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By Tara-Nicholle Nelson | Broker in San Francisco, CA

5 Payoffs of Closing Escrow By Year's End

Every intentional human behavior has one or more payoffs. Sometimes they are rewards we’re consciously aware of, like getting our literal paychecks in exchange for the sweat of our brows. Other times, we are much less conscious of the potential payoffs of our behavior, as when someone procrastinates at filing their taxes to avoid the realities of their financial situation (for a while - the tax man always cometh, sooner or later).

Psychologists call these less-obvious payoffs “secondary gains.” According to them, a payoff is a payoff, whether or not you know you’re getting it!

When it comes to putting a firm, year-end deadline on your personal mission to buy or sell your home, there are the obvious payoffs of having 2013 dawn on your new life in your new home, being out from under water or simply being able to move onto a new phase of your life.  But there are loads of secondary gains, as well.

Here is a handful of payoffs, some obvious, some less, which you stand to realize by getting your home purchase or sale closed before the curtain drops on 2012 - and the ball drops on 2013:

1.  Guaranteeing that you benefit from the Mortgage Debt Relief Forgiveness Act. 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 you need to sell 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 your short sale closed before year’s end. If the stars align and your escrow closes by December 31st, you’ll avoid the enormous tax burden that could result if the Act expires and you had to do a short sale in the future. (Note: there are several other, non-expiring exemptions from this mortgage debt tax - if you’re considering a short sale, talk with your tax advisor to see whether this urgent year-end deadline applies to you.)

And if you’re buying in a market where many homes are still underwater, you 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 you do happen to be kicking your house hunt into high gear right now, you’re likely to face fewer competitors, and that means a lower incidence of multiple offers and lower likelihood of being outbid, if you live 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 you to have less competition from other sellers for the qualified buyers who, like you, 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 your home bought or sold soon:  the folks who are active right now, both buyers and sellers, are motivated to get deals done.  

If you’re 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 you can score a mansion for pennies, but it might get you 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 you pay 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, you pay all of your mortgage interest from the date you close through the end of that month. And at the beginning of your loan, most of your monthly mortgage payment is interest, so that could tally up to be a nice little, wholly deductible sum.

Second, if you prepay mortgage “points” at closing in order to get a lower interest rate for the life of your mortgage loan, the IRS considers those points to be prepaid mortgage interest.  And I’ll do you one better:  if your contract requires the seller to pay points toward your mortgage, you - the buyer - can also deduct those points on your 2012 tax return!  (The IRS says so, but please don’t take my word for it - get a tax advisor to give you a personalized assessment of precisely what you can and cannot deduct in any given tax year.)

Finally, there are other closing costs that are deductible, buyers, on the return you can file as early as January, 2013. The most notable of these are property taxes, but you might also have some moving cost deductions, if you relocated for work and moved far enough to meet IRS guidelines. (Again, 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 your home purchase before the year is over is the only failsafe way to lock in low rates now for the life of your home loan.

While you might not have 100 percent control over whether or not you can close escrow on your purchase or sale by December 31st, you probably have more than you think:
  • 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).

Agents: What’s your #1 piece of advice for current house hunters who want to close escrow by year’s end? And for sellers?

Comments

By Slowfoodisgood,  Thu Oct 4 2012, 10:59
When the Feds last met they said they anticipated that the current interest rates would stay as they are through 2015.
By Adeiza,  Thu Oct 4 2012, 11:19
Always promises promises promises. I am so tired than I gave up. I tried so hard do not go for forclosure, everybody wants take the money that I do not have, Then I blow up. My house I am not more paying, my credit card also and nobody care. I am 78 years old, my job "retire me by force, wit hthe excuse that Estate do not have money.
Then neither I , no job, no money to pay the bills, then lets us old americans live in the streets. Thank you , thank you.
By Wendy Morris,  Thu Oct 4 2012, 11:25
Gave up when investors always came with cash. Also owner of home in short sale would intentionally destroy the home you want to but so it doesn't pass inspection because they want to continue to live free and save.. A sheriff deputy no less!
By Itsnotme1207,  Thu Oct 4 2012, 11:51
i'll show my home anytime! just give me an hour atleast since husband works from home and i can spruce it up just a tad. don't care if it's thanksgiving dinner; i'll get out so a buyer can look. planting a few evergreens this weekend to add color and nice holiday feel for the buyer. i may not want to move after i plant these beautys lol! i would think that if they are wanting to close by dec 31st then october or november would be pretty busy for showings. What do you all think?
http://www.trulia.com/property/3006972280-1802-Twin-Oaks-Dr-Van-Buren-AR-72956
By Joseph Lebron,  Thu Oct 4 2012, 11:53
In NY 5 boroughs and Long Island, it takes 30-90 days to have a closing of escrow. If a contract of sale is not executed prior to November 1st, depending on the mortgage process & situations of the parties to the contract, there is a good chance closing would go into 2013...especially considering how difficult it tends to be scheduling closings in December due to holidays, vacations(yes many people, especially attorneys, vacation in December) or simply the overwhelming amount of other deals which are trying to squeeze their closings in before years-end..there is only so much time available for closings to be scheduled, and banks may not be willing to close until January due to their own bank guidelines and their pools of money available for the month. Stay in touch with your attorney and mortgage loan officer and push them along, or else you may be disappointed.
By Karen Steed,  Thu Oct 4 2012, 12:11
I agree with Joseph, time is running out to close before the end of the year if you plan to finance the purchase. Especially if you are buying a foreclosure. There always seems to be just one more document that the underwriter needs, and so many people are on vacation. Good luck to everyone who is trying to buy before the end of the year!
By Jeff,  Thu Oct 4 2012, 12:21
I entered escrow on a home in California October 2nd 2012. It was a short sale and there were 15 offers on the home. I wasn't the best offer but I wrote two letters to the sellers telling them (a family) a little about myself and complimenting them on their home and also letting them know we knew what they were going through (I foreclosed in 2009). After waiting 3 years I was qualified for an FHA loan and have locked things in at 3.25%. I've been told that BOFA has a new task force for short sales and since BOFA had the 1st and 2nd they'll be coming out in the next few days t do the appraisal. I'm praying I'll close before or on Dec 31st! For everyone out there who has gone through foreclosure I want to let you know there is a light at the end of the tunnel ;-)
By Gerald Widen,  Thu Oct 4 2012, 12:58
Right now I am waiting for an answer on a short sale. We went to contract about 4 weeks ago and the SS package went to Chase about Sept 14th-15th for approval. The house is vacant but supposedly the owner is moving back in to protect it. Also put up some fencing for protection and other repairs that probably cost a few thousand dollars. I hope this is a good sign but wonder who is paying for it. The house is for me (I'm 64) to live in and the offer is cash and is about 80% of what it is probably worth. Any guesses on my chances?
By Gregory Sergienko,  Thu Oct 4 2012, 12:59
Love the column, but on the other hand, if you're not going to itemize deductions for tax year 2012, any mortgage interest and other transaction-related tax deductions you pay in that year will be wasted. Such people might want to close on January 2 or whatever.
By Russ Andrews,Broker,  Thu Oct 4 2012, 13:24
good advice for someone buying next year but it is very late in the year to be thinking of closing by Dec. 31st if financing is involved. In my area, North Central Washington ( the State ) home sale are up 20% from last year. However strict underwriting is causing delay after delay in closing transactions. I have 3 pending sales that are 90+ days under contract and no sure closing date because of repeated requests for additional information, etc,.
By zaniya424,  Thu Oct 4 2012, 13:25
I entered my contract on July 24,2012, live in NY and I am still waiting to close. I am very proactive and it is true- you really have to follow-up with the various people that are working on your loan. These people take for granted that their attitudes towards getting things done in a timely manner does affect the buyer. Nonetheless, I am pushing for a closing no later than 10/19/2012- Thanks for the heads-up.......if my closing doesn't happen by the specfied date I am going to take my concerns- two levels higher for answers!
By Chris Carter, MORTGAGE LENDER,  Thu Oct 4 2012, 13:33
For Jeff and Gerald above - Aside from being a huge moral hazard, short sales take a very long time. The key is getting the written authorization from the original lender. If you were going to forgive a legal debt owed to you, would you be in a hurry to negotiate and relase?
By Philip Brown,  Thu Oct 4 2012, 13:53
Don't forget the new tax on higher profits from selling your home that will be kicking in shortly. That should motivate sellers more than anything else right now.
By Jeff,  Thu Oct 4 2012, 13:56
Here's an interesting article I found regarding BOFA short sale time-frame I hope there's some truth to this..

http://www.dsnews.com/articles/bofa-makes-changes-to-trim-short-sale-timeline-2012-04-09
By Jackieb,  Thu Oct 4 2012, 14:07
Philip:

What is the new tax on higher profits from selling your home that will be kicking in shortly?
By Othermotherteresa,  Thu Oct 4 2012, 14:39
Please remove my name from your email list. Not interested in buying or selling a home.
By Sukh Sagar,  Thu Oct 4 2012, 17:27
Very useful money saving tips.
By aimlay,  Fri Oct 5 2012, 04:53
I live in Missouri and I see listing after listing posted as "contingent no kick out". If lenders don't want additional bids on foreclosures and short sales, why do they accept first offers? There are many homes I"m willing to purchase for more than they "sold" for. I have worked with two real-estate agents and have to say that I really don't have much trust or respect for this profession. Either they don't know the answers to my questions and I have to obtain outside professional advice or they're too slow in responding. I'm starting to look at other alternatives such as "for sale by owner" and "help you sell".
By Joanne Bernardini,  Fri Oct 5 2012, 05:15
I always encourage my clients to consult with their accountant to get all the facts on why it may be beneficial to settle before the end of the year! An offer that is a few thousand less than they wanted may not be so unattractive after all!
By Helen Oliveri,  Fri Oct 5 2012, 13:34
Great tips, Tara.
By Michelle Lugerner,  Sun Oct 7 2012, 06:42
Just a heads up on shortsales. We put a bid in on a shortsale house in NJ. On Feb 6, 2012 we had a binding contract w the seller. We knew we would need to wait for the bank. 7 months later.... The seller was able to get a "deed in lieu" w the bank and protect his credit. We on the other hand retracted and cancelled our contract because now we didn't have a chance now to get the home.... Just be aware of what youre doing, listen to your attorney's advice, and get out when he suggests you do. And just a note... The seller/shortsale home owner didn't care about the home. It was destroyed... I'm sure it did worse in those 7 months we were waiting! Good luck and keep your heads up
By Annie,  Sun Oct 7 2012, 17:29
Is there any hope for me if my mortgage is not fannie mae and I owe a lot more than appraisal. Please advise. Gertrude Ramos pgaramos@verizon.net
By James10076771,  Mon Oct 8 2012, 08:13
now im really confused!!!! Some of you have one opinion,and then just when i thought"HEY,OK!!That makes sense" Then some other ""EXPERT """ comes on and says no, thats not what to do.To many Wanna Be Experts
By Edie,  Tue Oct 9 2012, 06:18
Requested assistance on our mortgage in January 2012. Received an offer for short sale that came within a few thousand of what the bank (PNC) needed. Once we new what the bank needed, we relisted, got an offer in May 2012 and JUST LAST FRIDAY, OCTOBER 5, 2012 received an approval from the bank. 5 MONTHS AFTER THE OFFER CAME IN. I called regularly. I used a realtor that had an in-house short sale negotiator that dealt only with banks. I submitted my paperwork as soon as it was requested. We almost lost the buyer! But with a VA backed loan, the bank doesn't care if you foreclose or do a shortsale. They will get their money either way! So, don't threaten them with ANYTHING or they will (oops!) lose your paperwork or ....gee, have to look it over again. You are at their mercy. And your point of contact at the bank? HA! They speak "script". Nothing else. I had to explain to one that their "investor" would certainly prefer this offer over waiting another 2 months and the property going to foreclosure and selling for $20k less. Duh. He was removed as my POC. Can we get some half way intelligent people to work on these short sales please? Even the negotiator at the bank said she is working for ME and won't be threatened by the buyer walking away....how can she say that when, if the buyer walks, we foreclose? Eleven months into this and I'm SO done. Now VA says we have to close within15 days. WISH ME LUCK PLEASE!!
By Edie,  Tue Oct 9 2012, 06:18
Requested assistance on our mortgage in January 2012. Received an offer for short sale that came within a few thousand of what the bank (PNC) needed. Once we new what the bank needed, we relisted, got an offer in May 2012 and JUST LAST FRIDAY, OCTOBER 5, 2012 received an approval from the bank. 5 MONTHS AFTER THE OFFER CAME IN. I called regularly. I used a realtor that had an in-house short sale negotiator that dealt only with banks. I submitted my paperwork as soon as it was requested. We almost lost the buyer! But with a VA backed loan, the bank doesn't care if you foreclose or do a shortsale. They will get their money either way! So, don't threaten them with ANYTHING or they will (oops!) lose your paperwork or ....gee, have to look it over again. You are at their mercy. And your point of contact at the bank? HA! They speak "script". Nothing else. I had to explain to one that their "investor" would certainly prefer this offer over waiting another 2 months and the property going to foreclosure and selling for $20k less. Duh. He was removed as my POC. Can we get some half way intelligent people to work on these short sales please? Even the negotiator at the bank said she is working for ME and won't be threatened by the buyer walking away....how can she say that when, if the buyer walks, we foreclose? Eleven months into this and I'm SO done. Now VA says we have to close within15 days. WISH ME LUCK PLEASE!!
By Edie,  Tue Oct 9 2012, 06:22
And please allow me to add, never once did I allow my attitude to show to anyone at PNC. I remained respectful and sympathetic to their workload. Even got to know some of the folks on a personal level. They'd talk to me about just about anything....where they got their glasses, what they did on the weekend, etc. I have a gift of gab, really. I am just venting (in the above comment).
Argh! :) Everything happens for a reason. It's just funny to watch it all unfold.
By Branton Pardee,  Tue Oct 9 2012, 18:23
.
By Brenda Warner,  Wed Oct 10 2012, 09:20
Well you better take a look at Obama Care,,,,,,,they are going to tax you on the sale of your house by 3.8% on all sales of homes after 2012. Take a look at it: http://www.gop.gov/blog/10/04/08/obamacare-flatlines-obamacare-taxes-home

Now that is a reason not to vote DEMOCRAT!!!!!
By Victor Dobrowolski,  Mon Oct 15 2012, 12:16
Brenda your dead wrong on this. see below. If it's your primary home your exempt up to 250K in gains, if investment home, you have to have a really big gain that puts your income above $200K, than it's only the aditional amout over 200k that is taxed at 3.5%

Under the new health care law, a Medicare tax of 3.8% will be imposed on investment/unearned income for high income taxpayers. High income taxpayers means those individual taxpayers reporting income over $200,000 and married taxpayers filing jointly reporting income over $250,000. Investment income includes, for this purpose, gain from the sale of your home. But wait: the $250,000 exclusion (or $500,000 for married taxpayers) still applies for purposes of the Medicare tax no matter what your income level. If your income is below the threshold, the Medicare tax does not apply. If your income is above the threshold but your gain is under the exclusion, the Medicare tax does not apply. If your income is above the threshold and the gain from the sale of your home is more than the exclusion, the Medicare tax does apply but only on the portion of the gain that’s more than the exclusion amount.http://www.forbes.com/sites/kellyphillipserb/2012/10/10/9-tax-related-myths-about-selling-your-home/
By Voices Member,  Tue May 21 2013, 14:39
Great article, the level of writing is very high! Excellent job, Tara!

David | http://www.rogersbussey.com/
By Voices Member,  Fri Aug 30 2013, 15:42
I do my best to close escrow prior to the new year but it is good to hear it from a professional! :) Keep up the great work! :)

David | http://kandkpc.com/cases-we-handle/slip-and-fall-injuries
By Voices Member,  Fri Aug 30 2013, 15:51
This is some of the better writing that I have found on the internet! Excellent work with this one,
Tara! :)

David | http://www.kidscountry.net/facilities/maple-valley/
By Voices Member,  Fri Aug 30 2013, 16:05
I love this type of writing but I wish that I could write like this! Keep is up, Tara! :)

David | http://www.amazingsmile.ca/library/1973/Invisalign%26reg%3B.html
By Voices Member,  Tue Sep 3 2013, 14:49
These payoffs that come with a closing escrow are very real! I can't wait to take care of this next year! :)

David | http://www.christeningwardrobe.com/categories/Christening/Girls/
By Voices Member,  Tue Sep 3 2013, 14:50
Tara, this has to be one of the best article around! I really love reading this type of stuff! :)

David | http://www.csicolumbia.com/kitchen-remodeling.html
By Voices Member,  Tue Sep 3 2013, 14:51
Tara, you have some of the most extensive retail experience and knowledge that I have read of this year! Keep it up! :)

David | http://www.housingmart.com/whybuyahousingmarthome.html
By Voices Member,  Tue Sep 3 2013, 14:53
This is my favorite article on Trulia by far! I will keep reading these because they are better than jaw surgery in Silverdale, Wa! :)

David | http://www.bracesinc.com/surgery.asp
By Voices Member,  Tue Sep 3 2013, 14:54
Upon reading this article, I have realized that this is such an interesting way to look at this. I will read this again to ensure that I don't miss anything else!

David | http://www.northernasphaltllc.com/about_us.html
By Voices Member,  Tue Sep 3 2013, 14:56
Tara! How long did it take for you to write this article? I absolutely love reading this type of stuff, it is such a great way to look at it! :)

David | http://www.americomstl.com/telephonevoicemail.html

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