Real Scottsdale Living » Short Sales

Who Pays the Commission on a Short Sale

Jon Griffith — Thu, 02 Feb 2012 05:52:09 +0000

A common question. I’ll do my best to answer it for you.

When a real estate transaction closes, there is a document created called a HUD-1 Settlement Statement. The HUD-1 is a spreadsheet of sorts that outlines the flow of money for the two parties involved in the transaction.

Who are the two parties? The buyer and the seller. On the HUD-1 there’s a buyer column and a seller column. The buyer comes to the table with money for the purchase. Costs are calculated for each party, and the bottom of the HUD-1 will show two important numbers: 1) Cash to/from buyer, and 2) Cash to/from seller.

You’ll notice we haven’t mentioned any aspect of the short sale yet. The reason for that is because the lender involved in the short sale, in other words, the investor who holds the note on your mortgage, is not a party to the real estate transaction.

They are a party to the settlement arrangement with their client, the SELLER. What? Yep, that’s right. The agreement between the seller and the seller’s lender is an independent settlement arrangement designed to make the agreement between the buyer and the seller work.

Huh?

I know. It’s a bit confusing. When there’s a lender who is owed money on a home that a seller is selling, at closing, some of the money that the buyer is bringing to the table goes to pay off the loan against the house. If the value of the home is more than the amount owed (the home has equity), then the seller will most likely receive what’s left over after paying the lender and paying closing costs. However, if the value of the home is less than the amount the seller owes, then the seller won’t receive anything. Moreover, the seller’s lender probably won’t receive full payment on the balance of the remaining loan. The only two solutions to remedy this is for the seller to contribute cash to bridge the deficiency gap at closing, or ask the lender to take less than is owed.

In other words, a Short Sale.

If the lender isn’t getting fully paid, then who pays the closing costs? Bingo. That’s the original question, isn’t it? Who pays the commission on a short sale? On the HUD-1, the line that shows how much the lender is getting at closing is calculated after all associated costs are subtracted from the sales price.

If a home is closing at $100,000 and $150,000 is owed, there are closing costs. We negotiate with the bank to take $100,000 minus closing costs.

The basic answer to the question is: The Seller pays the commission, but because there’s no money left over after paying off the lender, the lender backs off enough to allow the buyer’s new funding to pass through to the seller, thereby satisfying all fees.

Who’s eating the cost? The investor is ultimately eating the closing costs.

Short Sale Cash Contributions at Closing

Jon Griffith — Fri, 13 Jan 2012 19:39:53 +0000

On many short sales, there’s a point at which the bank will tell us that the seller is required to come to the table with cash or a promise to sign a note for a certain amount of money.

In a specific example, a home owner has been told that they are on the verge of an approval, but until they either pay $3,500.00 cash or promise to repay $7,000 in cash over 120 months (that’s 10 years,) the approval will not be issued.

What’s Presented

The bank will typically represent that the mortgage insurance company who holds a policy on the note is asking Wells Fargo to ensure they get a cash contribution before they’ll pay the claim on the loss from the short sale. They’ll say that it’s their request.

What’s Really Happening

Sometimes the MI company does request cash, but remember, the bank is in the business of getting your money in their pocket, and they’re not beyond using the ruse of a mortgage insurance company request to ensure you pay them so they recover more of their losses. So more than likely, the MI company has has NOTHING to do with the request.

The bank is telling the seller that the mortgage company needs a cash contribution, but the mortgage insurance company never told the bank that they needed it. This is a tactic that negotiators use which I contest is converted to incentives paid to negotiators for bringing in more money for the bank. The bank is still going to file their claim with the mortgage insurer to recover a vast majority of the losses, but the insurer will be none the wiser that they’ve just squeezed the seller for even more.

How I Handle This

I call their bluff.

As a “private investigator” for short sale approvals (that’s basically what we are,) I hunt down the truth. A simple friendly phone call to the mortgage insurance company will easily reveal whether or not the bank or servicer is telling the truth. When we learn that there was never a request, it means we have more information than they’d like, and that’s how one wins negotiations. The person with the most information wins, every time. (It’s also assumed that that person has walk-away power.)

What if they actually did make the request? That’s okay too, because that can also be negotiated away directly with the mortgage insurance company provided the details can be “worked out” as they call it. If the seller has no money, and no room in their budget for a promissory note payment (in our example $7,000 ÷ 120 months = $58.33 per month) then there can be no contribution.

Now, in light of the situation, $58.33 per month is a small price to pay for the mess that we’re cleaning up, but it’s absolutely unnecessary, and likely to be defaulted on. The notes are usually proposed at 0% interest, and $58.33 per month to a behemoth of a bank is less than peanuts. It’s not even peanut dust.

So, if it comes down to blows, and the MI company absolutely won’t budge, then a payment might be wise just to make the problem go away. You can see that we do everything we can to make sure that this is never the case.

Short Sale Basics Part Five: The Gap and Closing the Gap

Jon Griffith — Wed, 28 Dec 2011 11:00:38 +0000

(This is the final article of a 5 part series entitled Short Sale Basics)

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.

Short Sale Basics Part Four: The BPO

Jon Griffith — Sat, 24 Dec 2011 11:00:15 +0000

(This is part 4 of 5 of the short series entitled Short Sale Basics)

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.

Short Sale Basics Part Three: The Net Payoff

Jon Griffith — Tue, 20 Dec 2011 11:00:12 +0000

(This is part 3 of 5 of the short series entitled Short Sale Basics)

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.

Short Sale Basics Part Two: The Offer

Jon Griffith — Fri, 16 Dec 2011 11:00:21 +0000

(This is part 2 of 5 of the short series entitled Short Sale Basics)

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.

Short Sale Basics Part One: Market Value

Jon Griffith — Wed, 14 Dec 2011 01:19:08 +0000

(This is part 1 of 5 of the short series entitled Short Sale Basics)

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.

Good Money After Bad

Jon Griffith — Wed, 02 Nov 2011 21:29:20 +0000

Come on! Seriously. You work WAY too hard every day for your money to be throwing it away.

If you are upside down in your house, you owe it to yourself to calculate the long term ramifications. The point of home ownership is a) to have a place to live that’s paid for, b) to build wealth and security for your family, c) to invest and generate cash flow.

As it is, with a 30 year mortgage, your total cost of ownership is much higher than the purchase price of the home. Many people consider a mortgage a forced savings account because part of the monthly payment reduces the total amount owed on the house and becomes equity. If you look at it this way, you also have to realize that during the first 15 years, MORE of your payment, in fact MOST of your payment is paid to the bank in the form of interest and is not “saved.” Your money hardly starts working for you until the latter 15 years.

Let’s look at a simple example.

Bob and Judy purchase a home for $250,000 at 6% over 30 years. Their monthly payment is about $1500.00 per month, and after 30 years, the total amount of interest paid reaches $289,500, making the total cost of ownership, not including deferred maintenance, $539,500. IF the house increases in value over those 30 years by 4% annually, at the end of 30 years, it should be worth approximately $810,000, yielding a gain of $270,500. If you divide the gain by the total cost, you get the investment gain, which is 50.1%. If my math serves me correctly, 50.1% over 30 years is 1.67% annually.

A 1.67% annual gain is not enough to outpace inflation. All things considered, Bob and Judy have a paid for home now, and they don’t have to worry about foreclosure, but the opportunity cost is just too great. Bob and Judy paid more in interest to the bank than the purchase price of the house. How much hard work does that represent? Ugh…it makes me sick to see so much potential thrown out the window.

The example I just outlined is a good standalone argument against 30 year fixed mortgages as it is. But what happens when you purchase a home and the value drops by 50%, which is exactly what happened in Phoenix in recent years.

Well, Bob and Judy’s original 30 year note would still yield the same numbers and at the end of the loan they would have paid a total of $539,500 as I outlined above, but in this case, they would have lost 50% of the original purchase price only 4 years into their 30 year term (2008-2012). What they had originally paid $250,000 for is now worth $125,000.

If over the next 25 years remaining on their mortgage, their home increases in value by 4% annually, at the end of the 30 year mortgage, their home might be worth $333,000 and they will have paid out $539,000 for a total LOSS of $206,000.

Is this all starting to become clear?

There’s a point during the loan term at which your house value and the amount remaining on your note will break even, but it’s at a little more than 10 years in. So for those 10 years you can count your payment as rent to yourself. It disappears. What you really have to pay attention to is the total cost by the end of the 30 year term.

So what’s the point? The point is that it’s time for you to take a look at your current situation and weigh them against your long term plans and the possibility of the unexpected rainy days changing your path. If you know for certain that you’ll be living in your house or owning the home for the entire 30 year term, then the worst that could happen is you’d lose a truck load of money, but you’d have a paid for home. If, however, there’s ANY remote possibility that you would need to move for any reason whatsoever before your house is worth more than you owe, then you need to recognize that every penny you spend on your house now is good money after bad.

In other words, if you don’t choose to short sell your house now, you may be forced to later. Really consider whether or not this is a possibility and then don’t delay on course correcting now.

Regardless of whether or not you choose to remedy your financial situation by paying off your note or short sell your home, you need to take inventory of your financial situation so you can plan your next steps.

The Short Sale Counter Offer

Jon Griffith — Fri, 14 Oct 2011 21:56:11 +0000

You may want to read this article before continuing so you have some context for the information here.

Since the buyer and seller are in the drivers seat concerning the terms of a real estate purchase contract, and the bank is simply a 3rd party, the information that comes from the bank to the seller is privileged information that the buyer is not entitled to know.

The information from the bank that the short sale addendum to the purchase contract implies that the buyer is entitled to know is a simple “yes” or “no” regarding short sale agreement. If the seller and seller’s lender come to an agreement, the seller notifies the buyer. If the seller and seller’s lender do not come to an agreement, the seller can do one of two things: a) notify the buyer in writing that they will not come to an agreement, effectively canceling the contract, or b) continue to negotiate with their lender.

Aside from proving that the seller diligently pursued the approval to the best of their ability, the seller does not have to disclose the details of the negotiations. The seller will disclose the final terms of the contract through the HUD-1. They may also provide the buyer with the actual agreement letter from the lender, but they don’t have to. All they need to do is notify in writing that an agreement was made.

One of the pieces of information that the seller and seller’s lender often deal with is what everyone has been calling a “Counter Offer.” In Arizona, the counter offer is a document that is used prior to ratification of the purchase contract and is between the seller and the buyer. One the contract is fully executed, only an agreement between the seller and the buyer can alter the contract price, and this is accomplished through a standard Addendum.

The lender may look at the seller’s proposal based on the contract and ask the seller to bring more to the table. This is what many agents are calling a counter offer, but they’re failing to explain that it is a counter offer to the seller, not a counter offer to the buyer. Therefore, if the listing agent in a short sale conveys to the buyer’s agent that the bank has “countered” the offer, then they are inherently confusing the purity of the short sale process and they’re putting their seller’s short sale success at risk. When buyers of short sales have come to an agreement on price, it’s the listing agent’s responsibility along with the seller to work hard to get the net payoff as a result of that contract to fulfill the lender’s loss tolerance.

The banks have most people believing that the sales price of the home is the important number, but we know better. The net payoff to the lender is the important number, and if we can meet that while remaining completely compliant with the law, then the purchase price is irrelevant.

When your lender wants more than the offer, convey that to the buyer as a last resort, but do your best to negotiate with the seller’s lender before scaring the buyer off.

Pre Approved Short Sale? No such thing…

Jon Griffith — Tue, 11 Oct 2011 22:51:12 +0000

When a short sale is approved by a lender, it is approved in writing with the names of the parties to the purchase contract included. This means that if there is a change in any way, shape, or form, to the contract that affects anything on the HUD-1 the approval letter that the lender has drafted no longer applies, and therefore, the approval no longer exists.

The term Pre-Approved short sale indicates a few possibilities:

The lender has evaluated the property prior to it being listed or prior to being notified of a purchase contract on the home, and have indicated a pre-approved sales price. In other words, “if you bring us this price, we’ll probably approve it.”
The lender has already issued an agreement to the seller for a lower net payoff, but the house is no longer under contract and a new buyer needs to step up to the plate.

Both are known as “pre-approved.” Neither guarantee a successful close of escrow. The first of these may be an unrealistic market value that nobody will ever pay for the home, so it won’t even sell, and therefore won’t enter into the short sale negotiation phase. The second of these indicates that the previous contract price and resulting HUD-1 managed to garner an approval, but now that there’s no buyer, that information is all new, and must be re-submitted to the lender for “re-approval.” That process can take as long as the initial approval. Sometimes it’s faster, but often it’s not.

Don’t be fooled by the term “Pre-approved.” It’s used as a marketing tool to attract buyers to a short sale. What it really should read is “Previously Approved at one point, but we gotta do it again.”

Banks are NOT a Party To The Short Sale Purchase Contract

Jon Griffith — Tue, 11 Oct 2011 20:15:27 +0000

This one topic drives me bananas because I run into it just about every day of the week.

A short sale is the sale of a home for less than is owed the bank. In order for this to take place, the lender has to approve the contract which is between the buyer and the seller. Not the buyer and the seller and the lender.

It amazes me to no end that so many agents do not understand this fact, and the contracts that I receive for my sellers frequently contain language referring to the short sale approval that is irrelevant to the purchase contract.

The real estate agent’s job is to market and sell your house. The role of short sale negotiator (who is quite often your real estate agent) is to speak on your behalf to your lender to ensure that the offer that you’ve been advised to accept will cut the mustard, so to speak. The benefit to you is that you don’t have to spend time on the phone (and I mean lots of time) dealing with incompetent bank employees in the midst of your current financial crisis, and that it most likely won’t cost you a cent to have this done for you.

Regarding the terms of the purchase contract in a short sale, the lender is no more a party to the sale of the home than an inspector or appraiser is party to the sale of the home. The relationship between the seller and the seller’s lender is one by which the seller is asking their lender to allow them to pay off the loan without recourse for less than the amount that is owed. This is called settling a debt, and leads to debt forgiveness, but the two agreements can be looked upon as separate agreements.

One agreement involves the terms and conditions between the buyer and seller, and one agreement involves the terms and conditions between the seller and the seller’s lender. Each agreement can sway the terms of the other, but they are not connected.

Would You Hire a Chevy Mechanic to Work On Your Toyota?

Jon Griffith — Fri, 29 Jul 2011 19:22:52 +0000

Short Sales Require Experienced Agents

Every week I hear stories in the office of agents who have taken short sale listings who have never worked on a short sale. They don’t know what they’re doing, and you are putting your financial future at risk by hiring them to sell your home.

Here are two critical questions you need to ask your potential agent:

How many short sales have you successfully closed?
If the answer is zero, regardless of any fancy “certifications” they may present to you, and regardless of how big they talk the talk, do not use them to work your short sale. Always investigate that agent to find out if they’re telling you the truth. With a few keystrokes, it’s very simple to research whether or not an agent has every closed a short sale.
Do you handle the negotiation on your own?
If the agent you’re interviewing aims to hand off the negotiation to a 3rd party company, steer clear. That 3rd party is going to charge you a fee, and charge your agent a fee, and the success of the closing will be out of your agent’s hands. You’re hiring your agent to represent your best interests. There’s nothing wrong with hiring an attorney to assess the potential results and review the agreement between you and your lender, but hiring an attorney to negotiate on your behalf will simply cost you money and time, and will keep you and your agent in the dark.

A Sale is a Sale, A Car is a Car

No it isn’t. While short sales involve all of the strategies that we normally use to sell a house, a short sale is not a regular sale. Each seller’s situation is unique, and a clear understanding of what will, and what could happen is a required attribute of your listing agent. That quality comes only with experience.

Even though your neighborhood mechanic understands the general principles of how a car works, if they are accustomed to working on Chevrolets, they are not qualified to repair your Honda. Sure, they may be able to do it, but at a greater potential cost to everyone involved.

Why would you place the successful sale of your upside-down home in the hands of an agent who has never closed a short sale?

Who Prices a Short Sale?

Jon Griffith — Tue, 19 Jul 2011 21:12:38 +0000

Inspiration for this article comes from a recent conversation I had with another agent about a short sale listing that hasn’t received any offers because the seller is emotionally attached to the house and won’t lower the price.

Guys, you’ve got to hear me on this one. Just like any other real estate offering, the owner is responsible for setting the price, but it’s our job to advise them. The seller is who prices a short sale. Short sales, like any other property, can be priced wherever you choose.

You could price a $400,000 home for $200,000 and sell it for $200,000. You might neet to spend some time in a padded cell for a while, but the bottom line is, you can ask whatever you wish. You could ask $800,000 for a home worth only $300,000. You’ll never see an offer, but you can do that.

Will you get what you ask? Not necessarily. And furthermore, if you don’t own your home outright, what you ask may be less than what you owe, in which case you would a) need to cover the difference out of pocket, or b) appeal to your lender for a short sale.

Short Sale Pricing

If you can’t cover the spread, you’re a short sale candidate, and you must learn to remove yourself from the emotional attachment to your home and price the property to sell.

Think about it! You’re not going to make more money when you sell it, so why would you resist pricing your home at a market value that will actually draw offers.

What Are the Financial Consequences of a Short Sale?

Jon Griffith — Tue, 05 Jul 2011 22:21:25 +0000

Before I continue, I need you to know that I am not an attorney, nor am I a tax professional. Please, before you make any decisions about your housing situation, consult a professional to have your questions answered.

There are 2 major potential financial consequences of a short sale. The first is a potential deficiency judgment, and the second is the tax liability.

Short sales can damage your credit, and as a result, there may be other financial consequences of a smaller magnitude, but the two big ones are deficiency and tax liability.

Deficiency

Any time a lender is paid less than they are owed, there is a risk that they could sue you for the difference, plus miscellaneous legal fees, etc. If you bail on a $100,000 home that’s only worth $60,000 and your lender sells it at auction, there’s an outstanding $40,000 that someone will have to absorb. In many cases, Arizona’s anti-deficiency statute may protect you from a future judgment, but that’s dependent upon the conditions surrounding the purchase of the home.

Tax Liability

Any time debt is forgiven for less than the amount owed, the amount forgiven is considered income, and it’s your responsibility as a tax-payer to report that amount to the IRS as income. Whether or not your taxable income will be affected by this amount is completely dependent upon factors that I am not an expert in discussing, but it is possible that you may owe income tax on that amount. Why is it considered income? If you go back to the point at which your lender funded the purchase of your home, the money came “in” to your transaction. Forgiveness of that debt later would be just like a lender giving you money. So it becomes income.

The “Should I Short Sale” Chart

Jon Griffith — Sat, 15 Jan 2011 22:54:11 +0000

One question that I hear over and over again is, “should I short sale my house?”

Before you can short sale your home, you need to know if your house is under water. If you’re asking the above question, you probably already know the answer. If you don’t, you might want an evaluation of your property to determine where it may stand in the marketplace.

The “counter” question to “should I short sale” is: Well, if you keep doing what you’re doing now, will you eventually run out of money, fall behind, and be forced to foreclose?

If the answer is yes, then it’s time to get your house on the market. This simple chart gives you a visual representation of what’s happening in the financial life of someone who is headed for foreclosure. Where you fall on this chart will depend on your personal circumstances. For this example, our home owner has $20,000 in savings, a monthly income of $5,000, and monthly expenses of $6,000. The monthly deficit is $1,000, which will slowly drain their savings over time, until they finally run out of savings and start falling behind.

You’ll see that in the chart, the home owner has 20 months before they run out of money, 90 days before the bank files the trustee sale notice, and another 91 days (Arizona) before the house goes to auction. The earlier you start the process, the better it will be. If you have no prospect of increased income, whereby you can flatten that blue area or tilt it the opposite way, and you have clearly determined where you red dot is on your timeline, then you know when you need to sell.

Don’t wait until you’re at zero to make that decision. Get the house on the market and get an offer. When you have an offer, it can delay the timeline and give you more breathing room.

Click the image to view a larger version.

On The Fence

Jon Griffith — Thu, 16 Dec 2010 22:23:29 +0000

This article is primarily written for the home owner who is in a hard financial position with questions about what steps they should be taking to solve the problem, but it serves a greater purpose, and that purpose is to provide valuable information for the public to chew on.

The holidays come once per year. It’s no surprise. At least it shouldn’t be. So it really doesn’t make a lot of sense for any of us to treat it like it is a surprise, but we do. We hold out until the last minute, all the while wondering where the year went, and then we proclaim that Christmas sorta just “snuck up on us.”

As a result of this perception, many people tend to put extremely important things on hold and then use the familiar phrase, “after the holidays have passed.” Now, if you couple the knowledge of Christmas coming once per year, with the habit of “putting off” until “after the holidays,” you can quickly see that 1/12th of (December) your life could very well be spent procrastinating. That’s not including any other time that you spend putting other things off until another day.

Right now, in this country, especially in areas like Florida, Las Vegas, and Phoenix, millions of people, perhaps even you, are in an extremely difficult financial position, and can be classified as house-poor. They just simply cannot afford their homes, and they’re scared to take the next step.

In the meantime, the lenders, the “big banks,” who have billions of dollars to hire the smartest psychologists and behavioral scientists to advise them on how to retain as much of their money as possible, have extended this “imaginary hand” to “help” you through the prospect of loan modifications so you can stay in your home. What this translates to directly is, “so you will continue to pay them as long as possible.”

Banks don’t care about you. Period. They don’t care about your hardships. They don’t care about your job-loss. They don’t care about anything but your money. That’s what they do. They borrow your money at insulting rates of return, and they loan it out like legal bookies charging a criminally insane rate.

The Truth about Loan Modifications – FAIL

The united states treasury predicted that government programs would help 3 to 4 million home owners improve their mortgage situation through loan modifications by the year 2012 (that’s about a year from now.)
They have actually only helped a little over 500,000. FAIL.
Roughly 100,000 of those who have successfully modified their loans with their lender are back in 90-day past due status, headed for foreclosure anyway.
60-70% of the remaining successful modifications will default and eventually foreclose. That’s a shared opinion amongst us “real estate” types.
The number of trial modifications that are actually converted into full modifications have dropped every month since June.

Fred Weaver, another experienced short sale expert of Group 46:10 insists that we need to redefine the term Trial Modification and call it what it is: “The we’re going to screw home owners payment plan.” I completely agree. He goes on to more clearly define it. “It’s an application fee to possibly take a look at your file…”

What many home owners are finding, at the end of their “application” period, is that they don’t qualify. But hey, who cares, the bank just got more money out of you, and you’re still headed for foreclosure. In markets like Phoenix, where nearly 80% of the homes are worth less than is owed on them, it’s far less likely that a loan modification will even make financial sense anyway. That is why banks are more willing to either foreclose, or allow a short sale.

Loan Modifications Serve One Purpose

Put your money in their pocket.

Get off the Fence

Foreclosure sucks. I get it. But the reality is, many of you are inevitably headed for it. It may not happen for 6 months, or a year, or maybe even longer, and it may be prolonged by emptying out your 401K and selling off all of your belongings, but it’s absolutely critical to your financial future to come to terms with the direction your finances are headed LONG BEFORE it actually happens. Why? Because the longer you wait to get off the fence, the harder it is going to be to short sale your home.

If you have done the math and those numbers guarantee that your retirement will be lost along with your home due to financial hardship, then your best solution is to get that house on the market and get it sold, now, not after the holidays.

Let a professional take the burden away for you. It’s our job in the real estate community to be the experts and to handle the details so you can relax and go about your life as peacefully as you would like it to be.

Client Q&A: Why Don’t We Have An Attorney?

Jon Griffith — Tue, 30 Nov 2010 20:07:24 +0000

Client Question:

I also checked out a 2nd opinion in which these realty specialists stated we should have a real estate attorney so we don’t get the shaft. Reading newspapers and online articles, banks are making it harder for us to short sale and/or foreclose. I don’t want to kill our credit. Why don’t we have a real estate attorney?

Dear Client:

Attorneys are important when it comes to representing you in legal disputes, or verifying that a legal document is in your best interest. The primary challenge of a short sale is to prove to the lender that the offer we have is the best we can get. Until we have an offer, we cannot do that. Once a lender approves the sale, which can take time, as you know, based on the lender’s experience, organizational level, and work-load, it’s important that the letters of agreement conform to what’s in your best interest. You will be signing an agreement with the lender once they approve the sale, and that agreement must do the following:

Release the lien so you can sell the home.
Release you from all future liability on the note.

You basically want the lender to allow the sale and declare a zero balance on your account in writing. That is what an acceptable Letter of Agreement contains.

Some lenders are crafty with their language, but for the most part, since they know that Arizona is a non-deficiency judgment state, they provide letters with both of these stipulations already in place, which is exactly what you want.

However, just to be cautious, and to protect your interests as a seller, in the purchase agreement, as a part of the short sale addendum, I will always write in a 5-day period for the seller to cancel the contract if the letter of agreement from the lender does not meet these two requirements. Once the letter of agreement is acceptable to the seller, it is delivered to the buyer, and the standard inspection period begins and everything moves towards a successful close of escrow and a successful short sale.

As for your credit, there is no way to avoid having a scar on it. When you complete a short sale, the lender has to write off a large sum of money and then they report it to the credit bureaus as something on the lines of “Settled for less than the amount owed.”

It will affect your credit, and it will take about 2-3 years to recover. This is an estimate, as the entire industry can’t seem to agree upon the effects of these things on your credit as it is. If you were to walk away from the home, and just foreclose, it will go on your record as a foreclosure, which is MUCH worse. In fact, it could affect many aspects of your life, such as employment, insurance rates, security clearance, etc. You definitely don’t want that.

The deficiency that the lender writes off could potentially become taxable income. In order for someone to write off a bad debt over a certain dollar amount, they have to report that the recipient of the “forgiveness” received the deficiency amount as a “gift.” In other words, if the home is worth $100K and you owe 200K, and you sell it for 100K, you’ll be forgiven of 100K, which will most likely be reported as income to you.

Whether or not you will be liable for income tax ON that amount is something you’ll need to discuss with your CPA.

Sometimes It Can’t Be Avoided: Specialized Loan Servicing

Jon Griffith — Wed, 06 Oct 2010 19:00:02 +0000

No matter what you do, no matter how hard you work on selling a house, there is still a possibility that it will go back to the bank. When the causes of that are outside of your control, there’s really nothing you can do. No matter of thinking outside of the box can force someone to cease being an idiot.

A property that I recently held as a listing went back to the bank on the 30th of September. It wasn’t because I didn’t know what I was doing. It wasn’t because the lender didn’t have the right information. It wasn’t because the offer was too low.

It was because the offer that we received came in one day before the auction, and here’s the real reason:

The loan servicing company refused to extend the auction date without a payment of $2500.00 outside of escrow. They simply refused. There was no time to negotiate, no time to reach the right person, and no time to get the job done.

The owner’s lender had an offer that was above what it was sold for at auction, yet they wanted to hold the home hostage for $2500.00.

“Where’s the money going to come from?” I asked. The answer? ”It doesn’t matter to us.”

That’s bank-speak for “send us more money” with no promise to fulfill their obligation. The problem with this type of transaction is that nobody in their right mind is going to simply wake up one day and decide to send $2500.00 to a bank with whom they have no relationship. Sellers are selling short because they don’t have any money. Buyers aren’t going to take the risk, and neither broker is going to enter into a transaction like that. Escrow companies will hold funds in escrow pending the sale, but they won’t release it until it’s final, so that doesn’t work, but it’s the only proper way to do it.

Ludicrous proposition, I say.

So what are some of the important things that you can do to minimize the chances that they’ll foreclose?

The very SECOND you know you are going to stop making payments on your mortgage is the same moment at which you need to get your home on the market. You don’t want to be making these decisions AFTER you receive a Notice of Trustee Sale.
When your agent asks for paperwork, make like a gazelle and get that paperwork done. Wasting time is not something that we can afford to do.
Let your agent do the work and don’t get involved with the bank unless advised to do so.
If your lender communicates with you directly, let your agent know immediately.
Your attitude may be that you just don’t care anymore. Continue to care until the process is complete.
Keep the home available to show AT ALL TIMES. Tenants who are living month to month need to be notified that it’s time to move out.
A vacant house is easier to sell short than one that is occupied.
If you live in the house, keep it clean.

In my experience the number one reason a home goes back to the lender is related to time, not the details of the transaction. Unfortunately this one didn’t pan out, but the rest of them typically do.

It’s Not the Bank Who Pays the Short Sale Fees

Jon Griffith — Fri, 17 Sep 2010 22:51:08 +0000

I’ve probably written about this before, but every time I overhear another agent advising their client that the lender pays the commissions on the transaction, I think, no, that’s not exactly true.

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.

The buyer secures funding.
The buyer’s lender sends money to the Escrow company.
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.

Agents Owe It To You, No More Attorneys Negotiating Short Sales

Jon Griffith — Sat, 11 Sep 2010 00:23:03 +0000

One of the hot topics that real estate agents continually bring up is the prospect of allowing an attorney to negotiate the short sale approval with a distressed home owner’s lender. Typically, in this type of situation, you as the home owner hire a real estate agent to list and market your home. You also sign an agreement with an attorney to handle the negotiation of the approval, and you will pay the attorney an up-front retainer before the work is even done.

There’s nothing wrong with seeking legal advice for LEGAL MATTERS. But short sales are NOT something that Attorneys should be involved with, ever!

“REALTORS NEED TO NEGOTIATE SHORT SALES, PERIOD!” – Brian Choat

I agree completely, and here’s why. Attorneys are not in the real estate business. The success of a short sale is dependent upon the knowledge of the real estate market. Attorneys specialize in litigation of legal matters in court, not real estate.

As your agent, I would NEVER recommend handing over your file to a 3rd party that you have to pay up-front. I do all of the negotiation myself, and when needed, I have talented people on my team who help me, who are NOT attorneys.

Realtors! If you’re handing your files off to third party negotiation companies, you’re doing your clients a disservice and you should either not take the listing, or refer it to someone you know can close short sales.

Home owners, make sure you do your research. Ask your agent if they’ve ever closed a short sale. If they haven’t, then they should be referring you to someone who has.

A little over a year ago, I was representing a client in the short sale of their home. As is the case in many, many short sale contracts, the approval process took long enough to give the buyer a chance to walk away. My client, who had never done a short sale before, and didn’t know the intricacies of the process, was a bit timid about continuing without the “hard-hitters” that the attorneys made themselves out to be. To move forward, the file was handed off to the attorneys, and I was still their agent on the deal. Literally months later, after the attorney had already been paid, and the price had dropped significantly, an agreement was negotiated by a paralegal, not a real estate agent. The communication was horrible between the attorney and the client, and the attorney was very difficult to reach. I was in the dark the entire time, and it’s my job to represent my client. I did not feel at all comfortable with the situation, and by the time the house closed escrow, my client had written off the attorney as a vulture just trying to cash in on the short sale process.

That’s basically the reason attorneys have gotten involved. They use scare tactics to bully home-owners into using them after they’ve consulted with them regarding the financial implications (a totally separate issue) that the short sale will have on them.

Negotiating a short sale has absolutely nothing to do with potential future litigation between the lender and the home-owner. A short sale is a short sale is a short sale, and real estate agents who have done them are the only ones who should be doing them.

No more attorneys.

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So what are some of the important things that you can do to minimize the chances that they’ll foreclose?

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