As a REALTOR® specializing in negotiating short sales for homeowners who owe more than their property is worth in today’s market, I am often asked if loan modification is an option.  The answer in short, is YES, albeit with a few caveats.  Negotiating a loan modification is a very similar process to negotiating a short sale and I am happy to report that the AZ Short Sale Team finally has a few success stories to report for clients who found themselves having trouble making their monthly house payments, but who wanted to stay in the home.  (More on this later.) 

In order to successfully negotiate a loan modification, the homeowner must be able to demonstrate that their current payment is greater than 31% of their gross monthly income.  That’s not all, however.  They must also be able to document sufficient income to support a reduced payment.  In other words, you can’t be broke.  If you’re broke, then your best option is probably a short sale.  But, if you have a steady, documentable income and can prove that you can afford to make a reduced payment, then loan modification may be a viable option. 

The most common question that follows “Is loan modification an option?” is “Will they reduce the principal balance?”  The answer, in short, is NO.  In fact, a recent article published on CCNMoney.com reported that the HOPE for Homeowners program which was intended to prevent foreclosures by giving lenders incentives to reduce the principal balance of loans to 90% of the current market value of the property, has saved just ONE family from foreclosure in the five months it has been in effect.  Seriously, just ONE family has benefited from a program expected to help over 400,000  families!  The bottom line is that lenders are far more willing to reduce the interest rate on a loan – to as low as 2% for several of our recent clients – than they are to take the loss on the property unless you’re willing to give up the house (sell via short sale).

While loan modification is the right choice for some, many others feel that a reduced monthly payment simply isn’t enough.  Many who bought during the “boom” years have as much 50% negative equity in their homes today.  For a homeowner who paid $300,000 for a house that is worth just $150,000 today, a smaller payment simply won’t suffice since it will still be nearly fifteen years before the property is worth the original purchase price.*  For households that need to move for employment or growing families, for example, staying in a home for the next fifteen years in order to make up for negative equity just doesn’t make sense.  After all, even the minimal impact that a short sale will have on a borrower’s credit score will be wiped clean long before the home appreciates to its original “boom” value.** 

If you own a home with negative equity, please contact us at LoanHelp@AZLifestyleTeam.com to schedule a free, no-obligation consultation.  We will be happy to discuss your individual situation and help you explore the options available to you. 

*At an annual appreciate rate of 5%
**In most cases

The Obama administration recently unveiled updates to the Making Home Affordable program to make it easier for home owners who owe more than the current market value of their homes to sell those properties at a loss via short sale and have the remaining debt forgiven.  The updates, announced by Treasury Secretary Timothy Geithner, address situations in which borrowers cannot qualify for refinance or loan modification through the program and are at risk of losing their homes.  The administration will now provide additional financial incentives to lenders willing to work with homeowners to negotiate a short sale and avoid the long and costly process of foreclosure. 

The benefits of “short selling” a home versus allowing it to foreclose are three-fold.  The homeowner benefits by minimizing the damage to his or her credit, the lender benefits by avoiding the costs involved in a foreclosure and the community at large benefits by keeping prices stabilized and avoiding yet another empty, neglected property on the block.   

Under the new plan, loan servicers will receive compensation of up to $1,000 per short sale accepted.  As an incentive to avoid foreclosure, borrowers could also be paid up to $1,500 in relocation expenses. In addition, because many homes have second mortgages, the Treasury will pay subordinate lien-holders up to $1,000 to settle the debt and forgive the remaining balance.

“We have heard from REALTORs^® that the extensive delay in the short-sale process has caused many buyers to go elsewhere and has left many would-be sellers with no option but foreclosure,” Charles McMillan, president of the National Association of REALTORs^®, said in a statement. “We are all pleased that the government has stepped in to help homeowners and those wishing to buy a home.”

A recent article on TheDailyBeast.com reported that Kathleen Fuld, wife of the former CEO of the now defunct Lehman Brothers, was seen exiting the Manhattan luxury purveyor Hermès with her goods in a plain white bag instead of a signature orange Hermès shopping bag.  While her husband no longer sits atop one of the largest investment banks in the nation, the couple is obviously far from impoverished.  One might think Mrs. Fuld’s attempt to veil her ongoing lavish spending habits was out of shame or guilt over her husband’s blunders which led the 158-year-old investment bank to its demise, but it’s more likely that ostentatious consumption has simply gone of out style. 

Richard Fuld has been described as the symbol of everything that was wrong with Wall Street.  Is Mrs. Fuld the symbol of everything that was wrong with Main Street?  After all, the culture of conspicuous consumption was practically a national sport until recently.  Who needs a savings account when you’ve got a $20,000 credit limit on your Visa?  Why drive a road-weary Honda when you can lease a shiny new Mercedes?  Equity in your house?  Cash it in and buy a boat!  Remember those days?  You should; they weren’t too long ago. 

As a REALTOR® specializing in negotiating short sales for homeowners with negative equity, I have witnessed the long-term effects of irresponsible spending and borrowing on a more intimate level than most.  I regularly sit at kitchen tables with homeowners who are struggling to make their mortgage payments and answer questions about how a short sale will affect their credit and when they might be able to buy a house again.  The men inevitably declare that “it’s a business decision” and remain emotionally detached while occasionally letting slip a hint of anger.  It’s the women who cry.  The women are the ones who picked out the paint colors and the window treatments and trekked the aisles of home improvement stores for the perfect dining room light fixture.  The women have appreciated the large capacity front-loading washing machine and the stainless steel side-by-side refrigerator and are now wondering if they can take those things with them when they move.  The women are the ones worried about what the neighbors will think and hoping we can sell the house without putting a sign in the yard.  Lately though, I’ve noticed a significant change in the attitudes of those considering a short sale. 

When I first got into the business, the stigma surrounding short sales was much greater than it is today.  A short sale was seen as “almost as bad” as a foreclosure.  Today, however, with property values in some areas at less than 50% of the mortgage balance, many homeowners are looking for ways to “start over.”  Short sales are now viewed as a more responsible way to get out from under the weight of a bad debt without simply walking away and leaving the banks to deal with the mess left behind.  Many people who choose to negotiate a short sale are able to cut their housing expenses by as much as two thirds and end up living in a comparable property in the same neighborhood.  Instead of boasting about that new pair of Kate Spade sunglasses, people are starting to brag about cancelling their cable and selling their ATVs on Craig’s List.  Getting rid of hundreds of thousands of dollars in negative equity and significantly reducing your cost of living has become another thing to brag about.  For many, a short sale is a way to close out one chapter of life and move on to the next. 

One client of mine recently confided that she and her husband plan to start a family soon.  They’ve decided to pursue a short sale in order to decrease their cost of living.  Instead of staying in their current home with mortgage payments totaling $2,500/month, they plan to rent a more modest home for $1,000/month while saving for a down payment on another home in the future.  In doing so, they feel they will be providing a healthier environment for their future children by teaching them the principles of living below your means.  Perhaps there are more important things in life than upgraded cherry cabinets and Prada purses?  This kind of thinking is a far stretch from the “more, more, more” attitudes of the past ten years.  It seems living more conservatively and staying within your means is finally en vogue.  Ironic isn’t it?  Personally, I find it refreshing.

Given the dramatic changes in property values over the past few years, you may be wondering if your property tax rate is fair or accurate.  In Arizona, property taxes are based on the Assessed Value, which, for owner-occupied residential property, is ten percent of the Full Cash Value.  So, if the Full Cash Value of your home is $300,000, you will be charged property tax based on the Assessed Value of $30,000.

Your tax rate will vary depending on where you live.  The rates are determined by cities, schools, water districts, community colleges, bond issues, etc.  The tax rate applied to each property is the sum of the state, county, municipal, school, and special district rates. The average tax rate for homes in Arizona is about 1.3% of the Full Cash Value (or 13% of assessed value).  So, if your home is assessed with a Full Cash Value of $300,000, and your property tax rate was exactly at the average 1.3%, then you'd be paying $3,900 per year in real estate tax on your home.

In the past, the Full Cash Value of most properties in Arizona has been lower than the actual market value.  However, with the steep decline in property values that has taken place in the past three years, this may no longer be the case.  In fact, the National Taxpayers Union estimates that 60 percent of homes are overassessed.  It may be worth your time to do some checking to see if your property-tax assessment is realistic.

You can find the assessed value for a home in Maricopa County on the Maricopa County Assessor web site.  Each year, the Assessor will send an updated assessment on the value of the home, upon which your property tax computation is based.  You probably got this in the mail recently.  The Assessor's Office utilizes a combination of information, including previous sales in the neighborhood, distance from major intersections or areas zoned differently, topography, view, livable square footage, lot size and components, etc.. The valuation is determined by a computer analysis of the information gathered.

Valuing properties is an inexact science to begin with, but when paper records were transferred to computers, many errors were made -- or retained. If there's a mechanical error, the tax assessor may offer a property tax reassessment.  If you don’t catch any blatant

Once you’ve entered your address into the Maricopa County Assessor web site, scroll to the bottom and click on “characteristics.”  This page will show some of the details of your home.  Check each item for mistakes such as the square footage or the number of bathroom fixtures (a “fixture” is a sink, toilet shower).  You may also want to look at the Full Cash Value of similar homes in your neighborhood.  Look for properties similar to yours in terms of age, style and features.  If the assessments on similar properties are significantly lower -- 10% or more – you may want to consider filing an appeal with the County Assessor.

To successfully appeal your property value, you'll need evidence.  Property profiles and web-page printouts are helpful, and photos can be especially useful if you're comparing the condition of your home with others.  You have 60 days after receiving your tax bill to appeal the property tax and present your evidence for an administrative review.  For more information, including forms to help organize your appeal, get the AHA's Homeowner's Property Tax Reduction Kit.  The kit is free with a trial membership on the AHA website.

Of course, if your home is worth considerably less in today’s market that what you currently owe on the property, you may have bigger problems than an overinflated tax bill.  If you’d rather get rid of the house altogether, you should consider a short sale which would allow you to sell the home for less than the current balance(s) owed.  For more information, please visit www.AZShortSaleTeam.com.

According to Chicago-based Spectrem Group, the number of millionaires in the US grew by just 2% last year, reaching 9.2 million households (excluding equity in primary residences).  That compares with an 8% increase in 2006, 11% in 2005, and a whopping 21% in 2004.  See the accompanying chart.

The slowdown in individual’s accumulation of wealth is also evident at the $5 million and above level. The number of people worth $5 million or more increased 2% last year, a BIG drop compared to 23% in 2006 and 26% in 2005.

What’s going on this year?  It’s a pretty safe bet that given the liquidity woes, see-saw financial markets and the general uncertainty in the economy – recession? stagflation? – we are likely to see less wealth creation in 2008, 2009.  Look for the number of US millionaires and multi-millionaires to be flat or decline slightly in the short term.

Citrus Acres, Mesa  -  Announcing a price reduction on 3358 N Ashbrook St, a 2,512 sq. ft., 2 bath, 4 bdrm single story. Now MLS® $499,000 - PROPERTY #7776.

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• Cash is king. Having enough money in the bank to pay closing costs that are typically an additional 2 percent to 3 percent of the price of the home is necessary.

• Location. Location, location. As any good real estate professional knows, homes in good school districts where the crime is low are much more likely to hold or increase their value.

• Compare. Besides just looking at the comps, buyers should examine what it would cost to rent a similar house in the same area and they might consider what it would cost to buy land and build a comparable home.

• Think long haul. It will probably take at least six or seven years of living in the house to be able to sell and come out ahead.

Property #7403

• 1,344 sq. ft., 2 bath, 2 bdrm apartment - MLS® $147,000 - Property #7403

Villa Hermitage, Phoenix  -  Completely remodelled Arcadia condo features beautiful laminate wood floors and upgraded designer tile throughout. The spacious living room features a large arcadia door where you can step out onto your private balcony. The large dining area features a pass-through niche and breakfast bar leading to the remodelled kitchen with new oak cabinets, granite countertops, stainless steel appliances and designer lighting. Both bathrooms feature granite countertops and custom tile. The unit is located in a very private area of the complex, close to the pool. You'll love Arcadia living! Just two miles from LGO!

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Villa Hermitage, Phoenix  -  Announcing a price reduction on 42-3416 N 44th St, a 1,344 sq. ft., 2 bath, 2 bdrm apartment. Now MLS® $147,000 - Property #7403.

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