Who Wants a Short Sale?

As far as short sales are concerned we have long since taken care of most of the individuals who should not have gotten a loan at all or a loan larger than they could handle. The next wave of client was the individual who lost their job or a portion of their income and has been holding on, waiting for the market to bounce back. We will continue to see these clients as they realize that not only have we not hit bottom, but that the bounce will not be there when it does.

We are also seeing the 800 credit score never-missed-a-payment client who is facing this reality and making a financial decision to do a short sale, a “strategic short sale” so to speak. This client will become a larger portion of the participants in the short sale market because it will simply not make any financial sense to service a $500,000 loan on a $300,000 property regardless of the interest rate or the number of years the bank is giving them to make the payments

We are seeing that same client sometimes forced into a short sale or foreclosure position by the terms of their loan. Many of the “investor” loans were loans with balloons after a number of years. These loans are coming due and there is no ability to rewrite that loan or to even continue on the same terms. An example is a client who paid over $500,000 for a house. The market value of that property today is about 60% of the mortgage amount or $300,000. The loan is coming due next month and the bank can’t renew the loan because the collateral is far less than the loan amount. In this example the client would have to pay at least $200,000 in cash to have the loan renewed (at $300,000). I know very few people who can or will come out-of-pocket $200,000 for a property worth $300,000 and still owe $300,000. Their option is to attempt a short sale or walk away from the property and have a foreclosure.

Completing a short sale involves much more than just sending in an offer that the bank accepts. By definition the Seller’s mortgage and judgment lien debts must be negotiated. There are three issues of liability that face the real estate agent and/or a third party facilitator who takes on the job of negotiating a short sale with a bank in North Carolina. First there is the Unauthorized Practice of Law. Second, and just as important, is the liability that goes with every short sale. Third is the statute concerning Debt Adjusting.

1. The Unauthorized Practice of Law Without a License. A real estate agent is licensed to negotiate between the buyer and seller. An attorney is licensed to advocate/negotiate between the client and a third party. The unauthorized practice of law is illegal because a person who is not trained and licensed as an attorney may seriously harm the interest of a member of the public by providing incompetent legal services.

The North Carolina Bar Association has stated, “Generally, a real estate agent can negotiate strictly financial terms on behalf of the client. Once questions arise about the legal rights of the client, such as whether a deficiency judgment may be entered or if there will be a complete release of liability or if there is a pending foreclosure, the agent is no longer negotiating financial terms, but is negotiating a legal settlement. That would be the practice of law.”

There are, however, deficiency issues and tax consequences associated with every short sale. These liabilities could easily be $100,000 or more. The “Catch 22” is that the real estate agent is not allowed to represent the seller in negotiations or settlement discussion regarding the deficiencies and tax issues. If these are not discussed and properly handled, though, the real estate agent and the agency they work for may be held responsible for such neglect. This is where law suits are born.

To take it one step further, if a foreclosure has been filed the real estate agent cannot even negotiate financial terms because that would be advocating on behalf of the Seller in a lawsuit. This is specifically the practice of law and the agent should be even more careful as to what, if anything, they do for their client in this situation.

The Unauthorized Practice of Law is a Class 1 misdemeanor criminal offense that may be prosecuted by the local district attorney.

2. Liabilities Inherent in a Short Sale. As stated above, if a real estate agent does take on this advocacy role on behalf of a Seller, the agent may also be taking on all of the responsibility and liability that would normally be associated with an Attorney.

3. Debt Adjuster – Class 2 misdemeanor. The North Carolina State Statute §14-423 states: “If any person shall engage in, or offer to or attempt to engage in, the business or practice of debt adjusting, or if any person shall hereafter act, offer to act, or attempt to act as a debt adjuster, he shall be guilty of a Class 2 misdemeanor.”

The bottom line is that if a real estate agent or a third party short sale company negotiates the Seller’s debt with the third party bank for a fee, they would be considered a Debt Adjuster under the statute and would therefore be guilty of a Class 2 misdemeanor.

So who can negotiate a short sale? A) The Seller, because it is their debt and their short sale. B) An Attorney.

I should start off by clarifying that the bank the mortgage payment is going to usually does not own the loan.  Most often they are just servicing the loan.  The loan is owned by an “investor.”  That could be another bank, a hedge fund, an investment group, Fannie Mae, Freddie Mac, a company or an individual.  It will make the discussion easier to just say bank as the servicer and the investor should have the same incentive.   “Should” is the operative word here.

The simple answer to why a bank wants to do a short sale is money.  More money now in compared to a foreclosure.  A foreclosure represents less money an indefinite time down the line with a great deal of hassle in the interim.  You may immediately ask, “then why are the banks being so difficult if they want it so much?”  Good question.  If I were King of the banking world things would certainly be different:  Real loan modifications with reduced principals, streamlined short sale approval processes and a little logic and thought on the part of the banks thrown in to name a few changes.

Ah, but we are where we are.  The picture that most folks have when dealing with a short sale is that they are dealing with a real banker who is looking out after the best interest of the bank or the investor.  The better and more realistic picture is that we are dealing with a negotiator in a cubical somewhere with 250 files on their desk with their hands tied.  The investor has tied the hands of the negotiator by giving strict parameters by which the investor will accept a short sale.  The overworked and underpaid negotiator is doing their best to craft your offer so that it meets the guidelines set by the investor.

There also seems to be a good deal of fear on the part of the banks that they will somehow be taken advantage of if they are not very, very careful.  My hope is that eventually they will see that we are at the tip of the iceberg and there are millions of short sales left to handle in order to get mortgages in line with market values.  Additionally my hope is that the banks will see that most people requesting a short sale are not trying to take advantage of the situation.  These people are in a desperate position that they never dreamed of.   They would much rather be paying a mortgage on a house worth at least as much as the mortgage.  Instead they are contemplating a short sale and taking a hit on their perfect credit score for the first time in their lives……and trying to do the right thing.

So, with the knowledge of the investor’s incentive and fear and the negotiator’s dilemma, perhaps your patience will grow when handling your next short sale.

We handle short sale files day in and day out.  We keep an eye on any trends or changes on how banks/servicers handle short sales from week to week.  At the present time we are receiving most short sale approvals 60 to 90 days after submitting the short sale package.  This is a change from just 3 months ago when the files were averaging 45 – 60 days.  There are a few banks/servicers that are taking longer still but the major banks/servicers are all taking about the same amount of time to complete the short sale process.  Once the approval has been given the bank/servicer will expect the buyer to close within approximately 30 days.  The entire process, therefore, takes about 90-120 days total.

The primary factor that determines the success and the length of time it takes is how knowledgeable and thorough the person submitting the short sale is:  Is the package complete and perfect when submitted?  Is it a “market price” offer?  Did the appraisal come it too high?  Did you respond quickly and politely to the negotiators request?  Did you follow up on a regular basis and escalate the file when necessary?  Did you properly address the deficiencies in a timely manner?

There is no right to a short sale.  This is a process that the seller must go through in order to get an approval.  There are many different steps to a short sale and usually with a great deal of hard negotiating to do.  The more professional, polite and experienced the person handling the short sale the faster and better results they will have.

How does hiring an experienced short sale law firm make attaining your short sale easier? While banks and mortgage note holders are now more willing to accept short sale offers, getting a short sale approved is a process with many steps, requirements and possible pitfalls. The attorneys at Wilde Law Firm, PLLC are experienced and confident with the short sale process. Our law firm concentrates solely on short sales and we are dedicated to using our experience to help you, the real estate agent, focus on selling real estate and avoid the possible liabilities associated with the short sale process. Please click below for further information about how Wilde Law Firm’s attorneys can help you navigate through your short sale today.

The following is not to be construed as legal advice. Consult an attorney today to learn more about your rights. Some options you may have when faced with foreclosure include:

SHORT SALE – A short sale is a sale of real estate in which the sale proceeds “fall short” of the balance owed on the note and deed of trust. The note holder or “investor” has been granted a secured interest in the property through the deed of trust. The deed of trust is recorded with the Register of Deeds in the county in which the secured property is situated. Many times, banks have incentive to accept a short sale offer, because the bank knows from experience that a “market price” short sale offer will save them the time and expense of a foreclosure; which includes the trouble and expense of taking title to the property after a foreclosure and selling it through their REO (Real Estate Owned) department. Banks are also aware that proceeding via short sale will usually bring 15% to 20% more than if the loan goes through foreclosure.

LITIGATION – As with many types of litigation, foreclosure litigation can be time consuming and expensive. Foreclosure defense attorneys can use a number of strategies to help fight foreclosure. Motions can be filed challenging a lender’s right to foreclose, and a foreclosure defense attorney can appear in court to argue the case on your behalf for court hearings set by the lender’s attorneys. Many times, however, while attorneys are doing their best to advocate for their client’s rights, the end result of the litigation is simply that a lender’s right to foreclosure is recognized by the courts and property owners are forced to then pursue one of the other avenues to avoid foreclosure from the list above. This is all after an individual has paid his or her attorney a retainer from which the attorney collects an hourly fee, a flat fee in advance, or an agreed to monthly fee. While foreclosure attorneys do their best to protect their clients’ interests, a true avoidance of foreclosure via foreclosure defense litigation, without use of one of the other foreclosure avoidance options, is a rarity.

LOAN MODIFICATION – A loan modification is another way to avoid foreclosure. In a loan modification, banks work with borrowers to reduce monthly payments to a reasonable amount that a borrower can now afford based on his or her changed financial situation. There are guidelines that borrowers are required to meet to qualify for federal modification plans and internal modification plans created by the banks themselves. Qualification for a loan modification is not a guarantee and this process takes time. Many times a healthy stable income must be shown. Also many times when a loan modification is approved, banks will require borrowers to contribute a “down payment” to begin the modification. During these economically depressed times, many people who are happy to learn they have been approved for a loan modification are disappointed to learn that they must put an amount down to start the plan that they are in no way able to afford. Another factor individuals must consider when pursuing a loan modification is the possibility that the reduced amount of payment now will result in a longer loan life as the current mortgage payment amounts in delinquency are many times added on to the back end of the loan. This means years could be added to the amount of time you originally expected to be paying back the original loan.

BANKRUPTCY – Filing for personal bankruptcy under Federal Laws is yet another option for those who are in the foreclosure process. The two types of bankruptcies commonly used by consumers are Chapter 7 and Chapter 13 Bankruptcies. Chapter 7 Bankruptcy is a complete liquidation of assets. The debtor in a Chapter 7 Bankruptcy is discharged from all dischargeable debts as defined in The United States Bankruptcy Code, but must turn over all nonexempt property to the assigned Bankruptcy Trustee. (Some property is exempted from liquidation. Consult a licensed Bankruptcy attorney to learn your rights) There are also financial guidelines an individual must meet to qualify for Chapter 7 Bankruptcy. While filing a bankruptcy can serve to stay a foreclosure proceeding (put a foreclosure proceeding on hold), lenders can file a motion in the Bankruptcy Court to lift the stay so that the foreclosure proceeding can continue. There is also the possibility of negative consequences to an individual’s credit in filing a bankruptcy that subsequently results in foreclosure. In a Chapter 13 Bankruptcy there is a formation of a repayment plan to pay back all or part of the debts an individual has. The repayment plans typically last three to five years. In a Chapter 13 Bankruptcy, borrowers will many times choose to remain in the home and have that debt added onto the repayment plan. A monthly payment is calculated based on the amount of debt an individual has, their typical expenses and their expected regular income. In pursuing a Chapter 13 Bankruptcy many times people are unaware that when the repayment plan is over, normal mortgage payment schedules will resume. This means that if an individual’s financial situation has not improved by the end of the Chapter 13 plan, there is a possibility that the foreclosure process can be restarted if they are again unable to afford the monthly mortgage payment.

DEED IN LIEU OF FORECLOSURE (DIL) – A deed in lieu of foreclosure involves borrowers voluntarily transferring ownership of the property to the lender to satisfy the total amount due on the mortgage. As in a short sale, lenders many times see this as a favorable route since they avoid the expenses associated with continuing the foreclosure process and taking title to the property. Also like a short sale, this is a process with many steps and possible dead ends. This is why when pursuing a deed in lieu it is helpful to consult with experienced professionals like the attorneys at Wilde Law Firm, PLLC to make sure that your goals are met before time expires and the property is sold as a foreclosure sale. Remember that while possible workout options are being discussed with your lender, the foreclosure process is continuing. This is why time matters in the negotiation and workout process, and why experience and familiarity with lenders’ loss mitigation procedures is key.

REINSTATEMENT AND PAYOFF – Reinstatement and Payoff procedures can be worked out with lenders or lenders’ attorneys when a property has gone into the foreclosure process. In a payoff, the borrowers agree to pay the remaining balance owed and all delinquent payments to the lender. The obstacle here is that most individuals are unable to afford to pay off the balance of their loan. Reinstatement procedure involves paying the lender delinquent payments to get the mortgage loan up to date. This reinstates the loan and ceases the foreclosure process. When pursuing reinstatement, a reinstatement figures will need to be requested from the bank. These figures many times shock borrowers when they return, as the amount owed now includes interest, various internal fees and the bank’s attorney’s fees. When the foreclosure process begins, banks as business entities must hire attorneys to represent them in the foreclosure process. The amount that banks pay to their foreclosure attorneys are almost always added onto reinstatement figures given to borrowers to make the loan current and avoid foreclosure. In addition to new fees and costs a borrower must pay to reinstate this loan, there is the question of whether or not the property is an investment the borrower wants to continue making payments on. With many homes being “upside down” (the amount of the loan is greatly in excess of the value of the property) in today’s market reinstating a loan may not be the best way to meet your goals. Which option is your best option? There are many options one may pursue when a person is in the foreclosure process. Please consult with one of the attorneys at Wilde Law Firm, PLLC so that we can discuss with you today why a short sale of your property may be your best option. The Wilde Law Firm, PLLC has North Carolina’s most experienced short sale lawyers and they are ready to use their legal training and skill to guide you towards a successful short sale. “Let us concentrate on what we do best…short sales…so you can concentrate on what you do best…sell real estate.” Contact the attorneys at Wilde Law Firm, PLLC, your North Carolina Short Sale Attorneys today.