Short Sale Scams Are Out There- Beware

I have helped short sale clients who once had millions and closed transactions for folks that never had much and perhaps should not have bought property to begin with. Distress affects us all. Few things are as difficult as financial stress. Illness or a crisis with our children certainly could be worse, but facing foreclosure truly sucks. It can bring out desperation, and it can also bring the scam artists to the front door.

On a number of occasions, one of our agents has listed a property for a short sale and brought an offer to the client. Most of the time the seller is ecstatic. There is light at the end of the tunnel. On a few sad occasions, the seller has gotten into the web of some pretty brazen scam artists who promise them things that cannot possibly be delivered. Instead of realizing that if it sounds to be too good to be true that it isn’t, the seller went along with the scammer’s plan. It follows a pattern:

• The short sale gets listed
• One of these bad people harvests the short sale listings and solicits them for their “better option.”
• The seller client, desperate and stressed, agrees to fire their agent, ignore perfectly good offers, and agrees to sell to the scammer for significantly below market value.
• In exchange for the sale, the scam buyer promises the seller tens of thousands of dollars that would otherwise go to their lender to defray the shortfall.
• The end game is, as an example, to sell a $400,000 property for $100,000 to the scammer. They have no skin in the game if the bank isn’t deceived; if the bank is fooled into the lowball deal, the scammer re-sells the property for $350,000 and pays the seller $40,000. Maybe. I don’t know how one would ensure their performance. That would be like running to the cops and complaining that the dope dealer shorted you a few ounces of crank.

In the above example, the lender is defrauded; a consumer is complicit with bank fraud; a valid listing contract with a reputable broker is broken. Worse, the consumer has no recourse if they aren’t paid off.

This has occurred with clients of modest means with an uninhabitable property they abandoned years before, and clients who had high net worth portfolios who fell on difficult times. The modus operandi is the same. The scammer approaches the owner of a listed property, promises them a big payday when they would ordinarily have little or no proceeds, and gets their cooperation in bank fraud. This plays right into the Achilles heel of lenders who do a poor job of valuing the distressed property. That valuation problem is for another day’s discussion.

2017 State of Short Sales, Westchester & Surrounding Counties

We’ve seen three trends since the “recovery” went into full swing the past 18-24 months, and short sales are still part of the landscape in Westchester and the surrounding area counties (Putnam, Fairfield CT, Dutchess, Rockland, and Orange).

1. Some people who think they are upside down aren’t. We recently put a property under contract that was dealing with a reverse mortgage. The seller bought decades ago, some updating was needed, and she was afraid she had no equity. The home was worth almost 50% more than she thought it was. Transaction gap, the phenomenon where it has been so long since a sale or purchase that the consumer isn’t current on the 2017 market, is a thing. Happily, in this case, all appears to be well.
2. Lenders still aren’t efficient. It shouldn’t take 6 months or more (sometimes much, much more) to promulgate a short sale closing, but we are still looking at 4-5 months being almost lightning quick in this silo of the industry. Sometimes it is unavoidable, as loans get sold and the hour glass starts at zero. Often, however, the bank simply stinks- I can think of two properties within a mile of my home that have been in short sale purgatory for more than 5 years. That is appalling. It is bad for the borrower, the lender has a non-performing asset, and the local market suffers. I don’t see this changing. Moreover, some banks
3. Moving incentives are still available on a limited basis. Sellers typically realize no proceeds from the closing of a short sale because of the math. The bank absorbs the loss, so there is no equity to distribute at the closing. However, some government programs such as HAFA are still in effect with a $3,000 credit toward moving, and the lenders themselves still have an occasional incentive. Taking a page from the “everything is negotiable” book, one of our agents does well at negotiating a moving allowance on behalf of the seller client when no program is offered. That is good advocacy.

The percentage of distress sales is considerably lower (thank God) than it was 5-7 years ago when the market was still hoping to recover, but short sales are still a factor. I remain bullish that they are a superior way of dispensing with non-performing mortgages for both lenders and borrowers; I wish lenders would devote better resources toward that end.

Mortgage Forgiveness Debt Relief Law Extended

Good news.

According  to reliable sources, the late night deal to avert the fiscal cliff included an extension of the 2007 Mortgage Forgiveness Debt Relief Act which was to expire at midnight last night. According to the National Association of Realtors, and confirmed by the text in the screen shot of the bill:

Of most interest to real estate, the bill would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender, typically in a short sale or foreclosure sale for sellers and in a modification for owners. Without the extension, any debt forgiven would be taxable, which, for underwater households, represents a financial burden.

Here is the clause referred to in the quote above:

Mortgage Forgiveness Debt Relief Act Extension

The full text of the American Taxpayer Relief Act of 2012 can be found here and here. I know a number of home owners and colleagues in the industry who were concerned that the law would not be extended or languish in ambiguity until a retroactive extension, neither of which would have been particularly good.

There are details which are best discussed with your CPA and other professional financial adviser, and no broker like myself gives tax advice, so do consult with your accountant or lawyer. If you need a referral to a CPA or attorney familiar with the law, send me and email and I’ll be happy to put you in touch.

Bottom line: The business and tax ramifications of doing short sales did not change from the past 5 years, and if you are in the process of a short sale or considering one, a significant obstacle has been cleared. We can all exhale.

Update: Deal has been approved by both Congress and the Senate, and the President has signed it into Law.

 

Is That $30,000 Incentive to do a Short Sale for Real?

A number of short sale clients have shown me letters, mostly from Chase, offering them an almost incomprehensible amount of money if they’ll do a short sale. It would seem hard to believe, in a world where short sale sellers typically walk from closing with the clothes on their back and no proceeds, that lenders would suddenly offer them tens of thousands of dollars to sell for less than what they owed the bank. But there, in real living color, I have been shown these letters, right at the kitchen table, with numbers to call for verification and everything.

We’ve looked into it. The ones from JPMorgan Chase are legitimate. In some cases, Chase is giving a $30,000 incentive to underwater borrowers to complete a short sale. I have verified it through attorneys, Chase, and several Chase officials, and the explanation has been the same: Chase wants to close out these assets and they’d prefer not to foreclose. In the cases I have seen, the loans were originally Washington Mutual mortgages acquired by Chase when they absorbed WaMu in 2008. Chase paid $1.9 billion for Washington Mutual’s assets in 2008 after they were shut down by the FDIC. They did not pay face value for these mortgages. They can afford to sell them at a loss and even pay an incentive to the borrower and still remain in the black- and safely distant from the robo-signing scandal headaches.

According to a senior VP at Chase I have known for many years, other banks are doing similar incentives. Wells Fargo bought Wachovia. Bank of America bought Countrywide. And they can, in house, offer a far better cash incentive in many cases than what sellers could get under the HAFA incentive of $3,000, which many people often do not even qualify for. Not only that, under the TARP rules, the banks can claim a loss on the face value of the loan on their taxes. And that appears to be what they are doing.

Not every letter a delinquent homeowner gets in the mail promising them cash, incentives, and other goodies is legit. As a matter of fact, much of the mail I have been shown by delinquent homeowners struck me as a scam. But I have to say, in the case of banks like Chase, those large incentives to complete a short sale are a fact.

WHATEVER you do, however, never do it alone. If you are in New York or Connecticut where I work, contact a lawyer and check everything out before you ever deal with the bank directly alone and without help. We have a team including lawyers and a CPA who can make sure that our clients make all the right moves and have their backsides covered. Forewarned is fore armed.

Originally Published on the Westchester Real Estate Blog. 

How Can I Get a Rental After a Short Sale?

Who would rent to someone who just did a short sale on their house? This question has been asked many times, and I understand the concern. The presupposition, that one’s credit is so compromised after a short payoff that no landlord would accept them, is not quite that accurate. In spite of what some say, the hit to a FICO score from a short sale is not as severe as with a bankruptcy or foreclosure.

And yet, how many people live somewhere after a foreclosure or bankruptcy? All of them.

Since virtually no one can buy after one of these transactions, our job has been, with the exception of those moving elsewhere, to also help them secure a home for rent. The most successful strategy has been to tell the compete truth. Landlords don’t care so much about credit ratings, they care about getting paid the rent. If a client can demonstrate that while they have one adverse trade line (their home loan) on their credit, but many others that are in good standing, a solid history of paying other bills, and show that the rent is lower than the mortgage payment they just sold off, they have excellent chances.

In many of our cases, we have shown that the rent was considerably lower than the prior mortgage payment, we’ve included the client’s job and salary on the application, and we’ve stressed all the other bills that were paid on time. Landlords often also know that most banks require a default to approve a short sale. If they don’t, we tell them.

Have there been rare cases where the landlord rejected our client? Yes. Rare cases. Who would want a puritanical jerk like that for a landlord anyway (did I say that out loud?).

In some cases, the biggest headache was pets. If you own your own place, you didn’t have to worry about the landlord accepting your pet. You were the landlord. So we have offered an extra security deposit in the rare case of a skeptical landlord. But all of our clients have gotten new housing with dignity, and as time goes by and they re establish credit, they can go back to the housing market again.

In New York, Inspections are Completed Before Contracts

The sale of real estate is far different in Metropolitan New York than it is anywhere else. For one thing, we use attorneys from the start. For another, the attorneys handle the contracts, not the brokers. Another difference is that they won’t draw up contracts until after the inspections are done, unlike other locales where the inspection is a contingency of the contract. My personal feelings about this are immaterial; it is just how it is done. One area where the buyers sometimes get stuck is the timing of the inspection. Theoretically, a buyer can do their inspections and not get the house for whatever reason. The bank could reject the short sale. In those cases, the buyer paid for an inspection and cannot get reimbursed for the expense. That is the cost of doing business, and part of the risk all parties take when approaching a short sale.

We cannot mitigate a buyer’s risk by allowing them to delay their inspection until after the short sale is approved. There are many reasons for this, but not the least of them is that if the inspection reveals a problem that can only be addressed by adjusting the price, it is too late. We have, in most cases, spent 3, 4 or 6 months getting the lender to approve the short sale. We can’t go back and renegotiate the price. That has to be done early on, before we submit the offer to the lender.

While the buyer does incur risk, their exposure is still far less than that of the listing agent, who has to devote 6 months to negotiating the short sale and will never see a dime of compensation unless it closes successfully. That is not small potatoes. And if a listing agent is well versed in short sales, the buyer’s risk in getting the inspection completed prior to contracts is significantly minimized. I like their chances.

Recently, we completed some difficult negotiations for an offer on one of our short sales in Brooklyn (yes, I cover all 5 boroughs too), and the buyer agent informed me that they would not do their inspection until contracts were sent out. The seller’s attorney will not do that-  they send contracts out in all sales after inspections here, as I said. That agent lost the sale. Another agent who advised their client correctly got the house for their buyer, and I expect an approved short sale on that property this spring. It all goes back to the buyer needing to understand that the chronology of events is the same in a short sale as it is in any other transaction. If you are buying a short sale, it is a unequitable apportionment of risk to wait until the blood sweat and tears of the approval are done in 6 months to do the inspection, because no adjustments can be made once the approval is issued by the seller’s lender.

Forewarned is forearmed! Get that inspection done early and you’ll expedite the purchase.

Lake Peekskill Short Sale: He Always Paid His Bills

We closed recently on a short sale in Lake Peekskill, Putnam County that was a challenge with both the seller’s lender and the buyer. The details aren’t important; it took some hard work, patience, and even a bit of diplomacy because the buyer rejected the first proposed approval from the bank and we had to take another 6 weeks and get a revised approval the buyer would accept. No easy feat, but we got it done and closed.

One of the things that stuck with me was the sadness of the seller client when we first listed the house. The circumstances upset him terribly. He had always paid his bills. He felt like he had failed because his value had dropped and illness had caused financial challenges to the point where he couldn’t continue. The thought of defaulting on his mortgage was an anathema to him. He was very upset.

Almost 30  million people are upside down in this crazy market, and in the case of the vast majority, they did nothing wrong except live in an era where they got caught in the undertow of declining values. Had they lived in any other era, they would have enjoyed appreciation of their value and built equity. But not today. My client was not alone. But it still killed him inside a little to sell the house under those circumstances, and his attitude about making good on his debts spoke to the honor he had always lived his life by. It was  difficult, but we sold the property for less than what was owed successfully, and he had no deficiency to haunt him after the closing.

These are heady times we live in, but I am gratified that in this client’s case, in spite of his adversity, we helped him avoid foreclosure and dispense with the property with dignity.

Notes from the Short Sale Trenches

Athletes speak of a “good tired” and a “bad tired” after a game, good after a win and bad after a loss. Tonight I am the good kind of tired. 13 months ago I met with a very nice lady in White Plains who called me after a Realtor she was interviewing proposed that since she was a short sale, she should deposit an amount equal to the commission in escrow with the broker to ensure their fee payment. That didn’t strike her as terribly kosher, she got on the Internet to research short sales in Westchester County, and she found me.

 

I got the listing; Ms. Escrowed Commission didn’t. The condo market was slow at that time, and we went the first 6 months with only one aborted offer. However, I earned her trust in the process and got an extention. We determined that in order to secure a buyer, we should clean up the overgrown outside patio. I put on jeans one afternoon and trimmed, raked and perspired the area to an appealing level. It worked. This past June we got our buyer, and in perhaps some of the best work I have ever seen from our team, the approval came through on August 2nd.

 

You read that right. It took us under 60 days to get the short sale approved (with two lenders!), but we didn’t close for another 4 months. When the buyer was unable to close at the end of August for what was then an unknown reason, we got a rare 30-day extension from the two lenders-yes, two lenders. When the second deadline approached, the buyer was again not ready. For the first time in my career, we got a second extension from both lenders. As the 3rd deadline approached, we discovered the buyer’s problem: They didn’t tell us this, but to raise their downpayment they were refinancing another property. This was a very unsettling revelation. Had we known that their mortgage hinged on such a dubious condition (a financed down payment), we might never have engaged them.

 

As you might imagine, the stress on my client, an Ivy League graduate, a cancer survivor and a single mother, was mammoth. As you might not have imagined, we actually had to negotiate a THIRD extension with both lenders, and were told that no further extensions would be granted. On the Tuesday before Thanksgiving, their refinance closed. Today, we closed our tranaction one day before our final deadline. My client, a hardworking soul, hugged me after the closing was buttoned up and returned to her job to finish her day.

 

Sometimes, you can do a great job and have it squandered because the people on the other side of the table aren’t on point themselves. Among the crosses we had to bear were a frustratingly uncommunicative attorney on the other side, and a weak and not terribly forthcoming buyer. I truly believe the agent on the other side was not at fault and frankly aghast at events on their side. My seller and her attorney, two consummate professionals and people of high character, did voice their feelings-professionally and calmly- at the closing table and left complete.

 

There are very few easy deals, and that is especially the case on this deal. Tonight, I will sleep soundly. And so will my client.

Short Sales are Not to Blame for Market Decline

A client forwarded me the link on Inman News to this broker in Nevada who blames short sale agents and sellers for the mess.

 Prices keep falling because the short-sale agents are listing at 5 to 10 percent below comps in order to try to get an offer, and often are accepting offers at even less. The banks come back at a higher price, and then the buyer walks. The downward momentum has been coming from the short sales, not from the REO listings.

All real estate is local, and perhaps there are many under-priced short sales in Nevada, but isn’t Nevada also one of the highest foreclosure states in the USA? It most certainly is. As a matter of fact, it is the NUMBER ONE ranked state for foreclosures, with 1 out of 97 households with filings, a staggering number when you consider that 2nd-ranked Arizona is at 1 out of 205.

I commented as follows:

I can only speak for my local market and not the author’s marketplace, but if the claim is true, then all those bank owned REO listings that have undercut the market have taken their queue from short sales.

I find that hard to believe.

Since lenders render a decision based on market activity, I wonder what sort of agent would ever responsibly list a short sale at such a fantasy price as 10-15 % below comparable sales.

What may be closer to the truth is that the author sees short sales selling 10-15% below unrealistic asking prices, which sit and rot while losing the war of attrition with buyers who won’t bite, while short sales are listed and sold at a number in line with actual sales.

“Market value” is what buyers are willing to pay, not what some sellers wish they could get.

Short sales reflect the market. They do not set it.

 

I know of no empirical data that suggests that the problem started with short sales. Banks only approve short sales based on market sales. Not asking prices. A short sale could very well be listed 10-15% below the competition. But the competing listings are probably overpriced, because guess what? They aren’t selling! To price a home to sell, you have to look at the sales, not the asking prices. Some of these unsold homes are on their 4th brokerage and are still chasing the market (and not running very fast either).

I do agree that banks often counter at higher prices, and that is because the historical comparables are from the last 6 months, and when the market is falling, historical look-backs are at a time when prices are higher. Short sales reflect falling prices. They don’t cause it. You can’t sell a house for “below” market value, because guess what? If it were underpriced, the buying public would bid it up. Where do we see that most often? Yup, you guessed it- bank owned foreclosures. Not short sales.

Market value is only what people are willing to pay. NOT what sellers or their brokers wish they could get.

When Everyone Walks Away with Money Exept the Seller

Just about every home sale is stressful on the seller. A short sale, given the higher stakes and financial ramifications, often has even more stress for the seller than a typical transaction. On a few occasions, I have had a short sale client lament that they are “left out” in a way, in that everyone is going to walk away from the closing with money except them. Short sale sellers realize no proceeds at closing.

I recall the first instance where this occurred; the seller didn’t really want to sell, and was dismayed at what her perceived as a feeding frenzy around him over his loss. The agents were making a fee, the lawyers were getting a check, and he’d lose his house. It didn’t seem right to him. The listing expired unsold 3 years ago, and it remains unsold with the 3rd listing agent. I don’t think the people could let go.

So what it in it for someone to do a short sale when they don’t get any money? Quite a bit if you ask me.

You avoid a foreclosure. A good point was made by the Distressed Property Institute in the CDPE course: negative trade lines lose their punch and fall off over time, but the one question on every mortgage application is “have you ever had a foreclosure?”

You leave your home with dignity. That goes for you and the neighborhood. Anyone who sells their home moves out on their own terms. Nobody evicts them, and nobody knocks on the door informing them he represents the lender and the house is now theirs. Short sale sellers pack their things and move to their next home like anyone else. And the neighborhood avoids the blight of a bank owned REO and all the baggage that comes with it.

You minimize the impact to your credit. A foreclosure is a nuclear event in credit. I could name nothing worse. While many people who do sell short have late payments, if they manage things correctly they can often be qualified to buy again in 24 months.

You avoid a deficiency judgment. A properly negotiated short sale typically results in the waiver of any deficiency. The slate is wiped clean. As I told my former client, if he just let the house go to foreclosure he wouldn’t get any money either. Worse, a deficiency judgment could haunt him thereafter.

I suppose there are other reasons, but to those who view a short sale as unpalatable, I would ask what they’d propose as a better option. Sometimes you have to choose your poison. Banks aren’t modifying loans these days- as a matter of fact, many of my clients came to me after they were turned down a 2nd and 3rd attempt to modify. You may not walk away with money in a short sale these days. But in a successfully negotiated short sale, do do get something few people consider: a second chance.

To add one more point, there are programs coming into prominence that do offer sellers a small stipend in a short sale, some as much as $7,000. I saw a letter from Chase today referencing up to a $20,000 credit for a short sale. I am sure the small print is copious for that, but HAFA is the first place we are going with our clients in short sales so they can get a credit from their lender at closing. Not every short sale broker is alike. You need a good one who knows how to get the debt discharged and the deficiency waived.

 

Please Take Off Your Clothes

I just finished my first day of CDPE (Certified Distressed Property Expert) class, and am reflecting on one of the more profound insights given by the instructor, Mark Boyland. Mark, who is an excellent presenter, compared the difficult issues we have to sort out with distressed homeowners with the rather matter of fact way a doctor handles another rather touchy thing:

“Please take off your clothes. ”

At my last physical, the doctor hardly looked up from his clipboard when he said that. But he was pretty comfortable about the request- so comfortable, that it seemed as mundane as asking his secretary if anyone called while he was out.

Now, when a guy is that blasé about your prostate test, there is a lesson to be learned.

We have to ask clients questions that are probing and invasive in any other context but real estate:

• How much do you owe on your house?
• Are you current on your mortgage?
• Why did you fall behind on your payments?
• Etc. etc.

These aren’t comfortable questions to ask. And the answers might be very difficult to examine for a seller who is facing foreclosure or imminent default. But we have to ask.  As I have blogged before, privacy does not reside in a vacuum. The more we know about a client’s situation, the better we can serve them.

A physician can’t give a physical to a person in a parka. We can’t help a distressed home seller whose equity position and status with their mortgage company is a mystery. We have obligations of disclosure to others in the market place, but more importantly the answers to the uncomfortable questions affect our pricing strategy, marketing, negotiation methodology, and literally dozens of other critical issues that arise in the obstacle-laden, serpentine maze of loss mitigation.

We are between borrowers under financial stress and a large monolithic financial institution. Information is crucial. Patients need to tell their doctor where it hurts or they can’t be helped. It is the same in real estate. It isn’t fun to ask these personal financial questions, and while some of us are more comfortable than others about it, we have to ask. The more honest and forthcoming the client is in their answers, the higher the likelihood that they can be helped.

How Much of a Loss Will The Bank Accept in a Short Sale?

How much of a loss will the lender accept in a short sale? I am asked this from time to time by consumers and agents alike. We always disclose when a property is being sold subject to lender approval, and I understand the rationale for asking about the numbers, especially with the high dollar value of New York area properties, but the question is actually a non sequitur. Here’s why:

Which home has a better chance of having the short sale being approved:

• A $600,000 home with a $650,000 mortgage
• A $600,000 home with a $850,000 mortgage

Many people assume that the house with the $50,000 shortfall is the one that will be easier to have the short sale approved. That assumption is incorrect. The fact of the matter is that the amount that the lender loses in a short sale is immaterial to the approval. Once hardship is established, short sale approval is based on the banks’s valuation of the home, chiefly through an appraisal or Broker Price Opinion (BPO). The lender could be losing $25,000 or $250,000- it doesn’t matter. It all hinges on that appraisal or BPO.

Why? Because you can’t expect to get more than the market will bring. And if the lender has to seize the home, they will do a BPO on the home and price it accordingly with no regard for the loan amount they foreclosed on. The lender is simply trying to minimize their loss. For that reason, the buyer’s terms are less important in many cases. A regular seller might give a significant premium to a cash buyer for example. A lender in a short sale probably won’t give that term much deference at all.

Therefore, the big question in a short sale is not how much the bank is losing or what they are owed, but if the offer on the table reflects comparable sales activity. That is the great yardstick by which approvals are measured.

 

Buying a Short Sale: Market Value, Not a Steal

As short sales have become more common and are even showing up in new markets in Westchester, I find myself educating my colleagues on what can and cannot be done in order to have a successful closing. Lately, we’ve received offers that are unrealistically low; essentially, what the buyers do not understand is that the lender is going to evaluate their offer based on comparable market activity, not their speculative attempts to get a bargain. 

I don’t blame buyers for wanting to get a good deal. I want the same thing for my own buyers- who doesn’t? But the lender in a short sale is not nearby, so they hire a professional to determine the value. Typically an appraisal or a broker price opinion are done and sent to the bank. If the BPO or appraisal match or are close to the offer, and approval is likely. If the offer is considerably lower than the bank findings, the lender will ask for more money. 

This is where agents need to educate the buying public. It is irresponsible to tie a house under contract for  an unrealistic low amount.  No seller can risk several months waiting for the bank to issue an inevitable denial when the home could have been active on the market and attracted a better offer. “Short sale” is not code for a steal. Buyers should ask their agent for comparable activity and formulate their offer based on realistic events. 

The market in Westchester County is relatively strong compared to much of the rest of the USA. Local activity is relevant to the short sale approval, not the considerably more depressed values in other areas of the nation. Buyers should base their offers on comparable sales (which we have in abundance in New York) and not speculation. I would encourage any buyer to read my prior post on short sales and what you need to know before buying one. 

Previous articles on Short Sales from my Active Rain Blog.

Will I Have to Pay Taxes After a Short Sale?

The concern of some homeowners looking to do a short sale that a 1099 issued from the bank will expose them to a new problem, namely a huge income tax bill on the forgiven debt, is understandable. With home values in Westchester in 2010 at a median of $630,000, a six figure 1099 is entirely possible. In the past, a bank could issue a 1099 for forgiven debt, rendering it akin to income for tax purposes.

However, even if the bank does issue a 1099, the likelihood that you’ll have a tax problem is virtually nonexistant for owner occupants thanks to a law passed in 2007, the Mortgage Forgiveness Debt Relief Act. From the IRS website:

The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness.

Most definitions of “principle residence” mean that you have resided there for at least 2 of the prior 5 years. That means that if you move out due to a job transfer or or other reason, you are not out of luck. Obviously, as a licensed real estate broker I do not give tax advice. You have to consult a tax professional like a CPA. However, make sure you discuss this law when you speak. It runs through 2012, and may well be extended.

 

Recent Media Appearances

I have been prominent in two separate stories in the media this past week regarding default properties and their effect on the market and the borrower. This past Sunday I was in the New York Times, and on Tuesday I was in a nice piece on AOL Daily Finance.

The Times piece centered on strategic defaults, where borrowers who could otherwise afford a mortgage stop paying on purpose. Many people who do this do so for cash flow reasons; if you paid $350,000 for a house in the peak and the same house is for sale at foreclosure down the street for $180,000, some people just buy the cheaper one and let the old house go, cutting their payment. However, the credit consequences can be dire. The debate on the ethics of the practice is heated.

The AOL Daily Finance article is part of a series on how the housing crisis has affected different places. Mount Vernon, a city in Southern Westchester County which has been rife with short sales and foreclosures, was discussed in the article. Values are down in the neighborhood I am quoted on about 50%. What is not mentioned is that many of the foreclosures were actually renovated by the prior owner before they ran into financial problems, which punctuates the crisis, for me, in a very sad way. You hate to witness broken dreams.

Which is why we work so hard on getting our short sales closed and done for our clients. Preventing foreclosures is what we are all about.

How Do You Price a Short Sale?

After two similar discussions the past week, it would be wise to address how a short sale should be priced. After all, if the offer submitted to the lender is subject to approval and therefore not a certainty, all the more that the asking price is also a hypothesis.

It is. But, as educated guesses go, a good short sale broker’s list price is pretty educated. It takes into account comparable sales, competing listings, and, sometimes, the gut sense of a seasoned professional. You have to skate a nuanced line in some cases between what will get the phone to ring and what the lender will sign off on.

I have blogged before on the stress that a short sale can put on a home seller. They are typically in default, getting collection calls and letters from the bank, facing the steps up to a foreclosure, and often overwhelmed with distress. When one is under stress, it is natural to instinctively move to eliminate the source of the stress, so often sellers want to lower the price to get moving, and dramatically so. The problem is that if you lower the price to be the lowest asking price the neighborhood has seen in 5 years, you can foster too much skepticism from the lender and  the offers you get might not be enough for the bank accept.

For example, if comparable sales put your homes estimated value at $400,000, it is irresponsible to whack the price to $320,000 just to get an offer and be done with it. You have to balance between what the buying public will respond to and what the lender will accept. And few homes sell in 10 or 20 days. It takes some time. Not all short sales tale a long time to find a buyer,  but some can, and too many reductions too soon can sabotage your efforts.

The best (and really only) approach is to price the home aggressively based on comparable sales, and then review and reduce every 30 days unless market activity indicates something faster. But it is market activity, and not nerves or stress, that should source the price strategy.

Can an Owner Reject an Offer in a Short Sale?

Contrary to what some may think, an owner is not obligated to submit every offer to the lender for approval in order to do a short sale. As a matter of fact, there are offers that an owner should never submit to the lender. That is the owner’s right, as they still hold title and ownership of the property, and the bank’s decision in a short payoff is simply the amount they’ll take to release the lien and settle the debt.

In Westchester and the surrounding areas of New York, offers are not submitted to the lender for approval, contracts of sale are. And those contracts are between buyer and seller, not the bank. The contracts are conditioned upon bank approval, but they are binding contracts none the less. And it can take every bit of 3-6 months for the lender to render a decision, all while the foreclosure wheel turns. If the owner goes to contract with an offer that is less than a realistic expectation of value, they can be six months closer to foreclosure when the bank issues their denial of the short sale.

Sellers are therefore looking for realistic offers, not for their own pockets, but to ensure the bank accepts the short payoff. If an offer can be judged favorably by 3 recent (i.e., 6 months or less) closed and 3 active comparables, the offer bodes well. Buyers who submit speculatively low offers, unsupported by 3 sold and 3 active,  are doing something ill advised; if their amount is not close to what comparable sales for similar properties are getting on the market, they could waste months waiting for the inevitable “no.” And that “no” could cost the owners their house.

We have a enough offers in multiple bid situations meeting resistance to the banks; lowball offers invite peril to the seller and frustration to the buyer. And it is ultimately the sellers decision as to whom they’ll go to contract with. A short sale sellers surrenders proceeds. But no owner surrenders their rights. While the bank makes the final decision on amount, it is the owner, on advice and market data from their agent, who determine what to submit to the bank for that decision.

NY Times: Banks Resisting Short Sales

The top emailed story on the New York Times website today, Short Sales Resisted as Foreclosures Are Revived, is over 2 days old. That it remains pinned as the top story to share is significant, especially to anyone in New York who is facing foreclosure or in a short sale. Bank of America has, after an absurdly short period of time, ended its moratorium on foreclosures and deemed that its house is in order to resume foreclosures. Aside from the field day that thousands of attorneys will have in the coming years with this, my thoughts are a mixture of dislike for the decision and sadness for borrowers who are in default with Bank of America.

The resistence to short sales is particularly unfortunate. The suspension was hoped to be a catalyst for making short sales a more viable option, but banks have yet to devote sufficient resources to streamline the process. The rationale is a fear of fraud, but fraud only accounts for a minuscule percentage of short sales- like 1 or 2 percent. The other 98 or 99% ought not to suffer because of it. The resumption of foreclosures removes any chances of positive change, unless the government steps in, which the Obama administration seems unwilling to do.

There is a silver lining to the story: The New York Times is finally getting interested in examining why banks resist short sales when they are so much of a better option for all involved. The Times is also starting to follow the money- banks do have some financial incentives, such as accounting practices which you or I could not do to write off a loss, which makes foreclosures more attractive.

Make no bones about it: in the absence of a government with a spine, banks will look at short term gain and little else. Changing their architecture to accommodate short sales is an expense and a learning curve, and they will resort to dumb rationalizations and red tape hell to keep the foreclosure train rolling.

This makes a savvy short sale specialist more of a necessity than ever. We are still batting .900, closing  more than 90% of the short sales we list, and I think it is due in no small part to understanding who, and what, we are dealing with. Choose your agent wisely.

Short Sale Fraud and Strawmen

This article in today’s NY Times makes reference to banks being reticent to approve short sale because of a fear of fraud. This is not the first I have heard the concern, and while any fraud is wrong, the argument is a straw man excuse to not streamline the process. Are there fraudulent short sales, where a family member buys and rents back, or an investor is flipping the house at a below market purchase? Yes. Should that ruin it for the 99% of the rest of the people? No, of course it shouldn’t. It is like being against health insurance because there are hypochondriacs out there.

A very small percentage of short sales are fraudulent.

Per the Times:

Concerns about fraud are one of the reasons lenders are so careful about short sales. Sometimes well-off homeowners want to portray their finances as dire and cut their losses on a property. In other instances, distressed homeowners try to make a short sale to a relative, who would then sell it back to them (a practice that is illegal). A recent industry report estimates that short sale fraud occurs in at least 2 percent of sales and costs banks about $300 million annually.

So 98% of the people should suffer? You’ll probably see the similar percentages on shoplifting. Should we close the malls?

It is just another excuse to not do the right thing.

$300 million is a drop in the bucket compared to the massive amount of wealth that has been plundered by the banks’ own fraud and deception. I’ll say it again: In the New York area, and Westchester county, where I am based, the property values are enormous and the dollars at stake for the regular borrowers facing foreclosure are enormous. They need to be treated right and presumed innocent.

Who Negotiates a Short Sale in New York?

Recently, a listing brokerage instructed one of my agents to include a HUD-1 as part of our client’s offer on that brokerage’s short sale listing. To say that it was a peculiar request is an understatement; The HUD-1, which is a mandatory form in any transaction involving a mortgage financing, itemizes and documents all expenses for both buyer and seller. In New York, especially Westchester and the Metropolitan area, it is prepared by the seller’s attorney in a short sale, with approval from the bank approving the short sale, the  buyer’s attorney, their bank attorney, and the title company. Aside from the real estate commission line item, there is no involvement of the real estate agent.

While the request was for a “preliminary” HUD-1 and not the final form, the instruction for us to provide one was ill advised and questionable to my thinking. A I said, the form includes the seller’s expenses as well. How can the buyer’s agent possibly know the seller’s mortgage amount, mortgage payoff, back taxes, back payments, or other liens and expenses? The answer is that they can’t, unless the seller provides it. Why the seller would provide such information to the other side in a transaction is beyond me. They have their own fiduciary in their listing agent and attorney.

Maybe they had a great, innovative point; if so, I didn’t glean it from their Kramdenesque stutter when I inquired. We had an offer. They needed to present it and crunch the numbers on behalf of their client.

Upon occassion, I am contacted by “short sale investors” who promise my full commission, will buy my listing for cash, and re-list the house with me after they close. Tantalizing, huh? Oh, just one little thing: They want to negotiate the short sale themselves. In other words, they want to be an authorized third party designated by my seller client to deal with my seller’s bank.

No deal. You know who deals with my seller’s lender? Myself and the seller’s attorney as their fiduciary advocates. The bank won’t even talk to us for reasons of confidentiality without a signature authorization from the client. For a seller to authorize the purchaser to negotiate on their behalf with the bank for the short sale is antithetical to any agency rule on a listed home I have ever known.

As I said, it is the seller’s broker and lawyer who negotiate a short sale in New York. There are some outside companies who are paid by the seller to do so for a fee, but I do not hire them. I refer my short sale clients to an attorney who can do short sales in their sleep.

The point here is that everyone needs to play their position in a short sale transaction, and that our fiduciary responsibilities and duties to be an advocate don’t go out the window when a short sale is involved.

Who negotiates for the seller? It should be the people the sellers hire, preferably their agent and attorney, not the people they sell to.

Originally posted on my Westchester Real Estate Blog.