| Louisville realtors, investors and debtors facing | | | | when I list the property, the owner/debtor is my client |
| foreclosure ask me from time to time how short sales | | | | (not customer). This means I must always act in his |
| work. Consider this a primer.I recently brokered the | | | | best interest. The lender is not my client and I owe it |
| sale of a house for $85,000 to an investor. The house | | | | no such duty. In a normal sale the seller and buyer |
| appraised for $120,000, giving the investor substantial | | | | have greatly divergent interests: the seller wants to sell |
| immediate equity. The lender took a $60,000 loss. The | | | | at the highest possible price, and the buyer wants to |
| owner/seller was forced to sell his house, for which he | | | | buy at the lowest. In a short sale there is no such |
| received not one red cent, and had to move into rental. | | | | contest between the parties: the seller wants to sell at |
| How is it that all parties walked away from the closing | | | | any price the lender will accept, and will generally |
| table satisfied?!In the beginning... | | | | agree to any price offered, contingent upon the |
| When a home owner owes his lender more than he | | | | lender's acceptance. So in a short sale, the lender |
| has borrowed, he's said to be "upside down on his | | | | takes on the mantle of "seller" vis-a-vi the buyer and |
| mortgage". This can come about in many ways, the | | | | these are really the parties who negotiate the contract. |
| principal amongst them occurring when he simply stops | | | | Now get your head around this one: as listing agent in |
| making mortgage payments, often because he is in | | | | a short sale I am often in the peculiar position of |
| serious financial difficulty. If his mortgage payment is | | | | actively attempting to negotiate for the sale at the |
| $1,000 per month, and he stops paying, or pays | | | | lowest possible price acceptable to the buyer! (But |
| intermittently, the fines, interest and principle can rack | | | | always with the caveat that this is in the seller's best |
| up pretty quickly. And if the owner can't pay the | | | | interest, and does not jeopardize the sale). This |
| mortgage, chances are he hasn't been able to make | | | | anomaly has many ramifications for the way I conduct |
| necessary repairs to his home. This situation is almost | | | | and negotiate these transactions.Price, Terms and |
| invariably accompanied by despondency, which again | | | | Timing |
| leads to neglect of the house.Stir into the mix | | | | Price: So how much will the lender lop off that price? |
| bankruptcy, and perhaps divorce, and you'll understand | | | | I've generally found that as the day of auction |
| it's not surprising to find the homes of these owner | | | | approaches, lenders become more malleable. Pretty |
| debtors are often seriously degradated. That leaky | | | | inefficient, because they loose a lot of time and money |
| roof is probably the last of the owner's problems.The | | | | that way. I supplied the lender of The Willows property |
| "F" word | | | | with objective material indicating that the drive-by BPO |
| Foreclosure. It's not a happy prospect for the lender | | | | was inaccurate, given the condition of the house. The |
| or the borrower. Lenders have different tolerances for | | | | lender then had an internal BPO done. That was key |
| late payments. However by the time the debtor is late | | | | to getting this particular deal done. I also sent off |
| for the fourth consecutive month the vast majority of | | | | photos and comps of my own. In some cases I've |
| lenders begin foreclosure proceedings. In Kentucky the | | | | sent the lenders well over 100 photos. Pictures speak |
| foreclosure sale of the home by public auction takes | | | | louder than words, and it's critical, when the property is |
| generally anywhere from 6 months to a year from the | | | | damaged, that the lender understand the shape it's in . |
| time the foreclosure procedures began. It can take | | | | Remember - the BPO realtor may be doing up to 50 |
| longer - I saw one artful debtor drag on the | | | | BPOs a week - he could care less about this one deal. |
| foreclosure proceedings for more that 20 months! Her | | | | But as listing agent I need to keep the lender informed |
| mortgage payment was $1,300 a month. After 20 | | | | of all issues that coincide with my client's best interests. |
| months that became a significant debt compounded | | | | The second Willows BPO came back at $100,000, and |
| by late fees, interest, legal costs, and the potential cost | | | | the lender initially tried to obtain that figure. Ultimately, |
| of selling the property at a public foreclosure sale. To | | | | with the foreclosure sale due to occur the next day, it |
| say nothing of the continuing, moment by moment | | | | reduced that amount to 80% of the $100,000 plus |
| deterioration of the property. By the time she moved | | | | $5,000 to pay off non-mortgage related liens. At 4.50 |
| out the bank had written off in excess of $80,000.The | | | | pm the lender agreed to stop the foreclosure sale |
| lender's and borrower's conflicting interests. | | | | scheduled for 11.00 am next morning.But hey, it ain't |
| Capitalism is a wonderfully contrived system. It hands | | | | over 'til the fat lady sings! Because the loss on this loan |
| not only the power-barons a potent array of weapons | | | | was $60,000, and because the lender had authority to |
| with which to fight, but also the poor and destitute. | | | | settle up to $30,000 only, we had to wait for final word |
| Though the battlefield is nowhere near even, double | | | | from the mortgage insurance company, which we |
| digit interest thrust too deeply down an indigent | | | | eventually obtained, but not without many hours |
| debtor's throat may precipitate his "nuclear" retaliatory | | | | additional work.As you see, the price of The Willows |
| option - Chapter 7 bankruptcy. And so these two, | | | | property was determined by the lender looking at the |
| symbiotically entwined, are locked in an elegant dance, | | | | bottom line - how much net it would receive. And in |
| teetering between dividends and disaster, profit and | | | | order to get this number, all lenders in short sales |
| poverty. One serious mis-step, and the band stops | | | | request a "fake HUD-1" or a "net sheet" submitted |
| playing.Thus, from years of bitter experience, lenders | | | | simultaneously with the offer. In a normal real estate |
| have learned that it's often better (cheaper) to attempt | | | | transaction the HUD-1 is drawn up at the end of the |
| to gain the cooperation of the owner and have him | | | | transaction, after agreement is reached. - in a short |
| agree to voluntarily sell and vacate his home, rather | | | | sale the title search is performed immediately upon |
| than evict him under foreclosure. Lenders also | | | | listing, even before there's an offer, so that the figures |
| understand that the chance of ever recovering the | | | | can be applied to the net sheet as soon as |
| money owed to them by the debtor is slim. But many | | | | needed.Terms: The most common terms distinguishing |
| debtors choose not to sell because, around the time | | | | these deals are that the lender often requires terms |
| they realize they will never catch up on their payments, | | | | such as "sold as is" and "proof of finance or funds |
| they often have another "Ah Ha!" flash of insight: that if | | | | required with offer", and to protect the seller, the |
| they stop paying their mortgage and just wait for the | | | | realtor should insert terminology indicating seller's |
| foreclosure axe to fall (or better yet, engage in a | | | | acceptance is subject to release from all liability for |
| hatfull of tricks to keep that axe at bay) they can live | | | | debt. None of this is carved in stone, and I've |
| "rent free" for at least 6 months. So now the debtor | | | | negotiated repairs and other concessions from lenders. |
| turns from borrower to squatter, perceiving it to be in | | | | Each case is unique. Paper will suffer any indignity - |
| his best interest to prevent the foreclosure for as long | | | | write the offer!Timing: The REO, Foreclosure and |
| as possible. And if the house, the lender's "security", | | | | Bankruptcy departments often appear to be |
| should fall apart in the meantime, so be it.The solution | | | | understaffed and overwhelmed, so don't expect |
| The lender is in a position to offer the borrower a | | | | instant responses. Some will take weeks to reply. |
| very important concession for his cooperation: to write | | | | Make sure the buyer and seller understand this. But |
| off the entire debt if the borrower finds a buyer to buy | | | | once a deal is struck, the lender will often expect an |
| the house at a price and terms acceptable to the | | | | unreasonably quick closing, and will attempt to penalize |
| lender, within the time stipulated by the lender. This is | | | | you with days interest for closing after a certain date. |
| the essence of a short sale. Lenders set their own | | | | This all goes back to the net sheet calculations; |
| guidelines for what they will accept. They may say | | | | because you have informed the lender how much it |
| they need to get fair market price, but will in fact often | | | | will receive by a certain date, it then attempts to hold |
| be prepared to sell for much less. They do not want to | | | | the line at that date, even though they are generally |
| chance selling this house at auction and risk receiving a | | | | very slow to respond. The Willows lender, after having |
| very low price. Or worse yet, receive a bid so low that | | | | not responded to multiple contacts, gave us just 2 |
| the property does not meet their reserve price, and | | | | days within which to close! Fortunately we well |
| they end up owning the property. In this case the | | | | prepared, but it was very close.Closing Note |
| property is administered by the lender's REO (real | | | | The tax consequences of short sales fall outside the |
| estate owned) department, which will then list the | | | | scope of this article. If you want info on how to handle |
| property with a realtor. And the cycle begins | | | | competing offers, dual limited agency within this |
| again......The Lender initially said The Willows house was | | | | environment, or need a copy of the net sheet I use, |
| worth $120,000, and wanted it sold at about that price. | | | | you may contact me.Update |
| It got the $120,000 figure from someone it had hired to | | | | Here's a new twist. A couple of weeks ago I |
| do a BPO. BPO is short for "Broker's Price Opinion." It | | | | submitted a $235,000 offer to a lender on a short sale, |
| is similar to a CMA (Comparative Market Analysis) and | | | | (Seller owes about $275,000) which the lender |
| serves the same purpose: to arrive at a fair market | | | | ultimately accepted. However, in it's acceptance letter, |
| value for a property. Most are done as a "drive-by," | | | | at the very bottom of the sheet, the lender stipulated |
| meaning that the "driver" (usually a realtor, maybe an | | | | that it retained its right of recourse against the seller |
| appraiser) drives by the outside of the property, takes | | | | borrower (my client)! And this despite seemingly |
| one to three photos and leaves. He then completes | | | | contrary language in the main body of the letter. I |
| the lender's BPO form on-line and e-mails it with the | | | | explained to the lender that the ONLY reason my |
| picture. Sometimes an "internal" is requested, in which | | | | client had agreed to the short sale (and not to jerk the |
| case the realtor goes into the property, takes about 3 | | | | lender around in the bankruptcy proceedings) was |
| internal and 3 external photos and sends these through | | | | because he expected to obtain a complete release |
| to the lender with the completed BPO form.When the | | | | from all liability at closing. After a weeks or so of |
| debtor had realized he would not be able to save his | | | | wrangling, attorneys etc, the lender "saw the light" and |
| house in The Willows, he contacted me to see if I | | | | agreed to the release.CMA |
| could help. He did not want a foreclosure on his credit | | | | Though the information provided is considered reliable, |
| report, which would have prevented him from getting a | | | | it is not complete, nor warranted accurate. Always |
| conventional mortgage for three years. Even with a | | | | consult your broker or an attorney.My name is Neil |
| Chapter 7 bankruptcy, the wait period is only 2 years | | | | Blumberg, real estate broker and recovering attorney |
| from dismissal. He also wanted to have his debt | | | | (South Africa), currently residing in Louisville, Kentucky. I |
| forgiven. I was able to accomplish both these goals, | | | | specialize in the arcane art of creative finance, and |
| saving him about sixty thousand dollars.The short sale | | | | assist my clients buy and sell homes and investment |
| process | | | | residential and commercial real estate. Member of |
| As a Realtor, the first thing I did was explain to my | | | | various real estate organizations including Real Estate |
| client all his theoretical options, including deed in-lieu of | | | | Exchangers, recent service on the Greater Louisville |
| foreclosure, loan renegotiation and others. He settled | | | | Association of Realtors Forms Committee and am |
| on short sale. I listed The Willows property, and had | | | | currently Chair of the Louisville Chapter of the Real |
| him sign an authorization for me to contact the lender | | | | Estate Cyberspace Society. |
| to see if it would agree to a short sale. Remember, | | | | |