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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.

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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.

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.

 

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 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.

 

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.

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.