Don’t Represent Jerks in a Short Sale

March 15, 2009 by  
Filed under Short Sale Do's & Don'ts

short-sale-must-trust-sellerEven more than usual, you need to be able to rely on your seller in a short sale.

When you are short selling a home, there is great deal of material that has to be gathered by the sellers for the short sale package. It all has to be accurate, with no misrepresentations, in order for the mortgage lender to accept the short payment.

You have to stare down the bank and stop the foreclosure, with the assistance of the sellers contacting the bank. You get to go through the foreclosure version of waterboarding as the lender takes the property right up to the sale date, then postpones it.

The sellers have to understand, and accept, the tax consequences of the short sale and not change their minds.

The sellers have to get nothing out of the short sale, then move out gracefully. If they try to get money out of anyone at the time of closing, it can be a misrepresentation as they have told the lender that they are walking away from the short sale with nothing. Although, some lenders are allowing the equivalent of moving assistance to the seller, so this may be getting better. If this comes up, you might consider having someone buy some furniture from the seller to give the seller the funds to move in separate transaction from the short sale.

In essence, you need to pick good people to work with. Short sales are difficult enough. If you represent a jerk, you get all the features of hell without the inconvenience.

I act as a short sale consultant for Realtors all over America. In the Triangle of North Carolina (Raleigh, Durham, Chapel Hill and lots of smaller towns like Cary), I get to select my own clients, and I try to choose wisely. But, when I am a consultant, I do not get as much input in chosing the clients as I would if I interviewed them myself. A delightful agent that I have known for many years asked for my help in an extremely complicated short sale and did not want to go through the Realtor training or Realtor education to learn how to short sale on such a complicated transaction. It took months. We got to avoid foreclosure three times, getting it postponed at the last minute each time, because the seller cannot pay the mortgage. The seller was able to sell a home for $1,500,000 when it had four liens and unpaid taxes that added up to about $2,100,000. Much of the unpaid debt was completely cancelled. Yet, he yelled at me when the judgment debt that was the fourth lien was only released as a lien on the property and not completely cancelled. We were only able to get the three preceeding lenders who were not getting fully paid to let us pay $5,000 on a $15,000 judgment. At first the creditor who had this judgment was so angry at the seller that he would not settle at all, but his attorney persuaded him it was better to get some money out of the seller’s only asset. When you figure that second loans of $250,000 are frequently settled for $2,500, you will understand what an accomplishment getting $5,000 to a fourth lien was. But, it was not good enough.

He insisted on documents being hand carried to him for his review, with deliveries made by the Realtors. When it came time to close, the seller would not even go to the escrow office to sign the papers at the proper time. The escrow was delayed due to his delay. Then, he would not agree to move out when the escrow closed. He wanted money to pay for moving and storage, and he wanted to stay in the house he was sellling for two weeks, rent free. Possession was supposed to be delivered at the close of escrow, not two weeks later. We worked out the money by selling some furniture at a public auction. The buyer was amazingly gracious on the move out date, but the seller made it difficult for the buyer to bring contractors to the house to measure for future work. I had everyone prepared to have to evict the former owner, but he moved out on his own.

Learn from my experiences. If the sellers are not truly fine people who deserve to be rescued, do not rescue them. So, if you have a hard working family in Garner or Knightdale, North Carolina, take good care of them and they will treat you well, But, I learned in lifeguard training that you can swim up to help someone who is going down and they can take you down with them. It is a tough time for the seller, so you do have to put up with a great deal to provide a needed service. But, do not sign up to be abused.

One of the reasons to do short sales is to get undying loyalty from clients and referrals of all their friends. If the client is the “south end of a north bound horse”, most of their friends are probably jerks. Do you want to spend your life working for people like that?

Pick your clients wisely, rescue the good people and help save America from the financial crisis. But, there are some people you should walk, no run, away from.

Short Sales With Multiple Loans and Liens

March 15, 2009 by  
Filed under Short Sale How To

multiple-70Some short sale sellers will make your life extremely “interesting” with their talent for putting on multiple mortgages and collecting liens. You get to negotiate them all, because if any one will not sign off, the short sale does not close. As the picture shows, you have to get every lender to jump into the deal.

This is why some Realtors will not take short sales with too many mortgages and liens. Some short sales do not close, and ones with multiple liens are the hardest to close. Once you have done some short sales, you will understand why. Refer the short sales you do not want to another Realtor who is willing to deal with the mess. A separate post discusses the priority of liens and their effect on how much to offer each lien holder in Lien Priority Determines Who Gets Paid & How Much

The first issue is how do you negotiate with all the liens. Some of the people providing Realtor training say to negotiate with the last one first . In other words, if you have a first loan and a second loan, find out what the second loan will settle for first, then negotiate with the first loan. There may be some merit to that, because you know what you have left to offer the first loan as a short pay.

I do short sales differently because I negotiate all of the debts at once. The reason is that there is not a linear relationship between them. In other words, the results of each negotiation is interdependent on the results of all the other negotiations, so you need all the answers all the time. If the property is in foreclosure, you do not have enough time to submit the package to the second lender, wait for their review and approval, then submit it to the first lender. I had a property in foreclosure in Palos Verdes, California with a first and second loan with Washington Mutual and a third with CitiBank. Citibank gave us an approval on the third loan one day before the deadline set for the foreclosure on the first loan. If I had waited to get that short pay approval first, then submitted to the other lenders, the sale would not have gone through.

To understand the interdependence, some lenders on a short sale home have guidelines for how much they will let a junior lienholder be paid. I am working on a short sale in Rancho Palos Verdes, Calfironia where the first loan is with Countrywide and the second loan, a line of credit, is with Bank of America. The seller cannot pay the mortgage. Countrywide will not allow the second lender to be paid more than $3,000 on the closing statement (HUD-1). Bank of America will not settle for less than $5,200, because they have a rule that they will not take a short sale that does not pay them at least 10% of the outstanding balance of the loan. The entertaining part of this standoff is that Bank of America is merging with Countrywide, so it is like a one member of a couple saying you have to put all the money in my right pocket, then the other member of the couple saying no don’t do that, put money in my left pocket.

How do you break this standoff? You have to know what is allowed under your local rules, the disclosure rules for lenders and the National Association of Realtors code of ethics. In California, the commission is paid by separate commission instructions to the escrow officer that are not part of the escrow instructions signed by the parties. You can consider having one of the Realtors send the amount of the difference to the junior lender. You can also have the buyer buy something from the junior lender that happens to equal the amount of the difference. You cannot do anything that is beyond the rules for proper presentation of information to a lender i.e. do not lie to a lender. See the post Don?t Put Your Client In Jail for more discussion, and substitute Yourself for Your Client.

If you watch a good chef, you will be amazed at how many things can be prepared at once with all of them finishing at the same moment. When you get good at short sales, you can handle many liens at once and get them to a closing at the same time, and be able to avoid foreclosure at the same time.

Owner’s Choices: Short Sale versus Deed In Lieu of Foreclosure

March 14, 2009 by  
Filed under Short Sale How To

warranty-w-red-110A deed in lieu of foreclosure occurs when an owner gives a deed to the property to the lender in order to avoid the foreclosure process. It is commonly called a deed in lieu. The benefit to the lender is it saves the time and expense of the foreclosure. The lender will only accept a deed in lieu if there are no other liens on the property i.e. not other loans, judgments or secured debts. The reason for this is that the lender does not want to take over the obligation to pay the other debts that are secured by the property. If the lender has a first lien and forecloses, that foreclosure eliminates the other junior liens, other than IRS liens. So the deed in lieu has to be the same result of clean title as a foreclosure in order for the lender to be interested.

The advantage of a deed in lieu is that it only takes one negotiation. If the bank accepts, the owner is done with the house. One of the essential goals of the negotiating with the bank is to get a complete release from the debt. In other words, the owner wants the bank to accept the property in full satisfaction of the entire debt, so that the owner will not be chased by any debt collectors after the recording of the deed.

The byproduct of this result is a benefit for tax consequences. If the property is taken in full satisfaction of the debt, there is no debt relief i.e. the debt was fully paid. Without debt relief, there is no income tax consequences of the deed in lieu, unless the IRS wants to challenge the transaction by claiming that the market value of the house was less than the full value of the debt. So, the owner needs something like a market analysis to have on file showing that the amount of the debt was equal to the market value of the property.

The owner can also negotiate as smooth transition out of the house, with a reasonable time to move to a new location.

One disadvantage of a deed in lieu of foreclosure is the effect on your credit score. Under the Fannie Mae guidelines, a deed in lieu will make you ineligible for that type of loan for four years. In contrast, a short sale takes two years to “season.” Also, the standard loan appllication not only asks about foreclosures in the last 7 years, it also asks about a deed in lieu of foreclosure for that same period of time. For a deed in lieu, you have to answer the question “yes” for 7 years. For a short sale, the answer is “no.”

A lender does not have to accept a deed in lieu. There have been owners who have written out a deed, recorded it and sent it to the lender. They do not have to accept it. So, a deed in lieu is not a sure thing. Neither is a short sale, a bank does not have to do a short sale either.

The deed in lieu is a sale for purposes of income tax, just like a foreclosure and a short sale. So, if you made a profit you may owe tax on the gain. But section 121 of the Internal Revenue code eliminates the tax on a gain of up to $250,000 for a single tax filer and up to $500,000 for taxpayers filing jointly for a qualified principal residence.

Why aren’t there more deeds given in lieu of foreclosure? Many people do not know about them and some Realtors do not discuss that alternative as there is normally no commission paid. Since the short sale is a sale, the Realtor gets a commission. Since the deed in lieu is not like a normal sale, there is normally no commission.

Lien Priority Determines Who Gets Paid & How Much

March 11, 2009 by  
Filed under Short Sale How To

capital-building-70When you first start to list a short sale property, you need to figure out how much is owed on the property. Most homeowners can give you the mortgage statements and you can calculate the balance due. However, I have had some “special” clients, who have mortgages, liens, judgments, unpaid property taxes, IRS tax liens and all sorts of items to keep my life interesting.

Unless you are absolutely certain you know all the debts secured by the property, do a title search to find out how what needs to be paid to close the sale i.e. find out how many liens there are and how much each one is. A lien is something that is attached to the property that must be dealt with when you transfer the title. Normally, you pay the debt and the lien is released. The type of lien you may be familiar with is a deed of trust that secures the payment on a mortgage loan. If there is a lawsuit that results in a judgment against the property owner, it can be recorded in the county where the property is located, and the judgment becomes a lien against the property. If people who do work on the property are not paid, they can file a mechanic’s lien. If the homeowners association is not paid, they have the ability to file a lien under the terms of the declaration of covenants, conditions and restrictions that cover the neighborhood. The taxing authorities can file a lien if the property taxes, state income taxes or other assessments are not paid. Similarly, if the Internal Revenue Service is not paid, they can file a lien.

It probably does not surprise you that the IRS has special rules. No matter when they record their lien, they are in first position. But, you may be able to work out an arrangement with the IRS to get the property released from the lien if the seller enters into a payment plan with the IRS. As you might expect, the IRS is slow, so you need to start work on this lien as soon as the property is listed by presenting whatever paperwork the IRS wants. Sending the hardship letter discussed in the post “Do a Compelling Hardship Letter” is a good way to start. One of the reasons to start early is to open a file on this request and have it assigned to the right department in the IRS. In this manner, when you get an offer, you are ready to submit the closing statement and other documents to the right person. Just like all the other creditors, the IRS wants to see that the owner is walking away with nothing, because if there is any money left over, they want it.

If there are more liens than there is money, who gets paid and who doesn’t? Normally, it is based on the priority of the liens. The standard rule is that the date the lien is recorded with the county recorder determines its priority. So, the one filed first is first, the one filed second is second and so on. But, if it was that easy, lawyers would not have to spend all that time dealing with title issues. Also, the rules of priority change from state to state.

The effective date of a mechanics lien is usually the date work was started on the property. So, if a custom home was built starting on January 2, 2008 and the landscaper was not paid for work done in June, 2008, and a mechanics lien is filed in July, 2008 the effective date of the lien is January 2, 2008, which would give it priority over a judgment filed in April, 2008.

How do you figure it out? You let the professionals do it. In my short sale addendum, I specify one closing attorney that will close the sale if a buyer wants to purchase a short sale property listed with me. That closing attorney may as well do the title work early, as nearly all of my short sales sell and close. The attorney can do the search and tell me the priority of the liens. Once you know the lien holders, order the payoffs on the mortgages as early as possible. You will need accurate numbers to put in the draft HUD so that you can determine how much money you will need. It is always interesting to see just how much it would take to fully pay everybody. After you know the totals, you work backwards to decide how much you can pay each lien holder.

Why does priority matter? Because if the first lien is foreclosed, all the lower priority liens are no longer attached to the property i.e they get wiped off by the foreclosure. The creditors may be able to chase the former homeowner after the foreclosure, but they will not be able to get money out of the property (unless it sells at the foreclosure sale for enough to pay the first debt with money left over, which will go to the next debt until it is used up, which is about as rare as a chicken with lips). So, the first loan will normally get paid much more in a short sale than the second, third and fourth. This is particularly true if the first loan has started a foreclosure proceeding, because all the other loans will get nothing if the foreclosure occurs.

Are there any rules of thumb? All kinds of them, and each lender tries to make them up as they go along. Many of the first lenders will insist on getting fully paid before they will let the second lien holder get anything. Many first lien holders will let you give the second lien holder up to $3,000 when they are not fully paid. Others have administrative rules that are a reflection of their business model. For example, Bank of America has decided it is not worth their while to process a short sale on a second or lower priority lien unless they get 10% of the outstanding balance. Their claim to logic is the cost of the staff time would exceed the amount they could recover on extremely small payoffs. I happen to disagree, because it takes no time at all to say you will take something instead of nothing particularly if you change your review process to minimize the number of documents you want in the short sale package. So, this is just a negotiating technique referred to as “higher authority”.

The other fun thing in negotiating with junior lien holders is the “south end of a north bound horse” effect. Some lien holders are so upset with the seller that they will not settle for less than full payment. If they mess up the seller’s short sale, there is an emotional satisfaction that is worth the financial loss. So, they will force the foreclosure unless you find a way to get them paid.

When you are negotiating with each lien holder, try to get a full release of the entire debt in return for the payment. You can negotiate a settlement where the lien holder will release the lien and apply the payment toward the debt, but not release the rest of the debt. It gets the property sold, but the creditor can chase the seller after the sale. If you can get the lien released and get the rest of the debt satisfied and released, the seller walks away clean. So, you have accomplished the full payment of a debt with the limited proceeds from the sale. You will not always be successful in getting a full release, but if you do not ask, you do not get. If you only get the lien released, you have succeeded sufficiently for the task at hand.

My policy is to deal with any type of lien holder and any number of liens. One of the more complex short sales had first, second and third mortgages, a judgment and unpaid property taxes. You have to realize that the more liens the more complex the sale. A sale with four liens is much more than four times the complexity and more than four times the work. If you are smarter than I am, you might want to refer complex short sales with multiple liens to another Realtor who is set up to handle difficult cases.

If all this gets too complicated, sit down with your favorite closing attorney and let them figure it out for you.

What is a Short Sale?

March 10, 2009 by  
Filed under Short Sale How To

dictionary-2-70x70The short answer is it is a sale where you do not generate enough money from the sale of the property to fully pay all the loans and liens, and the creditors accept less than full payment for these debts. In other words, the payment is “short”.

In your grandparent’s day, if you sold a property and did not have enough money to pay off all the loans, you took the rest of the money out of your pocket and brought it to the closing of the sale.

I have heard that the first short sale was done by Fannie Mae in 1988. I did my first one in 1992. In the early ’90s, it was unbelieveable for a banker to have someone call and offer to pay them less than what was owed. You could hear some real ugly words out of a banker’s mouth back then. Failing to fulfill the promise that you will pay back what you borrowed was obscene to them. When you think about it, the banker has a point, because the borrower is not living up to the promise to pay back the loan.

This is a process that may not be perfect, but it is frequently the most practical solution to the current financial crisis. If the property has gone down in value so you cannot get enough money out of the sale, a short sale may be the best choice. If the borrower has had a recent financial disaster, the short sale may get more money from the bank than any other choice, because you cannot get money out of a broke borrower.

A short sale works where the property qualifies and the borrower qualifies. If there is enough money from the sale, the bank gets fully paid. If the borrower has the money to bring to the closing, the bank probably will not approve a short sale. If the property has insufficient value and the borrower has insufficient funds, consider a short sale.

There is a wide range of training that the Realtor must have to give the right advice. There are at least three sides to the negotiations, instead of two, because you have to get the sale agreed by the buyer and seller then approved by the lender. There are title issues, so you have to understand what the liens are and how the priority of the liens affects how much each lender gets paid. There are income tax issues. There are issues concerning the foreclosure process. You need to explain the effects on credit reports. You need an understanding of the law concerning debt collection to try to get a full release from the debt. You have to be aware of interpretations restricting your ability to negotiate with a bank if the foreclosure process has started, as it may be considered the unauthorized practice of law. You have to be able to close an “as is” sale, so the second round of negotiating after the inspection is different. A short sale even takes special talent for the closing attorney or escrow officer.

Where are you going to learn all this? Right here at

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