That Terrible “F” Word and Reverse Mortgage

I really hate that “F” word. I hear it all the time; at the mall, in the parking lot, and now, of all things, it’s even in the newspaper! I should be used to it. Truthfully, I’ve always had such an aversion to that word that I never thought I’d be able to even get it out of my mouth but low and behold, here I am, having to utter that nasty “foreclosure” word right here in front of God and everybody!

The Impact of Foreclosures

There’s just nothing positive about a foreclosure. With foreclosures, we all lose; the owner loses their home, the neighborhood loses value. The bank often receives less than full payment and they usually end up with an asset that needs repair and maintenance until it is sold. With no disclosure and unknown repairs, there are certainly risks for the purchaser.

Innocent Victims of Foreclosure

Historically, of all the innocent parties that get pulled into a foreclosure, an innocent tenant is probably most tragic but as times and circumstances have shifted, the most frequent foreclosure notices revolve around reverse mortgages. In fact, the most recent notices in the Tribune Herald seem related to someone’s estate. This is normally a strong indicator that a reverse mortgage is involved.

Reverse Mortgages and Equity

The real tragedy is that most of these homes have equity that could be realized if the heirs would just reach out to a knowledgeable REALTOR®. A reverse mortgage that has been in place for years will certainly have a generous amount of equity, but even newer loans could net the estate a tidy sum. Remember, reverse mortgages are FHA-based mortgages. Even from the git-go, they do not loan the full value.

Selling After a Reverse Mortgage

Trust me, I understand how a reverse mortgage can be beneficial but the variables regarding selling soon after the borrower passes should not be overlooked. When someone dies, there’s a “stepped up basis” related to the property value. It’s normally the best time to sell in order to limit capital gains and given that section 121 of the IRS code allows a 3-year window for a deceased owner-occupant exclusion of capital gains, selling as quickly as possible just makes good sense.

Advice for Owners in Foreclosure

None of this is meant to discount the tragic circumstances related to a tenant occupying a foreclosed property but that’s a tale for another time. In any circumstance, owners finding themselves in an unfortunate situation should reach out for assistance right away. It’s best to avoid the terrible “F” word at all costs! Happy Belated Mother’s Day. Hope you didn’t forget to phone home!