Short Sale With a Guarantor
Even beautiful homes like this are sold short. This one involved negotiating with a guarantor, which saved the day. Without the guarantor, we were dead. With it, we sold the property and took this burden off a delightful family right before they had another child. She was so happy, she sent me a text message from the hospital after the baby was born. If you wonder whether your clients appreciate your efforts in a short sale, ask yourself if you have ever had anyone text you a thank you note right after giving birth.
This was Rod and Cassandra’s home in North Raleigh, North Carolina. Rod?s company folded, so they had a financial problem. They had purchased the house a short time before, and it would not sell for enough to pay off the entire loan and a full commission. They also purchased it from a business partner and without representation by a real estate agent, and they paid a price that was high for the neighborhood. They decided to try a discount broker, which made sense mathematically, as the sale price could be enough to cover the discount commission and the loan. They were trying to do the right thing with the information they had. But when the house did not sell, they contacted me.
At first, I tried to sell the house for enough to cover the loan and commissions. In spite of my best efforts, there were few showings. So we had to reduce the price. Cassandra said they did not have the money to pay off the rest of the loan to the bank, so I explained ?short sales,? which I have been doing since the 1990s. She had heard that she would have to pay income tax on the amount that they did not pay back to the bank.
Federal legislation in 2007 allows a homeowner to pay less than what is owed on their mortgage and not pay income tax on the ?short? amount due the bank, under certain situations. They appeared to qualify under that legislation because the loan they were not able to pay was used to purchase the home. When you do not pay back “purchase money” on your primary residence, you do not pay income tax on the amount you are “short”.
With the discount broker and a price no one would pay, Cassandra and Rod would get nothing out of no sale and would have no income tax consequences (although there might be some tax problems coming out of a foreclosure). With my reduced price that buyers loved, Cassandra and Rod would get nothing out of the sale, have no income tax consequences, and the house would be sold so the problem would be gone. We reduced the price enough to get three offers, which bid the price back up.
Then I had to navigate through months of short sale review with the bank. The bank wanted to turn the short sale down because they got an appraisal that said the house was worth $100,000 more than the sales price. We waited months for the appraisal, and it comes in at an ridiculous price. You would think that a bank would question that appraisal, as the house had been on the market for about a year, priced well under what the appraisal said it was worth.
To get a short sale approved, you have to find every way to negotiate, and do not give up with the first “no.” Look at the seller’s monthly mortgage statement to see if there is a mortgage insurance premium. If so, there is a guarantor that will take some of the loss on this loan. Even if there no mortgage insurance premium on the monthly statement, the lender may have bought mortgage insurance and the premium is being paid by the lender, typically covered by a higher interest rate charged to the borrower in return for a “no pmi” loan. So, anytime the original loan was more than 80% of the value of the home, there is a decent chance that there is mortgage insurance somewhere. A rule of thumb is that the first 20% of the loan is usually subject to the guarantee, so if your offer is up to 20% short of full payment, the guarantor is the one most interested in the loss. There are different percentages of coverage, so it is not always 20%, but that is the most common.
The loan I was negotiating had a guarantor, i.e. the bank was not going to take the loss, the mortgage insurance company was, and the guarantor would be the company that was “short”. I contacted the guarantor. I negotiated with the loss mitigation expert there, convincing her that the appraisal was wrong by sending her a huge volume of market analysis. It is unusual for a loss mitigation negotiator with a guarantor to take all this time to analyze the value of a house, so Radian Guarantee did an exceptional job to make this sale work.
When the guarantor said they would approve the sale, the bank had to go along with it. The best part of the sale occurred when I called Cassandra to say it was approved. She screamed for joy, then started crying. She was eight months pregnant and the pressure of this home was a huge burden. When she sent me a text message from the hospital after her child was born thanking me again, I knew how important being relieved of this debt was to her.
If at first you do not succeed, try and try again. If the bank turns you down, see if there is a guarantor, or at least a supervisor to review the decision.