Foreclosure University Blog

Question:  In Illinois,if there are outstanding water bills prior to OUR purchase from the bank, do they get wiped out when the property is sold on the courthouse steps?

Answer:  - Yes, when the bank forecloses on a home and they get it back as an REO, in order for them to sell the property with a listing agent, the home usually has a clear title. If it doesn’t, you’ll be able to see what is clouding title when you go to closing. That’s also why you get title insurance. The title company is protecting you against any unpaid real estate taxes or liens.

Question:  We are moving and our home will have to be a short sale. We have perfect credit and have never been late on a payment. The short sale will need to be on the second mortgage only. We owe $150,000 on the second and the short sale will probably be $75,000 of that. We are purchasing a lot where we are moving to and I want to make sure they will not be able to put a lien on it for the difference. In other words what assets will they come after for the difference.

Answer:  - Well, technically they can come after you for whatever is not satisfied. If the short sale is approved and successful, the individual doing the short sale will need to make sure it “satisfies” the loan in which you will receive a 1099-c. If they don’t satisfy the loan, then the bank retains the right to come after you for the deficient amount.

There is actually another option, similar to a short sale, but takes half the time, allows you to stay in the home or (be able to actually sell it in this case) for a profit. We basically get rid of the $150,000 second mortgage by offering a settlement with the lender. The loan is completely satisfied and it never shows up on your credit like a short sale does. Just another option out there for you to think about.

Question:  Our home has been foreclosed and the redemption period is over… We are being evicted… There is a “cash for keys” offer on the table… What can we take – “legally” – from the premises and still meet the “cash for keys” expectation… and what repercussions would there be if we elect to not accept the offer and leave the house after eviction… without any legal trouble…

Answer:  - You can legally take everything that is yours which means anything that is NOT attached to the property itself. This would include furnishings, some appliances, personal belongings etc. You should leave the light fixtures, appliances that are attached or built in like the dishwasher, microwave, stove, the furnace, a/c unit, etc. You get the idea. The goal here is that they want you to leave peacefully. They are tired of ticking off tenants or homeowners who wreck the home as they leave. In the long run, it’s better to pay cash to help them leave. Now, you don’t have to leave if you don’t want to either. The bank or realtor may want you to believe you have no other option. But legally you do and you don’t have to accept their “cash for keys” offer. You have to weigh all the options. Is it benefiting your family to leave now or would it be better to leave a few months down the road to give you time to settle into another home. Timing is important. It’s not fun to leave right before a holiday or when school is almost out. It costs to move as well. Don’t settle on any amount less than $1000 or 1% of your homes value. Remember, if you leave now, you have to start making payments somewhere else. If the eviction process takes 90 days, that’s 3 months of rent you don’t have to pay for. By no means do I encourage you to stay, but run the numbers and make sure it’s beneficial for your family. The only repercussions if you don’t take the offer would be that you don’t get any cash to move out and you will be evicted eventually.

And more more thing. If you decide to go with the “cash for keys” option, make sure it’s all in writing

Question:  This question is about a line of credit in first position and what happens after a foreclosure by the second lender(in California). The loans are in an unusual order. I provided a second loan for an owner of a rental house (meaning I am a lender, somewhat like a bank). The owner/borrower already had a Wells Fargo line of credit secured by that rental house. Since the homeowner (now the previous owner) failed to make payments to me I caused the foreclosure and am the present owner. I want to ask “What happens with regard to the line of credit?”. The LOC is for $75,000 which is slightly more than the current value of the house. For that reason I think Wells Fargo will not want to foreclose on me. Will Wells Fargo in fact pursue me at all rather than the original borrower? If so, will they want instant repayment? If I can’t repay immediately how will Wells Fargo determine the rate of interest and repayment schedule?

Answer:  - No, they won’t pursue you if I am reading this correctly. Same thing happens as with any 1st and 2nd lien holder. If the first lien holder forecloses and the 2nd lien holder doesn’t protect their position, they are wiped out. Any surplus from the auction would go to them. The home then goes back to the 1st lien holder. The 2nd who was wiped out has options. They can either write off the amount lost in the form of a 1099, or the can pursue the homeowner to try and collect the amount lost. So no, they won’t come after you, they will come after the person who originated the mortgage with them.

1. Probates in Every State

If you own property in more than one state, there will have to be a probate in each state where there is property. One state (your residence state usually) will be the state where the primary probate is conducted, and the probates in the other states will be ancillary probates. If you hold property in a trust like I have in my Accumulation and Preservation of Wealth there will be no probate.

2. Do You Really Want to Give the Government an Interest Free Loan?

If you are getting a tax refund, you are giving the government an interest free loan. This year don’t have so much withheld from your paycheck. It works out best if you have to pay just a little at tax time. Yes, you have to be a better money manager, but you’ll be a lot richer. Uncle Sam doesn’t need an interest free loan from you.

3. Naming Your Trust

For a little extra liability protection, name your living trust with an odd name rather than using your own name. It will make it harder for a creditor to find your property. For example, it shouldn’t be the Jarad Severe Living Trust. It could be the Pretty Tree Trust. You can name your trust anything. Always include the date the trust was established as part of the trust’s name. Be sure you use the trust properly.

4. Social Security Trick

Have the big wage earner in the husband and wife team wait until 70 to start the Social Security payments. If you wait until then, you’ll get more each month. Have the lower wage earner start drawing their SS at an early age, then when the higher wage earner’s SS kicks in you can both collect at the higher rate. The higher wage earner will “file and suspend” their SS benefits until age 70 and you can use the lower wage earner’s SS benefits before you both retire.

5. Joint Tenancy and Kids – Bad Idea

Never put your kid’s name on a bank account, deed, or any other asset as a joint tenant. The kid owns 100% of the asset along with your 100% of the asset. (Yes, that doesn’t make sense, but the law doesn’t have to make sense.) Kids are like yogurt – you never know when they are going to go bad. If they go bad, you can lose 100%.

6. Probate Applies to All Assets

If you die without a properly written living trust, your family will have to probate all of your assets that require your signature to transfer. Probate is what you pay the lawyer and it typically takes about 10% of the estate.

7. 1031 to Get Out of Real Estate

There are a number of ways to do a 1031 exchange on a piece of real estate and “get out of real estate ownership.” There are ways you can make it so you don’t pay the tax on the sale of your real estate property. You can end up with an asset that gives you good cash flow without the management headaches.

8. Roth If You Can

You need to go to great lengths to get a Roth IRA. Once you have a Roth, even if there isn’t a lot of money in it, you can start buying property in the Roth and many other things to build your Roth fortune. If you have an AGI of over $179,000 you can’t create or fund a Roth IRA this year.

9. Laws Are Slow to Change

The “legal structure” of trusts, corporations, LLCs, limited partnerships, and other entities doesn’t change very often. For example, the last major change in living trust law was in 1978. How the entities are taxed changes frequently, but the laws dictating the legal structures don’t change often.

10. Disregarded LLC

A Limited Liability Company (LLC) where you are the only owner (member) can be treated as a “disregarded entity” by the IRS. You don’t have to file a tax return for the LLC. The LLC’s income is just reported on a Schedule C with your 1040. You still get the liability shield of the LLC, but the tax convenience of a sole proprietorship.

11. Use Government Per Diem

If you travel for business look at using the government per diems. Go to the website, Per Diem Rates and pick your state and city. You can use the meal per diem, even if you don’t eat that much.

12. Annual Gift Limits

You can give any other person up to $13,000 in 2011 and it isn’t reported as a gift. If you give an individual more than that, then you need to file a gift tax return. You can give as many individuals as you want the $13,000 and not worry about the gift tax. If you don’t have anyone you want to give $13,000 this year to, I will volunteer to be the receiver of your gift. I don’t have to report it as a gift or income. Seriously, gifting can be a good way to diminish the value of your estate.

13. Two Types of Powers of Attorney

There is a general power of attorney and a durable power of attorney. You will use the general power of attorney to sell your son’s car. The general power of attorney becomes invalid if the principal (guy who makes out the power of attorney) becomes incompetent. The durable power of attorney just hangs around in the file cabinet and doesn’t get its power until the principal becomes incompetent.

14. Second Marriage – Watch Out!

If there is a second marriage in the family, the couple had better do their estate planning, because the intestate laws will “screw” either his kids or her kids. It’s a guarantee.

15. Your Estate Includes

Your estate tax will be calculated to include your house, dog, cat, kids, car, all the other real estate, stocks, bonds, IRAs, 401(k)s, other retirement money, your life insurance face value, your little business that you’ve never put a value on, etc. Trust me, the IRS will evaluate it. It’s all there. You’re worth more dead than alive.

16. Power of Attorney

All powers of attorney automatically are void upon the death of the “principal” (the guy who makes the power of attorney). If you think you are going to avoid probate because Dad has a power of attorney, think again.

17. It’s Worth Knowing the Law

The law touches everything you do. If you understand the laws you can make more money at everything you do. Imagine the wealth you can get when you know how to structure the deal, control taxes and keep the crooks out of your pocket.

18. Good Attorney vs. Bad Attorney

It is always cheaper to use a good attorney than it is to use a cheap bad attorney.

19. Sign Documents the Same

When you are signing legal documents, such as deeds, contracts, etc., use the same signature each time. If you take title to your property using your full name, John James Doe and then sign the deed selling the property as John J. Doe, the title will be clouded (bad). Make a habit to always sign the same name. Never use nick names on legal documents.

20. The IRS Hurts

The IRS is your major impediment to financial success, either in your own personal life, or in your business. The only way to control the IRS is to know and use their own laws.

21. Man Overboard Drowning in His Asset Protection Plan

A lot of lawyers and “asset protection experts” will talk you into having a separate LLC, family limited partnership, or corporation for each one of your investment properties, business activities, and whatever else they can think up. They love it, because these guys aren’t bashful about charging for each entity they put in place. Here’s a true story about 2 doctors. The attorney had set them up with 53 family limited partnerships (one for each of their 53 properties) and had charged them $5,000 for each partnership. Then to top things off, he had made the partnerships in his state not the doctors’ state and he had appointed himself as the registered representative for each partnership. In a gesture of kindness, the attorney was only charging $1,500 per year per partnership to be the registered agent and issue K-1s to the doctors after his accountant billed for doing the taxes on each partnership.

The poor doctors called up my friend and stated that they no longer had to worry about asset protection because their lawyer now had all their money. The point is, don’t go overboard. You can’t manage the complexity of more than 3-5 entity structures in your life, unless you pay the attorney your fortune to “manage” the entities for you.

22. Living trusts are revocable and irrevocable

The term living trust simply notes that the trust is created during the life of its creator (grantor, trustor, or settlor). The trust could be revocable or irrevocable. The living trust used for estate planning is almost always a revocable trust, because the creator(s) usually want to get out of the trust if they need to for some reason. When the grantor(s) die(dies), their revocable living trust suddenly becomes an irrevocable trust. (Yes, it always happens that way, because it is pretty hard for the dead guy to revoke his trust, so the law just makes it automatically irrevocable.)

23. Land Trusts – Don’t expect protection

Land trusts are often “sold” as an asset protection tool. They don’t give you any asset protection. They are always a revocable trust. (They could be established as irrevocable, but they never are.) Revocable trusts don’t give asset protection. If they are revocable, the courts can always get the property contained in them. Land trusts can give you some anonymity if you give the trust a name other than your own name. But, they don’t offer any asset protection.