Short Sales March 5, 2007
A short sale is when a homeowner in financial distress owes more against the home than what the home is worth, and the homeowner MUST sell.
If the homeowner does not have to sell, or does not want to sell their home, there are MANY options available to homeowners. They could 
move into a more affordable home and rent out their existing home, they could take on a roommate, they could refinance (although this is not always the best path. Homeowners in a short sale situation are often in financial distress, which means higher rates and fees because you’re seen as a higher credit risk to a new lender), they could talk with their existing lenders to re-configure the terms of the loan. Homeowners who do not want to sell or do not have to sell ought to seek out a HUD-approved housing counseling agency that offers default counseling. Why? Because at bare minimum, SOMEONE, in this case our federal government, has deemed the housing counseling agency competent. What a homeowner should not do is to blindly trust that the signs by the side of the road are from reputable folks. In fact, the assumption ought to be that if a deal looks and sounds too good to be true, it is. There are no angels on earth. Homeowners, you can be easily taken advantage of by these folks. Wake up and keep reading.
Selling short means you’re asking the underlying lender(s) to accept less than their payoff in order to facilitate a sale of the home, instead of foreclosing on the home.
Foreclosure is expensive for a mortgage lender. Mortgage lenders are not in the business of foreclosing on houses. Banks and lenders are in business of making loans. They don’t want the house back. This is a business decision for the lender. Which means it has to make rational, logical sense.
Homeowners, you will be asked to prove financial distress. This means you will have to submit proof that you don’t have the money to make up the shortage. If you do have the money, this is no longer a short sale, the industry calls this a “seller to bring cash in at closing” sale. If you ask your real estate agent to help you in hiding assets, an agent cannot assist you with defrauding a lender.
If an “angel” investor offers to ‘take over the payments’ and lets you pay rent until you’re back on your feet, and then asks you to sign a quit claim deed, transfering title to the investor, stop everything and go get some legal advice immediately. You might be thinking: I’m in financial distress; how can I afford legal advice? Contact your local bar association for a referral to free legal aid. A quit claim deed transfers interest but not liability. This means you are still liable to make sure the mortgage is paid, and further, transfering yourself out of title means your lender might decide to call your note due and payable. There are many foreclosure rescue scams to be careful of. If the rent is set too high, thus not allowing you to really get caught up at all, this has a name: equity skimming. Go see an attorney.
Homeowners, you will be asked to pay back the shortage. That’s right, your lender will ask you to sign a brand new unsecured note in order for you to pay back the difference in monthly installments. If, out of the goodness of their heart, (don’t count on it) the lender “forgives” the debt, then the IRS sees this as a taxable event. Homeowners: Go see your favorite tax attorney or CPA for tax advice if you are in a short sale scenario.
Homeowners, the worst mistake you can make is to go into denial and stay in your “happy place” and not make those hard decisions. Let’s review. The best steps you can take are preventative. When you see yourself getting close to needing to sell in order to avoid foreclosure:
1) Decide if you absolutely must sell or if you’re better off riding out the financial tough road. If there’s a light at the end of the tunnel, and you don’t want to sell, perhaps you’re better off not selling.
2) Talk to a HUD-approved housing counseling agency that offers “default” counseling.
3) Don’t ignore letters or calls from your lenders. I recommend renting and watching the movie “House of Sand and Fog” to wake you up from your state of denial. Talk to your lender.
4) If you’re committed to selling, interview three licensed real estate agents. If one of them offers to purchase the house right there in your living room…..ask the agent if that’s ethical and legal and see what they say. Real estate agents have an obligation to put YOUR interests ahead of their own interests. State agency laws vary, but this is a core concept of agency.
5) Always seek legal counsel if you are a short sale homeowner. There are things attorneys can do that real estate agents cannot do.
Real estate agents: The best steps you can take are to educate yourself about how to present your firm offer to the underlying lien holder(s). In a short sale, title is transferred using a warranty deed (in some states it is called a different sort of deed like a bargain and sale deed) which means title must be clear of all liens and encumbrances (except for items that will run with the land like easements, real estate taxes, and the like.) This means you might have to present the firm offer to more than one lien holder. Example:
Sale price: 300,000
First mortgage payoff: 250,000
Second mortgage payoff: 100,000
Real estate agents: In the above example, if you’re trying to work with the first mortgage lender and they’re not giving you the time of day, it’s because they are expecting to get all $250K because they’re in first lien postion. Your work will be with the second lien holder, who has much to lose should the first foreclose and everything to gain by negotiating with you NOW, before foreclosure.
Real estate agents, check your local Multiple Listing Service (MLS) policies and procedures about disclosing the “short sale” terms to the other members of your MLS.
Real estate agents, the lender(s) will ALWAYS ask you to cut your commission. Always, always, always. It is their duty to mitigate losses. That means asking everyone to cut their fees. Don’t take it personally. So, should you cut your commission? These transactions are difficult, time consuming, gut-wrenching, and ulcer-inducing. Why on earth would you accept a low fee? When asked to slice your fee to the bone, say “no.” The lender needs you more than you need them; the lender does not want to foreclose.
Sometimes real estate agents tell me they wouldn’t touch one of these deals because of the increased liability and the hard work. To that I ask, “Well, what if you were the one who sold them the house?” Then the room usually falls silent.
Real estate agents should always ask the homeowner this simple question: “What are your plans for housing once the home sells?” If the homeowner is in financial distress, often their plans including moving in with relatives. If not, you may wish to connect the homeowner with social services sooner rather than later.
Sphere: Related Content- Posted in : General Real Estate
- Author : Jillayne Schlicke
Comments»
I Think foreclosures are a great opportunity here. Banks are trying to sell their homes as quick as possible to make profit on unpaid mortgages. You often find that they are willing to offer attractive rates or terms as concessions in order to sell the homes. For more information on bank foreclosures please visit: http://www.mostlyforeclosures.com/
Jillayne, your post is excellent and very timely. I’m afraid we will be seeing more short sales taking place over the next 2-3 years and this solid information for consumers to digest. I will be sure to include this in future post.
Waking up this morning to Bart Simpson’s back side…I KARUMBA!
Some of the things escrow watches for in short sales:
False repair work invoices to straw contractors or family members, last minute increases in commission disbursements, last minute filed liens etc…
All are ways to fraudulently increase proceeds and/or reduce the loss to the homeowner. People get creative when under financial distress. In many cases, lenders will not allow the homeowner to make a dime if they are taking a large hit.
Excellent post, Jillayne. In terms of consulting an attorney, you are absolutely right that many people believe they cannot afford to do so. However, if the homeowner has ANY equity in the home at all, the amount of equity will probably exceed the cost of an attorney, and the attorney can help you to protect (or realize) that equity.
The Seattle P-I had a good piece recently on foreclosure rescue scams. A couple of local attorneys are quoted in that story. If you’ve been the victim of such a scam — an “angel” offered to help but ended up with your house and your equity — contact one of those attorneys. They are making a career out of suing such “angels” for fraud and helping homeowners to recover some of their lost equity.
Hi Lynlee,
I read your post while stuck in traffic this morning. Yes, I am admitting to reading email on my pocket PC on I-5. Shame on me.
When I did, I screamed “NOOOOO” and I think I frightened another driver next to me. I had not heard about straw contractor invoices happening in escrow on a short sale. Thank you for pointing this out.
I have heard that some lenders WILL allow for a homeowner to receive a small amount of cash back at closing only for the purpose of putting first and last month’s rent down on an apartment that would have kept the homeowner from being homeless.
Sometimes the bank insists that the home seller signs something at escrow that says he or she is not receiving any cash back at closing. Usually this is because the lender believes the seller in fact might be trying to do just that.
I’m getting ready to teach a RE 2.0 class this morning for the Sea Assoc of Realtors so I need to run. Will check back later!
Jillyane says: “Real estate agents, check your local Multiple Listing Service (MLS) policies and procedures about disclosing the “short sale” terms to the other members of your MLS.”
This gets very sticky. MLS policies may protect the members of the MLS better than the seller. If you disclose that the mls offering may be reduced due to short sale, you are making known your seller’s distress situation, and the price offered may be less than had you not noted this.
Back in the days when we all represented the seller, we would put “Short sale - selling office commission to be 1/2 of that received at closing” and that info was not disclosed the the purchaser. The MLS policy may be leftover from those days, so be careful. Now that the “member” you are disclosing that info to represents the buyer, you have to be more careful what you reveal to that agent for the buyer.
Sometimes better to offer the anticipated lower commission in the first place, than to reveal you seller’s weaknesses, if you are the agent for the seller. I recommend you ask the attorney for the seller how to handle it, and get written approval from both the seller and the seller’s attorney before noting it is a short sale in the mls, regardless of “mls policy”. At minimum, consult with your brokerage attorney regarding following mls policy, that may tell you to reveal the seller’s weakness.
Then there’s the matter of disclosing to the potential buyers, that the sale may not close at all. Often the lenders will not give approval to close at reduced amounts until the week prior to closing.
Don’t assume that just because a seller is selling because he can’t make the payments, that it will be a short sale. Get the payoffs in advance of listing the property and don’t forget to check real estate taxes in arrears and also Home Owner Dues in arrears. Had one years ago where the HOA dues on a condo had not been paid for 5 years.
When someone is in financial distress, there are often other judgments that do not readily appear on sites agents can access.
Also escrow must be very careful NOT to disclose the seller’s situation to the buyer and buyer agent, when seller is distressed and it is NOT a short sale. Had one a year or two ago where escrow told me of the seller’s problems, (we were agent for the buyer) even though it had nothing to do with the buyer, and there was plenty of money in the sale price to pay the lienholders.
I’m not sure about escrow rules, but seems to me if the buyer was not affected, it was not right for the escrow person to let out that the seller was behind in his payments. Sounded more like “gossip” than “need to know” info.
“if the homeowner has ANY equity in the home at all, the amount of equity will probably exceed the cost of an attorney”
Craig, you lost me there. If there is equity, it isn’t a short sale is it? When there is not enough money to pay the lienholders in full including interest and penalties, do those lienholders who are shorted allow for attorney fees for the seller?
Hi Ardell,
I am not a licensed real estate agent so I will need the help of a licensed agent to read my position and find the weak areas in it:
Disclosing the short sale terms to the buyer seems to be in everyone’s best interest.
There are many home buyer investors who actually WANT to find homes preforeclosure or in short sale scenarios.
Besides, if the buyer is unaware of the short sale terms, makes an offer and it’s accepted, and only THEN finds out it’s a short sale, the buyer could decide to walk, right? What if that buyer must be moved in by, say, Easter, for the annual family Easter Egg Hunt. If this particular home is going to take many, many weeks to close, this might not be the right home for that buyer. Now we’ve wasted everyone’s time.
It’s like someone asking me out on a date and then later telling me he’s married.
I think disclosing the short sale terms HELPS the seller and the buyer find each other.
I think buyers want to know before they make their offer, if the seller can perform. In a short sale scenario, the seller can’t perform without the lender’s permission.
Hi Ardell,
As far as attorneys fees go, in a true financial distress situation, a homeowner can contact the local bar association and receive legal aid.
In other cases, the home sellers absolutely needed legal counsel and had money to pay the attorney fees.
With short sales, sellers might have questions about:
Bankruptcy
Taxes
Assets
Liabilites
Divorce
Failure of a business that lead to the resulting personal financial crisis
Mortgage fraud
Death/probate problems that lead to the resulting short sale
Great Post and one that’s after my own heart! I have been having some conversations with Southeast Michigan appraisers and real estate agents and am being told that short sales are making up about 90% of the volume right now. I do not know just how true that statement is but I do know that there are a lot of these sales going on. I am just now starting to see articles of the Northwest part of the Country seeing a higher foreclosure rate and more short sales. I don’t think that you will see as high as a rate as other parts. But is a great time to see topics like this.
Hi Shane,
I have been teaching the short sale class for about six years now and here in the northwest we have not seen a drop in the demand for this class. It’s been steady for six years. On the other side there’s been no recent drastic increase in demand for the class.
Great article, Jillayne. That is a terrifying scenario with the quit claim deed. Hopefully I will never need to be in a situation where I need to make use of that information.
I’ve seen some incredible trustee sales in the past year- but none of them went for less than the primary mortgage value (usually 80% of the previous sale price). Still I have to wonder why the sellers were willing to settle for so little in this market rather than simply listing in the MLS and walking away with a little bit of equity.
Hi Alan,
Thanks for stopping by RCG. In every single short sale class, an investor wanna-be wanders in hoping to pick up some tips. They tell me these tactics and more are what’s taught in the “get rich quick” seminars. Someone is definitely getting rich quick in those seminars and it’s not the attendees.
Hi Bill,
Sometimes the sellers have WAY over-mortgaged as they try to work their way out of a deficit. There’s a first, and a second mortgage. Then there’s a third mortgage. Next there’s a payday lender lien, or two.
When it has gone all the way to a trustees sale and the payoff is near market rate, there’s usually something else on title as a lien that might not be known like a huge tax lien against the home seller. Sometimes it’s not that but something even more sad. It happens when the seller goes into denial and just gives up.
Yet another reason to connect folks with social services. There’s aLOT of emotion going on for a homeowner in financial distress. The homeowner might be presenting a concerned face but underneath that they’re sad, angry and afraid. A trained counselor can help a homeowner get to a place where good decisions can be made.
Wow, reading your comments and then the post it is no wonder sellers buyers and real estate agents are confused.
Our local (NW)MLS is caught between the rock and hard place (DOJ and Washington License Law) which makes it impossible to say outloud to selling agents if you write up on offer on this home you may or may not get paid if and when the sale closes because seller is behind in payments. But the fact is that the notice of defualt (NOD) is public record. What is not always clear is how much is owed and to whom.
You will find that most lenders will work to help get the home sold because it is in their best interest to do so. It cost a lot to foreclose on a home and resell it. Time is money so if a lender can get it sold today for what they would net in six months it makes sense. But if a lender is not going to get the full amount owed then they want everyone to get less money including the agents. Good news is that some lenders are now agreeing to allow the sellers to get some funds at closing to pay the moving costs. But this is only a few lenders at this time.
Hi Jim,
Thanks for stopping by RCG. NWMLS Bulletin number 169 dated July 13, 2004 says on page 2
“2. Rule 10f
A member must make sure that the listing is complete and accurate when it is input into Locator. A listing is not complete and accurate if it fails to disclose that the listing is a short sale or the third party whose consent is required…”
Agents tell me they put an *asterik in the commission section and then inside the notes, tell selling agents that this listing has short sale terms.
Yes, if the home is in preforeclosure a notice of trustees sale might be of public record.
In WA state, a notice of default letter is NOT a recorded document.
Also, it is entirely possible that a seller would need to sell short and NOT BE IN foreclosure.
A good example of this is a forced relocation where the homeowner has been paying as agreed.
It’s so nice to know that I’m not the only one doing short-sales out there. I’m in the middle of my second short sale this year and anticipating a lot more in the future. And just a word of advice to anyone out there about to get involved in one is PATIENCE! The banks are forever slow to respond, so you really do have to keep contacting them almost daily. But it is a win-win-win situation, the bank doesn’t have to foreclose, therefore the seller doesn’t have to be foreclosed upon, the buyer can get a great deal, and the Realtors get paid! Thanks for sharing this article, I will definitely link it to my blog too!
Hi Karisma,
Glad you found some helpful tips from the article and thanks for the link from your blog. How’s the market in KC?
I visited Kansas City several years ago on business and promised my dad that I’d visit the Harry Truman museum in Independence. What a great town. I had the best barbeque beef sandwich in my life in a little diner right there in Independence.
I have been specializing in short sales for a while now. As a real estate agent, the first thing I do is identify through the local courthouse, homeowners who have foreclosure actions filed against them. I than use various methods to make contact with them, including phone calls letters, and knocking on doors (leaving behind a pamphlet if there is no answer).
Most of these homeowners are being heavily preyed upon by unscrupulous real estate agents and investors. Many investors offer to buy their home only if they are not using a Realtor. I let them know in my first letter to them, that any legitimate buyers will still be interested in their home, even if they are represented. My goal is to get in front of and counsel these homeowners on their options. Refinancing, sale-leaseback and Chapter 13 bankruptcy are all options that may be available to them depending on the circumstances. I try to determine the underlying problem that caused the foreclosure situation in the first place, and determine whether or not that problem has been resolved. I mentioned sale-leaseback as an option, but this is a high-risk option for the homeowner, and requires an agent to be extremely mindful of the terms of the contract. I believe that it is important to negotiate a win-win situation for both the borrower in foreclosure and the investor taking on the risk. In most cases this is not a viable option, but always recommend an attorney review the final documents for your seller.
In most cases the homeowners are simply in over their heads. Most mortgage professionals get people approved for much more than what they should really be paying with little or no cash reserves. The mortgage industry as a whole demands this. If you dont get them approved someone else will, and you will not get the next deal. In addition, with the current market not having any equity is problematic. When representing a seller in a short sale situation, the first thing to remember is that you are best helping him/her by getting the debt eliminated. Be sure to do a search and hold right away with a title company to make sure there are no hidden liens that will create a problem. Get written permission to disclose your sellers motivation to sell, so that you can market the property as a pre-foreclosure and immediately draw interest. You are not betraying your duties to your seller in doing so, because in any case their net proceeds will be the same ZERO. I also have a special addendum that I require prospective buyers to submit with any offers. This addendum outlines that any acceptance by the seller is subject to lender approval, and sets a time line for that approval. It is important to secure a buyer who is comfortable with waiting a month or so for bank approval, and that the process is explained to any buyers and their agents upfront. You will find most agents are ignorant of the process and can become impatient if their expectations are not properly set up front. Lastly is the short-sale process. It is a long and laborious task, and customer service in most lenders loss mitigation departments is worse than any other industry I have ever come across.
These are just a few of the steps and problems encountered in this process. For more information on how to list and sell pre-foreclosures feel free to email me.
Hi Ralph,
Thanks for visiting us here in Seattle. How’s the short sale weather over there in Wisconsin? Everyone in my family was born in Milwaukee except for me!
Are you seeing a rise in short sales, or are the short sale transactions about the same in 07 v. 06?
In CA.. if the buyer of a foreclosure or short sale property is an investor he can not legally be represented by a real estate agent.. The seller can have representation but not the investor/buyer..
Can anyone answer this?
I am living w/my brother whom bought my home a year ago. We both live in the home. He bought it believing my mother would be moving in with him as she is elderly and lonely etc…I was going to relocate, buy again yadda yadda etc……right after my brother bought my home, my mother was diagnosed with termil cancer. It was decided amongst family she should stay in the low income/disabled apartment unit she was in…for financial reasons. I decided I best stay with my brother to help him pay the mortgage.
I have since found I can no longer afford it. And my brother cannot do it alone. We/He is already on a payment plan..that far exceeds the actual payment due to being late etc…the house has been on the market steadily for almost a year…dropping the price now to just 20k over what is owed. There is a prepay penalty of 2 years, now I believe the payment plan interest as well. My brother bought the house from me for 270k, prepay penalty I believe to be about 9,300..and then the payment plan interest??? I don’t know. How can I get my brother out of this situation w/out it costing him more than just letting the house go? Can he be sued for monies left oweing? Can they put a lien on assets or properties? Can they cause him years of financial ruin? I believe the house will sell in a short sell immediately, in this area. it has a main house and a little mil unit in aback within the city limits of Everett WA. He just wants out at this point w/out it costing further stress or financial liability.
Hi Tony,
I sent you an email aside from this blog. Thanks for stopping by raincityguide. You’re asking some good questions, but I need to ask some questions first before I can help you.
1) When you sold the home to your brother, did you do so with a full title transfer, using a warranty deed, deeding the title to the property from you to him?
2) Is his name the only name on the delinquent mortgage?
3) Is the new mortgage loan with an institutional lender using a deed of trust form? This is my guess but I need to know for sure.
4) Is your home listed with a licensed real estate agent or are you trying to sell “by owner?”
Yes, I believe it was a full transfer. And his name is the only one on the mortgage. Yes, it is a deed of trust, and the home is listed with a licensed real estate agent.
Hi Tony,
When you sell short, the lender will ask your brother to pay back the difference between the sales price and what is owed.
So do some rough math with your real estate agent: In TODAY’S market, what will the home realistically sell for v. what does your brother owe, including late payments, interest, and penalties such as the prepayment penalty?
Consider other costs of selling such as your brother’s real estate agent commission (check the listing agreement; this is usually a percentage of the sales price), escrow fee, title insurance fee, and excise tax.
After you add up all the costs (lender payoff + other costs of selling) do one more thing: Have your agent show you the preliminary title report. Make sure there are NO OTHER liens showing on title besides the mortgage loan. For example, if your brother has a judgement against him, this will need to be paid off at closing. If he obtained a second mortgage, this will need to also be considered in the total payoff.
Sales price - costs = a number.
That dollar number will be the amount of money the lender will ask your brother to pay off in a brand new unsecured loan. He will be asked to make monthly payments until it is paid in full. Terms are negotiable with the lender.
Your brother may not want to pay back the shortfall (who would if a person is in financial distress!) this is very different than his INABILITY to pay back the shortfall.
So, for example, if he is un-able to pay back the difference, perhaps the bank will be nice and just write it off as a loss. I’m going to be real direct here: Don’t count it. I have heard of this happening but it is rare. Some people hope that maybe the bank will waive part of it. Don’t count on it.
IF they DO “forgive” the debt, the IRS sees this as a taxable event, which means your brother will be taxed on that amount next April.
There are two important steps for your brother to take RIGHT NOW.
1) Have your brother see an attorney. If he does not have any money to pay for an attorney, contact the local bar association in your county
http://www.snobar.org/
and seek a referal for free legal aid.
An attorney can do things and give advice that a real estate agent cannot. Consider one of the attorneys who blogs for raincityguide. Their names and pictures are up there near mine.
2) Have your brother see a CPA or tax attorney so he fully understands the tax consequences of his decisions.
Have your brother gather up all the documents he received when he applied for the loan and when the final loan papers were signed. Your attorney will most likely want to see everything.
Tony,
Another very important consideration: what are your plans for housing when this is all said and done?
Do you and your brother have enough money for first/last month’s rent on an new place?
If not, the Snohomish County Assoc of Realtors funds an endowment every year with a huge auction. The proceeds go into a fund for people who need grant money for first and last month’s rent. It is administered by the Volunteers of America in Everett.
Jillayne,
I often hear the owners say the sale is “short” because the bank led us to believe that the house was worth more than it really was when they did lent us the money in the first place.
If the market hasn’t gone down since the loan was taken. And the house can’t sell at the price the bank used for the basis of the loan. And the borrower relied on the bank and the appraiser to know the value. Shouldn’t the bank bear some responsibility for the house not being able to sell at a point that exceeds the loan amount?
If the owner had no idea what the house was worth, and the bank is the one that set the value at time of loan, maybe they should participate in the fact that they were wrong to loan that amount in the first place.
Just a thought.
Hi Ardell,
Often what happens is that a homeowner ended up with a 100% LTV loan and then got behind on his or her payments for whatever reason, and there are many reasons why homeowners fall into financial distress.
Late payments, interest, penalties and a prepayment penalty can all add up very fast.
The bank has more than likely sold the loan to investors. The loan in question is subprime (Tony and I determined that via email) and more than likely the investors are going to want their return on investment. A bank can’t arbitrarily “forgive” debt. They also have a duty to their shareholders to maximize profits.
It is a balancing act for the bank, too: How can a bank help the homeowner in financial distress and also remain profitable?
The consumer wanted to sue the bank for giving them a loan way in excess of the home’s value, in the case I am thinking about. But the reality is he took the money and spent it, so he owed it. Still I could see his point that the bank was at least partially negligent and complicit in his fate.
Given the change in bankruptcy laws…this could become an issue into the future. In the past the debt was more esily forgiven after the sale if it was part of a bankruptcy.
I put an offer in on a “short sale”. I do not think it will close in time as I have already sold my home. I want to approach the “short sale” seller about renting the vacant home which is in pre-foreclosure.
Can the owner legally rent a home in pre-foreclosure and is it unwise. I am wondering what the pitfalls are?
If your offer is accepted and you know you are going to be the eventual owner and it is vacant, sounds like you may be able to work something out there. Contact the person who is representing the seller.
Your risk of course is that it won’t close at all, in which case you will have to move again.
Jillayne, do you recommend that borrowers utilize a third party negotiator like
http://shortsalecenter.com/index.html
or
http://www.foreclosureassistance.com/
Or if you have others to suggest, let me know - I have a client requesting information but wasn’t sure where to send them. thanks,
Hi John,
Absolutely not.
Third party intermediaries charge a fee. The profit margin for a firm like this is excruciatingly low. This means the companies are often run on a shoe-string budget which means the service will likely be questionable.
A well-educated Realtor who is experienced in representing clients who are in a short sale position, is a far better selection for a homeowner.
If the Realtor is recommending a third-party intermediary, then ask the Realtor to deduct the intermediary fee from his or her commission. If the Realtor does not want to do that, find a Realtor experienced in negotiating short sales.
All the advice that a third party intermediary would give, a homeowner can receive for FREE by meeting with a HUD approved hosuing counseling agency that specializes in DEFAULT COUNSELING. Here’s a link to the HUD website. Remember to look for agencies that specialize in default counseling.
http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm
Thanks, he was looking for more info like…
Phone numbers / names / addresses for where to start with his lender (CW) - they have his 1st and 2nd. And he’s had one 30 day late, should he have more (as some advice was given to him) or just keep paying 20 days late or so but stay current. Had a couple of thousand in an account that showed on the application = should that be liquidated and something done with it? As far as assets, are they going to let him keep his IRA and retirement accounts.
This property is his 2nd home, is that ok with them? And is a potential loss of $50-70k worth their time to even look at? How does the consumber run numbers to see if their scenario is even a plausible one? Thanks1
I will have to respectively disagree with Jillayne in this case. I am a real estate agent in Wisconsin who does almost exclusively short sales, and bank owned business. When you are selling a home and getting the bank to “go short” you are typically not receiving ANY proceeds from the sale. This means that the amount of commission you are being charged is irrelevant, what is relevant is how successful your real estate agent is at getting you out of debt. I started a short sale negotiating company in order to start getting compensated for the extra work it takes to negotiate a short sale, and that company charges a processing fee depending on what the lender is willing to pay (typically $595).
This amount comes out of the banks proceeds and does not affect the home owner. Because so many agents are good at prospecting and selling homes, but not good at the short sale end of the business, I have been consulting with and negotiating short sales for other agents as well recently. We always make sure we are working to best help the distressed home owner. There is no reason for the homeowner to ask the agent to reduce his commission to make up for my $595.00 fee because that fee is not really being paid by the homeowner, but rather by the lender who is taking a further reduced net proceeds. Additionally I have an addendum to MY listing contracts that says if my commission is cut by the lender, I will take that the lender offers me as payment in full and not charge the distressed homeowner any money out of his or her pocket to complete the deal.
Ralph says:
“This means that the amount of commission you are being charged is irrelevant”
Commissions are negotiable. A homeowner in financial distress ought to be able to pay a competent real estate agent a fee for performing his or her duties. Commissions are HIGHLY relevant for a short sale homeowner for one reason only: If a homeowner owes more than the house is worth, the homeowner will be paying the agent’s commission in another way other than the proceeds of the sale. Typically, the lender asks the homeowner to sign an unsecured note for the difference, which would include the closing costs and agent commission. A homeowner in this case ought to hire an agent who is EXTREMELY COMPETENT in negotiating short sales. I this case, no other third party processing fee would need to be paid.
Ralph says:
“I started a short sale negotiating company in order to start getting compensated for the extra work it takes to negotiate a short sale, and that company charges a processing fee depending on what the lender is willing to pay (typically $595). This amount comes out of the banks proceeds and does not affect the home owner.”
The $595 is paid for by the homeowner, not the lender. Lenders don’t take on additional charges by third parties. I repeat: THE HOMEOWNER is paying this fee.
I thought about deleting Ralph’s comment simply because it appears to be a commercial for his company, but I decided to leave Ralph’s comment in place only to show readers how third party intermediaries operate.
A competent real estate agent can do what any third party intermediary claims to do, with no additional $595 fee.
Hi John,
Whoa, slow down there, cowboy. Let’s take your questions one at at time:
1) Phone numbers / names / addresses for where to start with his lender (CW) - they have his 1st and 2nd.
A: Phone numbers of lenders are located on the homeowner’s monthly statement.
2) he’s had one 30 day late, should he have more (as some advice was given to him) or just keep paying 20 days late or so but stay current.
A: I never advise a homeowner to stop paying their mortgage. The only person competent to give legal advice to a homeowner is an attorney. Homeowners do not need to be in foreclosure for a lender to accept a short sale.
3) Had a couple of thousand in an account that showed on the application = should that be liquidated and something done with it?
A: In order for a short sale to be approved, a homeowner must PROVE that they have no money. If the homeowner has money, he or she will be asked to bring that money in at closing to make up the shortfall.
4) As far as assets, are they going to let him keep his IRA and retirement accounts.
A: If I were the banker, and assets were available, I would ask for the homeowner to obtain a loan against these items, and bring the cash in to closing. If a homeowner has assets, you don’t have a short sale transaction. You have a “seller brings cash to closing” transaction.
5) This property is his 2nd home, is that ok with them?
LOL. The lender will likely ask the homeowner how much equity is in their primary residence. Perhaps a new secured note and deed of trust could be placed on their primary residence.
This transaction is sounding less and less like a short sale. Short sale approvals are reserved for people in true financial distress. In this particular case, the homeowner appears to have assets to cover the short fall.
6) And is a potential loss of $50-70k worth their time to even look at? How does the consumber run numbers to see if their scenario is even a plausible one? Thanks
A: Consumer adds up his or her liquid and other real property assets. If the number is zero, then a new unsecured note is signed at closing for the consumer to pay back the $50-70K. If the consumer has money in the bank, the bank will ask that the money be brought in at closing and applied to the unpaid balance.
Please don’t ask me how a homeowner hides their assets. Typically, we would call this “lender fraud” and no one reading this blog will want to be a party to that.
#1 - My company actually only does short sales for my personal production, other agents in my office, and other agents in my local area, so if this appeared to be a commercial I apologize. - - -
#2 - I NEVER have sellers sign a note to pay me a commission. Last year I closed over $10 Million in sales, and MOST of it was short sale work. None of my sellers had to come out of pocket at all. I was able to get 1st mortgages, 2nd mortgages, Federal (IRS) tax leins, child support leins and judgments removed. Most of the time, the lender would insist on cutting my commission to 5%, there were some instances if 3-4% (Especially if I had the buyer and the seller) and rarely did they agree to 6% or higher.
I NEVER charge the sellers the difference when my commission is cut. Nor do I charge them the $595.00 fee if the lender doesn’t let it stay on the HUD-1. If the lender cuts the fee, I deduct it from my commission, and I would expect other agents to do the same.
These people are in a tough financial situation, and it’s my firm desire to make it better. I started the independant contractor firm to negotiate these and collect enough of a fee to pay my full time short sale processor. This fee is often left by the lender EVEN WHEN they are insisting on cutting my commission simply because it’s a 3rd party fee, and they don’t think it’s negotiable. With 4-6 seller sides per month (plus an extra 2-3 deals a month from other agents its an extra source of income for a service I can provide MUCH better than any other local agent, and not EVER at the expense of the homeowner.
That being said, I have never worked with an outside third party provider, perhaps my ethics are the exception and not the rule, as this is largely an unregulated field.
Thanks for the answers, and I should have clarified a few of those points, I have lots of notes and questions in my file for this client.
I didn’t mean to allude to them wishing to hide any assets whatsoever. They asked me if they should cash in what little assets they had and go ahead and pay down on some other credit accounts, that’s what I meant by ‘do something else with them’. Sorry about that - it does sound rather mysterious in my previous post.
thanks.
Hi Ralph,
Thanks for stopping by again.
Are you saying that you are ALWAYS able to reduce the amount owed to the lender and other parties claiming a lien on title, down so low, that the homeowner owes the lender ZERO, including negotiating the lender payoff(s) so low as to negotiate enough money to pay all closing costs and agent commission?
When a homeowner owes more than the house is worth, and pays an agent commission, the bank is going to ask the homeowner to pay back the difference. The agent commission is added in to the entire amount owed and includes other costs such as escrow and title fees, and excise tax. The homeowner usually ends up paying all this back.
I understand that if you’re asked to cut your commission, you’re not asking the homeowner to pay the difference.
I believe short sales are a specialty transaction and should be treated as such by homeowners. Much like an agent with a multi-family or commercial property would choose an agent who specializes in MF or commercial. Agents who are NOT competent in short sales are wise to refer the homeowner to a highly competent short sale agent in their market. The homeowner is often far better served in this regard. It sounds like you are doing very well in your market area.
My dad happens to be in Wisconsin at this very moment attending an Elks Band 50 year reunion in Milwaukee!
Hi John,
Whew! Sometimes homeowners ask questions that are beyond what we can answer. I am a firm believer in always strongly recommending that any short sale homeowner seek legal counsel.
So, for example, why would they want to pay down some other credit account when they have a creditor right in front of them that they’re shorting? Sometimes it is challenging to try and figure out all the possible consequences of our actions. In this case, an attorney such as a real estate attorney or consumer protection attorney is able to do this for a fee.
If a homeowner is in true financial distress, free legal aid is available through your county or state’s bar association.
I have only had 1 borrower have to agree to pay anything to anyone. It was a private 2nd mortgage lender who was only willing to release the lien this way. The seller ended up filing bankruptcy a few months after the closing under advice from an attorney. Other than that, the answer is YES, I am always able to get everyone to agree to ZERO in the end.
You are right, a homeowner should look for an agent that specializes, but there are times when the homeowner has a relationship with a real estate agent. These are the few cases where I have been able to be of service to other agents in my market area who have recognized my ability to help them, but mostly my “SHORT SALE PROCESSING” company is just an additional profit center for me to make up for lenders trying to get into my pocket with commissions.
Ralph - I am a Realtor in West Central Florida who has never done a short sale or foreclosure in all these years. Now it seems my rose colored glasses must come off and I must learn in order to best help prospective sellers and prospective investors. When I click on your name I can’t seem to go to your email or your website to contact you directly. I’d like to get properly educated and be mentored as I learn this market. Any advice on what, where the best resources to do that are would be appreciated.
Hi Deborah,
Thanks for stopping by raincityguide.com I emailed Ralph the other day to alert him that his website link leads to nothing.
To start, I recommend finding an agent in your market area that currently specializes in short sales and co-list with him or her for a few of your short sale transactions.
I recommend finding a HUD-approved housing counseling agency that offers default counseling in your city (some counseling agencies only do first-time homebuyer seminars). Go to one of the classes on preventing foreclosures and learn ALL the options for homeowners in this situation, which will cover foreclosure, a short sale, and many other options as well.
I recommend finding a couple of great real estate attorneys in your city, so you can interview them in advance to make sure they can handle your referrals for legal counsel.
I recommend going over the rules of your local MLS with your broker to determine if short sales are treated differently within your MLS, such as disclosing to other MLS members the short sale status of a listing.
I recommend reading the foreclosure laws that govern your state so you can become familiar with the timeline of a foreclosure. Many (not all) people in financial distress/short sale scenarios are also headed toward foreclosure.
I recommend contacting your local association of Realtors (county or state assoc) to determine if there are any state-approved continuing ed classes for real estate agents on this topic. This will be a far better way to gain some quick education. I recommend avoiding the get-rich-quick-on-short-sales seminars. Somebody is definitely getting rich quick off those and they’re the seminar folks, not the attendees.
I recommend taking your favorite escrow closer out to lunch and asking him or her the following question: “what can I do as a real estate agent or Realtor, to make the short sales that I bring you, close on time, so that I receive my commission, with as little drama as possible?”
I hope that helps! Good luck, and keep in touch.
Hi Jill,
I’m in this situation and hoping that you could help.
#1. I helped my mom to buy a house in 2000 & she’s been making payments on the house. My name is solely on the mortgage and title of this house.
#2. I then bought another house in 2004. Refinanced once for this new house. My name is on title and mortgage. I took some equity out of this one and now the value went down and I want to Short Sale it.
If I let the #2 go to foreclosure, will the lender of # go after the equity of #1? If I decide to transfer the title and mortgage to my mom before letting the #2 go, will they?
Please help! Thank you!
Hi Kelly, here are my answers:
“If I let the #2 go to foreclosure, will the lender of # go after the equity of #1?” If I decide to transfer the title and mortgage to my mom before letting the #2 go, will they?
No to your first question. But there are some risks inherent with foreclosure. Lenders do have options, depending on the circumstances. I’m not an attorney. Craig and Russ, up there on the sidebar, are attorneys. Contact them for a legal opinion.
I would advise anyone facing foreclosure to discuss their situation with an experienced Realtor. Short Sales are not a part of real estate basic training but there are a number of educational seminars a Realtor can take to get up to speed. Lenders will pay a reasonable selling commission so Realtors have an incentive to get involved in Short Sale situations.
The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer. The way mortgages are sold, the mortgage holder can be anywhere and certainly not aware of local real estate conditions.
If the package is complete, the Lender will order a BPO, or Broker’s Price Opinion, from an independent Realtor. Ths BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Your Realtor can meet with the Agent doing the BPO and offer information supporting the offer, such as the average time on market of comparable homes, recent selling prices and point out any defects in the home. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company.
The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. Yes, there can be tax consequences. The Seller does receive a 1099 on the forgiven part of the mortgage, but there are provisions in the tax code for the offset of the phantom income due to insolvency. Most Short Sellers will satisfy the insolvency requirements or the Lender would not be allowing the Short Sale in the first place. Be aware too that if the home goes to foreclosure, a 1099 is received for the FULL amount of the mortgage, plus late fees, legal fees etc. Obviously every individual situation is different so a CPA or tax attorney should be consulted.
The process does all take time and Lenders are swamped, expect at least 2-3 months before a sale can be finalized, even if the Lender accepts the first offer. If they do not, the price can be negotiated.
I am a Realtor, a Broker Associate and I am involved in Short Sales. It is a detailed but fairly straightforward process that can work to benefit Buyer, Seller and even the Lender. The Buyer gets a good price on a home, the Seller gets to avoid the disruption and credit hit of a foreclosure and the Lender avoids the delay and expense of foreclosing on a property they don’t want to own and that would negatively impact their ability to make more loans.
All this information is available on the web site
http://www.free-foreclosure-information.com
Hi Brian,
Thanks for stopping by.
“Be aware too that if the home goes to foreclosure, a 1099 is received for the FULL amount of the mortgage, plus late fees, legal fees etc.”
Homeowners do not receive a 1099 when their home goes into foreclosure.
I have said repeatedly throughout this post, readers will do best if they contact a real estate attorney in their state, as state deed of trust and foreclosure laws vary.
Hi RCG - I (like many people) am facing the inability to meet my obligations and with my home having been on the market for avout a year now, I’m facing a short sale. When I started the process and first listed the home, it was “in the black” and would have had enough equity to pay the 1st and 2nd (and even the broker commission). I’m finally at a number where I’m getting steady showings and my realtor is confident I will get a reasonable offer, but the problem is that I will be short.
Knowing the position I was in, I contacted my 2nd lender and informed them that I would need to sell short. After much back and forth and transfers to other depts (because I haven’t been late yet), I finally was able to work with someone in their Loss Mitigation group who sent me a short sell packet and briefed me on their policies. The short sell packet (these things are getting so popular, they have it packaged to send out) states the credit reporting, IRS reporting, and broker commission policies - 3% on a broker who gets both ends and 5% for a split in case anyone is wondering. I’ve requested a BPO, contacted a RE attorney, and talked to a Banruptcy attorney to discuss my options. The Bankruptcy attorney to mostly get me some leverage with the lender if they fail to accept the short sell. From what I am finding it is simply a matter of putting the lender in the position to know that the choices are a short sell or a bankruptcy/foreclosure. This is something that can be easily seen in the financial summary I will provide and pointed out very clearly in the hardship letter.
So my questions… In this day and age of the internet and vast communication options, what exactly can these “3rd party specialists” or even “experienced Realtors” offer that I can’t do myself for a short sell? I know that a Realtor has a much better handle on the market than I do, but I’m told flat out that nobody can influence the BPO. I’d just like to understand what someone else could bring to this that I can’t work out with my attorney and lender directly?
In addition, why would I need to disclose this as a short sell in MLS or even to my broker? I’m not sure how it works in other states, but in NY it is typical to have a closing 60+ days from an accepted offer. That is typical even in perfect scenarios… So if it takes that long anyway and the lender’s policy is to pay the commission to the broker (I signed for 4.25% BTW), why disclose? If it’s “MLS rules/policy”, I’m sorry I don’t really understand that - what ever could possibly happen if the seller breaks a MLS policy without any knowledge of the realtor? Is there a MLS police to come get me? Sorry for being facetious… But, honestly, the sharks and vultures circle when they see blood. If I disclose to too many people I am in a financial hardship, logic dictates that I am just opening myself up to so many who would seek to take advantage of me. There’s just not enough completely honest people in the world.
Many Thanks
Hi Michael, Third party intermediaries proport to be able to negotiate down the amount of money you owe…..for a fee. The profit margin on these businesses is extremely thin, usually run by a one-person shop and sometimes they even make you pay the fee up front ! before any work has been done. Steer clear.
Each local MLS has its own rules. In the Seattle area, there is a NWMLS rule that requires the listing agent to disclose to the other members of the MLS (the other Realtors) that a home has short sale conditions.
If a home owner is not able to perform on the sales contract, without the permission of the lender being shorted, then this is considered a material fact and must be disclosed to all parties. Your real estate agents may not have a choice. Yes, your financial hardship is now known. However, this might have the advantage of attracting the right kind of buyer. There are plenty of people out there who are fine with waiting out the short sale approval process because they’re not in a hurry.
Homebuyers who are in a hurry to close by a certain date might need to purchase another home. When the facts are made known to these folks (if withheld) they would have the ability to walk away and now everyone’s time has been wasted.
Caveat Vendor: Seller must disclose known facts about the home, including if another party (lender) must approve the sale.
Yes, your lender that’s being shorted, the second mortgage holder, will give final approval on the sale.
Thanks for stopping by RCG and I’m glad you are taking steps to move down a new path. Please come back and tell us how it all turned out!
Michael,
Having an agent who is experienced in short sales in your area can be a godsend. The number one reason you need to disclose there is a short sale in the contract for sale is so that you can spell out that the offer is contingent upon you successfully negotiating a short sale with the lender. If you do not have language to that effect, you may face an angry buyer who sees the need to sue for actual damages or specific performance and expose you to even greater liability than you are already facing. I don’t know about NY, but in Wisconsin I used an attorney to draft an addendum to the offer to purchase that addresses this on all of my short sale deals. You are right that the lender will typically allow only for a 3-5% commission. That is what I get. Sometimes an agent can get more, but it’s inconsequential to you either way, as long as they are successful, they don’t charge you an upfront fee, AND the don’t require you to pay the difference when the lender cuts the fee.
3rd, although the bank tells you that NOBODY can influence the BPO in most market area’s its the same agents doing BPO’s over and over again, and an agent experienced in this area may have relationships with these other BPO agents. I know I do in my market area’s and I always meet the BPO agent or appraiser at the property and furnish them with all of the relevant information such as comps that I know will support the value, and a copy of the contract.
You also addressed IRS reporting. Remember you are subject to IRS reporting even in a foreclosure, if there is a shortfall or defeciency that the lender does not collect, or if you file bankruptcy. You will get a 1099 in almost any solution that does not result in FULL repayment, but you do not necessarilly have a tax liability there. You need to speak with a tax preparer about the property being your homestead 3 of the last 5 years, and other circumstances regarding bad debt.
Whoa, slow down there, Ralph. You’re making some broad leaps and generalizations about the IRS, foreclosures, and 1099s.
It sounds like you work very hard for folks in Wisconsin. I have no idea where Michael lives, so Wisconsin laws may or may not be relevant to him or our readers. It is always most prudent to refer a short sale homeowner to an attorney in 100% of the cases.
From my knowledge base, a homeowner whose home is foreclosed does not receive a 1099. This is not considered a taxable event. If you have other knowledge please post the direct citation to the IRS statute. Homesteads are a completely SEPARATE issue.
Readers, this is a good time to pause and reflect why real estate agents sell real estate and why attorneys handle legal matters.
When a real estate agent jumps in with sweeping broad legal generalizations about tax laws, deed of trust laws, foreclosure laws, and bankruptcy laws, readers ought to be concerned.
Get your legal advice from an attorney, period.
Thanks Jillayne… and thanks Ralph because I truly believe you are trying to help.
The 1099 can be “written off” if you prove yourself insolvent at the time of the event. Something I would have to work on with my accountant. I do stick with professionals.
Maybe I should clarify… I live on Long Island in New York. From my experience speaking with friends in other states, realtors perform much more of a “service” in other areas. Here - in NY - they typically get the listing - get all the standard lead disclosure type paperwork signed and then market your home. You typically get a call from their “office” that such and such wants to show your home, so short of open houses (which seem to be replaced by online tours from realtor.com and such sites), your realtor isn’t showing your home. The only other thing they really do is get the offer paperwork completed. This all gets handed off to the attorney and then everything from there on out is done via your attorney… It’s common that you’ll get an accepted offer and never see or talk to your realtor again until they show up at closing. In fact, the offer documentation where the buyer details terms of the buy (how much down / financed / etc) to realtor isn’t even legally binding. Until the contracts are signed, it’s basically fluff. At the closing, the realtor sits in the back while you do all the paperwork with your attorney and then collects their check at the end.
Honestly, the marketing that the realtors do here is the only big thing they provide. It’s frankly the only justification they have for “earning the commission”. It’s very frustrating to watch realtor after realtor come in to show your home when they know nothing about your property… I will always offer help to tag along and answer questions, explain, etc. But typically they decline saying “they’ll let me know if they have questions”. I sit there frustrated as I hear them say, “Let’s see - this door… is a closet! - very nice…. and let’s see, this door leads to the… basement!” All they do is walk around stating the obvious… and I’m not talking about one or two realtors here.
Anyway - sorry to get off track.
Michael,
It sounds as though you loathe Realtors. I can understany why. Half of all Realtors are at the bottom half of their profession. (Talk about re-stating the obvious!)
I was a lender for 8 years before becoming a Realtor. I decided that the level of service provided by most agents was sub-par and though I could do a better job. While most agents are lousy… the few very good ones make up for it.
Here are a few facts: 74% of all homebuyers start their search in some sort of online function
74% of all people who visit an Open House are going to buy a (not the house they visited) home within 90 days.
An overwhelming majority ultimately turn to a real estate professional when purchasing a home.
Yes, you will have to put up with some lousy agents showing your home and telling the buyer that “This is a Toilet!” and that’s unfortunate, but you home will get more exposure to more buyers and will sell faster. The statistics still back that up, and your lender will allow for a commission in the short sale, so you aren’t saving any money by taking the burden (and all of the liability) on yourself.
Last, do everyone a favor and disappear when your home is being shown. People like to feel free enough to comment, good or bad, on a home they are visiting, and it is easier for an agent to overcome an objection with you not present. For example a buyer may HATE the color of a wall or something else cosmetic, and an agent may have a suggestion how to fix it, or know someone who can redecorate to the buyers tastes within their budget.
Nobody is going to even bother telling their agent they hate something if you are there.
Excellent advice. We are working with many home owners in pre foreclosure. Most of which are falling ’short’. Hence, we have to negotiate a ’short sale’. There are many ‘investors’ in our area trying to ‘help’ these homeowners too & I’ve heard a lot of sad stories from signing over their home to paying $ upfront, etc. I hope everyone reads advice like yours & thinks twice before they sign anything.
Hi Susan,
Thanks for stopping by RCG. I have been meaning to do a follow up post on avoiding foreclosure rescue scams. There have been some good stories in the mainstream media on this topic, but it bears repeating now. Best of luck to you in the challenging Florida market.
[...] You’re in luck. Short sales are being advertised. You only need to search for the code words. Here is what the code words for foreclosure are showing us today: [...]
[...] (formerly the ShackBlog) we did a little digging into how easy it is to find publicly advertised Short sales and foreclosures in the MLS and we found afew. [...]
My neighbors are in default and the bank listed their house in a short sale 1 month ago with real estate agent.How long does the bank wait to sell this house before they give up and foreclose? and how are they allowed to live there rent free whilst the house is listed for sell on the market??
Hi bill,
State deed of trust laws vary. Speaking in general terms, a homeowner has a specific period of time from the time the homeowners defaulted on the loan, to the time when a lender can sell the home on the courthouse steps in the form of a public auction.
If the home sells prior to the foreclosure auction, your neighbors wouldn’t necessarily be living there “rent free” as a short sale requires that the homeowner pay back the shortfall, to the bank.
Where do you live (which state)?
One of the better articles I’ve seen written about anything mortgage-related. I never comment, but I thought your article was really informative and well written. Rare in this industry.
I learned a lot tonight! Thank you.
Hi Colin,
Thanks for stopping by. What do you think about Pres. Bush’s idea to give a tax break to homeowners who have had their debt forgiven by their lender? (Currently, the homeowner receives a 1099 for the amount forgiven.)
Hello,
My husband and I are relocating for work to IL. We are purchasing our first home and made an offer on a house that turned out to be a short sale/preforeclosure. (we didn’t find out until we’d submitted the offer/contract). We waited patiently for the seller to sign, then found out the sale was contingent upon his lender approving the sale. (the listing stated only “Allow time for bank approval”….perhaps our real estate agent should have understood what that meant? We did not know.
Because I’ve read many horror stories of lenders taking forever to make a decision on these types of things, I asked our attorney if it was possible to put some kind of deadline on the contract. we sent this amendment to the seller’s attorney stating that the lender had until Sept 13 to decide. Does anybody know if this sort of “amendment” can even be upheld since it doesn’t really apply to the seller, but to his lender? We are moving at the end of the month (luckily our employer offers temp housing for up to 60 days), but still don’t know yet if the house will be ours or not.
Can anybody advise if there is anything from the buyer’s side to help speed this process along? The lender has already had the “application” for 3 weeks today. Also, my concern is that since this is a short sale, the house is still technically on the market. Is it possible the bank could drag their feet long enough to get another offer higher than ours and take advantage of that??? That doesn’t sound very ethical to me, but I’m not sure if there is anything illegal about such actions.
Any advise anybody has would be greatly appreciated as this is our first home, and we were “lucky” enough to stumble into this situation. Thanks in advance!
Hi Michele,
Q: Regarding the amendment to the purchase and sales agreement that gives the lender until Sept 13th to make up their mind, has this been signed by both you and the seller?
Yes, the home is still technically on the market. The lender will want to see if any other offers come in that are higher than your offer. There’s nothing unethical about that. If you were the lender being shorted, you’d want to try and get as much money as possible, too.
From your side, the best you can do is to get information on what’s going on with the seller.
At this point, the home seller should have put together an entire “short sale” package with the help of his or her real estate agent. This package would include such things as proof that the seller has no money to pay the shortfall, proof of financial distress, and a signed agreement that the seller will pay back the difference owed to the bank (the shorted amount.) In some cases, the bank may decide to “forgive” the short fall. This is not a 100% guarantee, though.
Have your real estate agent find out from the real estate agent for the seller how much information the lender is still waiting for FROM THE SELLER. If your real estate agent doesn’t know, or cannot get an answer out of the other agent, ask to speak with your agent’s BROKER.
Unfortunately, we have lots of short sales coming our way nationwide, and lots of real estate agents who have never handled one of these types of transactions.
From the comments left here by other real estate agents WITH experience, it is important for RCG readers to understand how crucial it is for short sale homeowners to select a real estate agent with experience, who can keep buyers like Michele informed and in contract.
My question is: if you own 2 homes and foreclose on one, can they
go after your other home? And also a 1099 is given for short sale, but not on a foreclosure is that correct? What else happens to you
besides a ruined credit after a foreclosure?
Thanks in advanced for your answers.
Seems if you owe someone money, they can attach your assets. So if they sell one and don’t get all of their money from that sale, they can get a deficiency judgment against another asset of yours.
I’m not a lawyer, but that’s my best guess.
Hi Ben,
Short sales are reserved for people with NO ASSETS. A homeowner has to PROVE to the bank (being shorted) that they are financially INSOLVENT. (Not shouting, just adding caps to make a very important point for readers.)
If a homeowner has assets, and yes, equity in another piece of real estate is an asset, then there is no short sale. Instead, you have a transaction called “seller brings in cash to close” transaction.
Yes, the bank being shorted can ask the homeowner to put a new deed of trust against the other home, and the proceeds of the new deed of trust will pay off the shortfall to the bank on the first home.
No, a homeowner does not receive a 1099 on a foreclosure.
What else happens to you besides a foreclosure on your credit?? Well, you get evicted from the house. That’s no fun. All the consequences of having gone through a foreclosure is an excellent idea for a blog article. I will write a long answer and post it separately.
For a homework assignment on the unintentional consequences of foreclosures, I recommend renting the movie “House of Sand and Fog.” This is a great film, adapted from a book by the same guy who wrote “Cold Mountain.” Ben Kingsley and Jennifer Connelly are in it. Well acted, but this is not a romantic comedy. It is very dark.
We placed an offer on a short sale home last week. We are in a position to wait for the lender’s decision; my concern is related to a possible tax lien on the property. We found out after we made the offer that the homeowner is approx. $8,000 in arrears on county/city taxes. Whose responsibility is that, typically? The seller, the lender, or (gasp) ours? Is there any way we could become responsible for the seller’s back taxes?
Hi Carmen,
Thanks for stopping by raincityguide.com
When a home is sold via short sale, the owner is going to use a statutory warranty deed (in WA state; other states might have a different name for this deed) which means that the title to the home is free and clear of all liens that show up on the preliminary title report.
I’m assuming that you’ve already had a chance to take a look at the preliminary title report, which is how the back taxes were discovered.
Yes, this is the seller’s responsibility: to pay off (or negotiate a short sale for) all liens shown on the title report. This does not magically become your obligation, this is the seller’s obligation to pay off prior to (or at) the close of escrow.
You’re at an important junction: It will become crucial to determine the seller’s motivation to do whatever it takes to see this home sale through to the finish. The people who can communicate this to you are the real estate agents. The agent you’re working with should be able to get a read on this from the agent who’s working with the seller.
If not, have your agent call the other agent’s BROKER.
Here is an example of how this might play out (there may be other ways.)
Sale Price: $300,000
Payoff to the lender $310,000
newly discovered tax payoff $8,000
other expenses to sell such as Realtor commission, excise tax, escrow fees, and so forth. Est: $10,000
So this seller is short $28,000.
I order to make this deal go, the seller must be willing to sign a new, unsecured note with the bank, to pay the bank back $28,000 in monthly installments.
Your next step is to find out how motivated the seller is to do just that.
Stop by again and let us know how it all worked out!
Carmen,
Not sure of your location (State), but generally, a local tax or IRS lein would have to be paid at closing to ensure you have an “encumbrance” free title. It is one of the many tasks escrow companies or attorney’s have in closing your transaction. Obviously, because you are aware of the situation as a buyer, it is imperative that these problems are taken care of.
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My husband and I purchased a new build and just moved in 3 months ago. THe approval process was a nightmare and a separate story ( should have back out of the deal when I had the chance). Anyway, we vacated our other property and it sits with a for sale sign for just about 1 yr. now. Its not moving. At this point I’m 1 1/2 months behing on the payments and have no way of paying them now. My realtor and I have been attempting a short sale but the bank is useless. They wont answer whether this is an option for me4 till an offer is made. That makes it hard knowing what to price at. My question is 1) any advise on how to advertise on MLS etc.. short sale and how to price the home to sell? And 2) Since I have another property am I ineligible for a short sale even though I have no equity in the home?
Hi Daina,
The way your bank is acting is typical. The bank has no obligation to give you a firm yes or no either way until a bona-fide purchaser has made an offer on the home. This is normal.
Your real estate agent will know your local MLS rules for how to advertise short sales. Some MLS systems have rules of disclosing the short sale terms to other MLS members (meaning other real estate agents would know, but the general public would not know.)
Follow directions from your real estate agent as to how to price the home. I can’t help you choose a price. I CAN help you get into the mind of the underlying lender.
The lender wants the total payoff. Anything short of that does not meet their goal to minimize loss. If the home is priced too low in order to net a quick sale and a buyer comes along with a low offer, the bank will want to know what the Realtor is doing to earn that commission: why aren’t better offers coming along? If the home is priced to high, chances of any offer coming in are reduced. Your best angle from the perspective of the lender is to have the real estate agent give you a market analysis as to where the home ought to be priced, not based on how much you owe but how much the home will likely sell for in your market, right now.
In answer to your second question, a short sale is reserved for people who must sell and are financially insolvent. You will have to prove to the lender that you have no other assets. If you do have other assets, you don’t have a short sale transaction. You have a “seller brings cash to closing” transaction.
If you are financially insolvent, then the lender will ask you to pay back the difference in regular monthly installments. You will sign a new unsecured promissory note at closing for the shortfall. If I were the lender, I would ask you to sign a new note and deed of trust, and I’d take a second equity position in your new home (even if it’s over 100% LTV) just to get a secured note instead of an unsecured note. If you promise to do this, I bet you would get more response out of the lender.
Can you find a renter for the first home instead of having to sell it?
Thank you so much for you response. I wonder however, do I need to be discussing the option of a secured note with the lender now or will that come out during the short sale waiting period while they are reviewing the offer. I did ask about moving the HELOC of the old property to the new property under new terms and was denied that request because “that wasn’t countrywides policy”. In answer to your question I have had an ad out for a month now looking for a short term renter however my terms are strict because I need property to remain on the market for a sale, and even if I find a renter that only covers the first mortgage, I still owe monthly on the second and unfortuneitely thats more than I can handle. But I am trying.
Hi Daina,
The underlying lender that is being shorted will send you a short sale package. In there, will be a form that will explain what you will agree to, upon the lender’s acceptance of the short sale. Take this package of documents to an attorney if you have any questions.
There will be an initial set of forms and documents, such as a list of items that will prove that you’re financially insolvent. The lender will need everything on their list before giving you a firm answer.
When a firm offer comes in, they will give you an approval, conditioned upon, for example, a new unsecured note. You’ll receive the lender’s approval package AFTER a firm offer comes in.
Usually, your Realtor would (hopefully) know all this. Readers, please be sure that if you have a short sale going on with your own home, that you’ve selected a Realtor who is familiar with the short sale process.
I need some help!! My parents have a manipulative semi-crazy buyer that has extended closing 5 x’s now. She has put down $5K earnest money. Both Seller/Buyer signed a contract indicating home repairs not to exceed $2K. The buyer has, w/out permission of seller, hired people to do her repairs without taking ownership. My parents 2nd home is now unuseable. Not only has she had the deck replaced @ a cost of $2495, she has had a 3rd, yes that is correct, home inspector come by and tear up their porch looking for dry rot, along with tearing siding off of the house. The home passed inspection the first time, and was written up with a few ’suggestions’, but no deal breaking fixes needed. This was 3 months ago. Since that time she has hired 2 different home inspectors to recheck the house causing the porch and siding to be torn up. Did I mention also breaking the garage door opener. The garage door worked fine at the 1st inspection, but inspector #3 has twisted the sensor and snapped it off and now she is asking my parents to replace this as well. Along with the threat that if her dog gets out and gets hit by a car she can sue them. She’s a needy nutball. Question: Are they liable for any repairs outside of the original inspectors review and the $2K max? The deal is supposed to close today, I doubt it. She does not have the full amount. Can my parents say deals off, we’ll take the $5K earnest money and use it to repair the damages she caused? Their realtor is useless. He has been paying the repairs with the escrow money, don’t both parties have to agree/sign when money is taken out for repairs? This person is trying her hardest to delay the purchase until she is able to sell her home. The lease on her rental is up in October. I’m telling my parents to run for the hills! Any suggestions?? I really apreciate the help.
You have a lot going on there, Cyndi. A Realtor works for a broker. I would first have your parents contact the real estate BROKER, explain the whole story, and then your parents should very clearly tell the broker what they want.
What state is the property located in?
IN A SHORT SALE,HOW LONG DOES THE DEFAULTING OWNER HAVE TO LIST AND SELL THE HOUSE WITH AN BANK APPROVED AGENT?WHAT OCCURS TYPICALLY WHEN HOUSE DOESN’T SELL AFTER LENGTH OF TIME?IS IT NORMAL FOR THE DEFAULTING OWNERS TO STAY ON PREMISES WHILE HOME IS BEING ADVERTISED FOR SELL.DOES THE BANK THROW UP ITS HANDS AND CALL IN AUCTION COMPANY WITH TRUCKS AND EVICT THE DEFAULTERS?
Hi Jay,
Here are the answers to your questions:
Q: HOW LONG DOES THE DEFAULTING OWNER HAVE TO LIST AND SELL THE HOUSE WITH AN BANK APPROVED AGENT?
A: Not all short sale sellers are in default on their mortgage. In the case where that IS happening, each state’s deed of trust laws are slightly different. Check your document titled “notice of default” or “notice of trustees sale” to get the drop-dead date.
Q: WHAT OCCURS TYPICALLY WHEN HOUSE DOESN’T SELL AFTER LENGTH OF TIME?
A: Well, does the seller HAVE TO sell? If not, could they put a renter in the home? Could they stay in the home and take on an additional renter? If the homeowner is in default, and the home does not sell, the home is auctioned off by the bank in a trustee’s sale and becomes a foreclosed home and the bank takes over title to the home.
Q: IS IT NORMAL FOR THE DEFAULTING OWNERS TO STAY ON PREMISES WHILE HOME IS BEING ADVERTISED FOR SELL?
A: Yes.
Q: DOES THE BANK THROW UP ITS HANDS AND CALL IN AUCTION COMPANY WITH TRUCKS AND EVICT THE DEFAULTERS?
A: Yes.
Check your local deed of trust laws for the exact timeline. Find your state’s main government website and do a keyword search on “deed of trust.”
[...] 5. Be more credible: Whether taking on short sales, professional status, or subprime lending, Jillayne Schlicke always finds a way to offer the voice of reason by providing an interesting perspective filled with interesting solutions… [...]
I have to disagree with the part of the article that said a mortgage has to be upside down in order to faciliate a short sale. Also, senior mortgagees are willing to negotiate even if they expect to get most or all of their money back. Why? Because the do not want a non-performing loan on their books as it will preclude them from future funding by Fannie Mae. The less Fannie Mae will allot to a lender, the less potential they have for funding future lons and thus less profits. I have negotiated short sales with a good chunk of equity in the property. Also, with the huge inventory of product for sale in my market, the banks know that it may well be a long, drawn out affair (read: hoding costs) before it sells.
My Short Sale was approved. I’m only about 10,000 short but I want to know what to ask for from the lender in terms of documents stating they can’t come after me for the difference. I’m banking on the 1099 but what can I do to make sure they don’t go after my 401k or other asset?
Also, how will this show up on my credit report? What should I ask for from the lender?
Thank you
Hi Chris,
You should ask for a WRITTEN approval from the lender. In that document, all the terms of the short sale will be there for you to review. By all means take it to an attorney if there’s something in there that you don’t understand.
If you’re 10K short, you will either be asked to sign a new unsecured note a closing to pay back the difference, OR the lender, out of the goodness of the kind soul, will “forgive” the debt.
You say you have assets? Don’t count on the lender forgiving the debt. They can’t, per se, “go after” the 10K, but they CAN make the short sale subject to you paying them back 10K, in monthly installments.
On your credit report, it will likely show something like this:
“short payoff”
or
“account settled for less than amount owed”
and then if you were late on your mortgage payment, those lates would show up.
Good luck, and check back with us to let us know how it all turned out!
Jillayne… thanks so much for the reply. I’ll let you know how it turns out!
Chris,
In a time where lenders are sometimes selling short 60 cents on the dollar, I wouldn’t sweat it too much. See if the note has an “exculpatory clause” which when excercised means the lender waives the right to go after the portion of the deficient debt. If they want you to sign something that says you have to pay the deficiency of 10K, I’d tell them where they can stick it. They are going to have to fork over plenty in attorney fees to get it. Their other option is foreclosure, which if you read my other post, they are loath to do.
The above poster is right re: the credit report. It is a MUCH better option than having a foreclosure on it.
Without knowing the details of your sale, of course, I’m under the impression that the negotiator for the buyer or lister isn’t playing hard enough. Good Luck.
I want advice on my condo that was almost a short-sale to an investor, but he backed out at last minute. The bank was about to accept the offer at $42,500 short of what I owed. Now I am wondering if I should see if the bank will let me refinance at the $69,500 that they were willing to accept from the investor? That way I could keep it and not go through foreclosure…any thoughts? Is it too far from reality to even bother with? comments are appreciated.
Chris again. Does passing of this act (see URL below) mean I won’t have to pay taxes on the 1099 I receive from my lender?
http://www.earthtimes.org/articles/show/news_press_release,192625.shtml
Hi Shauna,
Did you have an agreement, in writing, from the lender, stating that they were going to “forgive” the $42,500?
I am guessing “probably not.” Banks just don’t arbitrarily decide to forgive the short fall. Most homeowners are asked to pay that back in regular monthly installments as part of a new unsecured note.
Banks can’t just start to write off, or “forgive” everybody’s shortfall because that would have a dramatic effect on a bank’s financial stability.
Likewise, a bank then would not just decide to allow homeowners the ability to “knock several thousand” off the existing debt in order to refi.
Your question about reality is a good question: This is not living in reality.
Look at it from your perspective: If you loaned someone $69,500. would you be willing to knock off $27,000 and take that as a loss?
No. None of us would: we would all want our $27,000 back. A bank owes duties to its shareholders to maximize profits, and, in this case, to minize the amount of the loss.
Hi Chris,
Thanks for stopping by again.
A: that law has not entirely passed the house and the senate. I think it’s just made it past the house. Watch the news out of Wash D.C. closely for any updates. There might be some time deadlines that may or may not make you an eligible homeowner.
Have you already received written confirmation that your lender will “forgive” the shortfall?
“Look at it from your perspective: If you loaned someone $69,500. would you be willing to knock off $27,000 and take that as a loss?
No. None of us would: we would all want our $27,000 back. A bank owes duties to its shareholders to maximize profits, and, in this case, to minize the amount of the loss.”
I would ‘want’ my $27k back, but would be open to forgiving it depending on the scenario. If the debtor had missed several payments and the outlook for catching up looked bleak, I would definitely be open to ’settling’ sooner for a $27k loss rather than wait and hope for ‘later’ for them to catch up, the market to rise, etc.
If I were the lender (personally, not as a bank) and the option instead of settling included going through lenghty foreclosure efforts, dragging the time frame out, and hoping to sell closer to what was owed, I would look very seriously at opting for the forgiving of the $27k (if the borrower was killing any deal related to signing a new note).
If that were the only way to get it done, I’d consider it. Face it, if the client couldn’t pay a secured note of ~90k, why would anyone realistically expect them to pay on an unsecured note of $27k? That would just be more paperwork for the bank to keep up with and come over a couple of months later when the client doesn’t pay those payments after the short sale is completed.
Hi John,
Banks have a duty to their shareholders to maximize profits (within the bounds of the law) and a duty to their regulators to make sound business decisions.
If banks decided to just suddenly forgive everyone’s debt, then why would any of us pay on the contracts we sign?
Why pay our credit card bills to the banks? Why make our mortgage payment….if our neighbor is able to walk away from 27K (AND not have to pay taxes on it) then why shouldn’t we?
Granted not everyone is going to approach things from this perspective, but I’m trying to help Shauna see that a bank has to try and minimize loss/maximize profit. They areduty-bound to do so.
Sure, every now and then there will be a situation that is so dire that a bank may opt to forgive the shortfall, but homeowners ought not move forward with a false belief that ALL banks will ALWAYS forgive everyone’s shortfall.
Trust me when I tell you that short sales are always better than foreclosure! I have a client where I short sold their home in July of 2007. It was almost a $100,000 loss for the lender on a $250,000 house. It’s now October, and I have the same client looking for a new home. They have been just approved for an FHA mortgage.
I’m not sure what the exact credit damage a short sale does to your credit standing, but it can’t be that bad. I do about 10-15 short sales per month and that is only increasing daily. It is a way for people to get a fresh start and work out the issues with their home.
The issue is NOT that the people that need a short sale are irresponsible. They simply got caught in a market where lenders where making it way to easy to obtain money for any home at any price. With the ARM mortgages that is. Now that the market is correcting itself and ARM mortgages are swinging to ridiculous intrest rates and payments, what options do these folks have?
With guideline changes on mortgages these folks can’t refinance becuase they have no equity. Yes, they made the choice to purchase this home, but have now become a victim of the market.
The tax issue is being addressed in congress now. They plan to NOT give the debt forgiveness 1099 anymore. And for good reason. If you read the IRS page, it’s clear that if the person is insolvent (assets no longer exceed their liabilities), the tax on debt forgiveness goes away anyway. I ask, who out there short selling their home is not insolvent?
I’ve been doing this a long time and yes, there are always people that abuse the system, but what is happening in 2007 is mostly good people in bad situations. Hold on folks, 2008 will be real estate anarchy!
Just wanted to clarify a few of my points….
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Banks have a duty to their shareholders to maximize profits (within the bounds of the law) and a duty to their regulators to make sound business decisions.
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Jillayne, I totally agree.
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If banks decided to just suddenly forgive everyone’s debt, then why would any of us pay on the contracts we sign?
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I never suggested that banks should “suddenly decide to forgive everyone’s debt”. I don’t think anyone here thinks that should be done, nor is it the expectation of someone in a short sale situation to assume that would be the bank’s reaction.
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Why pay our credit card bills to the banks? Why make our mortgage payment….if our neighbor is able to walk away from 27K (AND not have to pay taxes on it) then why shouldn’t we?
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That’s adding quite a bit of leeway to my example, but, I should also clarify… I certainly think that everyone should pay their debts as agreed. However, IF a borrower had gotten themselves into a situation of several recent missed payments on a property that was upside down and they were in a short sale situation, my belief is that in their situation, they probably wouldn’t be the best candidate for the bank to expect FUTURE payments on a loan after a potential short sale is negotiated and closed.
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Granted not everyone is going to approach things from this perspective, but I’m trying to help Shauna see that a bank has to try and minimize loss/maximize profit. They areduty-bound to do so.
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I’m definitely not arguing that point - I agree with you and I’d venture to say most of the readers here (hopefully) understand that as well. The bank isn’t going to arbitrarily get every short sale transaction request and stamp “approved/forgiven” and go on with their day. It would only be after careful examining of the entire file and crunching the numbers both ways of foreclosure vs. short-sale, and then 1099 / debt forgiveness vs. signed note at closing (or a hybrid, partially forgiving the short amount and having a note for the difference).
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Sure, every now and then there will be a situation that is so dire that a bank may opt to forgive the shortfall, but homeowners ought not move forward with a false belief that ALL banks will ALWAYS forgive everyone’s shortfall.
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Couldn’t agree more, you are right - especially with many websites touting short sales as an automatic ‘wipe the slate clean’ type of catch-all answer consumers may be (incorrectly) thinking that no matter what their situation is, they can just do a short sale and solve everything. That, as you mention, is certainly not the case and hopefully the consumer will realize that early enough in the process not to have false beliefs about the outcome.
Hi John,
Thanks for stopping by again. All these foreclosures nationwide make me wonder about our national banking system.
What happens when banks end up losing so much money on foreclosures that they have to take a loss on their quarterly earnings, and then eventually lower the dividend paid out to shareholders?
I think, although I am the first to admit that I am not an expert in such matters, that banks may end up putting themselves in a position to not forgive short sale debt but instead, they’ll be faced with having to justify to their regulators that they are TRYING to collect the shortfall.
Just a hunch..What do you think?
I see where you are going with that, and it is an interesting thought.
Much of this debt was wrapped up into mortgage backed securities sold to investors on the secondary market (many times at top shelf ratings, even if it was a bundle of subprime loans) or was insured by PMI companies.
I think that for banks, it will just come down to the numbers, they really shouldn’t have to justify to regulators about trying to collect, they just show that the decision they made on that particular file resulted in less net loss than the choice they didn’t go with.
That’s a really over-simplified answer to a very complicated question though. Several banks have already passed on ‘one time’ chargeoff losses to shareholders this quarter and last, and I think we’ll see more of that over the next few earnings periods.
Jillayne -
We have discussed several times in the past, information on 1099’s and how they affect a homeowner who has to sell his/her home in a short sale.
I hope you find this post relevant. Feel free to repost any or all info you find relevant.
Ralph
oops… the link is in my name above, or here http://activerain.com/blogsview/248686/HELP-My-lender-is
I was approached by a reader who notified me of an anonymous podcast made by a Realtor who goes by the name Agent 23 regarding a short sale case study in, I’m guessing by what I heard, the state of California. It’s 70 minutes long, and avail in 4 parts. It is interesting to hear Agent 23’s perspective on short sales that he’s seen go through/fall apart.
The downside is that Agent 23 demanded anon