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Posts Tagged ‘avoiding foreclosure’

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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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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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.

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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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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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The government has moved to increase the incentive for lenders to allow short sales on their defaulted loans. I welcome this, although there is nothing specified as to how they’ll hold banks accountable for streamlining the process, which is rife with red tape, bureaucracy and long waits. If they truly want to make short sales happen more frequently to help more distressed homeowners out, they would mandate a maximum of 6 weeks for a short sale approval.

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J. Philip Faranda is Westchester & the Hudson Valleys’s Premier Short Sale REALTOR. He has listed and sold successful short sales in Westchester, Rockland, Putnam, Dutchess, and Orange County, as well as the boroughs of New York City. Find out more at www.NYShortSaleTeam.com

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128 days ago, I sat at a dining room table in Putnam Valley, New York, just north of the Westchester County border with a young couple who were listed 4 times previously with 3 different brokerages in unsuccessful attempts to sell their home. Along the way, they got behind on their payments due to loss of income and had all but lost hope that they could avoid a foreclosure. 

One of my agents, Tom Ricapito, had found these nice people quite by accident, and told them to talk to me before giving up. This was the first time they had ever heard of a short sale. I told them I had closed dozens, and they listed with my company with Tom as their agent. He later told me that our meeting gave them new hope. It is funny how these people found us quite by random chance, and not through our regular marketing. When you specialize in New York short sales, they sometimes find you.

Continued here.

J. Philip Faranda is Westchester & the Hudson Valleys’s Premier Short Sale REALTOR. He has listed and sold successful short sales in Westchester, Rockland, Putnam, Dutchess, and Orange County, as well as the boroughs of New York City. Find out more at www.NYShortSaleTeam.com

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