The simple answer is…more than meets the eye.  Let’s backtrack a bit.  In February the Big 5 banks: Bank of America, JPMorgan Chase, Citibank, Wells Fargo and Ally Financial (formerly known as GMAC) got a slap on the wrist and a $25 Billion dip in their rather deep pockets for their part in the Robo-signing controversy.

At least $10 billion will go to principal reduction in loan modifications and $7 billion is earmarked for refinancing loans for borrowers interested in keeping their home.  Up to $7 billion will go towards other assistance, which includes short sales.

What does all that mean for us?  Good news actually.  First of all, the banks are going to be a little slower and more cautious about foreclosing.  They are experiencing the real cost of foreclosure in terms of money, time and public relations. Short sales, on the other hand, are up this past year because the banks halted much of their foreclosure operations and finally added staff to the loss mitigation departments. They have had success in closing large numbers of short sales and probably see this as a better alternative than foreclosure.  Foreclosures can bite back in many ways.  Add to that some of the $7 billion that will go to short sales and we are poised for a record year in short sales.

As we have discussed in an earlier newsletter, the bank, the seller and the housing market are all better off with a short sale and we have years of inventory to work through. Many sellers, agents and buyers have finally figured out what short sales are and are becoming more comfortable with them.  Short sales are creeping into our dinner conversations and vernacular.  Short sales are here in a big way…and growing.

How does that help the agent?  The housing market gets stabilized quicker with a higher average sales price.  For agents involved in short sales, this means more closings. For those agents who still don’t want to touch them, at least there are fewer foreclosures in the neighborhood.

An important point not to be overlooked is how all of this affects the homeowner.  A foreclosure can be a financially and emotionally debilitating event in their lives.  A short sale, by comparison, can be a difficult and frustrating process but the results are usually a speed bump instead of a  crash.  The homeowner being foreclosed on may NEVER enter the housing market again while the short sale recipient will probably be back…..cautiously and better prepared, but back.

With all things considered the settlement looks like good news.

Ok, maybe short sales won’t save the planet (does that mean that I don’t really need to finish designing my superhero outfit for Captain Short Sale, or maybe The Mighty Short Sale Warrior?  I was kind of digging the yellow cape). Anyway, short sales may not stop a speeding train or fix our banking system but they will certainly play an important and growing role in restoring the housing market to a balance.

Let’s look at the present situation:  Millions of properties are in the foreclosure pipeline and millions more are poised on the brink.  Properties are underwater to the tune of 20% to 40% and more.  Almost a million foreclosed properties (REOs) are on the market and still more being held back in inventory awaiting the completion of the Presidential election and a more favorable market.  On the bright side, the economy is moving in the right direction, interest rates are at an all-time low, buyers are out looking for bargains and investors are starting to get back in the market.  Add to the mix a 25 billion dollar settlement with the “Big 5” banks and we have ourselves a real rodeo.

Now these Big 5 banks were just put through the public relations wringer and a big dip into their rather deep pockets because they screwed up on how they were handling the foreclosure process for mortgages.  The funny thing is that they did not even own most of these mortgages……they were just the Servicer on most of these files.  With their most recent experience I know that these banks now have even more incentive to take short sales.  Why?  1) Short sales are a much faster solution than a foreclosure; 2) banks/lienholders recoup substantially more of their investment in a short sale than in a foreclosure; 3) The banks avoid the public stigma of the “foreclosure bullies”; and 4) The banks avoid the growing nightmare and expense of taking title to the properties and the accompanying title issues.  Short sales by comparison are quick, clean, more lucrative and quiet.

What does that mean for real estate agents and the market in general…?

…Homes in better condition, higher prices and shorter time (in years) to the housing market recovery.  The huge and often overlooked bonus is that today’s seller is in much better condition financially, emotionally and credit wise with a short sale than a foreclosure.  It is a speed bump in their lives rather than a possibly life altering financial and emotional event.  I believe it is also important to point out that today’s seller, if properly helped, is tomorrow’s buyer.  A mistreated and disrespected seller (insert FORECLOSURE here) will be out of the market longer…..if not forever.

Wow, maybe we should all reconsider our yellow capes.

Oh Those Pesky 2nd’s

10% of the amount owed:   As we all know the land of short sales is anything but settled.  Even after three years of doing this full time there always seems to be something new coming or going…like unsecured promissory notes or confession of judgments.  Over the summer all of the investors and servicers for the 2nd mortgages must have gone to the same seminar.  2nds used to take $3,000 (begrudgingly) to release their secured interest on the property and let the property be sold in a short sale.  Now they all seem to want 10% of the amount owed to allow the short sale to go forward.  No, the argument that the 2nd won’t get anything if the property goes to foreclosure does not get you very far with the negotiator.  How many times a day do you think that they hear that argument?  The good news is that the 1st note holders are approving 10% sometimes.  If the 1st only approves the standard $3,000 then the parties need to be prepared to somehow make up the difference.

2nd noteholder strategy: It certainly seems that the 10% strategy pays off for the 2nds, even if less short sales close because of their higher requirements.  In the example below we see that asking for more money will increase their bottom line even if fewer short sales close.

10 approvals at $3,000.  If 8 actually close that will net the bank $24,000.

10 approvals at $15,000.  If 2 actually close that will net the bank $30,000.

In reality, I think that the numbers come out in favor of the bank more dramatically than this example, but you get my point.

What about releasing deficiencies:  We find that the large banks/servicers will take the 10% and release the deficiencies.  The regional and smaller banks often will approve the short sale but want extra cash from the Seller to release the deficiencies.  The required extra amount can be as much as 40% of the amount owed on the 2nd mortgage.

Submit both packages at the same time:  I also don’t recommend waiting to send in a short sale package to the 2nd until you receive the approval from the 1st.  Send them in at the same time.  Sometimes the 1st will approve ahead of the 2nd and sometimes it is the other way around.  Either way we will use the approval in hand to gently push the other to complete their review and approve the short sale.

Multiple Short Sale Offers

NORTH CAROLINA SHORT SALE ADDENDUM. The North Carolina Short Sale Addendum to the Offer to
Purchase and Contract states: “Buyer and Seller understand that additional offers may be received
by the Seller’s Agent, which must be presented to the Seller pursuant to North Carolina law. Such
offers may be accepted by the Seller as backup contracts and forwarded to Lien holder for review
and approval.”

The lienholder is not a party to the Offer to Purchase and Contract. The Short Sale Addendum
specifically gives the lienholder the right to accept any offer, regardless of its Effective Date. The
lienholder is taking a loss on this short sale and rightfully has the ability to mitigate its loss by
accepting a higher or stronger offer even if it was signed much later in time than the first or primary
offer.

NORTH CAROLINA REAL ESTATE COMMISSION REQUIREMENTS. The North Carolina Real Estate
Commission requires that the real estate agent or the attorney handling the short sale inform the
bank of the existence of another offer, even if it is lower. Further, the North Carolina Real Estate
Commission has stated that, even if the Seller does not accept another offer as a back-up offer, the
bank should be informed of the unsigned offer as they have a monetary interest at stake.

BANK POLICY. Most banks have a policy that they will only review one offer at a time. These
banks often will not want the real estate agent to forward additional offers to the Bank unless the
primary offer is terminated by the Buyer or rejected by the bank. Some banks, usually smaller
local or regional bank, want to see all offers and will choose the one they feel is the best.

RECOMMENDATION. The Real Estate Commission is the governing body for the real estate agent.
Even if an attorney is handling the short sale, it is the real estate agent’s responsibility to follow
the requirements of the Real Estate Commission. I recommended that the real estate agent make
sure that the attorney handling the short sale inform the bank of any additional offers, even if the
bank has a policy to review one offer at a time and does not want the real estate agent or attorney
to forward any back-up offers. That way the requirements of the Real Estate Commission are
followed.

A simple email to the bank’s negotiator informing them of another offer should suffice. I don’t
recommend that you necessarily have to forward the actual offer to the bank unless they request
all offers as this may confuse the negotiator. (The bank negotiator may think that you are
terminating the first offer and want to submit the new offer for consideration.)

In Blog #9 we talked about Flopping and how withholding information from the bank regarding
a higher offer could be viewed as mortgage fraud. Because of this, I would recommend that,
regardless of what state you are in, you consider informing the bank of all offers as suggested
above.

There is a new game in town and it goes by the intimidating name of “Flopping.” Freddie Mac and Fannie Mae also use another name…Mortgage Fraud. Did that get your attention? It should. The real estate agent will encounter this in a number of ways but most ways will be a variation of the following example:
A real estate investor will come into your office and want to see your short sale properties. They will want to put a “low ball” offer on a property and will insist that, because they are under contract with the homeowner, all future offers must go to the investor and not the homeowner. Smells fishy already, doesn’t it? They will usually have documentation that the homeowner signs giving him this right and the investor the right to market the property in the mean time.

Additionally, the real estate investor will insist on negotiating the short sale. Another indicator is that the listing agent will not usually get a commission when the short sale closes with the bank but rather on the sale to his future buyer.

In reality this “investor” is trying to convince the bank that his “low ball” offer is a market price offer in hopes of buying the property for less than he will sell it for. While he is negotiating the short sale with the bank, he is also marketing the property at a substantially higher price, hoping for a buyer to take it off his hands as soon as he gets an approval from the bank. The plan is to get a buyer under contract, close on the low amount approved by the bank, and then close immediately with the new buyer at a higher price. The investor gets to keep the spread for his troubles.
There are a couple of problems associated with this scheme:

1. NCRC Violation for the Agent. According to the Short Sale Addendum we use in North Carolina and the North Carolina Real Estate Commission rules, the bank must be informed of ALL offers once the short sale negotiations have started with the bank. This is a requirement of the real estate agent’s governing body. This is the responsibility of the agent, regardless of who they have helping them negotiate the short sale. Any failure to abide by the rules will be enforced against the agent… Ouch!

In our example, if the offers are going to the real estate investor and not the bank then the real estate agent is in violation of this rule.

2. Practice of Law. In North Carolina, negotiating a short sale with the bank is the practice of law. The Seller and a North Carolina licensed attorney are the only ones permitted to negotiate with the bank. By negotiating the short sale with the bank, the real estate investor is in violation of the law, which is a Class I Misdemeanor. If he charges an extra fee for this service he is also debt adjusting which is a Class II Misdemeanor. The agent may also be caught up in this violation as well.

3. Mortgage Fraud. The bank’s, Freddie Mac’s and Fannie Mae’s position is that it is mortgage fraud to withhold information regarding a higher price offer. Fraud is like a hot skillet. Everyone who touches it gets burned.

4. No Offer, no Close. If the real estate agent does not get a substantially higher offer during
the time it takes to get the short sale approved, then he will probably not close. The result of this is that the Sellers have wasted three months or more of their selling season. If a foreclosure is pending, then you can see how expensive this bet may be for them.

I would recommend staying completely away from anything that resembles Flopping. If you don’t know whether you are in the middle of one of these prohibited transactions or suspect that something is amiss, then please get your short sale attorney involved.

We strongly suggest that the Seller use his/her own closing attorney for a short sale. Our firm requires it if we are facilitating the short sale. Why? Well, if the Seller docs are prepared by the Buyer’s closing attorney, as is usually done in a real estate closing in North Carolina, the Seller ends up with no legal representation in the transaction. By its very nature, the short sale is fraught with legal issues and liability.

The Seller’s closing attorney in a short sale should have a consultation with the Seller and review the approval that the bank/servicer has agreed upon and discuss how it will affect the Seller. This attorney would, therefore, need to have experience and understanding in the following areas of the law:
1. Deficiencies
2. Taxes
3. The Mortgage Forgiveness Debt Relief Act of 2007
4. Asset Protection
5. Real Estate closings

This is beyond the desired area of practice and experience of many attorneys who limit their practice to real estate closings. The reason this is so important is that the Seller should be fully informed of all aspects of the short sale, including the negative consequences prior to signing any closing documents. A fully informed and professionally handled client is a happy client with few problems down the road.

Here are a couple of examples of the issues involved in a short sale that would need to be discussed with the Seller prior to closing:

Example #1. If the deficiencies have not been released they should have a “deficiency plan” in case the bank/servicer files a lawsuit in pursuit of a deficiency judgment. This would include an explanation of the judgment process, the different possible results, what attorney or firm would be recommended to represent the Seller in that instance, and what a judgment would mean to the Seller.

Example #2. If the deficiencies have been release or if the deficiencies might be released in the future, they should have a discussion regarding the possible tax consequences. This may also include a discussion on estate planning in order to protect other assets in the future.

How this helps to protect the real estate agent:

The Seller’s real estate agent and the real estate company are much more protected with this approach. First of all, the likelihood of a complaint or a lawsuit is substantially diminished. Secondly, if there were a complaint or a lawsuit down the road regarding the short sale, the Seller’s closing attorney or Wilde Law Firm would be the responsible parties and therefore the target of the lawsuit. We both have malpractice insurance with a stable of attorneys that will come to our aid in this instance.

What I see throughout North Carolina is a scenario where the listing agent negotiates the short sale and the parties close with the Buyer’s closing attorney. The listing agent could have done an admirable job in the handling of the short sale with complete disclosure and explanation to the Seller. More often than not, though, the short sale was not handled as well as it should have been, the deficiencies may or may not have been discussed and the tax issues were a surprise for everyone. In either scenario the issue of the Unauthorized Practice of Law (UPL), negligence and fiduciary duty is at issue.

The bottom line is that a complaint to the North Carolina Real Estate Commission or a lawsuit could be devastating for the agent and their company because they are absolutely the responsible party and the only one standing in case of trouble. Further, it is unlikely that the E&O insurance would cover an agent in a UPL situation.

If you have not had to negotiate with a Home Owner Association (HOA) regarding past HOA dues in order to get a short sale closed, well you haven’t lived. It is, seriously, one of the more frustrating tasks that we have to handle. It seems that more than half of the HOAs have some hard and fast stance on not accepting anything but a full payoff of the past due amount. I have had a situation where we were racing to get a short sale approved in time to beat the foreclosure sale. We got it approved but had to deal with the HOA in order to close. In that case the HOA would not budge on their $12,000 HOA past due amount…even when we offered them $9,000. The property went to foreclosure and the HOA lien was wiped out so the HOA ended up with $0.

I have also seen a drastic increase in HOA’s filing foreclosure actions. I scratched my head at first trying to figure that one out. North Carolina is not a Super Lien State. In a Super Lien State the HOA’s lien jumps ahead of the mortgage in a foreclosure so they are always paid in full. In North Carolina the HOA lien falls in line behind the mortgages/deeds of trust and always gets extinguished in the foreclosure. So why foreclosure? As you may have noticed, the banks are not rushing to foreclosure for various reasons. We are seeing banks taking a year or more to even begin the foreclosure process. This means that the HOA can take title to the property, rent it and continue ignoring the mortgage(s). When the bank finally forecloses and title is transferred to bank, the HOA may have pocketed enough rent to catch up on the HOA dues and then some. This is either smart or fraud.

The bottom line is: Pay your HOA dues even if you have stopped paying the mortgage. The bank seems to have wised up and decided that a homeowner living in the property, not paying the mortgage and keeping the lawn mowed and the AC on is better than an empty neglected house. In that situation the homeowner is enjoying the use of the property so they should at least pay the HOA dues. By not paying them their fellow neighbors are the ones getting hurt and not the bank. Additionally, by not paying them you may be precluding a short sale if you don’t have the cash to catch the HOA dues up completely at closing.

The mantra for a Buyer should be WHAT IS THE FASTEST WAY TO GET MY OFFER APPROVED AND THIS SHORT SALE CLOSED. There is a long track of hurdles to get over between the offer and closing. That list includes: 1) document collection; 2) package compilation and submission (sometimes multiple times); 3) document review and additional document request; 4) valuation; 5) follow up and escalation; 6) negotiations with the bank for the short sale…better known as horse trading; 7) negotiations with the bank regarding the deficiencies; 8 ) Investor approval; 9) final HUD approval; 10) closing.

There is a misconception on the part of many Buyers as well as many agents that this is an easy and quick process. They think that you just have to present an offer to the bank and the bank gratefully takes the offer and considers it with thought and logic in a timely fashion and approves it. This is not the case. You would be surprised how many listing agents have this same belief. We have heard time and again from bank negotiators that agents send in an offer with no short sale package or an incomplete one, refuse to send in requested documents, and then yell at the negotiators when the offer is not getting any response. This is not a formula for success.

A short sale is a process that the offer (and the parties) must be go through in order to get an outcome…..any outcome…..even a rejection. I have heard from banks that their statistics tell them that less than 50% of approved short sales close. With that kind of a track record I can understand why they don’t do back flips when an offer is presented. In their eyes, the odds are against ever closing.
So if the odds are against you at the outset wouldn’t it be prudent for a Buyer to do everything they can to improve their chances of getting an approval if they truly want this property at their price…. sometime in their lifetime? One way to improve the odds is to have someone handle the short sale that knows what they are doing. As previously discussed, there are at least eight necessary steps to handle completely and professionally in order to obtain a short sale approval from a bank. There are certainly real estate agents, attorneys and third party negotiators who understand what many of these steps are. Of those I am sure that a few are performing every step (including the difficult negotiations required) necessary to get an approval at the best terms. If you are with one of them, then you are good to go. (In North Carolina and several other states this is considered the practice of law and an attorney is required to negotiate with the bank so check with your state’s Real Estate Commission and State Bar)

If, however, your short sale is being handled by someone that does not do this regularly, professionally and thoroughly, then your odds are well below 50%. If your short sale is being handled by someone who handles a short sale occasionally but is conscientious and determined then you are probably approaching 40% to 50%. If you are with someone with the requisite experience, focus and time, then your approval rate just doubled.

It’s the Seller’s short sale, so why should a Buyer get involved in who handles the short sale process? As discussed above, if a Buyer wants this deal, then the Buyer has a stake to protect and should have a desire to increase the odds of success. Additionally, the short sale may technically be the Seller’s. However, the deal is the Buyer’s, the property will be the Buyer’s, time spent negotiating a short sale (or wasting it on a rejection) is the Buyer’s and the eventual price approved by the bank is the Buyer’s.

Lastly, The Buyer’s Agent should also consider who is handling the short sale because it is their relationship with a potential buyer that is at stake. If an agent brings a buyer to a short sale and they wait for months on end because the agent on the other side doesn’t know what they are doing and they end up with less than satisfactory results, they may lose that Buyer forever. That Buyer is expecting their agent to help them through this arduous and confusing minefield we call short sales.

In North Carolina we now have a Due Diligence Period that can be negotiated and put in the Offer to Purchase and Contract (Offer to Purchase). We could have done it with the old contract but it is now a prominent part of the new Offer to Purchase. In a short sale situation, however, the best thing to put into this section is N/A. Why?

1. The Seller can’t make anything on a short sale. Unless this is a short sale under the HAFA guidelines, the Seller is not allowed to make any money on a short sale. If there was any ‘due diligence’ money paid to the Seller they will have to bring it to the closing as a cash contribution. It is a bad idea to give cash to a Seller (who probably needs it) and then have to ask for it back right before closing….especially if they also have to bring a cash contribution at closing for the short sale or for the release of deficiencies. Depending upon the amount, it could kill the deal….or more likely it would have to come from an agent’s pocket.

2. There is already a built-in Due Diligence Period in a short sale…for free! The Short Sale Addendum accompanies a short sale in North Carolina. This is the controlling document. In other words, if there is a conflict between the Offer to Purchase and the Short Sale Addendum, the Short Sale Addendum wins. How do I know this? It says so right on the Addendum. Anyway, the Short Sale Addendum allows the Buyer to walk at any time and for any reason, prior to receiving the approval letter…….. and the Buyer gets his earnest money deposit back. Most short sales are taking between 45 – 90 days to get approved. That is a 45 – 90 day due diligence period for free.

3. It creates a conflict and/or an unrealistic expectation. What we typically see put into the due diligence section is “30 days from short sale approval.” This theoretically creates a due diligence period that starts the day of approval and allows the Buyer to perform his inspections during that 30 period. There are two problems here: 1) The approval letter usually states that the Buyer has 30 days to close – not 30 days from the end of his due diligence period. As far as the bank/servicer is concerned, the Buyer should have done his due diligence on this “as is” contract prior to making the offer. The bank/servicer is not a party to the Offer to Purchase and is, therefore, not subject to it……and they are driving this bus; 2) The Short Sale Addendum states that the Buyer may walk away from the deal up to the date that the approval is received. After that, the earnest money goes hard and the Buyer is expected to close. Since, as we discussed above, the Short Sale Addendum controls in a conflict, there is no additional due diligence period. If the Buyer is not informed of this at the beginning of the short sale process, you are headed for a conflict. Emotions are high after 3 months of waiting and now you have to let the Buyer know that they have 30 days to close, regardless of what is in the Offer to Purchase and the unrealistic expectation it created.

Bottom line: Get your due diligence done as early in the process as possible (see earlier blog), put N/A in the Due Diligence section and be ready to close when the approval letter comes.

The simple answer is as soon as possible. I know that the Buyers don’t want to spend $350 for a home inspection before they know if the short sale will get approved. I get that, but lets analyze why it is better to get it done sooner rather than later:

1. Think “AS IS” contract. As you know, a short sale needs to be treated as an “as is” contract. The old game of negotiating an offer price, get the home inspection and then use the results to lower the price even further does not work in a short sale. If we get the home inspection results prior to the Broker Price Opinion (BPO) or Appraisal, we can use that to justify the offer price at the BPO inspection. This can help assure that the BPO comes in at or near our offer price. If we get the inspection results after we receive the approval there is usually nothing we can do with it as far as the bank is concerned. We are negotiating with the bank that is not the property owner. They only have a secured interest in the property so they are not going to fix anything. The real property owners, the Sellers, usually don’t have the money or incentive to fix anything. The only tool we have is to lower the price and we just spent 2 – 3 months getting an approval at the offer price.

2. What if the home inspection finds that substantial repairs are needed? If there is substantial structural damage we can use the inspection report prior to the BPO to justify lowering the offer price and supporting it at the BPO. This would be substantial roof damage, foundational issues, mold or something similarly expensive. We are not talking about the usual loose gutters, a leaky faucet or non-working ceiling fans. If we find out about it after the approval we are probably not going to get any concession from the bank/servicer. Sure, we have had a negotiator take a second look after the approval but it is rare. Even then it came with a lot of work and delay….all for $350.

3. Spend $350 instead of your time. If the Buyer wants to wait for the approval before he spends $350 on a home inspection then he does not value his time….or anyone else’s. If the Buyer is going to walk because of the results of a home inspection, wouldn’t it be better to walk sooner rather than later. They will lose the $350 anyway if they walk after the approval. If the buyer finds something they can’t live with they can terminate the contract and move on to another property and all it cost was $350. If they wait until after the approval, they lose the same $350 and 2 -3 months (or more) of their life waiting on nothing.

4. Play the odds. I know what you are saying…”short sales are hard and so few of them get approved.” We get most of ours approved. If the Buyer is serious about getting the short sale approved and not wasting his time, he should make sure that whoever is facilitating/negotiating the short sale knows what they are doing. This way the Buyer is not wisely spending $350 on an early inspection only to watch the short sale go south because the person handling it is clueless. Yes, short sales are sometimes mind-numbingly difficult but if you have the requisite experience and knowledge handling the short sale (hopefully an attorney) and you have a market price offer, you will get it approved. How does the buyer influence who handles the short sale? Do some research and make the offer contingent on XYZ handling the short sale facilitation/negotiations. (More on that in another blog)

5. Get it done early. The absolute best idea is to get the inspection done before you get a buyer. That way everyone knows the condition of the property from the beginning. You then put in a supportable ‘market price’ offer and the Buyer’s anxiety is down, which results in more patience from the Buyer and higher odds that the Buyer will stay through the whole process.

The bottom line is that if the Buyer is serious about getting this particular property in a short sale and does not want to waste his or anyone else’s time, get the inspection done early in the process.