What is a Foreclosure?


Helpful Tips for Foreclosure Sellers, Buyers and Investors
in Silicon Valley




In your quest to find your dream home in Silicon Valley, you inevitably heard Bay Area Realtors talk about Short Sales, Foreclosures and Real Estate Owned (aka REO or bank-owned) properties.

If you are asking yourself the question - What is a Foreclosure? - or if you are interested to invest in a short sale, a foreclosed home in Silicon Valley or in the San Jose metro area, here are a few helpful tips from a short sales and foreclosure specialist before you jump.


Beware The Asking Price

You have probably read about well below market value prices of foreclosures, REO homes and short sales. You should be aware that, based on the condition of the home, most distressed properties properties will sell at a price only slightly under and in many instances at current market value.

In many instances, the asking price for a short sale home is often the minimum price that will be accepted for the sellers.

You should also know that given the fact that Silicon Valley is a seller's market, home bidders will submit multiple offers that will push the price well above the asking price to secure the deal (read below).

Finally, do not forget that foreclosures, short sales and REO homes, even in Silicon Valley, are almost always in need of repairs as former owners, faced with financial issues, were not in a position to maintain the property as well as they should have.


The Foreclosure Process Explained

The terms short sale, pre-foreclosures, foreclosures and REO homes (Real Estate Owned homes) are actually used to qualify the same property at different stages of the foreclosure process.

The pre-foreclosure process starts when a lender files a notice of default of payment (aka NOD) against the owner(s) of a property. By doing so, the lender exercises the right to be reimbursed for the amount owed or to become the owner of the property.

At this stage, homeowners still have 85 days to pay off the money they owe to their lender(s). However, if home owners already know that they will not be able to reinstate their mortgage payments, they will usually attempt to "short sell" their property.

With the help of a short sales specialist, a negotiation is initiated between the home owners and their lender(s). The role of the Realtor is crucial as he/she is the one who will negotiate with all lender(s) to make them approve the sale of the property for less than what was initially borrowed.


This negotiation process will hopefully culminate in the short sale of the home, named as such because homeowners are “short” to repay their lender(s).  If the property in short sale does not sell, the actual foreclosure process will begin.

During the next stage of the foreclosure process, the lender will attempt to sell the property to the highest bidder in a public auction. If the home does not sell during the auction, the lender will repossess the property, which marks the third stage of the foreclosure process.

At the beginning of the third (and last) stage of foreclosure, the lender is now the sole owner of the distressed property. The home is then referred to as a Real Estate Owned (aka REO) property. Lenders will then engage with Realtors to sell the property, most often "as is".


Can Your Lenders Still Come After You?


Since January 1, 2011 unless otherwise exempt, no deficiency judgment shall be rendered by the first trust deed lender of one-to-four residential units if the borrower sells for less than the amount owed (short sale) with the lender’s written consent.

A first trust deed lender’s written consent shall obligate the lender to accept the sale proceeds as full payment and to fully discharge the remaining debt on the first trust deed.

Since July 12, 2011, the same rule now applies to secondary lien holders. For more information on this particular matter, please read my blog about Deficiency Relief for Short Sales Sellers in California.

Since January 1, 2013, under certain conditions, homeowners who default on their refinance loans are protected against personal liability for any deficiency following foreclosure. This new law only applies to refinance operations executed on or after January 1, 2013.

You should also know that, until December 31, 2013, the Mortgage Forgiveness Debt Relief Act will exempt the taxation of mortgage debt that is forgiven when homeowners and their mortgage lenders agreed on a short sale or a loan modification.

Effective January 1, 2014, the Senate Bill SB 426 will prohibit lenders from claiming that a deficiency is owed or collecting on a deficiency against the owners of a foreclosed home. The new law applies to loans foreclosed upon by a trustee’s sale, as well as loans secured by purchase-money, owner-occupied, one-to-four residential unit properties (including refinances with no cash out).

As a reminder, in 2011 the Senate Bill SB 458 stated that any lender that agrees to a short sale must accept the agreed upon short sale payment as full payment of the outstanding balance of its loans and cannot require the short seller to provide funds in addition to the sale proceeds.

Once the lender has approved the short sale and the sale is concluded, the lender may no longer pursue the debtor or the debt. Until now, some debt collectors were still attempting to collect deficiencies. With the enforcement of Senate Bill 426, they will not be able to do so. 

Nevertheless, keep in mind that a lender can pursue a deficiency against a guarantor or other surety (such as a mortgage insurer), or pursue other security for a cross-collateralized loan. 


Can The IRS Still Come After You?


At a Federal level, the IRS has recently clarified that California’s homeowners who sell their homes in a short sale are not subject to Federal Income Tax liability on the proceeds of the sale as they will never receive the money, their lender(s) will.

In other words, the IRS acknowledges that the debt written off in a short sale does not constitute a recourse debt under California law.

This clarification from the IRS should protect sellers who are short selling their home from any personal liability upon expiration of the Federal Mortgage Forgiveness Debt Relief Act of 2007 on Dec. 31, 2013 which used to protect homeowners who were short selling their principal residence against federal debt relief income tax.

At a State level ,the Internal Revenue Service (IRS) acknowledged that the debt written off in a short sale does not constitute a recourse debt under California law.

In a nutshell, underwater home owners who short sold their home should not have to pay state tax on the debt written off by their lender(s).

The California Franchise Board also recognized that short sales in California are not subject to State Income Tax for cancellation of debt.

Nevertheless, always bear in mind that the tax consequences of a short sale are complex. Therefore, I encourage sellers who are considering short selling their home to seek the advice of a CPA.

An IRS letter from April 2014 indicates that forgiven short sale debt is not subject to cancellation of debt (COD) income only if it is non-recourse at its inception and that their prior letter was overly broad.

In their new letter, the IRS states that in order for a debt to be non-recourse at the time of the short sale, the original debt must be used to purchase or build a 1-4 principal residence or a refinance of such debt. As in the prior letter the IRS affirms that a lender's forgiveness of such debt in a short sale will not result in COD income, but instead will be treated as capital gains.  And as before, single or joint tax filers selling a principal residence can use the appropriate $250,000 or $500,000 capital gains exclusion.

What changed is that a loan used to substantially improve the taxpayer's principal residence may now be treated as COD income instead of capital gains.  Additionally, the IRS clarified that an investor's short sale debt will also be characterized by the nature of the debt at inception.  If it was recourse debt (non principal residence purchase) originally, it will remain recourse debt at the time of the short sale.  This may be somewhat good news for investors who may prefer to have short sale debt treated as COD income rather than capital gains.  COD income may be avoided under a claim of insolvency where capital gains cannot.?


Foreclosures, Short Sales, REO listings in San Jose

New foreclosure and short sales listings are made available every month on the San Jose Real Estate Market across all neighborhoods.

You can check out the latest short sales and foreclosure listings and trends in Almaden Valley, Willow Glen and Cambrian in San Jose, CA.

If you are looking for assistance with your short sale or if you are interested to know more about how to invest in a foreclosure, a short sale or a bank-owned (REO) property in San Jose area of in Silicon Valley, please fill in the form below to receive free information and helpful tips from a certified local San Jose Foreclosure Expert and Short Sales Specialist.


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Helpful Links For Foreclosure Help

You will find below contact details and helpful links to federal, state and non-profit agencies that can help you deal and avoid if possible the foreclosure of your home.

FORECLOSURE HELP OF SANTA CLARA COUNTY

If you are a home owner at risk of losing your home in Silicon Valley, your first step would be to contact the Foreclosure Help Services of Santa Clara County by mail (help@foreclosurehelpscc.org) or by phone (408-293-6000) for foreclosure assistance at no cost. 

HOPENOW.COM

Focused on helping homeowners in crisis, this non-profit alliance helps you assess your options to avoid foreclosure. Here are a few helpful links:

  • Research your options here
  • Find your mortgage lender here
  • Find here a foreclosure counselor in your area

FTC.GOV

The Federal Trade Commission provides expert advice on foreclosure. You can:

  • Find a foreclosure counselor here
  • Learn how to raise your own credit score here
  • Learn how to fix mistakes on your credit report here

MAKINGHOMEAFFORDABLE.GOV

This is the official federal government website for loan modifications and foreclosure alternatives. Here are some helpful pages on foreclosure and short sales:


PORTAL.HUD.GOV

You will find a lof of information and resources on how to avoid foreclosure in your State on this government-sponsored website. Check the page about
Avoiding Foreclosure

MYFICO.COM

Understand your credit score. Helpful pages of this website include:


RESPONSIBLELENDING.ORG

A non-profit organization that works to stop predatory lending practices, which is recognized as one of the key reasons behind the foreclosure wave that engulfed millions of homeowners in the US.

FINDAFORECLOSURECOUNSELOR.ORG

A non-profit organization created by Congress to provide financial support, technical assistance, and training for community-based revitalization efforts. You can
find here a legitimate foreclosure counselor near your home.

NATIONAL COMMUNITY REINVESTMENT COALITION (NCRC)

A national coalition of more than 800 non-profit organizations that seek to increase the flow of private capital into under-served communities. NCRC’s Consumer Rescue Fund works with victims of predatory lending to provide mediation, refinancing and renegotiation of the mortgages. Refinancing services are currently available in California.


NATIONAL ASSOCIATION OF CONSUMER ADVOCATES

The National Association of Consumer Advocates (NACA) is a nationwide organization of more than 1,000 attorneys who represent and have represented hundreds of thousands of home owners victimized by abusive predatory business practices. Legal representation is provided by lawyers and private practice attorneys either free or charge or at low-cost.


BAY AREA LEGAL AID

Bay Area Legal Aid provides free legal help for low income people in various counties of the Bay Area. For Santa Clara County, call 408-850-7066.

HOUSING AND ECONOMIC RIGHTS ADVOCATES (HERA)

HERA is a California statewide, not-for-profit legal service and advocacy organization. HERA's mission is to ensure that all people are protected from discrimination and economic abuses, especially in the area of predatory and unfair mortgage practives.


FORECLOSURE.COM

If you are interested in the latest active foreclosures and short sales homes for sale in your neighborhood in Silicon Valley, you might be interested in this widget below from one of the top foreclosure sites.

Just select California (State), Santa Clara (County) and San Jose (City) to view the latest short sales and foreclosures listings in San Jose, CA.