To Buy and Hold

In mid-1996, I represented buyers who bought a house in Summerland that had been on the market for approximately 11 months. Disregard the fact that prices have skyrocketed since then; they made a good buy thanks to that slow market, sweat equity and, most importantly, a “short-pay.”

Short-pays are an interesting animal that differs significantly from foreclosures, which are when the lender does not want to play anymore (for good reasons like nonpayment of a loan) and they want to take their marbles (your house) and go home. In a short-pay, the lender attempts to work with the borrower so that the lender does not have to spend the time and money to foreclose on a house that they then have to sell in order to get their money. To make foreclosures even less appealing to the lender, the properties are not always left in pristine condition when vacated by an unhappy homeowner.

For the homeowner, being granted a short-pay includes many benefits, like staying in the house and avoiding a foreclosure on their credit score. In this case, the lender agrees in advance to consider accepting a payment for less than the amount owed on the loan. Note the word consider; there is no guarantee. It is tricky because at the outset neither the seller nor the lender knows what the exact dollar amount will be until an offer is submitted.

One way to get the lender to cooperate in a short-pay is unforeseen and extenuating circumstances on the property itself. In the case of my buyers for the Summerland house, it was amazing how I negotiated the price down for the loan payoff after the out-of-state lender received my photographs of the cracks on the walls, ceilings and driveway. This was no smoke and mirrors – the attached geological report and estimate for repairs were legitimate.

So, there is no “free lunch.” They made a good buy but had to spend good money to make the necessary repairs. Today, sitting on their deck with the magnificent view makes it all worthwhile.

If I were an accountant, I would say that in a short-pay, or in circumstances where a portion of a debt is forgiven, the IRS considers that portion as a gain to the seller. That means you owe tax on a gain that you never received. This is when you very well might be in a position of not having the money to pay the tax. See your accountant and lawyer for tax and legal advice.

Still another option is a deed in lieu of foreclosure. I negotiated that for a buyer with Bette Davis as the seller (no, not that Bette Davis).

Learning to Appreciate an Appreciating Asset

A reader e-mailed the following comment: “I suggest you update your article with David Lereah's most recent statements. He now predicts a national decline of 0.7% in home prices, the first nationwide decline since the Great Depression. So much for the bullet point that describes, ‘Real Estate is an appreciating asset.’”

To give the reader’s comments some credibility, a couple of years ago Dr. Christopher F. Thornberg, at that time a senior economist for the UCLA Anderson Forecast, was on my radio program and challenged the National Association of Realtors assertion that the national median sales price has never gone down. Why? He said inflation helped buoy the consistent increase in real estate appreciation since the Great Depression.

No matter how much truth there is to Thornberg’s statement (it doesn’t mean much to me), do you know anyone who has purchased Santa Barbara real estate since the Great Depression and regretted it? Yes, certain people were forced to sell within some timeframes and lost money. But overall, you should learn to appreciate what is ultimately an appreciating asset.