Question of the Day: Pre-Approvals on Short Sales

May 9, 2012 By Jon Griffith Leave a Comment

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

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

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

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

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

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

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

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

Arizona Short Sale Addendum Part One: Introduction to Terms

April 20, 2012 By Jon Griffith Leave a Comment

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

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

Shall we begin?

Lines 1-4: Identity

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

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

Lines 5-6: Definition

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

Pretty simple.

Lines 8-15: Short Sale Contingency (condition)

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

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

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

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

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

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

Identity
Definition
Short Sale Contingency
Documentation to Creditor(s)

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

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

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

Other Terms and Conditions

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

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

April 9, 2012 By Jon Griffith Leave a Comment

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

How The Money Flows When Borrowing

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

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

The Idea of Phantom Income

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

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

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

Yikes! What Does That Mean?

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

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

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

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

Enter the Tax Relief Act of 2007

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

Why is this important?

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

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

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

Thus, the importance of acting now must be emphasized.

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

Word Is Spreading Quickly About Bank Of America

March 20, 2012 By Jon Griffith Leave a Comment

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

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

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

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

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

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

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

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

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

Short Sale Practices that Don’t Make Sense

March 20, 2012 By Jon Griffith Leave a Comment

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

One Must Be Licensed

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

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

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

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

Expiration Dates on Approvals

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

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

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

Buyer’s Agents and Lenders Asking for Approval Letters

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

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

Lines 22 and 23 are clear:

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

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

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

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

Stupid Things Banks Do

March 15, 2012 By Jon Griffith Leave a Comment

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

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

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

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

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

Pre-Approved Short Sales, What It Means

February 8, 2012 By Jon Griffith Leave a Comment

Short sale approval letters are settlement agreements written by the home owner’s lender setting forth terms and conditions that the seller must meet through the sale of their home.

Most have an expiration date requiring that the settlement agreed upon be paid by that date. Although it’s of little consequence, in my opinion (as it’s a debt settlement between the seller and seller’s lender), they also stipulate the name of the buyer on the agreement.

This would naturally mean that any settlement agreement would be invalid if the buyer stipulated were to cancel the transaction. However, since the most important factor to the investor who owns the note is the net payoff, an approval tips their hand to the dollar amount they’re willing to accept, regardless of the buyer.

Sometimes a lender will be pro-active about the prospect of a short sale, and will “pre-approve” a sale amount and terms that will be acceptable to a future buyer.

So, a pre-approved short sale is one of the following:

It’s a property that has previously had an offer that met the investor’s payoff requirements but has lost its buyer-OR-
It’s a property that has been given a pre-approved price without an offer.

A house is only worth what someone will pay for it. Period. If the investor has pre-approved a short sale that has not yet had an offer, it’s likely they’re unrealistic about the asking price, so the 2nd example above is less likely to be a success, but still possible.

On the other hand, if the property has already been approved based upon a contract that was previously submitted from a qualified buyer, then the terms of that deal can be used to attract a new buyer.

Buyers who find short sales opportunities in the middle of this scenario are often pleased to find that it takes a fraction of the time to acquire a new settlement agreement from the lender.

Filed Under: Short Sales Tagged With: agreement, buyer, property, short sale

Who Pays the Commission on a Short Sale

February 1, 2012 By Jon Griffith Leave a Comment

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.

Filed Under: Short Sales Tagged With: short sale, short sale approval, value