396 Hermann
As we wrote a year and a half ago:

Purchased for $749,000 in March of 2007, another one of the four little Donald MacDonald “Urban Townhouses” on Hermann (396) didn’t find a buyer at $795,000 (which would have represented annual appreciation of roughly 5%) and is now asking $779,000 (which would represent annual appreciation of closer to 3%).

And while these little homes aren’t everybody’s cup of tea, we do happen to like little spaces, big windows, and wood burning fireplaces (not to mention the neighborhood).

Withdrawn from the market a month later without a sale, 396 Hermann returned to the MLS three months ago asking $749,000. Two weeks later the price was reduced to $729,000. And yesterday the price was dropped to “$599,000” as a “short sale.”
As a plugged-in tipster writes: “It’s almost like they gave up on figuring out what the market price is — let the bank and the buyer figure that one out.” Of course that also might mean the bank will be figuring out how big a promissory note the seller will be saddled with for the shortfall (which we’ll assume the agent has explained).
∙ Listing: 396 Hermann (2/1) – $599,000 [MLS]
And On His Little Urban Farm He Grew A Little Apple… [SocketSite]
Note to Short Sellers (And Their Agents): Read The Fine Print [SocketSite]

49 thoughts on “And On His Little San Francisco Farm He Grew…A Short Sale”
  1. Hayes Valley Charmer the MLS states? I would say Duboce Triangle, The Castro, The Lower Haight – but not even close to Hayes Valley!

  2. Here’s a sale from yesterday to add some perspective, a SOMA studio/jr. 1BR just sold for $299,000 down from $545,000 in 2006. http://www.redfin.com/CA/San-Francisco/403-Main-St-94105/unit-719N/home/1074051
    Illustrates what many were saying here in 2006 and 2007. Patience pays off. So for about the price of a SOMA studio in 2006, you can now get a pretty cute 2BR place right next to Duboce park, one of the best neighborhoods in the city imho, and at lower interest rates! Wait two more years and prices will be down another 20%, although I expect interest rates will have started to rise by then.

  3. Where is the refrigerator? The listing claims that there’s one in the unit, but I can’t see it in any of the photos. In fact, I can’t see where one would even fit.

  4. lol I had the same thought when I saw the kitchen…where’s the Fridge? perhaps a below the counter model? Do they make those?

  5. I’m sure it’s a half model, and is probably under the counter to the right. That would go with the architect’s desire to keep things small and simple. I’m too much of a packrat to live in a Donald MacDonald, myself. Everything in his houses is just barely big enough….

  6. So nobody wanted to pay $750K to live in a trailer, even here in world-class San Francisco? Odd. This place sure looks well-insulated, though. Anyone know what kind of cardboard those walls are made from?

  7. @william
    “Hayes Valley” is the official neighborhood, according to the San Francisco realtors. The district is drawn very broadly to include all of the Lower Haight and some of what you might call Duboce. It’s silly, I agree. But it’s not the listing agent’s fault.

  8. Yeah, popularly that neighborhood is definitely “lower haight”, but there is always disagreement about precise neighborhood boundaries. Clearly the realtors think Hayes Valley is swankier.
    In my understanding this is definitely not the Duboce Triange, because the triangle is defined by Market, Castro, and Duboce. But it’s obviously Duboce Park adjacent….

  9. Wow, this is the one of the most satisfying threads on Socketsite. Prices down hundreds of thousands of dollars! That portside Jr1br unit price drop is simply astounding.
    The interest in these townhouses was simply off the charts in 2007. To see their astounding fall gives anyone pause about how something that was so, so hot in 2007 could take a beating this bad.

  10. What’s amazing, is we see the charts, the graphs, etc. that the bulls state is evidence of a stabilizing, and yet, the mount of money that is being lost in SF real estate right now is simply breathtaking.
    Where else can you lose your entire life’s savings just trying to get a place to live for you and your family? How long did someone work for a downpayment, only to see it destroyed in a short period? It’s pretty humbling watching the power of what this must be doing to people’s lives, just because they refused to sit out a market that was clearly overheated, and still is. How happy the sellers must have been when they stepped on the heads of the more prudent to buy this place, only to see all of their dreams crushed. How they must have wished they were more careful and sat on the sidelines with the rest of us! How long will it take them to recover?
    At least they can take solace knowing they paid the real estate agents who helped them into making that disastrous decision tens of thousands of dollars. The pretty staging and photos! The encouragement they got from their own agent to bid more! The fraudulent sales everywhere that their agents were so happy to provide to them as “comps” (in contrast to the minute a condo on Berry street sells for under 600psft, the selling agent comes on here a few days ago and provides a litany of reasons why it was “not really a comp”).
    It would give me a certain comfort knowing that, for the real estate agents who were so friendly to them, so helpful, the real estate salespeoples’ life’s savings were secure as the lives of their clients were being pushed off the edge of a cliff.

  11. tipster, you are right on many of your points, however I have to disagree on this one “…refused to sit out a market that was clearly overheated”.
    Remember the old adage “You’ve got to be IN IT, to WIN IT.” ?
    People who “sit out” for a long time on anything (real estate, a new career, new relationship) typically end up taking no action and remain sitting out for their entire life and it passes them by… ! That’s been my observations across friends, families and even strangers that I have had the good (or bad) fortune of crossing paths with…

  12. Re the comments about the borrower signing a promissory note in consideration for the short sale . . .
    I haven’t heard about this.
    I don’t know why a borrower would agree to this. What’s the consideration for the borrower? No foreclosure process on a credit report? Seems like it would usually be better to walk away and let the home go to foreclosure rather than agreeing to pay money one is not otherwise obligated to pay (a.k.a. a gift to the bank to absolve the defaulting borrower of a guilty conscience?).
    Let’s use this house as an example of why a short sale is usually a bad idea.
    Say the first on this house is $700,000. Say this agent’s gambit works and this place sells for over asking at $625,000, leaving it $75,000 short. Why would a seller/borrower be willing to become personally responsible for that money when he could walk away and let the home go back to the lender in foreclosure? Is it worth $75,000 to avoid the credit rating hit? I don’t think so. What is a credit rating worth? Imo a lot less than most people would think. Maybe 10k? 15k?
    Of course a short sale could also leave the borrower with some tax liability if they don’t agree to the promissory note and the lender instead forgives the debt and issues a 1099. This is what I understood the typical short sale process to include.
    The agents/banks should certainly be nervous about their liability when they get a debtor to agree to this. These debtors/borrowers are desperate and like a cornered rat many of these people will rush into whatever apparent opening is before them. Many are so emotionally battered that they will not make wise choices and the banks will certainly be trying to sucker people into crappy deals. It’s happening all the time right now. Plus, a $75,000 promissory note is much better than writing off $75,000 from the short sale or losing even more on a foreclosure. So I could see how the banks would want borrowers to do this.
    If the bank suckers this borrower into a short sale this year, with a promissory note of $75,000, the seller will be making things worse for himself. He will end up in a new dwelling unit anyway (and probably have to leave sooner than if he simply defaults and stays in the home until the bank forecloses and the muscle comes and pays him for the keys). He will also probably end up with a lawsuit filed against him for the rest of the promissory note within a year or two from now (after the bank and servicer have sold the promissory notes to collection agencies and attorneys, etc., and the debtor realizes he couldn’t afford the promissory note anyway and defaults on that).
    [also, what are the terms of these Notes? When do repayments begin? what interest rate? Are they structured so the bank forgives, say, half the loan, and the debtor promises to pay back the other half?]
    I’d be curious to see if the banks are actively pursuing this strategy. If the borrowers are not represented by counsel I wonder how many of these deals will hold up to legal scrutiny. If you, as an agent, are pressuring a borrower to agree to enter into a promissory note to pay money the borrower was not legally obligated to pay (in order to get a commission from the short sale), I would think that there would be a big fat target on the agent’s back in the future as the short-seller realizes he’s $75,000 in the hole for a home he hasn’t lived in for months/years and can’t afford to pay it off.
    [Editor’s Note: Always start with the links (Note to Short Sellers (And Their Agents): Read The Fine Print): “…Bank of America and Chase have quietly added language in their short-sale agreements that require the borrower to sign a promissory notefor the shortfall.”]

  13. I used to live in this area many years ago in my youth and I always liked these townhouses in particular but the crime in the lower haight/duboce area is not for the faint of heart.
    I have friends who live right across the street from Duboce park in a top floor flat and their home/building got burglarized more then once over the past couple of years. They don’t have parking so their car is parked on the street and gets broken into so often, they budget for it each year.

  14. If you, as an agent, are pressuring a borrower to agree to enter into a promissory note to pay money the borrower was not legally obligated to pay (in order to get a commission from the short sale), I would think that there would be a big fat target on the agent’s back in the future as the short-seller realizes he’s $75,000 in the hole for a home he hasn’t lived in for months/years and can’t afford to pay it off.
    Please don’t internalize someone else’s paranoid rambling internet nonsense and worry about its actual real life ramificatons.

  15. Editor,
    Thanks for the link to the Business Times article and the previous post. Some good comments on that previous post.
    Anonn,
    Why do you think the Hope Now program forbids promissory notes for short sales and deeds in lieu?
    https://www.hopenow.com/pdf/What%20is%20a%20Short%20Sale.pdf
    Why do you think the Business Times article describes banks as “quietly” adding these terms to short sale agreements?
    The reason is that these are inherently bad deals for the underwater borrower.
    And the agents have a different financial incentive than the defaulting borrower. An agent is presumably contacted by the defaultng/underwater borrower and would not get the commission if the bank simply forecloses (right?). Therefore an agent would want the sale to be approved and could theoretically pressure an underwater borrower to sign a promissory note even if it’s not in his best interest. It does not make agents/realtors bad people. They are human too (although this V t.v. series makes me suspect a lot of people may really be sleeper aliens). The point is the bank and the agents have financial incentives to get the underwater borrower to agree to a promissory note–and usually this is not in the defaulting borrowers best interest.
    You are blithely ignoring the danger for an agent if you think a $75,000 hit (to use my hypothetical example from above) will be quietly borne by these underwater suckers that are signing promissory notes. People are acting like cornered rats. If someone gets suckered (or remembers the facts differently than the agent does, i.e. even if the agent did nothing wrong) and realizes two years from now that he is on the hook for $75,000 and he thought the bank would just forgive it or it would go away but now he’s being sued for it you would be surprised at how people will react.
    It is not a fantasy to think that some of these short-sellers will feel wronged by the agents (even if the agent acted properly) and will sue them for advising them to sign a promissory note.
    I would be curious though why you are so cavalier about the risk. Even assuming an agent explains the ramifications to the short-seller he better make sure he has procedures in place that minimize the risk. Did you put this advice in writing? Make any statements that the bank won’t come after the money? There is a lot to go wrong and $75,000 might not seem like a lot of money to realtors who get big commissions like that all the time but for a regular chump that gets suckered out of $75,000–he’s going to be pissed–and he will gladly take his pound of flesh from whoever he can. The banks will probably be protected. They don’t have a duty to the underwater/defaulting borrower. An agent is a more likely target (and usu has insurance, no?).

  16. “I don’t know why a borrower would agree to this. What’s the consideration for the borrower? No foreclosure process on a credit report? Seems like it would usually be better to walk away and let the home go to foreclosure rather than agreeing to pay money one is not otherwise obligated to pay (a.k.a. a gift to the bank to absolve the defaulting borrower of a guilty conscience?).”
    I don’t quite think you understand what consideration is or how CA mortgages work, SFHawkguy.
    The consideration issue is really a red herring, so I’m not really going to address that other than to say that this is not a unilateral promise to pay the bank money, but rather a negotiated deed-in-lieu-of-foreclosure deal, so there is adequate consideration.
    As for CA mortgage law, purchase money mortgages can’t have deficiency judgments, but refis and non-purchase money mortgages can have deficiency judgments if they are judicially foreclosed. If people have non-purchase money mortgages, they can’t necessarily walk away with zero liability. If the borrower had a purchase money 1st and then opened a 2nd/HELOC, the holder of the 2nd mortgage should be able to get a deficiency judgment for the HELOC under judicial foreclosure.
    In practice, people generally do walk away with zero liability because banks rarely judicially foreclose, so you are right that people shouldn’t typically agree to sign a note, but if they do sign a note, it would stand up to legal scrutiny in the cases I described.
    Also note that cancellation of debt income on a short sale isn’t always taxable. Congress has created various exemptions under certain conditions in the recent downturn.

  17. SFHawkguy — you’re mixing up different things. The HopeNow program is a federal program. If the short sale doesn’t occur under a federal program, those guidelines don’t apply. There are many short sales that wouldn’t qualify (e.g. if the income ratios don’t fit, if the note is for more than super-conforming, etc.).
    Note also that even the link you sent makes note of what I said above re: second mortgages — i.e. that one may need to negotiate with a second mortgage holder.

  18. Corntrollio,
    My use of “consideration” is not a red herring, although it evokes a couple of complicated concepts. I’m using consideration in two ways:
    1) Consideration is a fancy term but my main meaning is the benefit the defaulting/underwater borrower is getting out of the deal. Assuming a non-recourse loan (as I was assuming above, sorry, I should have been more explicit, I know that not all loans are non-recourse in CA), the only consideration I can think of is that the defaulting/underwater borrower avoids non-judicial foreclosure which may impact his ability to borrow in the future. One could put a price on this consideration–my opinion is that most people that are underwater/defaulting exaggerate the benefit of this consideration (hence my guesstimate of it being worth 10-15k). So yes, I acknowledge that there may be some minimal “consideration”–I just think it’s minimal. You may be right that this usually meets the minimum requirements for a valid contract (this may be a peppercorn of consideration).
    2. Lack of consideration, in the strictly legal sense you are hinting at, may be one way to defeat this deal in the future. As you hint, it may be a weak argument (but maybe triable–don’t underestimate a jury or judge’s antipathy towards banks/agents and they might be willing to find a lack of consideration). These deals may also be unconscionable. There will probably be allegations that the agent colluded with the banks and the deal is a result of fraud or duress.
    If I had to guess, I would guess that the main way to attack these deals in the future would be to go after the agent. You speculate that these are good deals–but I didn’t really see you prove that. How exactly are these good deals? And yes, I’m assuming non-recourse loans in California.
    Of course, if one has recourse loans that is another story.

  19. corntrollio,
    I understand Hope Now is a federal program. My point is that signing a promissory note on a non-recourse loan that one has defaulted on is an INHERENTLY bad deal. That’s why the Hope Now program prohibits them.
    And yes, we’re discussing hypothetical modifications/short sales/deed in lieu outside of the Hope Now program.
    Say you’re the agent selling this house, and assuming that we are dealing with only non-recourse loans, what is the argument to the defaulting borrower that he should sign a promissory note for $75,000?

  20. SFHawkguy — you’re right that someone could challenge signing the promissory notes as unconscionable or against public policy (or fraud or duress), but that’s a completely separate analysis from consideration. Even if the bank said, “if you sign this note for $75K, I won’t foreclose on you,” that would be legally adequate consideration. As long as the agreement to give up the deed in lieu of foreclosure is *after* the mortgage is signed, it’s not illegal.
    The argument to the defaulting borrower would be: 1) you might take a hit to your credit; 2) you might be on the hook for recourse funds if the mortgages are judicially foreclosed; and 3) you might be liable if someone gets injured on the property while you still own it. There are probably other arguments.
    Are all of those worth $75K? Probably not, but your hypothetical is just a hypothetical with made-up numbers. It’s entirely possible that these notes might only be for $10-15K. If I were the borrower’s lawyer, I wouldn’t advice them to sign a note for $75K, certainly, but if people want to sign stupid agreements without reading them, the law allows them to sign stupid agreements without reading them.
    It’s not even clear from the article that BofA ever asked anyone to even sign a note. It just says that the borrowers signed a covenant to do so.

  21. It’s too high at $599K. I like these places too (kitchen is awful in this unit), but not at $599. One of the other units in the complex just sold in August:
    10 Steiner St.
    Sold on 08/17/2009
    $565,000
    So, why should this one go for more?

  22. This place is almost 400 sq feet larger then the listing for the studio in SOMA.
    Yes, it’s an under counter fridge.

  23. You’re right, we are just speculating. But it’s informed speculation and it helps us figure out greater truths.
    I asked the rhetorical question earlier, what are the terms of these loans and how prevalent are they? According to the Business Times article and the previous post we have uncertainties like . . . . a covenant or agreement to execute a Promissory Note . . . up to 10 years in the future. . . zero interest . . . . don’t normally collect anyway. .. bankruptcy and death discharge . . . . but also .. . . we hear that servicers owe a duty to get the greatest return for investors . . . . which means getting as much from borrowers as possible . . . . and of course your point, that the law doesn’t protect the stupid from signing agreements they haven’t read.
    And the U.S. regulators should be asking precisely these questions. How many people doing short sales are getting this “deal”? It may be technically legal . . . just as jacking up people’s credit cards to 30% is legal. But it sure seems rotten.
    We still largely don’t know how much fraud occurred with the last bubble. Yes, people should have known option ARMS with no money down were bad bets. Yes, we are a nation of suckers. Plenty of people lined up for free money and the American dream. But we also allowed a system to be put in place where the hucksters have the advantages. In fact, that’s seems to be the fundamental underpinning of our economy! Shaking the average American upside down so that every last penny drops out and then we blame him for being so stupid to allow himself to be shaken so violently by the huge, hulking Uncle Sam and his Co-Conspirators–the banks and the others that make money on their misery (and don’t we all now? Again, that’s our economy. Hucksters shaking down suckers and the rest of us living off the misery).
    I don’t know where the real estate professionals fit in this picture. But there most certainly is a financial incentive for realtors to encourage a borrower to sign a promissory note if the bank will therefore approve a short sale and therefore give the agent a commission. Servicers will try to hoover as much money out of borrowers as they can (they have a duty to do so–that’s one of the excuses for screwing borrowers over) and this just seems like a natural area where an unsuspecting borrower can get fleeced.

  24. I remember looking at these places when they were going for $325k around 1997-1998 and even then they looked so tiny and claustrophobic – basically one room living upstairs and sleeping/bathroom downstairs. There’s no rational reason to buy a place so small instead of renting – they’ll soon find out they have a limited pool of buyers interested in tiny, overpriced gerbil cages.
    Geekgrrl, I lived across from Duboce Park in a top floor flat for 13 years and we’ve never had a break-in. Your friends’ landlord needs to install a iron gated entrance.

  25. Geekgrrl how old are you, 90? I live a few blocks away and I think this is the best place on earth. Streetcar service, active community, nice park, good litle shops and cafes. We even have the bike lane wiggle. Good blend of everyone’s included, not too too, lots of trendy stuff. okay i’ ll start a photo blog about this ‘hood. geekgrll ther are plenty of people who have lived here for 50 plus years raised families here and who love this place..

  26. SFHawkguy wrote:

    …thats seems to be the fundamental underpinning of our economy! Shaking the average American upside down so that every last penny drops out and then we blame him for being so stupid to allow himself to be shaken so violently by the huge, hulking Uncle Sam and his Co-Conspirators—the banks and the others that make money on their misery (and don’t we all now? Again, that’s our economy. Hucksters shaking down suckers and the rest of us living off the misery).

    I think one of the characters from the show The Wire put it best:

    We used to make things in this country. Now, we just put our hand in the next guy’s pocket.

    Real estate agents facilitate a transaction and live off of “rips”. That’s what they do. Whether or not they actively coerce underwater borrowers to sign a promissory note doesn’t change that.

  27. @sfgirl and @kathleen. Why are you two – for lack of a better word – “beating up” on Geekgrrl ?
    All she did was share her experience about the Safety (or lack of) in that neighborhood.
    The idea that installing “iron gates” to prevent burglaries ignores the underlying problem, which is, “Why should any home in a safe neighborhood require IRON GATES in the 1st place ??”
    It is natural for anyone to defend their neighborhoods, no matter how crazy, dirty, violent it may be, but please don’t let yourself be blinded by Zeal.

  28. To counter corntrollios argument above about the value of the consideration [the value a defaulting borrower gets by agreeing to sign a promissory note instead of allowing a foreclosure]:
    1) Credit hit. Most people losing their home should not be seeking further credit anyway. They should earn and save their way out of their financial difficulty. Plus, so many people will have impacted credit (10% of CA mortgages are currently +60 days late) that credit analysis may change in the future and people that went through foreclosures may still may get credit. Plus, as you surmise, some short sale agreements may involve the borrower promising to pay a portion of the deficiency and the lender agreeing to discharge the rest of the deficiency. So there will be a negative notation on the credit report anyway because of the discharged debt, no? So either the defaulting borrower pays off the entire deficiency (in my hypo $75,000) and “saves” his credit or pays ($15,000) to not have a foreclosure on his credit report but a discharged debt notation instead.
    Also, future lenders may have ways to discover the defaulting borrowers’ credit distress anyway (Was a notice of default recorded? Will the promissory note be recorded or otherwise public or available to banks/potential lenders?). Anyway, most people probably overvalue a “good” credit report, the banks may see the mortgage distress anyway, and defaulting borrowers shouldn’t be so dependent on credit in the future. “Good credit” is not even worth the $10,000 to $15,000 I threw out before unless the defaulting borrower has a unique need for a “good” credit score.
    2) Judicial foreclosure. The lenders/servicers don’t currently do this anyway so it’s not much risk and not worth much. In fact, it probably helps the lenders because they would have had to spend money on attorney fees and court costs (and probably expert fees) to seek the judicial remedy. Plus, many people would be pushed into bankruptcy where the banks stand to get nothing so it’s probably not worth it to banks to judicially foreclose. In probably helps the banks to convert a costly remedy into a promissory note that may be easier to collect. Plus, the defaulting borrower (the prey) is released from his trap so that he can go out and get healthy and fat again and then when he’s not suspecting it the trap will be sprung again. A great deal for the banks! By letting him out of the trap (sort of) they actually ensure a better hunt later. I’m sure banks are sifting through all the credit information these defaulting borrowers gave the banks (or they otherwise have access to) to figure out which victims are most likely to get healthy in the future (and Unlce Sam is encouraging people to share their credit and financial information with the banks–Obama’s hope program is leading the sheep to the slaughter).
    4) Premise liability. The borrower will still have the danger of his reckless friends causing liability in his new dwelling unit. In fact, if our defaulting borrower is like most cornered rats he may be so overwhelmed with losing his house (where he may have been required to keep homeowners insurance) that he may have forgotten to insure himself in his new rental unit.
    Plus, how likely is it for there to be liability on a foreclosed house? If the borrower waits until the bank goons come to the house to pay him for his keys it will be pretty clear who has liability after that.
    In fact, after thinking about it, the promissory note deal is almost never worth it to our hypothetical defaulting borrower primarily because he can get free rent while waiting for the bank to take the house back. The extra months of free rent (years for many people) is worth far more than the meager consideration listed above.

  29. There are no across the board rules that apply to any short sale. Every situation is different depending on the bank (who holds the note behind the scenes at that bank) and the property.
    To make blanket statements that apply across the board is ignorant.
    It doesn’t matter whether or not the bank makes anyone sign a promise note – whether it’s a short sale OR a foreclosure -the banks have the right to go after the borrower in a recourse loan. There are plenty of stories of banks even attempting to do so with non-recourse loans – without any kind of promissory note involved.

  30. Missing the point (an apt name),
    There are indeed across the board rules that apply to short sales. Corntrollio did a good job laying out what the rules are. Individual situations vary and that is what we are discussing.
    And yes, it is complicated. The complication works in the banks’ favor. When you have the government pushing upside-down borrowers into the hands of the banks and the banks and realtors have an incentive to screw over an underwater borrower (extract money out of him that they were not legally entitled to) it creates an unfair situation that makes it hard for the cornered rats to think clearly and stand up for their legal rights.
    What’s your point?
    And if a bank is trying to collect on a non-recourse loan there actually may be laws that prohibit that and provide a remedy to the defaulting borrower (other than trying to get the borrower to sign a promissory note I haven’t heard of banks suing for non-recourse loans or calling or writing to collect this debt that they are clearly not entitled to collect). We still have a few laws that protect consumers (despite the fact our Congress is bought and paid for by the banks and they have done their utmost to make the rules favor the banks). And one of those laws protecting consumers prohibits lenders from coming after debtors when they don’t have a right to collect. A bank might find itself in trouble if it tried to collect a non-recourse loan after it’s one attempt to collect when it did a non-judicial foreclosure. Is your point that banks screw people all the time so we should just accept it?
    So I don’t see your point. You seem to disagree with the idea that it USUALLY is a bad idea to agree to execute a promissory note in lieu of a foreclosure. Where did I say this is a “blanket” rule? In fact, I surmised that for some unique defaulting borrowers they may want to pay the premium to “save their credit”.
    I would love to see the argument for why it’s in a borrowers interest to agree to this. Give me an example to demonstrate your point. Show me the situations where an underwater defaulting borrower should pay the bank money he is not otherwise obligated to pay the bank.

  31. I would love to see the argument for why it’s in a borrowers interest to agree to this…
    Depends on the size of the shortfall and the terms of the note. A small shortfall pushed out 10 years has some value to maintaining your credit and avoiding a 1099 today. NPV the costs today of the default vs the payment 10 years out. your discount rate might of that calc may not be mine.
    you are spot on, if the shortfall is large, then it wont make sense — even in a recourse loan. file bk today or 10 years from now. simple math.
    I would agree with SFHawk, the favored strategy (again depending on the size of the loss) is stay in rent free — and fight the foreclosure. make some partial payments, promise to pay next month, make sure they have a real mortgage at court, fight MERS, delay, stall…should get you a year+ which is quite valuable.

  32. is there a consequence associated with a 1099 other than filling out a 982? I thought we generous tax payers decided to forgive all of the taxes associated with cancelled housing-related debt. free money, indeed.
    The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
    This provision applies to debt forgiven in calendar years 2007 through 2012. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).

  33. Geo,
    Good point about pushing the debt out 10 years (interest free this may make sense at some dollar amount–again, I would not go too much into 5 digits for most people–“good” credit is really not worth that much). There may be some value in this course of action, but I still think the debtor is usually better off getting the 1099 the year of the default because, as others noted, currently there are exemptions to forgiven debt that may not exist in the future and it is much more likely that the debtor is “insolvent” now, but won’t be insolvent when the note comes due 5 or 10 years from now. He is much more likely to be able to walk away without any tax liability now than he is in the future.
    And as far as staying in the house and delaying . . . it certainly would be a bit of poetic justice if underwater defaulting borrowers simply pretended to seek a short sale or modify a loan only to stay in the home rent-free as long as possible. In fact, I would not be surprised if a defaulting borrower said this to his servicer trying to squeeze every penny out of him:
    “Thank you for your interest in negotiating my debt. I remain committed to working with you. Unfortunately, our family is undergoing reorganization and with the downturn in the economy we are swamped with requests and are trying our best to deal with these requests in the most efficient manner possible. Please bear with us and we will get back to you as soon as possible. We really want to make a deal with you and we ask for your patience.”

  34. Geo,
    Good point about pushing the debt out 10 years (interest free this may make sense at some dollar amount–again, I would not go too much into 5 digits for most people–“good” credit is really not worth that much). There may be some value in this course of action, but I still think the debtor is usually better off getting the 1099 the year of the default because, as others noted, currently there are exemptions to forgiven debt that may not exist in the future and it is much more likely that the debtor is “insolvent” now, but won’t be insolvent when the note comes due 5 or 10 years from now. He is much more likely to be able to walk away without any tax liability now than he is in the future.
    And as far as staying in the house and delaying . . . it certainly would be a bit of poetic justice if underwater defaulting borrowers simply pretended to seek a short sale or modify a loan only to stay in the home rent-free as long as possible. In fact, I would not be surprised if a defaulting borrower said this to his servicer trying to squeeze every penny out of him:
    “Thank you for your interest in negotiating my debt. I remain committed to working with you. Unfortunately, our family is undergoing reorganization and with the downturn in the economy we are swamped with requests and are trying our best to deal with these requests in the most efficient manner possible. Please bear with us and we will get back to you as soon as possible. We really want to make a deal with you and we ask for your patience.”

  35. Where is the “one car parking” mentioned in the listing? Does one have to drive into your neighbor’s (potentially occupied) driveway and make a left into that area in front of the house? Or is it one of those driveways cut into the curb that only the owner can block?
    I live just around the corner on Duboce and, while I do get woken up about monthly by a loud hobo, I have found this neighborhood to be quite safe. My car, which I park on the street, has never been broken into (of course, I don’t leave so much as a dime visible in it). Nor has my place (which doesn’t have an iron gate) ever been broken into. I’m not discounting Geekgrrl’s friend’s experience but I’ve always LOVED living here. It’s so central and has everything.
    If this place were about $125K cheaper I’d be on it in a second.

  36. I do not want to beat up geekgrrl. (you go girl)
    Her safety issues regarding the neigborhhood were “the past” How long ago is fair question.
    In the 60’s or 70’s this neighborhood was scary. These Donald McDonald houselets were a gas station and dream in a developers eye.
    Most people buying in the Lower Haight/Duboce Park neighborhood take iron safety doors down, not install them.
    Zeal is not always a bad thing.

  37. While the listing for 396 last noted “Accepted offers, looking for back ups.” and indicated in escrow, the listing was just withdrawn from the MLS.

  38. What circumstance might have resulted in the listing being withdrawn? I assume an accepted offer, and by the time the bank negotiated the short sale the bidder backed out? Now has to be withdrawn in order to be re-listed?

  39. This place sold for $615,000 (over asking!!) — down 18% from 2007. Not too bad, all things considered. Really great location.

  40. re: short sales – hire an attorney and have them negotiate the promissory note OUT of the agreement. if the lender won’t do it – then let it foreclose.
    as for agents – yes there is an incentive to get a short sale closed. but there is also an incentive to not get sued down the line by the seller when the lender wakes up to get their money.
    there are some agents who are completely unaware of this particular pitfall – and i suppose some dishonest ones who know of it and will roll the dice with what might happen in the future and not explain to the seller all the pitfalls. but believe it or not there are some honest realtors who know about this, and who will do right by the seller regardless of current financial incentive.

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