Tag Archives: liability

Foreclosure Alternatives

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Realtor.com quoted me in 3 Foreclosure Alternatives: What to Do Before Your Mortgage Goes Underwater. It opens,

Maybe you’ve missed a couple of monthly mortgage payments. Maybe a notice of default from your lender is looming right now. You understand the severity of the situation, but what most homeowners don’t know is that foreclosure is not the only option you have when you’re no longer able to afford your house.

The first step for anyone in risk of foreclosure is to get in contact with your lender. This shows that you are aware of the problem and committed to finding a solution—and trust us, that will go a long way. The earlier you reach out, the greater shot you have of amicably rectifying the problem.

After you speak with your lender, your lender will lay out your options, including the foreclosure alternatives that you might be able to take advantage of. Let’s take a closer look at some of the alternatives so you—and your credit history—don’t suffer the ultimate blow.

1. Standard sale or rental

If your home is currently valued at more than you owe and if you are up to date on your mortgage payments (but you anticipate that paying your mortgage could become a problem), you can hold out as long as possible for a buyer.

You can also try to rent out the home to cover the mortgage payments until the house sells, says Carolyn Rae Cole, a Realtor® with Nourmand & Associates. In the end, virtually all homes eventually sell—it’s just about pricing.

2. Short sale

When a home has fallen in value and is priced so low that there isn’t enough equity to cover the mortgage, you might have the option to conduct a short sale. It’s also known as going “underwater.” This means the lender agrees to accept less than the amount the borrower owes through a sale of the property to a third party.

A short sale works like this: A specialist brokers a deal with the mortgage lender to sell the home for whatever the market will bear. If the amount of the sale is for less than what’s owed on the mortgage, the lender gets the money from the sale and relinquishes the remaining debt. (This means you won’t owe anything else.) In a short sale, the lender usually pays for the seller’s closing costs. A traditional sale takes about 30 to 45 days to close after the offer is accepted, whereas a short sale can take 90 to 120 days, sometimes even longer.

Sellers will need to prove hardship—like a loss of primary income or death of a spouse—to their lender. In addition to explaining why they’re unable to make mortgage payments, sellers will have to provide supporting financial documents to the lender to consider for a short sale.

3. Deed in lieu of foreclosure agreement

A deed in lieu of foreclosure is a transaction between a lender and borrower that effectively ends a home loan. Essentially both parties agree to avoid a lengthy foreclosure proceeding by the borrower voluntarily turning over the home’s deed to a lender, says professor David Reiss of Brooklyn Law School
. The lender then releases the borrower from any further liability relating to the mortgage. However, if the property is worth significantly less than the outstanding mortgage, the lender may require the borrower to pay a portion of the remaining loan balance.

You might be eligible for a deed in lieu if you’re experiencing financial hardship, can’t afford your current mortgage payment, and were unable to sell your property at fair market value for at least 90 days.

Bottom line: This agreement is a negotiated solution to a bad situation—borrowers who have fallen behind on their payments are going to lose their house and the lender is not getting paid back in full.

Multifamilies for Retirement Income

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photo by Laurent Montaron

Financial Advisor quoted me in More Retirees Turning To Multifamily Homes For Income. It opens,

Many clients are investing in multifamily residences as a way to generate retirement income.

“A common way for people nearing retirement is to buy a triplex or fourplex, live in one unit and rent out the others,” said Keith Baker, a financial advisor and professor of mortgage banking at North Lake College in Irving, Texas. “They sell their home and use the equity they have built up to do this, and if they still owe some debt, it will be paid down more quickly.” Among the best multifamily properties to acquire for supplemental income is one that has separate entrances with no shared common areas so that each family has their own space, according to Michael Foguth, a financial advisor in Brighton, Michigan.

“Townhomes are very popular,” Foguth told Financial Advisor. “Also popular are duplexes where you have one unit on the ground level and one unit on the second level.”

But clients should not spend so much money to acquire a property that their retirement income ends up undiversified. “If the bulk of your retirement income is tied up in one property, you are exposed to natural disasters like floods as well as economic downturns in that market,” said David Reiss, a professor at Brooklyn Law School who teaches real estate finance.

An alternative to buying a property is modifying an existing residence with the intent of renting out rooms on websites like AirBnB or HomeAway. “You would need to make sure that deed restrictions, zoning and city ordinances allow this,” Baker said. “It also will require property insurance and additional liability coverage.”

When a multifamily rental property is also a primary residence, a portion of the mortgage is tax deductible, according to Carla Dearing, CEO of SUM180, an online financial planning service. There may also be the opportunity to leverage tax benefits like depreciation.

“Selling your home and taking out a loan on a rental four-unit apartment complex allows you to deduct from your income the pro-rated interest expense along with the depreciation expense of the portion of the units you don’t live in so that much of the income is sheltered,” Baker said.

Over time, the income support received from a rental property can be greater than the interest income from investing in the stock market. “You’re likely to receive a nice stream of income when you are renting to people with guaranteed incomes,” said James Brewer, CFP, in Chicago. Nationally, the average price-to-rent ratio is 11.5, meaning that the average property owner is buying a property for a price of 11.5 years worth of rent, which is an estimated 8.7 percent yield on her investment, according to data from Zillow.

A house that cost $200,000 should bring in $1,450 per month in rent using the national price-to-rent average, according to Matt Hylland, an investment advisor with Hylland Capital Management in Virginia Beach. That’s compared to 10-year government bonds, which yield 1.7 percent and the S&P 500 index, which yields about 2 percent.

“But this 8.7 percent is before any costs,” Hylland noted. In other words, clients who add rental property to their portfolios should also add cash to their emergency funds so that have money on hand to maintain and repair the house. “If the roof needs replacing, do you have $5,000 available to fix it?” asks Hylland.

Ideally, a multifamily acquisition will be move-in ready. “Homes that require construction or renovation can easily turn into a money pit, costing twice what you estimate up front,” Dearing said.

Co-signing: Smart or Stupid?

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Realtor.com quoted me in Co-signing a Mortgage: Smart or Stupid? It opens,

There’s no doubt about it: Buying a home these days is hard. Even if you’re lucky enough to be a homeowner yourself, that doesn’t mean your kids or assorted loved ones can easily follow in your footsteps—at least, not without help.

One way that “help” can occur for home buyers who don’t qualify for a mortgage? Getting someone else—like you, dear reader—to co-sign. In a nutshell, that means that if they can’t pay their monthly dues, the lender will expect you to cough up the cash instead.

 It’s a noble idea, helping someone buy a home. But also, of course, a scary one. It’s no surprise that many co-signers are parents doing what parents do: putting their own financial well-being aside to help their children move into a home.

But let’s be clear here: The risks are huge. Some of them are obvious, but there are plenty more that you may not have even considered. So if you’re considering co-signing, it’s best you know exactly what you’re getting into, and how to protect your finances in case things don’t go well. Here are the main caveats and considerations to keep in mind.

Identify if your borrowers (and you) are good candidates

We’re not saying co-signing is a terrible idea across the board. There are plenty of legit reasons why those near and dear to you may have trouble getting the loan on their own—say, because they’re self-employed, which makes banks leery. But if your kid can’t get a loan because he just can’t seem to pay his AmEx card on time, well, that’s a different story. Judge your own risk accordingly.

Co-signers should also consider whether they’re good candidates to be taking on more financial commitments. Generally, you should consider co-signing only if you meet a few requirements. For example, “You own your home free and clear and don’t require much credit or have a need for it,” says Mary Anne Daly, senior mortgage adviser with San Francisco–based Sindeo.

Consider the pitfalls

If your borrower has a less-than-stellar history of paying back creditors or holding down a job, proceed with caution. Extreme caution.

“Unfortunately, I’ve seen parents dig further into their savings to pay the mortgage when their child can’t make the payment,” says Ryan Halset, a Realtor® with Seattle-based Boardwalk Real Estate. And if you can’t pay, it will tarnish your credit history and future odds of borrowing money.

“Your chance of getting a loan yourself in the future could be in jeopardy,” says Janine Acquafredda, an associate broker with Brooklyn-based House N Key Realty. “Not to mention the risk of ruining relationships if things go sour.” But maybe that last part’s a given.

Think like a lender

Hard as it might be, try to keep your personal relationship with the home buyer from coloring your decision. Even if it’s your child or a longtime pal, it shouldn’t (entirely) trump the warning signs.

“Before you commit, think like a lender and look at the borrower’s income, work history, and existing debt to determine if the borrower is worthy and not a potential liability to your good credit,” says Frank Tarala, owner of Sterling Heights, MI–based Principal Brokers Network.

Saying no may be tough, but it could save you tons of heartache down the road. David Reiss, professor of law and academic program director for the Center for Urban Business Entrepreneurship, recounts a situation where parents stepped in as co-signers just before the financial crisis hit. The home’s value plunged by more than half. The borrower then left the area—and his home—in search of a new gig and couldn’t make both the mortgage payments and the rent on his new apartment.

“The parents, retirees living on a modest pension in their own home, found themselves dealing with the default of their son’s mortgage with no financial resources available as a buffer,” Reiss says. “This situation has devolved into a nightmare of defaults and attempted short sales with no end in sight.”

The Future of the Sharing Economy

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photo by Dennis Yang

I was interviewed on PBS’ Nightly Business Report (produced by CNBC) about the near-term future of the sharing economy in the wake of the horrible shootings in Kalamazoo, allegedly by an Uber driver while he was working for the service. You can find the interview here (my segment appears right after the 22nd minute). A transcript of the interview follows:

SUE HERERA: So, will the tragic Uber shooting spree over the weekend change the way that people feel about the sharing economy?

Let’s turn to David Reiss for his thoughts. He’s professor of law at Brooklyn’s Law School Center for Urban Business Entrepreneurs.

Nice to have you here, David. Welcome back.

DAVID REISS, BROOKLYN LAW SCHOOL PROF. OF LAW: Thank you.

HERERA: I guess that is the question. Do you think it will change the way people feel about the sharing economy, this case in particular?

REISS: I think we have to look at the short term and long term. In the short term, we’ll see people will think twice about it. But in the long term, and as I think people think about their experience with sharing economy services and seeing how frequently terrible and tragic incidents like this occur, I think we’re going to see a return to probably some growth in that area as people put this into perspective.

BILL GRIFFETH: Are you surprised as our reporter Kate Rogers pointing out here that in their conference call just now, they seem to be digging in their heels on not changing their background check policies here. Why not, as I said, do that if only for PR reasons just to reassure the public? I mean, this is a PR problem for them right now, isn’t it?

REISS: It is. And I think they’re probably in crisis response mode. They’re probably not wanting to make big promises about big changes to acknowledge that their business model is intrinsically flawed and they will probably want to make changes on their own time.

HERERA: There have been more calls for more regulation of the sharing economy, specifically by those who are impacted in a negative way by the sharing economy. We have to put that out there. But do you think it opens the door a little bit wider for regulation?

REISS: I certainly do. I think there’s been this attitude of it’s better to ask forgiveness than to ask permission and an incident like this and all of its tragic consequences raise the argument that maybe that’s not the right way to go, that getting it right the first time is better than kind of seeing how it unfolds.

GRIFFETH: Growing pains in the sharing economy or is this a real dent? What do you think?

REISS: I think it’s growing pains. I think the sharing economy has been growing so rapidly with so many innovations. But I think it’s here to stay. I think people are voting with their feet in terms of using the services and government is trying to figure out how to adapt and how to regulate and what’s the appropriate level of regulation.

HERERA: Does it change, though, their liability? Do they have to change some of their policies, all of their policies because there’s a liability issue? And the weekend’s horrible events really point that out.

REISS: I think businesses react to lawsuits and to large judgments, and if courts and juries find that this behavior was negligent or reckless, they will get a clear message and they will change to adapt. I think that regulators are going to look carefully at them. So, I think a lot of this is in flux and I’m sure there’s going to be changes. I don’t know what they will be.

GRIFFETH: Have you used Uber and will you think twice, if not?

REISS: I’ve used Lyft, and I would continue to do.

HERERA: All right. On that note, David, good to see you again. Thanks for joining us.

David Reiss with Brooklyn Law School’s Center for Urban Business Entrepreneurs.

Hefner’s Life “Estate”

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Plan of Playboy Mansion Pool and Grotto 2 by Ron Dirsmith

Fox News quoted me in Playboy Mansion for Sale — With One Tenant for Life. It reads, in part,

We called it: In October, we revealed that the Playboy mansion — home to Hugh Hefner and the site of epic parties back in the day — is in need of major renovations. Now, if a new report from TMZ is to be believed, it looks like Hef is finally ready to throw in the towel: Within a month, the crumbling 6-acre estate will be up for sale.

In spite of the 29-room (six-bedroom) Beverly Hills mansion’s decrepit condition, its owner, Playboy Enterprises, hopes to sell it for north of $200 million. Plus, the buyer will have to grapple with another huge catch: According to TMZ, the buyer will have to grant 89-year-old Hef a “life estate,” which means he can continue living there until death parts him from his beloved bachelor pad.

Ummm … who the heck wants to buy a home with someone living in it? Strange as it may seem, “life estate” arrangements are as old as the hills.

“Life estates go way back to the earliest roots of the common law, and they are great for providing for someone to live in his or her own home until death,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “Effectively, a life estate grants the [original owner] many of the indicia [characteristics] of full ownership for the rest of his life. Upon death, complete ownership of the property can pass to another. A common example would be where a husband bequeaths a life estate in the home to his wife, with the remainder to his children upon her death.”

But Hefner’s deal differs in one key way: He’s not bequeathing his home to family members or even a deserving Playboy bunny, but to an as-yet unknown third party who’ll be forking over millions to move in once Hef passes on.

 “This seems like a version of a reverse mortgage, because it frees up equity in the home during the owner’s lifetime without interfering too much with his use and enjoyment of the property,” Reiss continues.

But this privilege will likely drag down the asking price, a lot. While the listing price may be $200 million, most experts say that $80 million to $90 million is more realistic.

“The life estate would likely significantly reduce the fair market of the property, because the purchaser must defer taking possession as well as other aspects of ownership — renovating it, for example — until the death of the life tenant,” Reiss says. “Moreover, the purchaser must deal with the uncertainty of the life estate: Will it end in a year or in 10 years?”

And aside from these uncertainties, there’s the question of liability. Without adequate legal protection, the owner could be responsible for any damage to the property or its inhabitants. Granted, Hef is 89 and probably passes his days playing chess, but if Playboy bunnies continue to hop in and out, anything could happen.

“What if there’s a fire and the place burns down? What if Hefner falls down and breaks his hip?” asks Wendy Flynn, a Realtor in College Station, TX. “After all, it is known as a party house.”

All in all, if you’re salivating for a piece of Playboy history, make sure to man up your legal team to protect you from all that could go wrong before you’re able to take possession. And even though the mansion is a decent candidate for a tear-down, “don’t start spending money on plans for the property,” Reiss adds.

Even though Hef is already past the average U.S. male’s life expectancy of 84.3, “a lot can happen before possession of the property is actually conveyed.”

Monday’s Adjudication Roundup

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Wednesday’s Academic Roundup

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