Short Sales

Good Money After Bad

November 2, 2011 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: cost, home, house, ownership

The Short Sale Counter Offer

October 14, 2011 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: counter offer, short sale approval

Pre Approved Short Sale? No such thing…

October 11, 2011 By Jon Griffith Leave a Comment

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.”

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

Banks are NOT a Party To The Short Sale Purchase Contract

October 11, 2011 By Jon Griffith Leave a Comment

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.

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

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

July 29, 2011 By Jon Griffith Leave a Comment

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?

Filed Under: Short Sales Tagged With: cost, home, short sale, short sales

Who Prices a Short Sale?

July 19, 2011 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: home, house, property, Short Sale Pricing

What Are the Financial Consequences of a Short Sale?

July 5, 2011 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: debt, financial consequences, judgment, Tax Liability

The “Should I Short Sale” Chart

January 15, 2011 By Jon Griffith Leave a Comment

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.