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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

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.

 

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

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.

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.

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.

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.

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.

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