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A recent posting from an Ohio broker highlights how real estate differs from place to place. In it, she says that she advises her clients to not sign a contract with a buyer if the house is a short sale prior to getting the bank’s approval. While I won’t quarrel with what works for someone else in another market, I disagree.

That may work in Ohio, but it is ill-advised in New York. I do most of my short sales in Westchester, Rockland, Putnam, Dutchess, Nassau, Suffolk, Queens, Orange and Fairfield (CT) Counties. It is the same in each place- when the buyer makes an offer, it is submitted to the lender with the seller’s hardship package and a contract that is conditioned on the approval of the short sale. The contract is prepared by the seller’s attorney. If the short sale is approved, we have a deal. If it is not approved, my seller is not obligated to sell and incurs no financial obligation to the buyer. Most of the time we continue to negotiate with the lender anyway, but the contract protects both parties.

For the buyer, the contract ensures that they will not lose the house to another buyer after enduring the long process of short sale approval.

For the seller, whom I represent far more often, the contract ensures that the buyer will not simply walk away without penalty or recourse after that same lengthy process. If I list a short sale, my job is to protect my seller. Handshake deals do not protect the seller, only contracts and deposits protect them. This does not “imprison” the buyer. It is virtually the same sort of contingency as their own financing, which is in almost every real estate contract, and no seller objects to such contingencies.

Moreover, the lenders require a valid contract of sale before they approve a short sale. With no contract, the offer is hypothetical. Hypotheticals don’t help my clients whose goal is to avoid foreclosure.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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BPO stands for “broker price opinion.” It is a part of the short sale process that the lender uses to evaluate the merit of a short sale application. Simply put, the lender uses a BPO to ensure that the proposed sales price is aligned with market conditions. Some Westchester County Short sales, for example, are 20% less than the house’s value from 3 or 4 years ago. A home that was purchased in 2005 for $500,000 may only be worth $400,000 currently. Just to be certain, the lender sends out a 3rd party to verify this.

The BPO report looks very similar to an appraisal. There is a description of the subject property, and usually at least 4 recent comparable sales. If the offer on your home is $380,000 and the comparable sales are $410,000, $395,000, 375,000 and $355,000, then the lender will know that the value is legitimate. If all the comparable sales are over $425,000 and there is no compensating factor, such as deferred maintenance or needed repairs, the bank may deny the application. As much as the BPO report resembles an appraisal, it is not an appraisal, which is more expensive and produced by a licensed appraiser.

Often the lender will forego a BPO and do a full-blown appraisal. The theory here is that the appraiser will be more accurate. This is a sound theory, but one pitfall I have personally experienced is that lenders have a bizarre habit of contracting appraisers from a different marketplace who turn in robotic, formulaic reports based solely on price per square foot and not local market conditions. We have had short sales denied because the home has over appraised, causing more work and, in one case, a foreclosure. After it was repossessed, the home ended up selling for $100,000 less than what the lender claimed to be market value. That lender is no longer in business.

As prices continue to shrink, overpriced BPOs and appraisals are becoming less common. The BPO usually comes after the rest of the process is complete, so in those cases a decision from the lender on the short sale ought not be far off. Some lenders do them earlier, but as the marker changes I see that less and less.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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This transaction came several years ago, before the market decline was fully accepted by home sellers. The client was a single mother who, because of a heart condition, missed a great deal of work and fell behind on her home loan. By the time I had met her, she was finished with another agent who failed to sell her home. She was skeptical of agents because of this, and felt that it was not her home’s price that was an issue, but how it was marketed. However, by the time we competed the CMA, she was clear that she owed more than the house would bring from the market.

Being the mother of two teenagers, my client was both scared and proactive. She was under terrible stress, which isn’t good for someone with a heart condition, but she was a fighter. She engaged with the bank as few sellers I have seen before or since. She hung on their every word. Anything they requested was faxed and followed up upon. She kept me on my toes. The buyer actually found the house through her craigslist posting. It never fails to impress me how much better things turn out for my clients who help themselves.

It was a tough process, but the short sale was approved. My clients’s attorney, well, let’s just say I wish he had half the initiative of the lady he represented. He did a sloppy job, and as a result of title issues he failed to detect, I walked away from the closing with about 75% of my commission going to cure a defecit. Niether the buyer nor the seller attorney seemed to feel at all badly about this draconian loss I had to eat. I never recommended the scoundrel again.

Regardless, my seller got out from under the house she could no longer afford, and she got her fresh start. Her attorney promised to refer me a client in exchange for my severe loss, but he never kept his promise. Just as well; I don’t want to hear from him. My client calls me from time to time, and she is rapidly approaching the point where she can buy again if she chooses. All in all, a tougher deal on me than my seller. That’s baseball.

 

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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Buying any foreclosure is tricky, and a short sale is probably the longest process. Is purchasing a short sale right for you? Perhaps you rent in Westchester, Rockland, Putnam or Dutchess and are considering a short sale purchase in one of those areas. Here are some things you ought to know:

  • You can’t be in a hurry. Negotiating a short sale might only take a month but in most cases it can go 90 days or longer. So don’t hire a mover, end your lease or lock your rate until you have confirmation that your offer is approved by the bank. If the seller accepts your offer that isn’t an approved short sale; any offer the seller accepts still requires approval from their lender.
  • You are buying the house “as is.” In rare cases, such as in an environmental problem, the lender will pay for repairs but most if the time you are getting the house as is, as found. The seller is in hardship, so they won’t be able to help either. So make sure you do your inspections and know what you are getting into before going forward.
  • You can’t “flip” the house. Short sales are very good deals in most cases but not so very low that you’ll be able to turn a short term profit. They usually are retail value, less repairs and maintenance, and perhaps less a bit for speed.
  • Status updates take longer. Unlike regular transactions where updates are a phone call away, all parties are forced to wait on the lender, who is not, shall we say, committed to keeping everyone happy. This doesn’t mean that the purchase is lost in the ether; but it does mean that more patience is required than normal.
  • If the listing agent is not a short sale specialist, it may turn into a nightmare. You wouldn’t want a podiatrist giving you root canal, nor do you need a rookie cutting his or her teeth on the biggest purchase of your life. Short sales are hard for experienced experts like myself; an agent who is doing their first or 2nd short sale is in for a long ordeal. The best way to handle that transaction is to not enter into it. If the house looks right for you and a short sale is disclosed, ask how many short sales the listing agent has successfully closed. If the agent hasn’t done many, the best thing to do might be to pass the house by. Otherwise, you might be in for 6 months of frustration.
  • Subordinate financing takes longer. If the seller has a second mortgage, then two lenders have to render their approval, and coordinating the two complicates matters. Some specialists won’t even list those homes (I do.).  Ask if there is another lender, and even if they are the same institution, it will add a measure of difficulty (the same lender but two different loans means two different divisions or departments). Do a lien search on the home before going forward. If there is a 2nd lien the listing agent hasn’t disclosed you might consider walking- they may not be in command of how to close this workout.
  • Ironically, you have to be ready to close rather quickly. This is the “hurry up and wait” irony of the short sale process. The lender will make you wait far longer than a normal purchase for a decision, but when that decision is issued there will typically be a 15 or 30-day deadline to close or the sale approval has to go back to review. By this point you should have done your inspections and other due diligence completed. Once the lender approves the sale it is then time to lock the rate, call the mover and give notice on your apartment.

This is a broad overview, but it boils down to knowing when to hold and when to fold.  No two short sale transactions are the same, even with the same lender. If you are in a state where attorneys are used it helps to have an attorney represent you in the purchase with short sale experience, but at the very least make sure they are experienced at real estate.

The long process aside, buying a short sale does put you ahead of the market, as the prices are more aligned with where the market is heading. This is significant, because the places where the bulk of my short sales are done (Westchester, Rockland, Putnam and Dutchess counties), prices are so high that even a 5% reduction can mean tens of thousands of dollars to you.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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The question that pops up for people who can no longer pay their mortgage is how much money they’ll have to come up with in order to get out from under their mortgage through a short sale. It is like the old catch-22 I’ve often heard where the client tells me that they want to seek bankruptcy protection but they don’t have the money to pay the attorney (of course, the answer to that is that the good attorneys I know will not charge for a preliminary consultation).  It is an understandable conundrum, and I’ll do some math illustrations here.

First, in a typical sale, the seller has numerous expenses, but the big one are the real estate commission, New York State transfer tax ($4 per thousand), Attorney fee, and the big one-the mortgage payoff (typically the biggest check drawn at closings).

On a $500,000 house with a $400,000 mortgage balance, assuming a 6% commission (all commissions are negotiable of course) and a $1500 attorney fee, the seller is liable for the following:

  • Commission: $30,000
  • NYS Transfer tax: $2000
  • Mortgage payoff: $400,000
  • Attorney: $1500
  • Total: $433,500

If you have the equity, all expenses come from the proceeds and you don’t give it another thought. Let’s look at a short sale scenario where the balance and market value are both $450,000:

  • Commission: $27,000
  • NYS Transfer tax: $1800
  • Mortgage payoff: $450,000
  • Attorney: $1500
  • Total: $480,300 shortage of $30,300

In a short sale, the bank absorbs the loss and discharges (settles/forgives) the loan debt, with no post-closing obligation, even if there are back  taxes and back payments. The reason is hardship. Lenders recognize that sellers do not have magic wands to wave and make the market values any higher, and that in selling the house the debtor is making a good faith effort to pay their debt. If you have hardship (which is typically why the house needs to be sold to start with), you should have a successful short sale. If you have  $100,000 in the bank, you don’t qualify for a short sale. I should also add that my clients do typically pay a small attorney fee to defray the attorney expense for the workout, but in short sale situations where the lender refuses and returns mortgage payments, it becomes a relatively negligible matter.

This is the same structure in my short sales in Rockland County, the Bronx, Putnam, and Dutchess.  Some municipalities such as Yonkers have a higher transfer tax. Of course, the broker or agent you choose matters as much as the surgeon you choose for an operation. You need a specialist or the results could be fatal. The lesson here is that homeowners experiencing hardship ought not put off acting because they don’t have money. You really don’t need any to get informed, get started, and get your life moving again. And the best part is that once the short sale is completed, the slate is clean. That day is the first day of the rest of your life.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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In some markets, people who only borrowed 80% of their home’s value are waking up to the fact that they actually have no equity. It is happening in all communities- Yonkers, Yorktown, Scarsdale, Somers, White Plains, Wappinger Falls, you name it. No demographic, neighborhood or school district is immune from the ripple effect of the declining economy. And if your mortgage adjusts, you lose your job, or any one of a dozen other unfortunate things, you may feel that you are in a dire situation. When the market was hot, people who had problems sold or refinanced rather easily. Problem solved. Not so easy in this climate.

Financial problems cause terrible stress. People that feel that they are trapped in a house they can’t sell because of a high mortgage balance can feel helpless and defeated. My observation is that the stress and worry are actually worse than the shortage of money. The worst thing to do is retreat, withdraw or give up. This doesn’t mean you have scream “Geronimo” and beat your chest. If you take small steps to help yourself you’ll be OK.  There are solutions if you are “upside down” or have negative equity. Help yourself- my most successful short sale clients were always proactive. Here are some things you can do:

  • First, communicate with your lender. You’ll feel better that you are being proactive, and the lender will know that you aren’t going off the grid.
  • Get help from a professional. List the home with a real estate agent who specializes in short sales. I’ll opine on how to find that agent later.
  • Get educated. Google short sales. Go to the library. Understand the process. Taking the mystery away will settle your mind.
  • Your hardship package should be treated like an extra credit project that you have to pass in order to not flunk out of school. Get the documents they request, fill out the forms and write that hardship letter. The better the package, the better  the chance for a fast approval on the short sale. Don’t put anything off, and ask your agent for help if you need it.

Now- on choosing an agent for your short sale:

  • The agent has to be full-time, with a documented track record,  and references.
  • Ask the agent directly how many homes they have sold in the past year, and how many short sales they’ve closed.
  • Make sure they document their claims and if they can provide references.
  • DON’T EVER let the agent obfuscate your questions by deflecting them and blathering about their company, office or sales team. You want to know how many sales/short sales THEY’VE done.
  • Have the agent explain their plan to sell the house. The plan has to make sense. Do they negotiate directly with the lender, or do they have a 3rd party do it? Where will they advertise? What is their opinion of a starting price, and how do they justify that price?
  • If you are not comfortable with the broker or agent, do not list with them.

Once you’ve listed the house on the market with an agent who is a good, full- time short sale specialist, pay attention to how many showings get scheduled. If you aren’t getting 1-2 showings a week, it may be time to lower the price. Bear in mind, too, that the house will have to be marketed as a short sale. There are two reasons: first, short sales have to be disclosed in most locales. Second, pre-foreclosures attract more buyers because people are looking for bargains. Since your bottom line is the same no matter what the final price, you should not be reluctant  to lower the price if so advised.

Making the house easy to show is crucial. Be as accommodating as you can be, and only reject showing requests in rare cases of emergency.  In many markets, there are 10 or 20 houses just like yours. If you are in Mahopac and the buyers are coming up from New Rochelle and you don’t allow a showing on a given day, they may not try to reschedule because of all the other options out there. People can’t buy what they don’t see. So, if there is a legitimate contagious illness or emergency, don’t do the showing. Friends visiting, a child’s birthday party, dinner, or a furnace being repaired are no reason to deny a showing. The stakes are too high.

Once an offer does come in make sure that your package for the lender has everything they ask for- bank statements, letters of explanation, disclosures filled out neatly, everything completed. Once your package in in review, the lender will send someone out to do either an appraisal or BPO(broker price opinion) to verify that the home’s value is indeed lower than the loan and in line with the offer.

At that point, you are off to the races. Typically, lenders give the buyer 30 days to close or the file has to be approved again. Make sure that the short sale terms, upon acceptance, are in writing and that you have, in writing, a release from the loan once the deal is closed. At that point you can, thankfully, start packing. That day is the first day of the rest of your life.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com

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Predatory lending is an insidious practice. Those that make a short term profit at the expense of another person’s financial health are criminals. Of course, they know little of the damage they cause, but those of us who try and pick up the pieces know that harm all too well.

I was called to meet with an elderly couple in White Plains, and a family friend was also present. I thought little of it in the beginning, but as I came to learn of their circumstances, I understood that the friend was there to ensure that they wouldn’t get hurt again. About a year earlier, a mortgage person convinced them to refinance their home with an option-ARM, which is a very exotic product intended as a short term loan for investors. I am sure the loan officer made a healthy commission, but these people belonged in this loan as much as Stevie Wonder belonged behind the wheel of a Ferrari.

The way it works is that the interest rate is artificially low in the beginning period, and then the difference between the note rate and the market rate is added to the loan principle each month. If the ARM  (adjustable rate mortgage) rate is 2% and the market rate is 7%, that month’s 5% annual interest is the amount that the loan amount increases. The low payment literally cannibalizes equity. Investors like them because the teaser rate is low, and by the time the adjustable rate period is at hand the home is resold. Not so for a long term owner occupant. By the time I had gotten there, they had realized that tens of thousands of their equity had disappeared. Nobody explained this to them, or, if it was covered, it was sped through so quickly they didn’t know what hit them. To make matters worse, the loan had a prepayment penalty, which is incredibly rare in the state of New York.

The clients were understandably mistrustful of anyone who promised to help them, and it was only their friend’s presence that convinced them to work with me. For the entire period of the listing (it took almost 7 months from listing to closing) we never met alone once. There was always a friend or relative present.  I didn’t blame them, and I actually preferred it that way, because every new person that met me became an ally.

It was a tough sell: we had subordinate financing, a prepayment penalty, a very outdated house, and the sale price of comps was still high at that point because the market decline was in it’s infancy. Even if we brought an offer, there might be appraisal issues. They also had a large amount of personal belongings to move, a difficult task for elderly, infirmed people.

We did get an offer, and the work began on negotiating the short payoff. One piece of good luck came through when a local non-profit that the clients contacted on their own got the pre-payment penalty disallowed (another example of people doing something to help themselves rather than curl into a fetal position). In our process we have the buyers sign a conditional contract, contingent on bank approval of the short sale. These things can go on for months, and there is always a danger of the lender giving the buyer an “out” by countering at a higher price. After weeks and months of frustration and waiting, the buyers did become nervous. I spoke with their agent quite often, and much of the discussion was reassuring them that we were confident we would get the deal done.

The approval did come through, and with a rare caveat: an unsecured note of $30,000 would have to be paid back by my clients. The lender would allow them to sell and release the lien, but the bank  wanted another $30,000. The term was advantageously long and the rate low, so the monthly payment would be a fraction of a $30,000 car for example, but it was a post closing obligation.  This is exceedingly rare; we had little choice. It was either that or foreclose. The clients accepted the lender’s terms.

They are renting now, and their expenses are far more in line with their fixed income. The stress is alleviated, and in spite of the small compromise they had to make with the lender to make the deal work, their quality of life is far better. In a perfect world, I would hunt down the loan officer that put them in that option-ARM and make him pay back the $30,000.

J. Philip Faranda is Westchester’s Premier Short Sale REALTOR. Find out more at www.NYShortSaleTeam.com  

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