Hard to Believe Chinese Drywall Could Help You with a Short Sale!

This is a true and funny story and the names have been changed to protect the innocent (and not so innocent!)

First if you do not live in Florida you may not have HEARD of Chinese Drywall. During the go-go years of 2004-2006 with the building boom on, US manufacturer's couldn't keep up with demand for drywall for new construction. So we began importing it from China. Now a lot of homes built with the product are having "mysterious" problems with wiring and plumbing corroding behind the walls and air handlers turning black and dying. The culprit SEEMS to be a sulphur gas being outgassed by the drywall. OK that being said - today the Sarasota Herald Tribune had another front page article about the problem and how the various builders affected are handling the situation (or in some cases NOT handling it!) Here's a link to that article:

www.heraldtribune.com/article/20090423/ARTICLE/904231089/2055/NEWS

OK so that puts this in context for you. Now as anyone who reads this knows, we do a fair amount of short sales, and not surprisingly one of them is in one of the communities where one of the builders in the article above built homes. I have been being frustrated with one of the lenders on the home who has been stalling hoping that they would get MORE money out of the short sale. Today I am speaking with their loss negotiator and asked where does she live. She was in a northern state. I asked have you HEARD of Chinese Drywall? Well she had not - so I mailed her the following note with a copy of the article:

"Attached is an article from today’s Sarasota Herald Tribune concerning what is happening here regarding Chinese Drywall. Note that the article specifically mentions XYZ Builders as one of the builders with problem. The subject property was built by XYZ Builders and is in XYZ Builders (name of community) and XYZ has acknowledged this IS one of the affected communities. The value on this property could drop like a stone if we lose this buyer."

 

And Hey PRESTO - she called back and told me - she is reccommending the bank ACCEPT the current Short Sale and I should have my acceptance letter shortly!!

 

I may have to incorporate this into my strategy for ALL short sales built after 2003!  Guess they really don't WANT to own THOSE houses!

- Mike W.

DON'T SHORTCHANGE SHORT SALES

Article below points out a more and more common "flaw" if you will of short sales that are not properly managed. The seller thinks the sale has gone through and he has been released from the debt but INSTEAD, upon closer review of the short sale acceptance documents you find that all the bank agreed to was to RELEASE the LIEN on the property so it can be sold. If  not CLEARLY spelled out then you cannot assume that you are not still on the hook for some or even all of the old debt.  We see MANY investor homes where the one or both of the lenders ask for SOMETHING more than the proceeds of the sale to issue a satisafaction. I guess that is the point that needs clarifying here. A release of the lien on the house ONLY clears the way to SELL the house - that's not the same as issuing a Satisfaction of Mortgage. A satisfaction ALSO clears the lien but it is also the thing that shows on your credit report that you have, by either paying in full or in part, satisfied the debt.   Anyway - BEFORE you get to the closing table, if you are working with your Realtor on a short sale - make sure you understand what is being offered to you and what will be expected of you post closing and include in that discussion any possible TAX ramifications as well. You may elect to suffer some of this but you need to understand what you are agreeing to....see below -   Mike - W


Short sales were a hot topic at a recent meeting of the California Association of Realtors' board of directors; and brokers, brokerage attorneys, and risk managers underscored the importance of agents reviewing all short sale documents carefully. They should ensure that lenders consider the balance completely paid after the short sale goes through. Sellers who find out after the fact that they still owe the entire loan balance will be dissatisfied and possibly blame their real estate agent. Want more short sales information? Go to: http://www.floridarealtors.org/LegalCenter/HotTopics/index.cfm

Source: Realty Times (12/01/08) Hunt, Bob
© Copyright 2008 INFORMATION, INC. Bethesda, MD (301) 215-4688

 

Think Short Sales Are Only in the Subprime Market? Think Again!

Attached is a link to a Florida Association of Realtors article pointing out the changes in the market place that are now affecting the half million dollar plus and even million dollar place home market.

For us, our experience is that, like the article said a large group of these short sale homes ARE located in the sub $200K and now even sub 150K range and WERE limited to the sub prime market but we had already been seeing plenty of Shorts 500K plus and even 1 million plus as far back as this time last year.  We believe that this (Sarasota Bradenton) market was a "leader" if you will, into the downturn - having had a market stall in September of 2005 and then at first a slow erosion of price which has turned in the last 14 months or so into a pretty rapid decline in price. And while the higher end SEEMED to react a little later - we saw that end of the market come down long before the folks nationally in the markets quoted have seen them.

Perhaps too, these took longer to go short as folks on the upper end of the market had more resources to exhaust and were willing to do so to try to avoid the stigma of either a short sale or a foreclosure. We have also seen banks be a lot more agressive in asking for some "owner contribution" on the higher end as they see this type of  customer as having a better income stream to tap into or they would ask them to liquidate 401K type assets (that usually can't be harmed in a Bankruptcy but the bank is assuming the customer wants to avoid that route as well) or even that the customer has a better income stream and can afford to take back a note after the lien is released.

But as the market continues to weaken AND folks have had their 401K's and their portfolios depleted they have less resources to tap on AND are less willing to exhaust what they have left to keep a mortgage that is far bigger than the current value of the home current.

Once again, this is not the answer for everyone but if you find yourself in this position and need to understand your options you should speak with someone who has done a number of successful short sales before you get too far behind on your payments.

http://www.floridarealtors.org/NewsAndEvents/n1-111708.cfm

- Mike W.

More Ranting and Raving on Short Sales.

I had an interesting conversation today. Seems in January I spoke with a very nice lady who, like many others out there - found herself unable to continue making her mortgage payment. I explained how a short sale works and she said she and her husband would discuss it. I followed up a couple times but she seemed to have lost interest - and I moved on to greener pastures.

Today she called my office and my cell - she needs to speak with me RIGHT AWAY. When I got back to my desk I checked at the Clerk of The Circuit Court site - she is being foreclosed upon. And received a summons. The house had been "Lis Pending" for over two months.

So I did call her, and she said there must be something I can do. I said well you really needed to try to short sell this months ago. Turns out that a neighbor of hers is a Real estate agent and she decided to list with them. They had the house listed for 500,000 (appx). I checked and a list of comparables justified a price of about....333,000!!  She says, well he never got much action and nobody made an offer. I said well why is it listed so HIGH?  She says well THAT'S what we OWE on it!!!!! And that's what my real estate agent  (her neighbor) said we have to sell it for! 

Well it's NOT a SHORT SALE when you sell it for what you OWE on it. And maybe the fact that you OWE $200,000 more than your neighbors are selling their houses for is a reason your neighbor can't seem to drum up any interest in the house!  We call it a SHORT SALE when the proceeds of the sale are going to have you "coming up SHORT" against what you owe the bank!!

For a short sale to work you need to have an offer that the lender thinks is reasonable against the current value of the house - not against what you OWE on it. If you do not have ANY offers you won't have any basis for a discussion with a loss mitigator to justify a short sale. In this case the lady's neighbor/agent told her he was unable to have a conversation with the bank - that they are "Too Hard to Get Hold of". Uhhh that's your job if you're short selling - the agent needs to keep dropping the price until you have an offer you can take to the loss mitigation dept. If you don't have an offer, you've got NOTHING the loss mitigator can talk to you about so sitting for months on the market at the current loan value is downright dumb!!  And for this poor lady what that agent did is use up all of her negotiating time ineffectively marketing the home at the wrong price.

Now, with an auction date set, all I could tell her to do was, call a lawyer and start packing! (I thought the lawyer might be able to help her at least negotiate a Deed in Lieu). Even the lawyer said, they waited too long - it's going to foreclose.

I did ask her - "How many short sales has your neighbor/agent done"? She said he told her TWO. I'd say if he left the home in the MLS for six months at the loan value - he sure as heck doesn't know how to do short sales. And here is proof positive - for that agent all he has is a listing he couldn't sell. But for his customer who was not properly served - well they face foreclosure, a severely damaged credit report for seven to ten years, lots of stress and sleepless nights.

If you needed a Thoracic surgeon and your neighbor was a veterinarian but said he had handled these would you pick a neighbor so there wouldn't be "hurt feelings"? Of course not! This process is way too complicated to leave to amateurs and hurt feelings or not - this is an area, like a doctor, a lawyer or a CPA - you pick it for competence - not because they are "nice" and live close by. Those nice neighbors can now help her pack - or just say "Tsk Tsk - what a shame" as she loses her house and her credit!  And they move on to their next sale....

- Mike W.

What your agent ought to be asking YOU if you're thinking of a Short Sale.

Below I am going to paste the contents of the questionaire we have devised to help us and our client to determine if a short if right for them AND if a short sale can even be accomplished. This is pretty comprehensive but could always use improvement. If you are not prepared to answer these questions to your realtor then maybe you're not ready OR you need to establish a relationship with someone you think is competent in handling the type of information that the answers will provide.  Anyway we look forward to your comments or questions as to why we would need some piece of this answered.

 

Ann M Winger, LLC Short Sale Preparation Checklist

 

1. Is this your primary residence?
2. Any other properties? Are they in trouble?
3. If tenant occupied is your tenant aware of any problem?
4.  If this is NOT your primary residence do you understand the IRS consequences of debt forgiveness?
5. If either of the lenders required it would you be prepared to offer some lump sum or sign a promissory note to facilitate a short sale? (Not always required)
6. Are you prepared to give us permission to speak to your mortgage lenders on your behalf?
7. Name and Account Number of First Mortgage Holder:
8. Approximate Current Amount Owed:
9. Is the account current?                                       Date of last payment:
10. Phone number for lender or copy of payment coupon
11. Name and Account Number of SECOND mortgage holder if any:
12. Approximate amount owed:
13. Is the account current? Date of last payment:
14. If married is your spouse on your mortgages?
15. Did you pay prior year’s property tax?                                 Do you have proof of payment?
16. Does the lender ESCROW your property tax?
17. ANY other liens on property such as HOA or Mechanics Liens? Current with HOA?
18. What is your current monthly income?  Can you document it?
19. Tell us about all your cash and non cash assets such as 401K and stocks – so we can determine if you will be considered a short sale candidate.
20. Do you have two years worth of fed tax records to provide banks?
21. What is your “Hardship Story”?
22. Are you working with a Bankruptcy attorney, do you intend to file bankruptcy?
23. If you are working with a BK attorney may we contact them?    
24. Do you have living arrangements for when the property sells?
25. We have reviewed the Short Sale Addendum to the Listing Agreement:    
26. As I have just explained them will you be willing and able to go through with a short sale if accepted?

- Mike W.

Who or What IS a "Short Sale Specialist"?

In an earlier blog entry I tried to lay out some specifics on doing short sales as I have learned them from experience. In our local market for the last 9 months they have become a pretty regular part of not only our business but of the overall market.  We still have Realtors who say "I don't handle those" or "I hate them and avoid them" but honestly they ARE a significant piece of the market now so if you avoid them you lock yourself out of a piece of the market.

But today's entry is me RILING on what I'm seeing out there as "Short Sale Specialists".  Last month I sold a home and the other realtor was a very nice person but pretty much brand new to real estate. I represented the seller but I found myself having to answer all the buyer type questions, find them a bug inspector, tell the buyer how to read his HUD and what money to bring to closing etc. Many of these things were just falling through the cracks as the agent just had never done them before. I asked the agent how long they had been in business. The answer was less than a year and had done very few deals - none of them a short sale. But lo and behold - printed on the business card was "Realtor, Short Sale SPECIALIST".  Now if a DOCTOR was a SPECIALIST in say BRAIN surgery I would ASSUME he'd OPENED SOMEONE'S BRAIN and hopefully a LOT of them, under someone elses guidance, until he/she WAS really a SPECIALIST.

Now we have this new portion of our business and we have people who maybe even have not DONE a single deal that is a short OR they brought a BUYER to the process - which really isn't ANY more work for the BUYER'S side than a typical sale and these people are calling themselves "Specialists".

Perhaps you're thinking, what's the harm? Well there IS REAL HARM here. If you hire somebody as your realtor to short sell your house they had BETTER know how to negotiate with banks! AND remember IF they blow it - their own credit is not harmed but they can torpedo YOUR credit - and your house goes to foreclosure instead of being short which is a huge difference on your credit report.

Since we now have people who have NEVER done a short or if they have they represented the buyer is it any wonder some realtors think these are potential disasters that "never close".

So far on all of my short sales we have had only one get out and out rejected by the bank and even on that one we are right this minute "resucitating" the deal with the lender and will likely close it too. We do expect that in some cases we will not be able to get the bank to accept a deal but we KNOW how these work and we KNOW the approach to take to get banks to accept deals.  If your agent wants YOU or worse yet THE TITLE COMPANY to talk to the bank....RUN, don't walk, away from them.  Truly here is where having a good negotiator on the phone with the bank and someone who KNOWS how to put all the paperwork together is critical. 

And ASK - how many short sales have you successfully closed? Tell me about a couple - who were the banks, what ended up being the actual closing terms, how long did it take from contract to closing. What steps did YOU take to make this happen? Here's a REAL clarifying question: "Do you KNOW how to put a HUD1 statement together"? If they say they leave that to the title company...they are NOT a short sale "specialist".  If they tell you they represented the BUYER - while it's good they got a deal done - all they did was wait while the seller and his agent got the deal lined up. Truly on the buyer side it is about managing expectations - not about managing PROCESS. Keeping the buyer IN the transaction is of course critical but the lion's share of the work is with the seller. Plus if I were using a buyer's agent to DO a short sale I would want to know they understood the process from the sell side.  I have buyer's agents calling me on my short sales wanting to put offers in because their client offered on another short sale and it's been THREE weeks and they haven't heard so they are backing out. These deals take 6-8 weeks and as the banks get BURIED they are taking LONGER. You want to BUY a short sale? Plan to wait 8 weeks to a closing - maybe more.

OK I have railed enough for one day - but I KNOW I am going to be back on this topic more, and probably sooner than later!

- Mike W.

Good News If You SHOULD Have to Short Sell

On December 20th President Bush signed into law the Mortgage Forgiveness Tax Relief Act. The gist of this legislation is to eliminate the income tax due on the portion of debt that the bank "forgives" in a short sale, or a foreclosure or in certain instances where the bank agrees to refinance a new smaller mortgage and forgives the portion that the house has declined in value - which IS now sometimes taking place.

In my article in short selling I mentioned that one of the risks is that the bank would issue a 1099 to the borrower for the portion they did not recover in a short sale or foreclosure. Previous to this legislation that 1099 for debt forgiveness would be considered income in the eyes of the IRS and would be taxed at the borrowers tax rate.

This law would eliminate a taxable gain on borrowers who received a forgiveness of debt from a lender in a short sale. Normally, if a lender forgives the debt, to this extent the homeowner would have a taxable gain. HR 3648 would eliminate this "phantom income" on a borrower's principal residence. The law applies to all debt forgiven from Jan 1, 2007 and on.

Note though that this legislation is ONLY for a borrowers principal residence. MANY of these short sales here in Southwest Florida are for either 2nd homes or investment property and this does not offer any help in that case. You would of course want to consult with a tax professional before filing next year if this turns out to be in your future. And in Sarasota it's in a LOT of futures. I have 10 active listings right now and at least half ARE short sales or have the potential to be one if the market declines further. Below is a statement by the National Association of Realtors regarding the legislation.

By the way I can't emphasize enough - talk to a Realtor who has DONE short sales BEFORE you get in trouble missing payments on your mortgage. You need to understand your options and I note now that some banks are making "Deed in Lieu of Foreclosure" seem "easy" - they don't disclose that this is every bit as bad on your credit AS a foreclosure and in MOST cases there are better workarounds.

- Mike W.

http://www.realtor.org/press_room/news_releases/2007/president_bush_signing_mortgage_forgiveness.html

Some Do's and Don'ts We've Learned About Short Selling Your Home.

First of all what is a short sale? A short sale is when you need to sell your home but it will not sell for what you owe the bank AND you do not have assets to cover the short fall. In the past we haven't faced this issue much as homes continued to appreciate. Now though we have had some declines in value and in addition many people have been lured into mortgages with very low payments that were not covering the interest owed so their loan principle balance has been going up while the value of the home has gone down.

In cases like this, if you were to sell the home for less than you owe on it - you would be expected to write a check for the difference at the closing table. Not surprisingly though, homes that were financed to 95 or even 100% of their value tend to be done by folks who would not have assets to put in at the time of purchase and certainly don't have them now that they are forced to sell for a loss. So what do you do?

Well one strategy is to work out with your lender or lenders an agreement to Short Sell the property. That means that you work NOT with the banks collections department but with the team at the bank known as "Loss Mitigation". If you provide the bank with an authorization your realtor can even call the bank(s) on your behalf to try to structure this deal. Some banks though will not have any discussion about selling for a loss while the loan is being paid on time so in fact you may need to be two or three months behind. Also you as a seller will have to prove to the bank that you do not have the personal assets to cover the shortfall - which is what they obviously would prefer. Most banks though would prefer a short sale to taking the house to foreclosure, because they tend to net a greater percentage of what is owed in a short sale.

For the seller why would you prefer a Short Sale to letting the home go to foreclosure? A couple very good reasons. First IF you can negotiate a short sale the banks actually file satisfactions of mortgage even though they did not get paid in full. Second - from a credit report perspective a short sale takes a much smaller "hit" on your credit report (about a 100 point hit vs as much as 250 for a foreclosure) AND it "washes" off the report MUCH sooner. Folks have been able to buy another home in as little as 24 months after a short sale.

Once you have had an initial conversation with your lenders regarding short sale you begin marketing the home, slowly reducing the price until you generate interest and offers. But in the case of a short sale any offer to purchase has to be approved not only by the sellers but by the lenders as well. It's important your realtor makes folks aware of this. This really will add a good chunk of time to the transaction. As I am writing this most lender's loss mitigation departments are BURIED and they give themselves 45 or even 60 days to evaluate the offer you have gotten. They will probably have a disinterested 3rd party do a statement of value to make sure they are getting something close to fair. Once they approve the offer then Buyer and Seller will be given some relatively short period of time (15-20 days) to do all the inspections and arrange any financing etc and get to a closing.

OK so for a seller, if the bank approves, it allows you to sell the property for less than you owe and not have to pay back the difference - so it's pretty clear what the seller's advantage is. But what about a buyer - what's in it for the buyer? Generally speaking, for those buyers patient enough to go through the process, they can get a very good value on a home that also tends to have less wear and tear than what happens to a house that goes to foreclosure and is gaveled down on the court house steps. Foreclosures take longer and in many cases seller and lender are not on amicable terms for the last 4-5 months and the property tends to be "let go" a lot more than a short sale. In our experience banks that can realize 65 to 75% of the value of their loan tend to be open to short sale and that can mean a very good value for the buyer.

What's the risk? First off for buyers they need to know, it DOES take longer and when they do get approval and have a home inspection they can expect that the sale will be AS-IS. Since the bank is losing money and the seller has no money you will not be able to come back after the inspection and ask for ANY repairs. So you need to factor that in to your offer. If upon inspection there is just TOO much work required, be sure your agent has written in a chance for you to get out of the contract and get your earnest money back.

For sellers they need to make sure that they speak with their accountant. There are some cases where the money written off by the bank has been declared "income" to the seller in the eyes of the IRS as most debt forgiveness is - and if the bank is sending you a 1099 for the charge off you could have a tax liability.

And lastly what's in it for the Realtors? Well they get to sell a property that might not have sold at all and they may also get their buyer a very good deal while getting their seller out of a very difficult circumstance. A couple words of warning for Realtors as well. First note that the bank will almost always reduce the commission earned. As a seller's agent you want to make sure in the MLS that you make buyers aware that it is a short sale, added time will be required to get any deal done, that the sale is AS IS and that the commission "split" is subject to adjustment by the lender. This last step is key so as not to create a situation where you've committed to share MORE commission than you will be paid. If everyone understands the ground rules going into the deal than there will be less problems going forward.

So is a short sale right for you? Each individual case is different but for many sellers AND buyers it may offer a real opportunity if managed properly. Be sure you use an agent who has DONE short sales - the cost of being the Guinea Pig while your agent learns this process could be dear.