house used to finance other purchases, other real estate, cars, boats, toys, gambling, food, or whatever, then the borrower has a moral obligation to repay these debts in a reasonable time frame, if not on the pre-determined schedule presented by the lender.  If the borrower refuses to pay, they are opening themselves up to legal problems, and will have an 800 pound gorilla in their financial future until it’s cleared up.

If the 2nd was purchase money, then you’ve reached a point where you need to continue to negotiate with the lender, because current tax laws may protect the buyer from a deficiency judgment, and debt forgiveness may actually become a reality on that loan.  Many times, in fact in most cases, the approval process is drawn out until the final hours prior to trustee sale.  The thought process behind this is for the 2nd to wait as long as they can before letting the debt go for pennies on the dollar.  In that time period, some home owners’ situations improve and they are able to get back on track.

In every case that I have dealt with, the 2nd, in a purchase money mortgage, gives in, because they won’t get anything if they play “spiteful lender.”

Have a question for me?  Ask!  I love helping you understand the process, because it helps the entire industry to be educated about how Short Sales work.

What Does It Mean: Upside Down In Your Home

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03upside-down-houseNo, it doesn’t literally mean that you’re upside-down.  It’s a financial term that describes the relationship between the value of your home and what you still owe on your home mortgage.

When you borrow money, you usually have to have something to secure that money against, so the bank has a way to recover their money if you don’t pay your payments on time.  Usually, it’s the item you’re purchasing.

When the bank loans you money on a house, they do so based on the current value of the house, with the assumption that you will pay back the loan in full, over time, regardless of the value of the home at the time you sell it.

Sometimes your home appreciates (increases) in value, and sometimes, such as in recent years, your house depreciates (decreases) in value.

If your home’s value is less than what you owe the bank, then it is said that you are “upside-down.”  There are only a few remedies for this situation, and they depend upon your future plans, and your current financial circumstances.

It’s okay to be upside-down in your home if you plan on staying there long enough to ride out the ups and downs of real estate values.  Don’t panic if your home is worth less than you owe.  If you can afford your payments and you have a relatively secure job, you can stay.

But, if you are in a financial situation where your income has decreased, your payments have increased, or any other circumstance has caused undue stress on the wallet, it may be time to take a look at your housing options, and perhaps find a less expensive place to live.

If you’re upside-down and you are faced with this situation where you must sell to make the right changes in your life, you are considered a short-sale candidate.

Don’t be overwhelmed, there are thousands of people in your position.  You are not alone.  Selling homes that are upside-down happens every day.  I know, I’ve done it, and it’s called a Short Sale.

It is nothing to be ashamed of.  I recently spoke with a client who said that she “felt like white trash,” just because she couldn’t afford her mortgage payments any more.  This is so far from the truth.

Whether your home is under $100,000 in value, or over 1,000,000.00 in value, if you’re upside-down and you’re facing financial troubles that will eventually lead to you losing the house, then it’s time to put your ducks in a row and hire a Certified Distressed Property Expert to help you prevent this from happening.

Upside-down simply means it’s going to be a bit more challenging, and will take a bit longer than normal to sell your home.  It also means that it will most likely cost you nothing out of pocket in the end.

Don’t give up!  There is a solution to being upside-down in your home.

The Myth of Tax Deductions

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Math doesn’t lie. When you add 1 + 1 you get 2. Subtract 1 from 2 and you get 1. Big surprise right? One of the most common things that I hear people mention when it comes to owning real estate is how important tax deductions are to their financial health. If you employ simple mathematics to this myth, you’ll see how ridiculous the logic is that tell you tax deductions make sense, because they don’t.

Let’s say you owe the bank $100,000.00 with an annual interest rate of 5%, and your income is $30,000/year. 5% of $100,000.00 is $5,000.00. That means at the end of the year, when you file your taxes, you’ll be able to reduce your taxable income from $30,000.00 to $25,000.00.

On a $30,000.00 annual income, you fall in the 15% tax bracket. $5,000.00 of your annual income was paid to the bank, and you’ll never see it again. The real savings to you in this example, since your tax bracket is 15%, is 15% of $5,000.00 which is $750.00.

In short, you spent $5000.00 to save $750.00. Your net result is a loss of $4250.00 in real cash. If you think that keeping your home mortgage means that you’ll benefit because you’ll be able to take a write-off, I’d be happy to pay you $750.00 as soon as your check to me for $5000.00 clears the bank.

Is it a Virus, Infection, or well what!

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There’s a certain threshold in a given area regarding how much you should upgrade your home and how much it will make a difference in the competition. It would not make sense to put a $5000.00 stove in a $200,000 condomimium, etc. That’s just one example. So, when a prospective tenant or buyer is looking for a place to buy or rent, there’s also a threshold to their perception of value, and when something seems out of place, it won’t matter to them that you have the nicest property in the area, when it comes to considering the rent or price.

Most upgrades will increase the ability to sell or rent your home over the next door neighbors, but it won’t guarantee that you’ll be able to draw a premium based solely on those upgrades, especially if the area in which you’re renting or buying doesn’t warrant such upgrades.

For potential rental properties, if you ever find yourself saying, “I can’t drop the rent that low because my mortgage is more than that,” then it’s time to think about the cost of carrying a vacant property.

Let’s say your mortgage payment is $1500/month and your home can draw $1200/month in rent. That’s a loss of $300.00/month when it’s rented. If it’s not rented, it’s costing you $1500.00/month.  If you rent it for $1200/month for one year, you’ll lose only $3600.00.  Let’s see, $3600 divided by $1500 is 2.4.

You choose.  You can be realistic about your asking price and get the property rented and lose $3600 in 12 months, or you could hope and pray you get someone to rent your house at your inflated price and lose $3600 in 2.4 months.  Hmmm… 12 months versus 2.4 months.

If this is your way of thinking, it’s just not realistic and you may need to be innoculated from the virus, infection, or well whatever it is that’s keeping you from seeing the real market conditions.

Remember, time is money and the entire nation is getting a swift lesson in loss mitigation.  Most of us are in a “collection” mindset.  We want the full payment and we want it now, and we waste all of our time trying to hunt it down.  The best method is to mitigate your loss by getting something going…anything.