Short Sale Cash Contributions at Closing

January 13, 2012 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: Closing, money, mortgage, note

Short Sale Basics Part Three: The Net Payoff

December 20, 2011 By Jon Griffith Leave a Comment

(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.

Filed Under: Real Estate Basics, Short Sales Tagged With: approval, money, short sale, Short Sale Basics

Will I Owe Taxes After a Short Sale?

December 5, 2011 By Jon Griffith Leave a Comment

(Please note that I am not a tax professional and you should seek the advice of a tax professional to answer tax questions.)

Here’s what I do know, and I learned this when I was a teenager working for tips at the local Pizza Hut.

When you make money, you’re responsible to report it to the IRS if your employer does not. That’s right. When they tip you, you’re supposed to report it.

When you borrow money, as in the purchase of a home or a car, a financial institution writes a check to pay for the asset and then retains the deed or title on that asset until you pay it off. If you don’t pay off the entire note, then the part that you don’t pay off, if forgiven, is viewed as income, even if it’s retro-active.

Since short sales involve such large dollar amounts, there’s no way to skirt the issue. If your lender doesn’t issue you a 1099-C (Cancellation of Debt) then you are just as responsible to report the forgiveness as income as the pizza delivery guys is responsible to report his or her tips.

Now, we all know that tips are taxable income, but what about when the bank approves a short sale?

The only answer I can actually give you is that you might be responsible for the income tax based on the forgiveness. You also might be able to write it off in accordance with the Tax Relief Act of 2007, which is expiring, by the way.

All of these are valid questions that you need to consult with your tax guy about, and make sure that you find the right tax advisor as there are plenty of “professionals” out there that don’t operate in the realm of real estate.

Filed Under: Personal Finances Tagged With: income tax, IRS, money, Tax Relief Act

Defaulting on Your Home Equity Line of Credit (HELOC)

April 16, 2011 By Jon Griffith Leave a Comment

If you’re not aware of what a Home Equity Line of Credit is, here’s a simple explanation.

If you purchase a home for $100,000 and the value increases to $150,000.00 you can borrow money against the value of your home. There are basically two ways to do this.

Cash Out Refinance:

That’s when you refinance the entire loan at a higher dollar amount than your original loan. 80% (typical refinance amount) of $150,000 is $120,000. So, if you owe $80,000 on your original loan, (again, you purchased with a conventional in this example) then the old loan would be paid off, and you would receive the difference of $120,000 less $80,000 for a total cash out refinance of $40,000 and a total loan amount of $120,000. Another way to look at this is that you’re digging yourself deeper into debt for a longer period of time.

Home Equity Line of Credit (HELOC):

This is when you present the value of your home to a lender who is willing to give you cash in exchange for a security interest in your home. For example, your $150,000 home which only has a loan of $80,000 on it has $70,000 in equity which any lender would be happy to help you tap into for an annual interest rate. If you do so, a 2nd lien will be placed against your home and you will have two payments. The first payment will remain as it was, and the 2nd will become a revolving line of credit much like a credit card.

It is questionable whether or not the first loan could still be considered, or at least a portion of it could still be considered a purchase money loan. (That’s a loan that was used to buy the house) and this is important when figuring out whether or not you can be handed a judgment if you default. A HELOC, on the other hand, is simply a revolving ATM cash line of credit with a low interest rate and interest only payments. Again, you’re still borrowing money from the equity in your home.

We all know what happens when we stop paying our 1st lender. They typically exercise the right to sell your house at a Trustee Sale. What is unclear to many is what happens when you stop paying your 2nd payment, but continue to pay the 1st.

Possible Outcomes

There are a few things that a lender on a HELOC may do to resolve past due payments. While the note is secured by your property, if you don’t have any equity in your property, then they aren’t going to exercise their right to sell the home, because the 1st lender will receive all of the net proceeds from the sale, and the 2nd will simply be out of luck.

So, they could, but likely won’t file a Trustee Sale notice to sell the house out from under you. Each lender is different in how they approach collecting bad debts.

Another solution would be to allow you to re-instate the loan by getting caught up. There is a period of time that the lender will give you, which is defined by each lender, and usually never adhered to 100%, in which you can do this. If you get caught up, plus all late fees, then it’s likely you can continue in good standing in the future.

If they grow tired of waiting for you to communicate with them to get caught up, and they recognize that there is no equity in your home, there will be a point at which they decide that it’s time to dump the bad debt. They do this by charging it off. This involves selling off the debt, most likely to an in-house collection company under their corporate umbrella, and then hiring an attorney to handle communications with the delinquent borrower. When the file is sent to the attorney and charged off, you can basically kiss all chances of re-instating the loan good bye. It’s at this point that you’ll start receiving scary letters from the attorney, and you’ll have only two options.

1. The worst option, get sued, go to court, have a judge slap a judgment against you, have your wages garnisheed or your account levied, and be forced to pay back what you owe, with steep annual simple interest penalties, is possible.

2. The better option is to settle for less than the amount owed, which is not always a guaranteed option. In the Short Sale world, this is what we do in order to make the 1st and 2nd go away. Sometimes even a 3rd lender is involved. In the world of HELOCs where you’re not past due on the 1st, and the 2nd has threatened to sue you, your bargaining power increases dramatically…but only if you have money to settle.

About That Bargaining Power.

Money talks. Think about this. If I owe you $100.00 and I pay you $50.00, then I don’t pay you for a few years, it’s likely that there will be a point in time that you write it off or forget about it. It’s at this point that I come to you and ask you if I can settle the remaining debt for $10.00. You figure, heck, it’s the best I can get, so sure…I’ll do it. That’s the risk you took in loaning me the $100.00. The catch is that I have to have the $10.00 to pay you. Oh, and that you’ll probably never loan me money again, and have probably written me off as a trustworthy person.

So, in the case of a HELOC, your best method to avoid a law suit is to bring a settlement to the table. Many lenders will be happy to accept ten, fifteen, even twenty cents on the dollar to satisfy the debt.

BEWARE! Your settlement agreement with your lender when it comes to a HELOC must include a release of lien on your property as well as a full release from the remaining debt. Have an attorney look at your lender’s settlement offer, which should be in writing, always!

Consequences

Your credit is already damaged because you’re late on the payments anyway, so that’s no longer a concern. You’ve probably already dealt with that part emotionally. The one BIG consequence to debt settlement of this magnitude is that the forgiven debt will be looked at by the IRS as income. Any time you settle debt for less than the amount owed, the difference is considered income.

To understand that better, think of it this way. Your lender handed you $100,000. You had $100,000 come “in” to your account. You failed to pay it back. They wrote off a portion, and the amount you didn’t pay back becomes recognized as income.

It’s going to be up to your CPA to determine whether or not income tax is owed on the amount forgiven.

The moral of the story? Stop borrowing money. Start saving.

Filed Under: Living Debt Free, Real Estate Finances Tagged With: debt, money, Possible Outcomes, property

The Beginner’s Guide to Financing

March 30, 2011 By Jon Griffith Leave a Comment

This is a very basic explanation of what financing is in the housing world.

When someone doesn’t have enough money to purchase a good or service, such as a home, they typically look to someone who does who is willing to lend that money to them.

In exchange for the use of someone else’s money, the borrower pays a small premium in the form of an annual interest rate.

For example, at the time this was written, interest rates were found to be around 4% to 5% annually. In other words, if you borrow $100,000 at 4% per year, that means that you will pay your lender approximately $4,000 in interest for the first year.

Your payments each month consist of up to 4 parts which are paid to either the bank you borrowed the money from, or the company that your lender hired to collect your payments (servicer.)

(1) One part is called the principal which represents the amount that you owe, and (2) one part is the interest, which is paid to the lender in exchange for borrowing the money. The (3) third payment is a semi-annual (that’s twice per year) property tax payment. The home owner is responsible for paying those taxes, but in most cases, the lender requires that your payment include enough to cover the semi-annual tax payment, and they end up paying the tax bill for you out of what’s known as an impound account. Sometimes there’s a (4) fourth part, and that’s called Mortgage Insurance. If you purchase home with less than 20% down (in other words, $20,000 in this example), then the lender will require that you pay an insurance premium every month. They do this to ensure that they get paid if you fail to make your payments.

At the beginning, MORE of the payment is interest, and less is principle. As time goes on, the interest paid every month decreases, because it is calculated based on the amount you still owe, which is also decreasing. By the time you reach the half way point, usually 15 years, the amount you pay in interest and the amount you pay towards the loan is nearly the same. Later in the life of the loan, you will be paying much more on the loan, and much less in interest.

This is called amortization (the death of a loan) and lenders do this to ensure that they get most of their investment back at the beginning, rather than at the end.

I can’t stress enough how beneficial it will be to you and your family to only consider 15-year fixed rate loans. Anything else will cost you much more and be much more of a risk to your financial well being.

Filed Under: Real Estate Finances Tagged With: home, interest rates, money, paying

Right Of Passage: Why Don’t We Celebrate More?

February 21, 2011 By Jon Griffith Leave a Comment

My philosophy on money is strongly rooted in the laws of mathematics. I can form metaphors to help describe how I see money moving around in our lives, but the bottom line is this: one builds wealth by spending less than they make. It doesn’t matter if you make $10.00/hour or $200.00/hour. If you spend less than you make, you will grow your nest egg. The focus of your financial wealth is to build a nest egg that can grow itself in the amount of time you anticipate having left on this planet.

The first step one can take towards thwarting this goal is borrowing money. The largest loan that most of us ever experience is the home mortgage. The crisis that our nation has experienced over the past few years wouldn’t exist if we didn’t borrow money.

So why is it that we nurture our youth in the ways of borrowing? Why is it that parents have good intentions but seem to miss the mark more often than not when it comes to saving for our kids’ futures.

There are so many lies that we are told every day by the people around us who believe the lies themselves:

I’ll always have a car payment.
You can’t go to college without a student loan.
It’s impractical to buy a house without a mortgage.
You need a credit card to rent a car.
You need to be worried about your credit score.

Lies.

I am not under the illusion that I can change a culture with one single blog post, but I sure would like to treat homeownership differently in this country. In fact, what if…

…what if owning a home was a right of passage from youth to adult-hood? What if we didn’t encourage our children to enter into contracts with banks, and instead, taught them the power of building wealth with their income by saving, so they were able to purchase their home with cash? What if we were to teach them that it’s okay not to over-extend our wallets just because everyone else is doing it too so that they will have money when it comes time to make that big move? What if we showed them that we don’t have to have it now!

I believe that owning a home free and clear is a goal that everyone can achieve, if they simply reduce their lifestyle and stop behaving badly. A single man out of college who lands his first job earning $30,000 would be better off living way below his means while he builds up enough savings to purchase his first home without borrowing a single penny from the bank, regardless of what his friends are doing. Not realistic? Well, if you believe that, then you believe other lies about money too.

Imagine the celebration that a family could have as they push their son or daughter from the nest into a paid for house! It would be something that would become a blessing, not a curse.

But, unfortunately, people don’t believe they can do it…so they won’t.

Filed Under: Personal Finances Tagged With: borrowing, home, money, wealth

On The Fence

December 16, 2010 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: banks, foreclosure, home, money

Sometimes It Can’t Be Avoided: Specialized Loan Servicing

October 6, 2010 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: escrow, home, house, money