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. 

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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.

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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.

 

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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.

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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.

 

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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.

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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.

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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.

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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.

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Weak Leadership

Being a businessman I seldom delve into politics in this platform, but it is clear to me that part of the problem in affecting a sustainable recovery is a lack of political will in our current leadership, including the White House, after reading this gem in the Times on the foreclosure fraud crisis:

the Obama administration has resisted calls for a more forceful response, worried that added pressure might spook the banks and hobble the broader economy.

So we’ll just spook the borrowers, who are already hammered and traumatized. Protect the banks. Look, I am a brazen capitalist and this is insanity. Insanity! And both parties are culpable.

In our local elections, state Senator Suzi Oppenheimer has been devoting the bulk of her campaign to going negative on challenger Bob Cohen, accusing him of being a slumlord, among other things. Cohen, who apparently owns  a number of buildings in the Bronx, is having tenant complaints and other dirty laundry aired by Ms. Oppenheimer in her bid for re election. This skirts the real issues. Cohen, a real estate guy, for all his blemishes might actually have more insight into our problems than the Senator, who has been in Albany since 1985. This is not an endorsement. It is conjecture. But neither candidate is addressing the issues facing the electorate while we discuss the man’s apartment buildings.

Late last night, in a post entitled Short Sales are the Answer, I said the following:

It is a shame that there is no political will on either side of the isle to hold lenders feet to the fire to affect meaningful change, and defaulted homeowners must contend with a mad race to work a miracle with an uncaring, unresponsive monolithic entity before that monster forecloses, repossesses their home, wrecks their credit and crushes their dreams. This is not progress.

In reading this morning’s NY Times on the White Houses sheepishness (Hey Mr, Obama, can you pretend that Bank of America is General Motors?) and reflecting on Ms. Oppenheimer’s electioneering in lieu of addressing her constituents’ pain, my words are all too sadly true. Forget Washington for a moment. This is Westchester County’s state senate seat. This is our representative in Albany.

Show me someone up for election with the guts to stand up to lender’s unwillingness to change their architecture against short sales, which are a huge part of the solution, and G.O.P., Democrat or Martian, they’ll have my vote.

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Foreclosure Moratorium Will Boost New York Short Sales

Now that Bank of America has joined Chase and GMAC in suspending foreclosures in 23 states (BoA is actually suspending them in all 50), including New York, the entire industry is abuzz with questions as to what the consequences are for the market, a recovery, and most of all, distressed homeowners. Now known as the robo-signing scandal, the issue is calling into question the legitimacy of thousands of foreclosures.

What’s more, with foreclosures halted, what will banks do to dispense with default properties and non-performing loans? The answer to my mind is clear: start paving the way for more short sales. Title is passed from one owner to the next with no interruptions or questions, the process saves the banks both time and money, and more borrowers can move on with their lives with dignity which is all to often a missing element of the current system.

The advantages are enormous:

• In a short sale, the bank doesn’t have to take 1-2 years to repossess the home. They get their money faster.
• In a short sale, there are no legal fees associated with a foreclosure.
• In a short sale, the bank does not have to manage the property, put the utilities in their name, or winterize the property except in rare cases.
• Short sales are seldom boarded up, vandalized, or vacant. They therefore net the lender more money.

This has always been the case, and made me wonder why banks are so difficult, but with foreclosures off the table short sales now appear to be their only option.  With New York among the states that more lenders are suspending foreclosures, this gives distressed sellers breathing room, and, more importantly to my thinking, dignity.

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Who Pays the Commission in a Short Sale?

When a question is asked of me more than once it is a good bet that it is a common one, so I’ll post briefly today on who pays the commission in short sale. The answer is simple: The lender pays the real estate commission.

In a regular sale, real estate commission is paid from the proceeds of the equity. In a short sale, sellers who cannot pay their mortgage and do not have the funds to cover a short fall cannot pay the commission, because there is no equity, no proceeds, and no outside resources. Therefore, as part of their loss, the mortgage company pays the real estate commission. They also wash away the past due payments, pay the back taxes, and anything else needed to pass the home to the new buyer with clear title.

No real estate broker should ever require a short sale client to deposit money in escrow, or take a fee in advance of an approved sale and closing. It is antithetical to the contingent nature of our business. The commission is an incentive to do your job, and I would be suspicious of anyone who asks for money up front.

Again, to be clear: In a short sale, the bank pays the commission. I have closed short sales in Yonkers to Suffern, Chappaqua to Poughkeepsie , and dozens of places in between. I have never taken a dime from sellers.  The bank has always paid the commission.

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Stress: The Worst Part of a Short Sale

I have listed two new short sale homes this weekend. One is just shy of $1 million, the other is around $200,000. One is in lower Westchester County, the other is in central Dutchess County. One is almost 3000 square feet, the other is closer to 1300 square feet. Although it doesn’t sound likely, the two clients have a great deal in common.

• Both are responsible and hard working
• Both are frugal and fiscally conservative in their management of money
• Both are college educated professionals
• Neither fits the profile of an irresponsible foreclosure candidate
• Both are mortified at their situation, feel alone, and under considerable stress.

What is different about many short sales in the current market is that due to job loss, loss of income, or something else completely not related to their responsible behavior, otherwise good and accountable people are finding themselves needing to sell and not having the equity to cover their costs. These were not sub prime borrowers. They are stable. One had his business fail due to the recession, and the other has lost income. This is unfamiliar territory for both, because they have always watched their Ps and Qs and never overextended their credit.

In both cases, I have let them know that they are not alone, and that they are actually smart for getting proactive and contacting me. In both cases, I will get them out from under their upside down mortgage and get their short sale approved. They will not owe the lender anything after they close. They will get a fresh start. I will keep a roof over their head and help them repair their credit over time. In 2 years after they sell, if they want, I’ll help them buy another house.

The money is not the worst part of a short sale. No one starves or has no clothes. The worst part is the stress. Address the stress or find someone to help, and you’ll be lucid enough to help yourself. That goes for Scarsdale. And Chappaqua. And Yonkers. And New Rochelle. Everywhere.

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