The Gap

If the net payoff on a given HUD-1 for the sale of a home does not meet the standards set by the investor as a percentage of the BPO (Broker Price Opinion) then there will be a gap.  For example, if the $100,000 offer yields a payment to the lender of $90,000 after all costs are calculated -AND- the lender is willing to accept no less than 88% of the BPO -AND- the BPO is reported to the lender at a value of $110,000 then $90K suddenly becomes 81.8% of the BPO (90 divided by 110.)  The bank will not approve the deal unless it’s 88%.  This is a general estimate and close to what many banks accept.  If 88% is the magic number, then  it means we need to bring the bank $96,800.  We’re $6,800 short.

Closing the Gap

(Often confused with the concept of counter offers in a short sale, and not always a step in every short sale process.)

There are many ways to close this gap.  One way is to continue to negotiate with the bank to prove the buyer’s offer is more realistic than the BPO report claims to be.  This is done through a BPO dispute.  It doesn’t work every time, and sometimes there’s not enough time before the house goes to auction to achieve this goal.  In some cases the market has changed enough from the time the offer was submitted to the time the bank evaluated the BPO that the buyer’s offer no longer stands up.

Another way to close this gap is to have the buyer raise their price.  This is a sensitive direction to go considering the buyer may simply walk away if they hear any talk of raising the price.

Yet another way to do this is to adjust the HUD-1, legally, to be as accurate as possible.  You see, it’s common to submit a HUD-1 with padded costs to the seller in order to have wiggle room to negotiate once you reach the stage of closing the gap.

Commission reduction is an option, but it’s the last option because we work very hard to obtain approvals for our clients and since the seller is typically not coming out of pocket at all because they’re in the middle of a financial hardship, we aim for a full commission as allowed by the bank once they approve a lower net payoff.

One last option is to have the seller come to the table to close the gap.  This is tough to do, but often can save a house from foreclosure.  This is more common when we see people strategically defaulting on their homes as they intentionally quit paying their mortgage and begin stockpiling the payments.  If this is you, my advice would be to set that money aside and consider it not available to you and to be used solely in aiding the process of short selling.  After all, the two major concerns for a seller are whether or not the lender will be able to pursue them for the difference between what the sale pays the bank and what they owe, and whether or not their tax situation will yield a tax liability for the deficiency.  The two simple questions are, 1) will I have to pay taxes, and can they sue me?  These can only be answered by the corresponding experts in those two fields…a real estate C.P.A. and a real estate attorney.

In Closing, the bank’s perceived market value of your property compared to the net payoff as a result of the sale will determine whether or not money needs to come to the table to get the deal done, and often times the bank is wrong, which is still mind-boggling, as the process of foreclosure will cost them far more than closing the gap.

The BPO

The BPO is that 3rd party opinion of value.  It can make or break the deal because banks look at this number as the letter of the law when it comes to your home’s value during a short sale negotiation.  When that opinion of value is reported back to the bank, they compare that value with the net payoff as shown on the HUD-1.  They don’t compare it to the sale price.  Remember, the net payoff is the number that matters.  If the net payoff is within a certain percentage of the BPO value, the bank will submit the offer to the investor for approval.  Most cases, if a file gets to this point, it will be approved.  The reason this is true is because most cases are Fannie Mae or Freddie Mac owned loans and they have already set standards that your servicer follows.

The Net Payoff

Let’s assume that the house you’re about to sell receives an offer of $100,000 and you owe $200,000.  I can’t stress this enough.  For the purposes of obtaining an approval from the lender, the deficiency DOES NOT MATTER.  The bank, nor anyone else for that matter, in terms of selling the home does not care how much more is owed.

What they DO care about is what the home is worth, based largely on a 3rd party opinion of value, compared to the Net Payoff.  The net is the amount of money the bank will recover once all closing costs are subtracted from the sales price agreed upon by the buyer and the seller.

In our example, the sales price bring $100,000 to the table.  Some of that goes to the brokers for their services, the title and escrow company (in Arizona they are combined,) perhaps an attorney or negotiator, the city or county for taxes, a 2nd mortgage, and perhaps other entities that have an interest in the property.  A house cannot transfer title if it is cloudy.

All records of where money goes in a real estate transaction are required by law to be reported on a HUD-1 Estimate.  This provides full disclosure to everyone involved in the transaction and is required by law.

Normally at the bottom of a HUD-1, there is a line that reads, “Cash to/from Seller” that has a positive number in it.  In other words, money left over after selling the house.  In a short sale this line needs to read ZERO, as all funds have been allocated already, with a majority of them going to the investor who holds the note on your house.

The Offer

When a house goes on the market and someone makes an offer, if that offer is less than the seller owes on their mortgage, then you have a problem.  You have a short sale.  You are going to need to ask your bank if they will accept an amount “short” of what you owe them.  There is a very methodical way to go about this process as a result of miles and miles of red tape surrounding the processing of the transaction that is different for each and every lender, and each and every investor holding a note or notes on your house.  That is why you hire someone who is experienced.  Not every real estate agent knows how to do short sales the right way.

The bank does not determine what an acceptable sales price is.  Period.  The buyer and the seller determine the sales price.  The important resulting number is the net payoff to your lender after all costs have been calculated.

At its core, a short sale is a standard real estate transaction.  A house is listed for sale at a price comparable to the surrounding market activity, including sold properties, competing properties for sale, and properties under contract.  A buyer makes an offer based on their personal assessment of the surrounding market.  Until that offer is accepted by the seller and subsequently closed, a market value is subjective.

Market Value

The market moves.  It’s alive.  It changes from moment to moment.  Our culture, driven by consumerism, is so tied to the idea that a product’s price is set in stone that the value of an item really does remain in the hands of the company or person selling it.  That’s why I so often hear people who call me off of my signs ask me “what a house is selling for.”

This is simply not true.

Price is determined by so many combinations of factors that no single entity is responsible for the asking price and you as the consumer don’t have to pay what someone asks just because they put a sticker on it.  Every product we buy and sell, including a home, is negotiable, and the value of a traded good is only worth what it was last paid for at the moment the transaction took place.  Only moments later, all of the dynamics that led to a certain price being paid for a good or service change and the process of valuation begins all over again.  That is why products that are traded more than once never have the same “most recent” price.

Market value is subjective.

Appraisals

An appraisal is a professional opinion of a home’s value.  When you purchase a home using a lender, while in escrow, the lender will order an appraisal to ensure that the home is worth at least what you’ve agreed to pay for the home.  If an appraiser reports a value lower than the contract price, your lender will not underwrite the deal unless you cover the gap with funds at closing.  You could also negotiate a lower price, or simply walk away.  Either way, it’s simply an opinion of value used to gauge the agreed upon price.  In a cash deal, a buyer might waive the appraisal, but he or she may also want to conduct an appraisal to ensure they’re not over paying for the property.

Inspections

When you and the seller come to an agreement on the price of the home you are considered “under contract.”  In the Arizona Purchase Contract there is a section called Due Diligence.  This is where your inspection time frame is defined, which is typically 10 days, but always negotiable.  During that 10 days, it is your responsibility as a buyer to conduct as many inspections on the property as you feel comfortable with.  Usually a single general inspection is enough, but sometimes the general inspector recommends that you find a specialist to confirm potential findings.  Inspections have nothing to do with the appraisal, although an experienced appraiser will often identify potential problems that a general inspector would also find.  At the end of the inspection period, the buyer writes a notice to the seller (the BINSR) with their findings, asking for repairs, backing out, or accepting the property as it is with no changes.

Both the Inspection and the Appraisal are considered contingencies on the contract that can kill the deal.  If the house doesn’t appraise, you won’t get lending, or can walk away or renegotiate the price.  If the inspection reveals a plethora of potential problems, you can also walk away or ask the seller to remedy the problems prior to close of escrow.

Both are recommended for cash buyers.  The appraisal is required when you get a loan to buy.

Here is a quick list of the Special Listing Conditions that ARMLS makes provision for when we list your home for sale:

• Short Sale Aprvl Req – Indicates that the property is worth less than what is owed on the mortgage.
• HUD Owned Property – this means that the property is owned by the Department of Housing and Urban Development.
• Pre-Foreclosure – any property that is in the 90-day period following a Trustee Sale Notice would be considered Pre-Foreclosure.
• Probate/Estate –  a process by which a will of a deceased person is proved to be valid, such that their property can in due course be retitled or transferred to beneficiaries of the will.
• Owner/Agent – we are required to disclose that we are agents if we own the property being sold.  Likewise, we are required to disclose whether or not we are related to the seller if we list their property.
• Age Rstr – the community may be in a 55+ sub-division, or retirement community etc.
• Preaprvd Short Sale – I’m uncertain why this exists, other than to convey to a potential buyer that the lender has previously agreed to a short sale at one point or another on the property.
• Lender Owned Prop – Owned by the bank, or what people commonly refer to as a foreclosure.
• Auction – just what it says.
• Court Approval Required – can anyone say law suit?  Divorce?  Bankruptcy?
• Relo/Corp Aprvl Reqd – Sometimes companies move people across the country by purchasing their homes from them and reselling them all in one fell swoop.  When this happens, since there are two title transfers, and one is the employer, they typically have to approve.

In Arizona, we also don’t have Mortgages. We have Deeds of Trust, also known as Trust Deeds. In the event that you stop paying your payments, your lender has the right to throw their hands in the air and say, “forget it! You won’t pay your bills, so we’re going to sell your house out from under you.” They don’t hire attorneys to sue you through a Judicial Foreclosure.

Most lenders in arizona will start sending you notices that you’re past due, and eventually they’ll try to scare you with a Notice of Intent to Accelerate your note, which basically means they’re threatening to exercise their right as defined in your note to call the entire note due in full. This action is done on what’s known as a Trustee Sale Notice.

A Trustee Sale Notice is issued publicly, recorded with the county, and mailed to you, and posted on your front door. From the date this is filed, you have 90 days before the house goes on the auction block.

So, rather than hiring attorneys, filing suit, and taking your home through the lengthy and expensive Judicial Foreclosure process, they simply put your house up for sale at an auction.

So then what?

Well, the bank will set an opening bid, and often this opening bid is a completely unrealistic amount. As a result, nobody will bid on the property, and the only entity that will actually buy it will be the bank itself. Once that happens, you’re out of the house. If there’s a bona fide tenant living in the house, the new owner must give them 90 days notice to vacate.

So Does Judicial Foreclosure Exist in Arizona?

Sure. It exists. In Arizona, when your your lender notifies you that they’re going to sell your home at a Trustee Sale, you have the right to re-instate the loan and get caught up all the way until 5PM the night before the auction. If you do so, it’s possible that you could again default, in which case the bank would once again issue a Trustee Sale Notice, which you have a right to re-instate. There’s a point at which you may abuse this enough that the bank would finally just say “screw it, we’re going to start a Judicial Foreclosure.” It’s rare.

Section 1c to be exact, provides for all of these.  You first define your purchase price, or the full amount you’re willing to pay for the property.  Below that, you include how much money you’re willing to put up as a deposit on the transaction to show the seller that you’re serious about purchasing the property.  This amount is released to you at close of escrow for the purpose of fulfilling a portion of the purchase price, plus closing costs.

The third line is often used to define the down-payment.  On a contract, I typically don’t write “down-payment.”  Instead, something on the lines of, “Additional funds due at close of escrow.”

When you open escrow after the contract is ratified by the seller (assuming all parties agree to all terms of the purchase contract and all parties have signed,) your earnest deposit goes to the escrow company, which you’ve chosen prior to writing the contract.  They issue you a receipt, and they hold this money through the escrow period.  You receive a receipt, and begin your 10-day inspection period (in most cases.)  Short sales are a bit different, depending on how the seller has instructed you.

When it comes time to close, you bring the difference, or the “Additional funds due at close of escrow” to fulfill your promise on the down-payment.  Below is an example of Section 1c for a house with a purchase price of $100,000.00, a 3.5% down-payment, and an earnest deposit of 1.5% of the purchase price.  Lines 9, 10, and 11 should add up to the purchase price in line 8.

The lien holder on your property is a third party to the real estate transaction.  They aren’t involved in the actual real-estate part of the deal.  They’re absolutely involved in the note that is secured by your home.  The job of getting a short sale approved involves convincing the bank that their note is secured by a property that is worth less than the amount of the note.

Technically, the seller pays the commissions, closing costs, etc.  On the HUD-1, in the seller’s column, it’s clear what the “Seller’s” responsibility is.  It’s clear what the “Buyer’s” responsibility is.  It’s also very clear that the bank doesn’t get a column.  Therefore, they do not pay anything.

The Money Flow in a Transaction

It goes like this.

1. The buyer secures funding.
2. The buyer’s lender sends money to the Escrow company.
3. The Escrow company disburses funds to the lien-holder, the brokers, and the seller.

This is a very basic example.  In a short sale, there aren’t enough funds to cover the lien holder(s), so where would the funds come from to pay the brokers and the seller?  Well, the seller receives nothing in a short sale.  The brokers get paid because they do the hard work of selling the property short.  The only way they can get paid is if they allow the seller to pay them less than they owe on the note, so the seller has the funds to bring to the broker(s) at closing.

So, while it’s the lender who takes the loss, it’s actually the seller who pays the commissions.

For a pushy sales person, the right time for you to buy a home may be RIGHT NOW!  TODAY!  Don’t WAIT…can’t you smell the steak on this grill?  But the truth of the matter is, the right time for you to buy a home is when you are able to, financially.  There aren’t any programs, tax credits, special incentives, or “great deals” that should make you feel as though you’re losing out if you don’t buy, especially when you’re not ready to handle the responsibilities associated with owning a home.

That includes when the market is down.  In fact, I would submit that the fluctuation in the market is going to affect only a few things for the buyer who is ready, and those things are location, location, location.  True, a down market (or a market where real estate is on sale, like it is now) it would be the best time to buy for someone who is ready to buy.  But, it may not be until the market has climbed a bit before you’re prepared.

Your finances should be in order before you consider such a commitment.  You should have 6 months of reserves based on the prospective home’s costs to survive if you experience an emergency.  You need health insurance.  You need to be generating income.  You need to budget and plan your retirement and your children’s college funds.  AND you need to be in the mindset that you won’t enter into a purchase contract on a home until you can put 20% down and take out no more than a 15-Year fixed rate mortgage that carries no more of a payment than 25% of your net take-home pay.  You need to have all of your debt paid off, have no car payments, no credit card balances, and no student loans.  If you’re about to get married, wait until you’ve been married for a year before buying, even if you’re financially ready.

Sound like an unreasonable proposition?  It’s very possible, provided you’ve made some good decisions along the way.  If you haven’t, and you’ve gotten yourself deeply in debt, don’t buy a house yet.  Wait.  I don’t care how “good of a deal” it is, and how “down” the market is.  You may not be ready to buy that house until the market is up, in which case, you’ll buy something a bit smaller, perhaps in a different location, but with the goal of owning the home free and clear as fast as possible so that you can pursue the next venture.

The right time to buy a home is when you have a plan that will lead you to not having payments on it.

Escrow:  1590s, from Anglo-Fr. escrowe, from O.Fr. escroue “scrap, roll of parchment,” from a Gmc. source akin to O.H.G. scrot “scrap, shred” (see scroll (n.)). Originally “a deed delivered to a third person until a future condition is satisfied;” sense of “deposit held in trust or security” is from 1888.

A simple example:

You agree to buy a car online for $10,000.  The car is on the other side of the country.  You entrust your money to an escrow company, and the seller entrusts the title to them as well.  Upon delivery and inspection of the car, you decide that everything is in good order, and you report to the escrow company that all is well.  The escrow company releases the funds to the seller, and the transaction is complete.

The Life of an Escrow

This section explains the life of an escrow during a real estate transaction, and the very first step begins with an experienced real estate agent’s ability to negotiate the right purchase price on a home.  Once that happens, the following process kicks off.

The Buyer

• Provides the Title/Escrow company with an offer to purchase (or acceptance of counter offer) along with a good faith payment called the Earnest Deposit, which is negotiable, but typically 1% – 2% of the purchase price.
• Approves and signs the escrow instructions and other related instruments required to complete the transaction.
• Approve the preliminary report or title commitment and any property disclosure or inspection report required in the purchase and sale agreement.
• Approves and signs new loan documents and fulfills any remaining conditions contained in the contract, lender’s instructions and/or the escrow instructions.
• Deposit funds necessary to close the escrow, such as the remaining down payment or renegotiated earnest deposit, etc.
• Approve any changes by signing amendments in the escrow instructions.

The Buyer’s Lender

Obviously not considered if the sale is all cash (yes, it happens, and it happens a lot.)

• Accepts the new loan application and other related documents from the Buyer(s) and begins the qualification process.
• Orders and reviews the property appraisal, credit report, verification of employment, verification of deposit(s), preliminary report and other related information.
• Submit the entire package to the loan committee and/or underwriters for approval. When approved, loan conditions and title insurance requirements are established.
• Informs Buyer(s) of loan approval terms, commitment expiration date and provides a good faith estimate of the closing costs.
• Deposit the new loan documents and instructions with the settlement agent for Buyer’s approval and signature.
• Reviews and approves the executed loan package and coordinates the loan funding with the escrow officer.

The Escrow Settlement Officer

• Receive an order for escrow and title services.
• Place order for the preliminary report or title commitment for the subject property from Fidelity National Title.
• Acts as the impartial “stakeholder” or depository, in a fiduciary capacity, for all documents and monies required to complete the transaction per written instructions of the principals.
• Prepare the escrow instructions and required documents in accordance with terms of the sale.
• With the authorization from the real estate agent or principal, orders demands on existing deeds of trust and liens or judgments, if any. For assumption or subject to loan, orders the beneficiary’s statement or formal assumption package.
• Reviews documents received in the escrow: preliminary report or title commitment, payoff or assumption statements, new loan package and other related instruments.
• Review the conditions in the lender’s instructions including the hazard and title insurance requirements.
• Present the documents, statements, loan package(s), estimated closing statements and other related documents to the principal(s) for approval and signature, and requests the balance of the buyer’s funds.
• Receive the proceeds of the loan(s) from the lender(s).
• Determines when the transaction will be in the position to close and advises the parties.
• Assisted by title personnel, records the deed, deed of trust and other documents required to complete the transaction with the County Recorder and orders the title insurance policies. Depending on the property location, the recordation of the documents may occur after the closing date.
• Close the transaction by preparing the final settlement statements, disbursing the proceeds to the Seller, paying off the existing encumbrances and other obligations.
• Deliver the appropriate statements, funds and remaining documents to the principals, agents and/or lenders.

The Seller(s)

• Accept Buyer’s Offer to Purchase and initial good faith deposit to open escrow.
• Submit documents and information to escrow holder, such as: addresses of lien holders, tax receipts, equipment warranties, home warranty contracts, any leases and/or rental agreements.
• Approves and signs the escrow instructions, grant deed and other related documents required to complete the transaction.
• Orders inspections, receives clearances and approves final reports and/or repairs to the property as required by the terms of the purchase and sale agreement (Deposit Receipt).
• Fulfills any remaining conditions specified in the contract and/or escrow instructions; approves the pay off demands and/or beneficiary’s statements.
• Approve any final changes by signing amendments to the escrow instructions or contract.

The Title Company

In Arizona, title and escrow are one in the same.  They perform both functions.

• Receive an order for title service.
• Examines the public records affecting the real property and issues a preliminary report or title commitment.
• Determines the requirements and documents needed to complete the transaction and advises the escrow settlement officer and/or agents. Reviews and approves the signed documents, releases and the order for title insurance, prior to the closing date.
• Records the signed documents with the County Recorder’s office and prepares to issue the title insurance policies.

Once recordation takes place, the home has transferred hands and the keys can be given to the new buyer.

In an article that I wrote back in 2008 on the SonoranHouse.com blog, I illustrated the financial benefits of renting vs. buying.  Here’s what one user had to say, along with my thoughts on the response:

WRONG… Renting is FAR better and Cheaper than buying a house.

Not so fast.  There are too many variables involved, and each situation is different, but the principle cannot be disputed.  Owning is a long term prospect.  Not short term.  In order to conclude that owning is better, one must assume that the property will be held for as long as possible.

1. The down payment is $20,000 OUT OF YOUR POCKET on day one. SO by purchasing a house you are immediately $20,000 POORER the day you buy your house. In contrast, you can RENT and only pay a SMALL deposit equal to 1 months rent and keep the rest of your $19,000 to use as a safety net to pay the rent with and live an easy STRESS FREE life knowing you have the rent covered for 19 months if it’s a $1K a month rental.

When you pay a deposit to a landlord, it is a fee that can never be recovered.  When you put money down on a house, you are instantly investing your hard-earned cash in an appreciating asset.  You are not spending the money.  Again, if your investment mindset is short term and you sell your home too quickly, you will certainly cut into your initial down-payment unless your property experiences unheard of appreciation in a short time period.  Not likely to happen again.  Buying real estate is a long term wealth building investment.

A rule of thumb for an emergency fund is 3 to 6 months worth of living expenses.  If your rent is $1000.00/month, you have 19 months of rent paid for, but that doesn’t take into account the rest of your expenses.  If a down payment on a house depletes your living expenses, they you are not ready to buy.  Your down payment should be above and beyond your 3 to 6 months.  So, if your expenses are $2000/month, you should sock away about $12,000.  The rest can be used towards your future down payment.  This all assumes that you are completely out of debt.  If you aren’t, then you shouldn’t be buying a house in the first place.  Most renters do not have this much money saved up and they live paycheck to paycheck, so they feel they NEED to have some sort of financial buffer to buy them time.

The problem with this is that they never get OUT of the rat race by behaving this way, and they never put their money to work for them.  They will live the rest of their lives working for their money.  What would be the difference between having 19 months of STRESS FREE living in a home that is appreciating in value versus apartment living with the same amount of a safety net?  The difference is that part of your monthly payment is being added to the home’s equity.  Some of that payment will be recovered.  NONE of the rent will.

2. The Tax Deduction is nonsense… You spend $1.00 in Mortgage Interest to deduct .10 cents off your tax bill. HARDLY a “savings” at all. Your still LOOSING .90 CENTS in interest!! WAKE UP PEOPLE!!

Tax Deductions are a poor excuse for people who are poor to continue to be poor.  The argument here is that it makes sense to pay the bank $1.00 in interest to avoid paying the government ten cents.  Obviously that is flawed thinking.  Spending 90 cents to save 10 is absolutely ridiculous.  That is why the largest mortgage anyone should be financing is a 15-Year fixed.  Obviously paying cash is the best way to buy a house.

3. When you own a house you pay PROPERTY TAXES each and every year. These taxes are about 1.5% of the value of your home or around $3000 a year. That’s $3K a year your LOOSING if you own a house.

Hmmm…let’s see.  Property taxes at $3000/annually, deductible at your tax bracket rate, or $12,000 wasted on rent.  Personally, I’d rather put the remaining $9,000 in growth stock mutual funds to offset the perceived loss, because by the time my $9,000 per year is invested over 30 years, it will pay the property taxes a few thousand times over.

4. When you own a house you pay Property INSURANCE on your house each year. This will be about 1% of the value of the home so figure $2000 a year on a $200K house.

I own a $200K home.  Taxes and insurance annually do not exceed $3000.00.  In fact, they don’t exceed $2000.00.  This has everything to do with location and tax rates.  Again, I’d rather cough up $2000/year for insurance than blow $12,000/year on rent.  So based on points 3 and 4, which add up to $5000.00, I’m still ahead with $7,000 invested annually in growth stock mutual funds.  Come to think of it, my down payment of $19,000 as used in this example will be reimbursed fairly quickly.

5. When you own a house you pay for ALL MAINTENANCE/REPAIRS/REMODELS. This means spending about 1.5% of the value of your home EACH YEAR to keep it in livable condition so figure another $3000 a year on maintenance/upkeep.

Nobody forces remodeling, so we’re going to remove that from the equation.  Deferred maintenance is a price that everyone has to pay for, whether you own, or you rent.  As the king of your castle, you determine what’s used on your property to improve and maintain it and you have a choice over the cost/savings realized from it.  By renting, you have no control over these things, and the cost of rent is at the discretion of the landlord, who can easily raise it high enough to force you out to make room for someone else as a result of increased management costs.  Owning your own home offers greater long-term housing security.

6. In order to “get your money back” out of your house you will need to SELL your house. This means FINDING SOMEONE ELSE TO BUY IT. You’ll have to pay Closing Cost, Real Estate fees, etc. and it can take a LONG TIME to find a buyer. THEN even if you sell, you will have to live somewhere so you would have to turn around and buy ANOTHER house or do what most smart people do in the first place… RENT.

False.  As a long term investment, the asset appreciates and the value of the loan decreases over time.  If you paid cash, you have an instant money making machine creating passive income.  If you didn’t, you’ll eventually reach a point at which renting your home to someone else will generate positive income above what you owe on the mortgage payment.  The tone of point number six seems to emphasize the dependence upon cash in the bank to provide a safety net.  Obviously if you’ve been able to save $19,000, you’re making more than you’re spending, so the time that it takes to sell should be irrelevant unless you’re forced to move via relocation or other circumstance beyond your control.  It’s true that if you sell too early, you’ll erase your gains because you didn’t have a long term mentality.  There is so much more risk to buying a home when you borrow, but if you are able to pay cash for a home, then I’d say you’re living well financially.  One’s intelligence is not a factor determined by the decision to rent or buy.  One’s wealth, however, is.  If you want to get rich and live free like nobody else, then you’ll invest wisely.  Renting is not investing.

Owning a house ONLY makes sense IF you could pay CASH for it. Even then, your still going to “Throw money away” on Taxes, Insurance, Maintenance, and the excess bills that come from owning a house when if you RENTED many of those bills are included in the rent.

Paying cash for a home ISN’T THE ONLY time it makes sense to buy a home.  It is the BEST practice for sure, but you’re not throwing money away on taxes because your home is appreciating in value, and in theory, you’re renting that home out, collecting $1000.00/month rather than spending it.  Can you imagine how nice it would be to be able to put $12,000.00  less a few expenses every year without having to work for it?

The fact that there are additional bills when you own versus renting is also a false assumption.  Do the math over a long period of time.  Take the appreciation of real estate and the potential passive income from owning a rental and see where it would be in 30 years if invested wisely, long term.  Compare it to the real costs of owning.  Remember, we’re talking about ownership versus renting.  We’re not talking about owning a high cost property that has no potential to generate future income.  That would not be a wise investment.  Of course, you could just keep on throwing your hard-earned money away.  In fact…

…I’ll look forward to renting one of my properties to you because you sound like the perfect tenant.

Failure to Provide Documentation

Your REALTOR®’s job is to help you sell your home before it forecloses.  This means marketing it well, pricing it right, attracting an offer, then submitting the offer to the lender.  The process for each lender is different, but similar.  There is one consistent factor that will slow down a short sale every time and that is the failure of the Seller to provide their REALTOR® with the documentation that your lender requires in a timely fashion.  Every day you wait to provide that information is another day closer to foreclosure.  When your REALTOR® asks you for documentation, make sure you provide it as quickly as possible.

Bad Broker Price Opinion (BPO)

One of the first actions that the lender takes on your house is ordering a Broker Price Opinion on the property to get a bottom line number from which negotiations can be based.  BPO agents are many, and as expected, when you’re dealing with a lender who doesn’t know the market, you’re also dealing with a lender who doesn’t know that the BPO agent they’ve hired to provide the price opinion may also not know that market.  If the BPO comes in at a price that your REALTOR® knows is invalid, or off-base, it places more of a burden on them to provide substantial data to prove that the offer that you’ve received is a fair market value offer.  If you can’t prove that, then the buyer will need to increase their price, or you’ll be looking for a new buyer, and that eats up valuable time.

Poor Pricing Strategy

Your REALTOR® should have a pretty firm grip on the market where your property is located.  This will enable him or her to develop a pricing strategy within the given time frame to lead the market in aggressive yet fair market pricing in order to attract an offer as quickly as possible.  You’re selling short, so price is of little or no concern to you, as you won’t be seeing any of the proceeds.  Your goal is to get out of the house as soon as possible.  Follow your REALTOR®’s advice on pricing and price adjustments, provided he or she knows what’s going on.  If they don’t, move quickly to find someone who is qualified.

Slow Response Times

In a real estate transaction, there are literally a dozen people involved in the process.  In a short sale transaction, there are even more people involved.  In fact, the people at the bank are probably the most likely to delay the process, and that’s pretty much a guarantee.  It’s important that you have someone on your side who is quick about getting the information that you were quick to provide to the lender.  It’s also important that your REALTOR® have the experience to orchestrate most of the transaction, including being involved in the buyer’s side of the transaction.  Buyer’s lenders are the second most liable party in the loss of time throughout the transaction.  Some of these you’ll have no control over.

Mortgage Insurance

If you don’t have mortgage insurance on your note, it’s possible that the investor who purchased your note took out a policy without you knowing.  This is perfectly fine for them, but once the loan servicing company (the company that you send your payment to) approves the information that they have received from you and your REALTOR®, it’s time for them to submit the file to the investor.  If the investor took out a policy on his or her investment, then they will have to deal with the approval of the mortgage insurance company, and that can be difficult, but possible.  Many times MI companies will ask you to sign a personal guarantee to pay back a portion of the deficiency (what you’ll still owe after selling) instead of releasing you completely.  I work hard to make sure this does not happen.  After all, you’re selling your home for less than it’s worth, and you’re doing so because you don’t have any money.

In a real estate transaction, there are literally hundreds of things that can stop everyone in their tracks.  The five short sale obstacles that I’ve offered you here today are some of the most common hiccups I’ve experienced.

Let’s do a backyard bargain example of escrow.  Bob is selling a lawn mower for $400.00, and Joe wants to buy it, but Joe and Bob don’t know each other very well.  They both, however, know Fred very well.  Joe has $50.00 in his pocket, but he’ll need to come up with the balance by borrowing it.  He’ll also need to have a mechanic take a look at it before he commits to buying it.  Bob accepts $50.00 from Joe to hold the lawn mower until it is inspected and the loan comes through, but since Joe doesn’t know Bob very well, Joe tells Bob that Fred will hold the $50.00 for both of them until the deal goes through.  Joe gets the loan, inspects the lawn mower, and decides to move forward with the purchase.  Joe’s bank wires the funds to Fred, Fred tells Bob that the funds are good, and Bob tells Fred that it’s okay to release the lawn mower to Joe.

As a buyer or seller, it’s important to be sure that all of the conditions of the property sale have been met before the property and money changes hands.  It is:

“A transaction where one party engages in the sale, transfer, or lease of real or personal property with another person who delivers a written instrument, money or other item(s) of value to a neutral third party.”

In the case of real estate in Arizona, this would be the Title/Escrow company.  The escrow company holds the money or the items until a specified condition has been met, at which point the item(s) or money is released.

The escrow holder, who is impartial to the terms of the transaction, carries out the written instructions given them by the people involved in the transaction (the buyer and the seller.)  The instructions are in the terms and conditions of the purchase contract.  Included in this is the receiving of funds and documents necessary to comply with those instructions, and completing or obtaining the required forms and handling delivery of all of the items to the proper parties upon a successful completion of the escrow period.

When all of the instructions have been carried out, including providing tax statements, loan documents, earnest deposit(s), and other particular services to be paid to principals to the transaction, a successful closing can take place and the property ownership transfer can be recorded at the county recorder’s office.  This is when title to the property changes hands and title insurance policies are issued.

NOTE, as of February 2011, the Loan Status Report is no longer part of the Arizona Residential Purchase Contract.  There is a Pre-Qualification form that is used instead.

In Arizona, our Residential Real Estate Purchase Contract includes a section for financing that requires a document called the Loan Status Report be included with the contract if financing is being sought by the buyer.  If the transaction is a cash transaction, we skip this requirement.

The Loan Status Report, as required by Section 2d, Lines 62-63, which states that:

“The AAR Loan Status Report (“LSR”) with, at a minimum, the Buyer’s Loan information section completed, describing the current status of the Buyer’s proposed loan, is attached hereto and incorporated herein by reference”

is required if you’re seeking financing.

Why?  Because the seller needs to know that you’re serious about buying the house, and that you’re actually able to buy the house.  When you open escrow, the status of the property will be changed from Active, to either Active with a contingency (AWC) or Pending.  This makes it less likely to attract attention, and essentially “takes it off the market.”  Time is money, and of the essence in a real estate transaction. 

Feel free to download a sample LSR today!

[download id="4" format="1"]

When a buyer comes to the table on a listing that I have taken, we require that they put some skin in the game.  After all, the listing agent does most of the work to obtain lender approval.  Of the buyer’s earnest deposit, which could be $1000.00, $5000.00, $10,000.00, you name it, we require that a portion of that deposit become non-refundable from the date of contract acceptance.

Remember, contract acceptance and bank agreement are two different events.  A purchase contract is accepted when the owner says, “yes, we believe that this price will be acceptable to the bank.”  A bank agreement to sell occurs when the bank says, “yes, we are willing to let the house go for that price.”

In Arizona, the buyer’s due diligence time line, which by default is 10 days in the standard purchase contract, does not begin until the bank delivers approval to sell.  That doesn’t mean that the offer hasn’t been accepted.  Remember, acceptance is in the seller’s hands, not the bank’s hands.

Why Open Escrow Before Bank Agreement?

We do this because we require a non-refundable portion of the earnest deposit to be held in escrow during bank negotiations, and that amount must be held in escrow.  Requiring the deposit ensures that the buyer is serious about buying the property and protects us from accepting offers from buyers who are throwing out multiple offers on multiple properties in hopes of catching just one property.  A buyer needs to be prepared to wait it out, and willingness to put $500.00 on the line is typically good enough for us to begin the work of seeking lender approval for the sale.  If the buyer walks, they have something to lose, and our time spent working is not spent in vain.

Some Title Companies Won’t Do This

That is true.  I have been turned down by title companies who say they will not open escrow prior to the bank letter of agreement.  Fortunately, there are smarter title companies out there who know that the industry is in a healing cycle, and if they turn away business, they’ll go out of business.  It’s in their best interest to work with us, and most of them do because they understand how much  work we do.

Others Will

One of the reasons title companies DO participate is because listing agents develop relationships with reputable, skilled officers who can get the job done quickly and efficiently.  While the buyer is the one who typically chooses the Title company to use, the good listing agents have developed systems designed for success that would be complicated by using just any old title company.  I can continually send business to a smaller group of escrow officers to ensure the short sale process is as smooth and successful as possible.  As a buyer’s agent, knowing that the listing agent on a short sale has a history of successful closings with a particular Title company assures me that it’s okay to direct my buyer to that escrow company.

Foreclosure occurs when the bank takes your home back because you went too long without paying them.  They do this because their money is tied up in your home, and you’re no longer profitable for them.  The last thing a bank wants is to own your home.  What they want is steady cashflow because they make money when they lend your cash to other banks.  If they don’t get paid, they take your house, then they auction it off, and then they come after you for the difference.

The Auction

When the home is sold at auction, it brings less than market value, typically.  This means that there’s a deficiency that you are responsible for.  That’s the amount that you still owe on the mortgage above and beyond what the home brings at auction.  Ultimately, this could lead to a law suit, a judgment against you, and some sort of lien or wage garnishment.  Either way, the bank will come after you.

In the process, you lose.  Your credit is destroyed, and you’ll be unable to borrow money for five to seven years.  This is a bad thing.

The Short Sale

If you are headed down the road to foreclosure, consider attempting to sell the home before the foreclosure happens.  In the housing industry, this is called a short sale, because you’re going to be asking the bank to accept less for the home than you owe.  You’ll be short the extra cash.  IT DOES NOT MEAN IT HAPPENS FAST.  “Short” does not refer to the amount of time it takes to get approval from your lender to do this.

Why Sell Short?

Why the hell not?  You’re going to foreclose, which is horrible for your credit, so why not attempt to reduce your deficiency by selling the home before the bank gets its hands on it.  The lender is going to sell the home for less than market value, and there are attorney’s fees attached to it which means your liability after all is said and done will be greater than if you had a a REALTOR, someone like myself, list your home, market it, and get it sold for as much as possible.

We Don’t Choose Between Foreclosure and Short Sale

100% of the homes that are foreclosed upon have a mortgage.  ALL homes that are headed towards foreclosure can be sold short of what is owed.  When we speak of Short Sales, we aren’t comparing them to a Foreclosure and then choosing the best option.  If you don’t pay your mortgage, you are on a time line of foreclosure.

A recent caller to the Dave Ramsey show had the idea that a “Short Sale” was a process applied to a financial hardship that was different than foreclosure.  Here’s the difference.  A foreclosure is the result of complacency.  Don’t pay your bill, and your bank will boot you out of your house.  A short sale is what you do to prevent a foreclosure, if you are unable to pay your bills.

A Short Sale Will Not Hurt as Much

It’s true.  If your home is worth less than you owe, whether you can afford the payments or not, if you have to sell it, you have to sell it for less than is owed.  If you don’t have the money to cover the difference, you will be required to get approval from your lender to release the home to a new owner.  YOU HAVE A MORAL OBLIGATION TO PAY YOUR MORTGAGE PAYMENT.  Walking away from the house is a breach of contract.  Asking the bank to allow you to sell for less is not.  The consequences to your credit, and your tax bill when you ask your lender to forgive you of the remaining balance after you have an offer on your house for less than you owe will make the difference between having a foreclosure on your record, with an inability to borrow for up to 5-7 years, and the ability to borrow within 2 years.

Don’t be a fool.  If you’re headed towards foreclosure, try to sell short before the auction date.  Your outcome will be much better.

This does not make sense. If you’re a buyer, and your agent writes a contract on a short sale, or any other home for that matter, take into consideration that line 362 of the Arizona Residential Purchase Contract is where you set the time limit for the seller to accept your offer, not for the bank to approve the short sale.

Seller Acceptance

When you write a contract, you give the seller a time limit to respond to your terms.  If the seller does not respond within that time limit, the contract is essentially dead.

Contract Acceptance Time Period © 2009 Real Scottsdale Living

Bank Approval

Without Seller Acceptance, bank approval cannot be sought.  The process goes in that order.  First, you write your offer and you give the seller a specific time period in which they must respond to your offer.  Then, when there is an ACCEPTED contract, the offer is submitted to the bank for approval.  Bank approval is what takes time.  Seller Acceptance does not take that much time.  Unless you instruct your agent to do so, setting an acceptance time limit of 60 to 90 days won’t help you.

It is in everyone’s best interest to move quickly through a short sale transaction and that includes a reasonable, realistic time frame given to the seller to accept your offer.

Remember that when the seller accepts your offer, all they’re saying is “yes, we agree that this amount will probably be satisfactory to the bank, and we’ll submit it after we accept it.”

Don’t get an accepted offer confused with a short sale approval, also known as a Letter of Agreement.

I recently presented an offer to my seller that named a month as the cut off date.  When I asked the buyer’s agent what their time limit really was, it was made clear to me that the buyer’s agent didn’t know how short sales worked.  They said that they just thought that they would give the bank enough time to respond and that they thought their offer was going to the lender for acceptance.

This is not how it works.

So, you say, “What are the effects of a short sale?”

Firstly, as a REALTOR it is my responsibility to understand as much about the legal implications as I can, but I can assure you that I am not an expert in legal issues, and I am not a CPA, so take what I write with a grain of salt and come to your own conclusion between your attorney and your tax advisor before making any extreme financial decisions relating to your real estate.

My job is to effectively market your home and successfully negotiate with the lender’s and/or lien holders on your property to work towards selling it in a timely manner to help you avoid foreclosure.

What are the effects of a Short Sale?

The list could go on, but basically, at the core, the first and most obvious effect of a short sale is that you’ll be selling your house for less than you owe, which leaves a deficiency.  Your income taxes can be affected, the neighborhood values will be affected, etc., etc.  For now, I’ll just answer some common personal questions regarding the results of a short sale.

What is a Deficiency?

That’s how much more you still owe the bank when you sell your home.  For example, if you sell your home for $100,000 and you owe $150,000 then you have a $50,000 deficiency.

Can the Bank pursue that Deficiency?

Yes.  The bank can do whatever they want.  Whether or not they succeed will depend on the governing laws in your state.  Be sure that you check with a qualified attorney to determine if the bank can successfully pursue a judgment against you.  Contrary to what people have told you, this is not a black and white issue and each situation, each lender, and each transaction is unique.

Whether or not the bank can pursue a judgment against you involves many different factors.  For example, if you borrowed against your home on a HELOC, you probably didn’t know that you personally guaranteed that loan.  So, when you sell short, or when you walk away and foreclose, the bank will pursue you, and they’ll probably win.  If, however, you took out cash to upgrade the kitchen, you may not have that liability on your hands.  Again, it depends on each situation.

How does a Short Sale affect my credit?

I’ve heard so many responses to this question.  The easiest answer is, negatively.  Prior to selling your home short of what you owe, if you have kept up your payments on time, you will probably not have affected your credit score.  If you think your score has been affected, please refer to AnnualCreditReport.com, where you can truly obtain your free credit report (unlike the misrepresented freecreditreport.com which I will not link to.)

How does a Foreclosure affect my credit?

Again, the easiest answer is, negatively.  The difference between a short sale and a foreclosure is the verbiage that is used by the bank on your credit report.  Each lender reports differently.  Basically, on average, someone who has a foreclosure will expect to wait from 5 to 7 years before they will qualify for conventional financing under Fannie Mae guidelines.  Someone who sells short will be more likely to qualify sooner than someone who forecloses.

How does a Short Sale benefit me vs. a Foreclosure?

When you have a deficiency, the bank will write it off as a loss.  They do this with a 1099-C.  On your end, a 1099-C is considered income.  Depending on the nature of your financial situation (whether it was a HELOC, refinance, non-purchase money, etc.) it is possible that this deficiency will be recognized as income by the IRS when you file your taxes, and that you’ll owe income tax on it.  If this is the case, whether you walked away or sold short, reducing the deficiency is the best way to go, because it means that you will have a smaller deficiency and therefore, less reported income, and thus, a lower tax bill.  Some people are protected for a limited time under the Tax Relief Act of 2007.  Please research this topic if it is of concern.

Why does credit matter?

In my opinion, credit is the financial worlds way of scoring how successfully you’ve carried debt, and we all trust the financial world, right?  We know they’re working towards our best interest, right?  Credit scores are pointless.  In fact, someone with a zero credit score can just as easily obtain financing as someone with a stellar credit score.  It’s the middle score that screws you.  Besides, the only reason a credit score is of any value is to become slave to your lender.  I personally don’t give a rip about my credit score.  Does that mean I don’t follow through with my obligations?  Absolutely not.  It just means that I prefer not to borrow money, so a credit score holds no value for me, whatsoever.

Lenders who base their decision solely on a credit score are to be avoided.  Find a good lender who will weigh your situation, look at all of the pieces of the puzzle, and make a lending decision based on that information.  Not a blanket score.

So Why Should I Sell Short?

Maybe you shouldn’t.  But, if you are considering foreclosure, at least afford the opportunity to your local REALTOR to feed his family instead of you feeding the IRS and the banks attorneys.  We do work hard to get these deals done for you.

If you have any questions about the effects of a short sale on you and your property, please feel free to comment here or contact me directly so we can discuss your situation.