Here is a handful of payoffs, some obvious, some less, you can share to help clients realize that closing before the curtain drops on 2012 is one of the smartest decisions they can make:
1. Take advantage of the Mortgage Debt Relief Forgiveness Act benefits.
This law exempts current homeowners from the hidden, serious income taxes that are normally incurred when mortgage debt is forgiven – including in cases where an underwater home is sold short. See, a mortgage lender extends cash to a borrower when they make a mortgage on a home. If that debt is wiped out without actually being paid back, then the cash that was extended to that borrower is normally considered income by the IRS, and is taxed as such.
But when the real estate market crashed, the federal government enacted this Act to eliminate the thousands and thousands of dollars of income taxes the average American who loses a home to foreclosure or short sale would otherwise incur. It’s sort of the government’s effort not to kick folks while they are down, and help them recover, financially, from these already traumatic events.
Thing is, this Act is set to expire on December 31, 2012. Most industry insiders expect it will be extended before that time, but growing numbers are surprised it hasn’t already been. And with the election set to take place shortly before the expiration timeline, there is an increasing concern that the Act could end up falling through the cracks.
If your sellers need to move an underwater home via a short sale, the time to list it was really a few months ago. But some servicers are expediting these transactions so that it might still be possible to get a short sale closed before year’s end. If the stars align and your seller’s escrow closes by December 31st, they’ll avoid the enormous tax burden that could result if the Act expires and they have to do a short sale in the future. (Note: there are several other, non-expiring exemptions from this mortgage debt tax – if you are working with short sellers, connect them with a tax advisor to see whether this urgent year-end deadline applies for them.)
And if your clients are buying in a market where many homes are still underwater, they might stand to benefit from the inventory changes that may result when sellers who’ve been trying to hold onto great – but upside-down – homes put them on the market in an effort to take advantage of the Act.
2. Reduced competition.
Conventional real estate wisdom pegs the summer months as the hottest months of the year, for several reasons:
- families with children prefer to move into their new homes before the kids go back to school
- in areas where the fall and winter months bring bad weather, it’s less likely to see house hunters out and hunting – and less desirable for sellers to have folks traipsing rain and snow into their homes
- and the holiday seasons tend to be busy with travel, family dinners and other home-oriented activities – which makes both buyers and sellers simply less likely to be active in the market, statistically speaking.
What this means is that if your buyers do happen to be kicking their house hunt into high gear right now, they’re likely to face fewer competitors, and that means a lower incidence of multiple offers and lower likelihood of being outbid, if they’re looking in a market where that has been taking place.
The converse is true for sellers: many banks are holding back on releasing REO inventory these days, and even some “regular” sellers will hold off from listing during the holidays, waiting until after New Year’s. This may position your clients to have less competition from other sellers for the qualified buyers who, like them, are trying to close escrow before year’s end.
3. Increased motivation of all parties at the table.
See all those bullet points above, summing up why buyers and sellers are fewer in number during the late Fall and the holiday season? All those same factors make for one more compelling reason to get a home bought or sold soon: the folks who are active right now, both buyers and sellers, are motivated to get deals done.
If you work in Boston or Minnesota, trust me: the buyers who are willing to pull on their boots and don their parkas to spend their weekends house hunting are no frivolous time-wasters – they are serious home buyers, ready, willing and able to pull the trigger when they find the right place. And the same goes for sellers: someone who’s willing to spend Black Friday scrubbing every nook and cranny to get ready for an Open House, or who is happy to clear the whole family out of the house when everyone else is doing the Thanksgiving Day tryptophan doze is a seller who is motivated to get their home sold, and ready to entertain your offer.
Some banks and asset managers handling short sales and foreclosures even have above-average motivation to move properties off their books and get transactions closed before the year end. This doesn’t mean buyers can score a mansion for pennies, but it might get them slightly more consideration, responsiveness and speed than you would see in such a transaction earlier in the year.
4. Transaction-related tax deductions.
When I bought my first home, I closed escrow on December 30th of that year, by design. I had just graduated from school, had seen a major uptick in income and was on a mission to score the tax perks of closing escrow at the end of the year. First off, any mortgage interest paid in 2012 will be deductible in 2013 – while that might not seem like it could possibly be much, the real deal is that at closing, buyers pay all of their mortgage interest from the date they close through the end of that month. And at the beginning of a loan, most of monthly mortgage payments are interest, so that could tally up to be a nice little, wholly deductible sum.
Second, if buyers prepay mortgage “points” at closing in order to get a lower interest rate for the life of a mortgage loan, the IRS considers those points to be prepaid mortgage interest. And I’ll do you one better: if a contract requires the seller to pay points toward a mortgage, the buyer can also deduct those points on their 2012 tax return! (The IRS says so, but please don’t take my word for it – coach your buyers to have a tax advisor give them a personalized assessment of precisely what they can and cannot deduct in any given tax year.)
Finally, there are other closing costs that are deductible, buyers, on the return they can file as early as January, 2013. The most notable of these are property taxes, but buyers might also have some moving cost deductions, if they relocate for work and moved far enough to meet IRS guidelines. (Again, best practice is to consult with a tax pro. I insist.)
5. Interest rate certainty.
If you’ve been on Facebook at all lately (!), you might have noticed that there’s an election coming up here soon. There may or may not be an administration change, but regardless of what happens with the election, there’s always the chance that the new year will bring new priorities, on a national policy level. The federal government, the Fed and other interest-rate impacting organizations have kept a very tight lid on mortgage rates throughout recent history in an effort to help our nation recover from the recession. But there’s no way now to know precisely how rates will change in the New Year.
Closing escrow on a home purchase before the year is over is the only failsafe way to lock in low rates now for the life of a home loan.
While clients might not have 100 percent control over whether or not they can close escrow by December 31st, you and I both know that they probably have more than they think – and should encourage them to flex that:
- buyers can get serious about getting out there, getting pre-approved and seeing homes as soon as they come on the market, even when the weather is bad, and sellers can heed any advice you’ve been ignoring from your agent on the matter of how to move your lagging home off the market (staging and price-slashing tend to be themes).