Miami Distressed Sales – Update

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During the most recent three month period from December 2008 through February 2009, we experienced quite a significant jump in the number of closed sales in Miami Dade County. Although the above chart does not show the results for the same period during the previous year, our total unit sales increased by 1,722 units or 43 percent over the same period! So what is really driving the increase in activity?

If you pay attention to the statistics in this table, what should immediately jump out at you is that two-thirds, or 66.2 percent, of the total unit sales during this quarter were either bank owned properties or short sales. This is further evidence to indicate how much the real estate landscape has shifted from a traditional market to one of mostly distressed sales. As buyers and investors are coming back into our market, we are now dealing with an entirely new landscape full of challenges and legal issues. Bidding, multiple offers, as-is contracts, revised contracts, Fannie Mae, asset managers, stripped properties, title issues, liens, association attorneys, and the list goes on.

With distressed sales representing such a large chunk of the current housing inventory, being aware of the potential legal and title issues that accompany bank owned and short sales is crucial. If you are considering getting involved in a short sale, here is a list that was recently provided by the National Association of Realtors:

1. Tax Consequences – Although the federal government passed a law in 2007 directing the IRS not to count mortgage debt forgiven by a lender as income, the provision is limited. It applies ONLY to purchase money mortgages, it does not apply to cash-out refinancing, and it does not apply to second homes or investment properties. There is also a dollar limitation of $1 million for married couples filing separately or twice that amount for joint filers.
2. Secondary Debt – Even if the primary lender forgives the debt, holders of second mortgages do not typically forgive the debt. It is more common practice that they accept a partial payment, like $2,000, and instead of forgiving the debt, they then sell the balance to a collection agency for another few thousand dollars. You may be caught by surprise when a collection agency calls you a year later seeking payment of the debt.
3. Inappropriate Lender Requests for Seller Contributions- It is not uncommon for lenders to go after money that the sellers have in a bank or retirement account before they approve a short sale request. They will sometimes push the real estate practioner representing the seller to get the sellers to sign over a note for the amount they have in the bank as a condition of the sale. However, in states where mortgage debt is non-recourse, they have NO right to the money.
4. Double Close and Flip- Here is what typically happens in this scenario: Investors insist on handling short sale negotations with the lender, allowing the real estate agent to focus on finding a buyer. During the negotiations, often without the agent’s knowledge, the investors talk the sellers to turn over the deed. Once the agent finds a buyer, the investors do a double closing, buying the property at a deep discount and then flipping it to the buyer at the listed price.
5. Loss Mitigation Experts – Companies that specialize in managing short sales promise to focus on the complicated details of the short sale. However, a lot of these companies are fly-by-night or have one person that is handling too many cases and may not touch your file for weeks.
6. Facilitating Transacations Not Listed On The HUD-1 Form – It is very common for investors to offer incentives to move a deal forward, but lenders do not want to see a seller walk away with money when they are supposedly taking a loss. Investors may try to work around this limitation by offering to buy something from the seller at an attractive price, such as a piece of furniture for $5,000. Be careful not to get involved in such transactions, which may potentially lead to charges of lender fraud.

If you are considering purchasing a distressed property in Miami, we are available to consult with you and discuss your plans. For further information, please call us at 305.673.5300 or send an email to  info@miamiangelproperties.com.

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