Question of the Day: Pre-Approvals on Short Sales

May 9, 2012 By Jon Griffith Leave a Comment

My apologies to a recent visitor who I missed in chat . Their question was:

Is there a particular type of loan that is most likely to receive a pre-approval price without an offer?

The real answer to this question is that Pre-Approvals don’t really exist. Each lender is different, each loan servicer is different, and each investor is different. The type of loan really has no bearing on whether or not an investor will evaluate a property prior to there being evidence of home owner distress. Sometimes lenders will tell the home owner what price to list the house at, but this is extremely rare. So rare, it’s not worth thinking about.

Until your creditor has evidence that you are in financial distress (missed payments, application for loan modification, etc.) they have no reason to put any effort into a solution for you. Truth be told, any “solution for you” is really a method by which the bank will attempt to collect as much money as possible before losing you and your secured asset.

The best way to kick off the short sale approval process with your lender is to present them with all of the facts, including a valid offer, all at the same time. It’s like serving a tennis ball. Whack it in their direction with conviction and facts (like, this ball is traveling fast and if you don’t react you’ll miss it) and they’ll have to respond in order to minimize their losses. That’s something they are interested in doing.

The type of loan product that you originally secured has absolutely no bearing on whether or not your home should be approved for a short sale or not. What it CAN affect are the potential legal and tax implications as a result of an approval.

So essentially, no. There is no particular type of loan that is more likely to receive a “pre-approval” over another.

Filed Under: Short Sales Tagged With: approval, home, house, short sale

Arizona Short Sale Addendum Part One: Introduction to Terms

April 20, 2012 By Jon Griffith Leave a Comment

As I encounter short sale listings from the buyer’s perspective, I run across many different variations of the Short Sale Addendum to the Purchase Contract. More often than not, in the additional terms and conditions of the short sale addendum, there are redundancies in language that confuse the contract.

Upon reading one such “custom” addendum, I was inspired to clarify the basics of a boiler plate Arizona Association of REALTOR®S Short Sale Addendum as it is written.

Shall we begin?

Lines 1-4: Identity

As with all other contract documents, this section outlines the Buyer, Seller, Property Address and Date. Pretty simple, yet often left blank by lazy real estate agents.

Note: A bullet proof contract will be complete and should indicate the level of excellence your agent strives to achieve.

Lines 5-6: Definition

“The following additional terms and conditions are hereby included as part of the Contract between Seller and Buyer for the above referenced Premises. (See how important it is to be thorough.) Delivery of all notices and documentation shall be deemed delivered and received when sent as required by Section 8m of the Contract.”

Pretty simple.

Lines 8-15: Short Sale Contingency (condition)

“Buyer and Seller acknowledge that there is more debt owing agianst the Premises than the purchase price. Therefore, this Contract is contingent upon an agreement between the Seller and Seller’s creditor(s), acceptable to both, to sell the Premises for less than the loan amount(s) (“short sale”). Buyer and Seller acknowledge that it may take weeks or months to obtain creditor(s) approval of a short sale. Nothing shall limit a Seller from accepting subsequent offers from subsequent buyer(s) and submitting the back up contract(s) to Seller’s creditor(s) for consideration. All parties understand and agree that Seller’s creditor(s) may elect to allow the Seller to sell the Premises only to the holder of the Contract with terms and conditions most acceptable to creditor(s).“

Again, quite simple, and quite clear that to lift the contingency, only one thing needs to happen and that’s that the seller and seller’s lender come to an agreement regarding the short sale. This information, contrary to popular bad-habit in the real estate community, is not incorporated into the purchase contract and therefore neither the buyer, buyer’s agent nor brokerage, nor buyer’s lender need to see the details of this agreement. Many people have a hard time grasping this concept. You’ll notice the stricken lines. This provision is in the addendum by default, but quite honestly, leaving these terms in causes huge headaches and essentially makes your offer as a buyer quite worthless. In order to show a buyer that a seller means business, I always advise this modification. We don’t want to give the lender any say over which contract will be approved, and we certainly don’t need to submit more than one offer to a scatterbrained lender at a time. That would prove disastrous and very confusing on their end.

Line 16-20: Documentation to Creditor(s):

Seller shall submit to creditor(s) a copy of this Contract, including this and other Addenda, and any other documentation required by the creditor(s) for approval of this sale within five (5) days after Contract acceptance. Seller agrees to diligently work to obtain short sale approval and will promptly provide the creditor(s) with all additional documentation required, including an appraisal, at Seller’s expense, if required. Seller instructs creditor(s) to provide approval status updates to Broker(s) and Buyer upon request.

What the…okay, this outlines one very important aspect of real estate contracts. Notice that contractually, your agent is not the one responsible for handling this task, yet it is what we offer you as a service because we are familiar with it, and we know that you don’t have the time nor patience to learn the process, and quite frankly, most people would give up before getting the job done. So we do it for you, but you are still the one responsible for making sure it happens. This is why it is absolutely critical that you respond quickly to any requests we have for documentation from you as you are contractually obligated to perform. If we ask for something from you that’s critical to fulfilling these terms, we’re doing so because we’re looking out for your best interests, and you need to trust that, and provide us with what we ask for quickly.

That wraps up the first half of the Short Sale Addendum:

Identity
Definition
Short Sale Contingency
Documentation to Creditor(s)

In the 2nd article in this series, I’ll go over the following topics:

Terms Upon Acceptable Short Sale Agreement
Buyer Cancellation
Legal and Tax Advice
Unfulfilled Contingency

And finally, I’ll wrap it up with the section that ends up causing the most confusion because of the many variations that agents write:

Other Terms and Conditions

Filed Under: Short Sales Tagged With: approval, buyer, contract, short sale

The Importance of Acting Now: Tax Relief Is Coming to an End

April 9, 2012 By Jon Griffith Leave a Comment

Debt forgiveness is a beautiful thing both emotionally and relationally. The mathematics of it are not so friendly. Why? Because of the IRS and because the Tax Relief act of 2007 is coming to an end.

How The Money Flows When Borrowing

When you buy a house with a loan, a lender agrees to purchase the item with their money with the understanding that if you don’t pay them back, they get to take whatever has secured the note. In this case, your house is the security. So, if you don’t pay them, they can sell the house and recover their investment, or a portion thereof.

Since the money used to purchase the home isn’t really handed to you, the buyer, it doesn’t feel like income, and as long as you pay back the note, it won’t be considered income. But, if the lender decides at any point to forgive you of the balance of the remaining note, it would be the same mathematically had they simply written you a check to buy the house directly from the seller. In that case, the money would have come directly to you and would be considered income.

The Idea of Phantom Income

So, when debt is forgiven, there’s a sort of “retroactive” income (many people call it phantom income) that is applied to you in the form of a form 1099-C (Cancellation of debt) statement. If you don’t know now, you’ll soon know that a 1099 is a tax form that declares income.

Why does the lender issue the 1099-C? Because every money transaction has two sides to it. The lender is taking a loss which they must report to the IRS in order to deduct it from their taxable income. Their loss is your gain.

What? Yep. Their loss is your gain. Think about it. Their original plan was to make a boat load of interest (their gain) over 30 years or 15 years, or whatever, as you paid back your loan. They weren’t planning on losing their money. But, since they have lost it, they get to deduct it. Since they’ve forgiven you, the balance forgiven becomes income to you in the tax year in which the forgiveness takes place.

Yikes! What Does That Mean?

It means, in short, that you may or may not owe income taxes at your tax rate on the forgiven debt. Here’s an example:

You buy a home for $300,000 and you faithfully pay for a year. During that year, the value of the house falls to $225,000 and you lose your job. You can no longer make your payments, and you go into default. Your REALTOR®, who happens to be an experienced short sale agent in your area, helps you sell your house for market value, leaving you with an agreement with your lender to write-off the remaining $75,000.

Well, the bank isn’t just going to toss that money aside without a tax benefit, so they file a 1099-C to show that you were the original beneficiary of the money that was used to purchase your home.

Suddenly you’re staring an additional $75,000 in annual income for the year, which may or may not be taxable based on your current circumstances.

Enter the Tax Relief Act of 2007

In 2007 a law was passed that offered protection against owing income taxes on forgiven debt provided you met certain conditions. That law expires on December 31st of THIS YEAR.

Why is this important?

If your home is underwater, and you’re experiencing financial hardship, you have a little more than 8 months to list, market, and short sell your home to avoid paying income tax on debt forgiveness. Unless our powers that be extend this provision, short sales, many of which are inevitabilities that home owner’s don’t yet realize due to emotional paralysis, will become very costly to the home owner.

Are you hearing me? Some of you have been sitting on the decision to short sale for a few years now…and every penny you’ve spent on your house is lost…

…the longer you wait, the more it will cost you. if you don’t act quickly, it may cost you even more that you ever imagined.

Thus, the importance of acting now must be emphasized.

Filed Under: Short Sales Tagged With: income tax, short sale, taxes

Word Is Spreading Quickly About Bank Of America

March 20, 2012 By Jon Griffith Leave a Comment

When you become someone’s client, a unique and confidential relationship is formed where information exchanged between both parties is done so with privacy and care. For instance, when you take out a loan from a bank you start a relationship with them…a master / slave relationship. This is becoming more and more evident every time your bank makes a change “designed to aid” you as a client.

In the world of short sales, we have what is known as the “3rd Party Authorization.” This is when you, the borrower, authorize a 3rd party to speak to the bank on your behalf. It’s not a power of attorney, but it’s similar. You give someone else somewhat limited access to your identity in terms of your relationship with the bank.

In a relationship where you are the client, usually you’re always right (the only exception in my opinion is at a bar after said customer drinks too much.) You make the rules. Why? Because you hold the power to be their client or not. The bank cannot force you to be a customer.

A 3rd Party Authorization is as simple as a statement to the bank, in writing, signed by you, that you are authorizing person a, b, and or c etc., to speak on your behalf about your account. In fact, you can even call the bank and conference in a 3rd party who can then speak on your behalf for that phone call only.

Bank of America is issuing a new 3rd Party Authorization form specific to Short Sales which will soon be required. Apparently they are calling it a “standard” form, but if you ask me, a standard spans many brands and companies and is not specific to one. This new 3rd Party Authorization form is BofA’s form, not a standard form. If they really wanted to develop a standard they’d work with other banks to come up with a true equalizing standard.

(Note: As I’m writing this, I’m thinking about some of the other “practices” in the Short Sale world that don’t make sense.“)

There are two notable points about this form. The firstly, it’s specific to Short Sales. It’s not a general 3rd Party Authorization. Secondly, the form requires that, in terms of Short Sales, all parties MUST either be a licensed real estate agent, or attorney.

The form can be found here, if you’d like to review it.

Filed Under: Short Sales Tagged With: Party Authorization, privacy, short sale, short sales

Short Sale Practices that Don’t Make Sense

March 20, 2012 By Jon Griffith Leave a Comment

Okay, I’m not going to go into detail about the decisions that banks make that don’t make sense. That’s not what this post is about. Rather, as I think about the new Bank of America Short Sale 3rd Party Authorization form that is soon to be required, I am reminded of a few other things that we cope with in short sales that don’t make sense, such as the following:

One Must Be Licensed

Someone, somewhere said that in order to negotiate a short sale payoff, one must be either a licensed real estate agent or an attorney. This makes no sense to me. A real estate sale and a debt settlement are independent of each other. When you sell your house, the proceeds satisfy the security against the property. If you owe more than your house brings, payment of the difference is negotiated by the seller and the seller’s lender. This is the short sale. In my opinion, the only part of the transaction that requires a real estate license is the sale of the home.

Hypothetical: What if the seller of the home puts his house on the market as a For Sale By Owner property, finds a buyer, then negotiates with his lender a short payoff of the note, and closes the deal without the use of a real estate agent? Does he need to be licensed to do so? Does he need to be an attorney? This would be absurd.

Hypothetical: A seller of a distressed property who is horrible at negotiating has a buddy who he knows is great at handling people on the phone. He puts his house on the market without the use of a Realtor, gets an offer, has his buddy conferenced in on every call to the bank, and closes the sale for less than is owed. As a thank you, the seller, after receiving his next paycheck, takes his buddy to San Diego for the weekend…clear consideration for the help he gave. Does his buddy need to be licensed?

It seems the difference between needing a license and not needing a license is consideration. What doesn’t make sense to me is what a real estate license has to do with settling a debt.

Expiration Dates on Approvals

I suppose I can understand that a lender, after issuing an approval, would want to create urgency to ensure that the deal is closed, however, it doesn’t make sense to put a time limit on closing a short sale for a property that has no pending trustee sale date scheduled. In fact, closing deadlines are already set by the purchase contract and the Short Sale Addendum to the Purchase Contract.

If we miss the closing deadline due to the buyer’s lender having some sort of problem along the way, and there’s no pending auction date, what difference does it make to the bottom line if we close a week later?

Actually, there is a small difference if there are prorated taxes involved, but if the original HUD-1 that was submitted for approval placed closing far enough out, then the taxes will already be padded, and as a result, if closing happens earlier than the original HUD-1 states, the bank will actually increase their bottom line.

Buyer’s Agents and Lenders Asking for Approval Letters

While it’s been common practice for seller’s to provide buyer’s agents with approval letters, it’s not necessary. The only argument I’ve heard FOR this practice is that the approval letter is like the Pre-Qualification letter, and as such, should be provided as evidence that an approval has actually happened.

Screech! The contract isn’t written that way. While the Pre-Qualification is indicates as an included document on the purchase contract when the buyer submits their bid, the Approval Letter is NOT an incorporated document. It can be written into the contract as a required document, but it’s not part of the standard contract. The only evidence that a buyer needs to prove that the short sale has been approved, is the AAR Agreement Notice which is specified in the Short Sale Addendum to the Purchase Contract.

Lines 22 and 23 are clear:

Agreement Notice: If Seller and Seller’s creditors enter into a short sale agreement, the Seller shall immediately deliver notice to Buyer (“Agreement Notice”).

That’s it. It doesn’t say “THE” Notice…it says notice, and that’s what the Agreement Notice is, which states:

Seller hereby delivers this Agreement Notice to Buyer pursuant to lines 22-23 of the Short Sale Addendum to the Contract. Seller and Seller’s creditor(s) have entered into a short sale agreement pursuant to which creditor(s) have authorized Seller to sell the Premises to the Buyer for less than the loan amount(s) secured by the Premises (”Short Sale Approval”).

Filed Under: Short Sales Tagged With: approval, Approvals, buyer, short sale

Stupid Things Banks Do

March 15, 2012 By Jon Griffith Leave a Comment

A mini rant for the day may shed a bit of light on one of the multitude of ridiculous requests we get from the lenders when negotiating short sales.

I am negotiating a short sale for a property located in Laveen, Arizona, recorded on the tax records as being in Laveen, not Phoenix. Due to the fact that the lender who wrote this loan in the first place got the city wrong on the note, the processor assigned to the file continually flags the file as inconsistent and repeatedly rejects my documentation because the tax records, which are the correct records, don’t match theirs.

This is a common occurrence in the Short Sale world. Banks reinforce the notion that they are unable to properly think through the possibilities surrounding the myriad of potential turbulence surrounding a real estate transaction to come to a rational and logical solution.

So, for today, I’ll be changing files, and modifying documents, hunting down parties for signatures, etc., and none of it has any bearing on the bottom line to the bank.

Filed Under: Short Sales Tagged With: note, Phoenix, short sale, short sales

Why Short Sales Will Be Around for a While

February 15, 2012 By Jon Griffith Leave a Comment

If in fact the reports are correct, and I believe they’re pretty close, then nearly 50% of the home owners in Phoenix and surrounding areas are upside down in their homes, owing more than their homes are worth.

That’s not to say that everyone is grossly under water, but underwater is underwater. The degree to which you’re under water will vastly impact your decisions regarding your future, and affect the outcome of a possible need…the sale of your home.

Life continues to happen, and that means that for who are able to make their monthly payments, a shift in circumstances may mean the need to sell their home and reconfigure their lives. If their house is upside down and they need to sell, they’ll have no choice but to sell the house short of what they owe their lender. If they have to sell, they’ll either need to cover the difference out of pocket, or ask their lender to take a loss.

The answer to the question, “how long will short sales be around” depends on the rate of growth in the real estate market and the rate of appreciation in resale values.

Let’s take a look at an example of one person’s situation in a highly desirable area of Scottsdale. Originally purchased at $115,000, this Scottsdale town-home appraised at $240,000 one year prior to the height of the market. A neighboring property with an identical footprint sold for $319,000. When the market tanked, the values dropped to their current range of $100-120K.

Why was the home appraised when it was? For the purpose of taking out a Home Equity Line of Credit (HELOC) which ultimately raised the amount owed on the property from $115,000 to $200,000.

With a town home valued at $100,000 and a mortgage balance of $200,000, there’s a HUGE gap to bridge before the home has any equity. So let’s look at an example of what happened to this particular condominium. We’ll look at it first from the “What If” angle.

What if the housing bubble had never happened?

The figure above assumes a 4% annual appreciation. The town home, purchased in 2002 for $115,000 gradually increases in value to an approximate value of $169,000 by 2012. Not bad, considering by then the amount owed on the home would be about $88,000.00. The green line represents the balance owed on the property, which should gradually decrease over time. In this illustration, there’s no evidence of a bubble, but the bubble was the only reason a line of credit was available, so the green line should continue to decrease.

But that’s not what happened. In reality, the following illustration shows a more accurate picture of what’s going on. The current value of the property is $100,000, not $169,000. So, by shifting the blue line to the right, we get a more accurate picture of how long it will take to break even on the property.

As in the previous figure, this assumes a 4% annual appreciation, but this time we’ve added the bubble, and shown that the value of the property TODAY is $100,000. Based on this, we can assume that it will be another 7 years before this house is worth what is owed…if 4% is the rate of appreciation and the home owner continues to make payments to the principal balance. Obviously longer if it’s lower, and shorter if it’s higher. Either way, this house is under water for a while. Another factor to consider is the number of interest only loans that cause that green line to remain flat. I haven’t illustrated that, but if you flat line the loan balance, you can imagine how long it will take for the blue line to reach the green line. In fact, the property may cap out at a certain value and never be worth what is owed.

What This Means

This means that if there is ANY reason that this home owner would need to sell the home (and life happens) then the sale will be a short sale. The conclusion drawn from this is that Short Sales will be around for a while.

Filed Under: Short Sales Tagged With: home, housing, property, short sales

What If Your Taxes Aren’t Up To Date On A Short Sale?

February 9, 2012 By Jon Griffith Leave a Comment

Dear visitor 789738098. I just saw that you had posted a question in my online chat and I was away from my keyboard so I wasn’t able to answer you, but I’ll be happy to address this question, as it’s a common concern.

Property taxes always take priority over any other liens. When you took out your loan to purchase the home, most likely your lender set up an impound account to hold a portion of your monthly payment to ensure that your taxes were paid on time. The lender will typically pay that bill for you out of the impound account rather than letting you be responsible for the payment. Why? Because property tax liens are a priority, and if you don’t pay them, whomever does pay them, be it the state, or an investor who has purchased a tax lien, can foreclose on the property. Lenders would be crazy to let you get behind on a few thousand dollars per year to risk losing what you owe them, which is typically hundreds of thousands of dollars.

If you have fallen behind on your mortgage payments, that also means that your impound account isn’t growing either, so when tax time comes, the lender doesn’t have your funds with which to pay the bill. But, knowing that a tax lien could cost them a fortune, they will still pay the tax bill to keep that from happening. You still owe it, unless you negotiate it away through a short sale.

In order for any property to change hands, title must be clear of all clouds. Tax liens are clouds on title. If your lender approves a short sale, that approval will be based on a HUD-1 that includes clearing up your property tax bill. There’s no way around it. The bill must be paid, and if you don’t have the money, the lender will have to pay it. They don’t have a choice. They’ll either pay it through the closing of a short payoff, or they’ll pay it when they sell the property after you lose it. The latter simply costs them more money in the long run (which is why short sales are win win for everyone anyway.)

So, if your taxes aren’t caught up when you bring an offer to the bank, rest assured the net payoff will take into account the past due taxes. In fact, in many cases, during negotiations, the bank pays the most recent tax bill which in affect changes the numbers on the HUD-1 in your favor.

Filed Under: Short Sales Tagged With: payoff, property, taxes, title