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Posts Tagged ‘Short sales’

The NY Times is reporting that the people who profit from foreclosures see loan modifications as a bad idea. Duh. It’s bad for business. I commented:

The opinion of Mr. Katari, who has a financial interest in more foreclosures (asset managers, folks, are the people who liquidate foreclosed property for lenders) is telling. Of course he’s against loan modifications and people keeping their homes; he profits from them losing them. This is like asking a wolf if protecting sheep is wise. Put the carpenters back to work indeed! We’ve already lost 50% of (admittedly inflated) value in some precincts and 20% or more here in New York. How much bloodletting does he want? Answer: more is never enough.

Call me crazy, but with rare exception, most people would happily keep their homes if their payments were lowered. The banks simply won’t agree to make the modifications permanent because they DON’T HAVE TO. Why is all the TARP money being repaid so quickly? So they can go back to being even bigger SOBs without being beholden to Uncle Sam. Remember “too big to fail?” Bailing them out with our tax money was like sharpening the guillotine blade for our own executioner. Now that they have been sufficiently re capitalized, even the Times has reported that they have positioned themselves to bet against the market improving. Did you think that the people who brought us the sub prime debacle suddenly became good guys?

It would be nice if the administration would show some courage and, once and for all, stand up to the hedge funds and their ilk to foster some real change (wasn’t that why he was elected?). The carpenters can’t go back to work if the housing market, the backbone of our economy, is further weakened. Read the writing on the wall. We should be in a recovery by now, and the real fallout may just be starting without strong leadership. There haven’t been 3 negative years in a row in housing since the Great Depression, which ironically, was also caused by the fox watching the hen house.

I felt better after letting off that steam, for sure.

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Yes, real estate brokers fire listings. It is a rare occurrence for me, but if a client is particularly uncooperative, self destructive, or a liability to the company’s well-being, the listing has to be cancelled and the client given the opportunity to seek their fortunes with another broker.

Today, after months of acrimony and headaches, I gave a seller client her release. The ironic thing is that she is a retired real estate broker herself, and someone I thought would be collegial to work with. She wasn’t. Just scheduling showings was like performing a miracle, filled with drama and angst. It was a short sale file, no easy task to begin with, and an offer has been on the table for about 2 weeks. My client refused to submit the offer to the lender for approval, and has been obstructing my efforts to affect a short sale.

This afternoon I got a call from an agent who could not schedule a showing; I called my client to get to the source of the issue. It was a tempest in a teapot. I am not showing a lack of empathy, believe me. If Ed McMahon showed up at your door with a check for $1 million, would you refuse the money because his tie and socks didn’t match? An offer on a short sale is important, precious, and not to be trifled with. For a veteran of our business to obfuscate important issues with pedantic obsessions with process is not something I can work with.

My hope is that this will be a wake up call to the lady that she needs to get serious about avoiding a foreclosure. For me to continue things the way they were going would be enabling destructive behavior and subordinate my diginity to earning a commission. Even in this market, that is something I cannot do.

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I sold my first short sale in the 90’s. I have over 10 in my pipeline. I am known in my marketplace for the specialty. Buyers are justifiably interested in the savings a short sale can offer. However, few buyers are prepared for the process, often because it is new terrain for their agent as well. Forewarned is forearmed. Here are some things that you should be prepared for if you have a short sale in your sights:

  • You must be prepared to wait…and wait. Occasionally, we get some short sales where everything just clicks and the thing is done almost as quickly as a regular sale. Those are the exception and not the rule. Typically, and it all depends on the lender, short sales can take months. Here is part of what is going on behind the scenes: the lender’s loss mitigation department is inundated with short sale applications. Often, the negotiators are rotated every 30 days. Faxes get lost. Responses take a long while, and the seller’s negotiator (typically the agent or in New York, the lawyer’s office) can be on hold for an hour waiting to speak with a human, only to hear that they were given the wrong fax number last week. It is a maddening, daily battle. Be glad you aren’t in the front lines. Eventually, it gets sorted out.
  • You are buying the house AS IS. Just like with a bank-owned foreclosure, it is “an as” is transaction, because no principal has the funds to remedy any physical issue with the house. Get an inspection for sure, but understand that unless it is an environmental problem, the lender won’t address anything and the seller cannot financially.
  • You WILL get clear title. In an approved short sale, none of the seller’s back taxes, arrearage or other issues convey to you. The lender is hitting the reset button and releasing all liens. That may not mean that a non-conforming bathroom shed or finished basement is compliant, but financially the title is whole.
  • No, you may not speak with the bank. Some buyers get frustrated with the process and figure that all they need to do is speak to someone and fix the short sale. They cannot. The lender will speak ONLY with the borrower or an authorized party about the mortgage being worked out for the same rules of confidentiality that prevent your bank from talking with anyone about your finances. Even if you were to get hold of a loss mitigator, your input will be as welcome as if you walk into a stranger’s operating room or onto a construction site.
  • You probably can’t “steal” the house. As a matter of fact, your offer may not even be submitted unless it is your best offer. Once the seller’s hardship package is approved, the bank will order a BPO (broker price opinion) or appraisal to ensure that the sale price is in line with market conditions. You might get a $400,000 house for $365,000, but you won’t get it for $250,000. Short sales are good deals, but they are seldom steals. Which brings us to this point:
  • The lender may counter your offer. The house may appraise considerably higher than your offer, or your offer may indeed be too unrealistic. If the bank counters you, look on the bright side: the finish line is in sight! If the counter isn’t to your liking, the smart move is to counter back. If you simply walk away, you may have nailed the seller’s coffin, who has, in good faith, been working and waiting just like you have been. Negotiate. If the seller chose your offer to submit to the lender over the others, you should operate in the same good faith and negotiate. The lender may still come down some.
  • Once approved, you have a deadline to close. The biggest irony in real estate is how glacially slow lenders are in approving short sales and how impatient they are to close once they rubber stamp one. Typically, it is only 15-30 days to close or the offer is rescinded. Therefore, you should have your act together with regard to your appraisal, rate lock, inspections, and so forth. When that approval come down the pike, you need to be prepared to pull the trigger.
  • You can’t get a seller’s concession. If you were able to borrow more against the house, the lender, who is losing money, will want it.

My view is that if the short sale process were easier and more streamlined, the market would stabilize far faster, doing the economy a world of good (are you reading this, Mr. Obama?). Unfortunately, the process we work with now is often bloody difficult more often than not, with lots of moving parts and a shifting landscape. Understanding that going in can lessen your frustration and minimize the confusion of a process that is anything but simple. Few worthwhile things are.

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I have started a blog on short sales, focusing past success stories from the files we have closed. The link will be added to the sidebar.

http://newyorkshortsaleblog.wordpress.com

I have also created a website for my company devoted completely to our expertise in short sales and heping our clients avoid foreclosure. That link will also be added to the sidebar.

http://www.NYShortSaleTeam.com

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Lenders are promising a “quick response” to distressed borrowers’ applications for assistance: 45 days. 45 days is fast?  45 days is glacial. What is slow?

45 days is long enough to get 2 additional 30-day late payments on your credit report. It takes two days to underwrite a loan; a hardship package is virtually the same material, so what they need the other 43 days for is a bigger mystery than Transubstantiation.

Just exactly what help they qualify for is unclear in the article. Politicians and consumer groups are less than enthusiastic about the pledge, and I share their skepticism. 45 days for a response, exactly what response qualified applicants will get, what contingencies are available for those who do not qualify, and what the criteria is for aid are all questions that loom large. If the decision makers are the same birds who came up with these exotic, irresponsible loans, no thanks.

Here is what lenders and borrowers need to understand: re-structuring loans, adding back payments to the end of the loan, and other bandages only delay the inevitable. The best way for all involved going forward is for more distressed borrowers to sell the home they can no longer afford and get into housing they can handle. If that means going from an over-leveraged house to a rented apartment, so be it. Better to rent and have a positive cash flow than to “own” at the expense of an already beleaguered credit system. If the only way to sell is via a short sale, the lenders should eat the difference and staple the quarterly loss to the forehead of their executives so this fiasco never happens again.

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Short Sales

Given the state of the economy and the number of people who are either delinquent, owe more than their home is worth, or both, the short sale is becoming a very common and misunderstood term.  I did my first short sale in 1997 (I learned from the best), so I am going to offer my thoughts on the matter.

First, a definition: A short sale is when the lender allows the borrower to sell their home for less than what they owe with no further obligation. Let’s suppose I bought a house in 2007 for $400,000 with 3% down. I owe $388,000 after I close. The market then tanks, I lose my job, and I fall behind. I put the house on the market, and the best offer I can get is $365,000. I am unable to pay the difference to make good on the loan, so I approach the bank and explain that I am experiencing hardship, that I have done my best to make good on my obligation, I am selling the house in good faith, and that my home is worth less than my debt. If the lender checks things out and agrees, I have just gotten an approved short sale. The payoff is short of the amount owed, hence the term “short sale.”

My definition is simple, but the process is not easy, especially if there is more than one mortgagee. The loss mitigation department of the bank handles it, and the borrower has to complete a fairly extensive hardship package, including financial disclosures, tax returns, a letter explaining the hardship, and more. The lender then has the house appraised or has a broker submit a Price Opinion, and, lest I forget, nothing can happen without an offer to purchase. In my local market, it is a team effort with the seller, their attorney, the listing agent, and hopefully a cooperative person at the lender.  The buyer has to wait patiently for the lender to approve their offer, and once that comes through they seldom get more than 15-30 days to close.

The lender not only eats a loss on the mortgage, they have to pay all the seller’s fees, like the real estate commission, attorney fee, back taxes, transfer tax, and in some cases even reimburse the broker for things like winterizing. I have seen lenders lose $100,000 in a short sale. Why do they do it? Primarily because it is the lender’s least costly option. Foreclosures often take a year (that is an awful lot of back payments & back taxes to eat), command massive legal fees,  involve securing & managing the property, and then selling the place for far less than what it would have gotten when it was owner occupied.  The sooner they can get the bulk of their money, the better.

On the seller’s end, they avoid a foreclosure and start out from scratch. They get no money in a short sale, but they don’t have to come up with anything either.

In extremely rare cases the bank may want some of the debt repaid in the form of an unsecured note after the sale, but this is rare. On occasion some banks issued a 1099 for the forgiven debt which caused a tax consequence for the seller, but this is now forbidden if the home has been the seller’s primary residence for 2 years. I have never seen a 1099 issued to a seller. Even if either of these things were to happen, a short sale is certainly a better option than a deed in lieu of foreclosure or an outright foreclosure. Both are far worse for the borrower’s credit and can result in a deficiency judgement.

Clients of mine who hav googled the term “short sale” have gotten information that varies from accurate and helpful to grossly distorted and lousy. I do short sales for a living. At any one time I have a dozen or more in process. The attorney I work with is the best on the eastern seaboard. It is my hope that in comparing my commentary with what is floating around out there in cyberspace that the reader will consider the source.

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David Schepp wrote a very good article on how the slower market is impacting people who owe more than their home is worth, yet have to sell. It appeared on the front page of the Sunday, April 27 Journal News. A client of mine was featured prominently and I am quoted as well. The full article can be found here.

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