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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.

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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.

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.