| Louisville realtors, investors and debtors facing | | | | to a short sale. Remember, when I list the |
| foreclosure ask me from time to time how short | | | | property, the owner/debtor is my client (not |
| sales work. Consider this a primer.I recently | | | | customer). This means I must always act in his |
| brokered the sale of a house for $85,000 to an | | | | best interest. The lender is not my client and I |
| investor. The house appraised for $120,000, giving | | | | owe it no such duty. In a normal sale the seller |
| the investor substantial immediate equity. The | | | | and buyer have greatly divergent interests: the |
| lender took a $60,000 loss. The owner/seller was | | | | seller wants to sell at the highest possible price, |
| forced to sell his house, for which he received not | | | | and the buyer wants to buy at the lowest. In a |
| one red cent, and had to move into rental. How is | | | | short sale there is no such contest between the |
| it that all parties walked away from the closing | | | | parties: the seller wants to sell at any price the |
| table satisfied?!In the beginning... | | | | lender will accept, and will generally agree to any |
| When a home owner owes his lender more than | | | | price offered, contingent upon the lender's |
| he has borrowed, he's said to be "upside down on | | | | acceptance. So in a short sale, the lender takes |
| his mortgage". This can come about in many | | | | on the mantle of "seller" vis-a-vi the buyer and |
| ways, the principal amongst them occurring when | | | | these are really the parties who negotiate the |
| he simply stops making mortgage payments, | | | | contract. Now get your head around this one: as |
| often because he is in serious financial difficulty. If | | | | listing agent in a short sale I am often in the |
| his mortgage payment is $1,000 per month, and | | | | peculiar position of actively attempting to |
| he stops paying, or pays intermittently, the fines, | | | | negotiate for the sale at the lowest possible price |
| interest and principle can rack up pretty quickly. | | | | acceptable to the buyer! (But always with the |
| And if the owner can't pay the mortgage, | | | | caveat that this is in the seller's best interest, and |
| chances are he hasn't been able to make | | | | does not jeopardize the sale). This anomaly has |
| necessary repairs to his home. This situation is | | | | many ramifications for the way I conduct and |
| almost invariably accompanied by despondency, | | | | negotiate these transactions.Price, Terms and |
| which again leads to neglect of the house.Stir into | | | | Timing |
| the mix bankruptcy, and perhaps divorce, and | | | | Price: So how much will the lender lop off that |
| you'll understand it's not surprising to find the | | | | price? I've generally found that as the day of |
| homes of these owner/debtors are often | | | | auction approaches, lenders become more |
| seriously degradated. That leaky roof is probably | | | | malleable. Pretty inefficient, because they loose a |
| the last of the owner's problems.The "F" word | | | | lot of time and money that way. I supplied the |
| Foreclosure. It's not a happy prospect for the | | | | lender of The Willows property with objective |
| lender or the borrower. Lenders have different | | | | material indicating that the drive-by BPO was |
| tolerances for late payments. However by the | | | | inaccurate, given the condition of the house. The |
| time the debtor is late for the fourth consecutive | | | | lender then had an internal BPO done. That was |
| month the vast majority of lenders begin | | | | key to getting this particular deal done. I also sent |
| foreclosure proceedings. In Kentucky the | | | | off photos and comps of my own. In some cases |
| foreclosure sale of the home by public auction | | | | I've sent the lenders well over 100 photos. |
| takes generally anywhere from 6 months to a | | | | Pictures speak louder than words, and it's critical, |
| year from the time the foreclosure procedures | | | | when the property is damaged, that the lender |
| began. It can take longer - I saw one artful | | | | understand the shape it's in . Remember - the |
| debtor drag on the foreclosure proceedings for | | | | BPO realtor may be doing up to 50 BPOs a week |
| more that 20 months! Her mortgage payment | | | | - he could care less about this one deal. But as |
| was $1,300 a month. After 20 months that | | | | listing agent I need to keep the lender informed |
| became a significant debt compounded by late | | | | of all issues that coincide with my client's best |
| fees, interest, legal costs, and the potential cost | | | | interests. The second Willows BPO came back at |
| of selling the property at a public foreclosure sale. | | | | $100,000, and the lender initially tried to obtain |
| To say nothing of the continuing, moment by | | | | that figure. Ultimately, with the foreclosure sale |
| moment deterioration of the property. By the | | | | due to occur the next day, it reduced that |
| time she moved out the bank had written off in | | | | amount to 80% of the $100,000 plus $5,000 to |
| excess of $80,000.The lender's and borrower's | | | | pay off non-mortgage related liens. At 4.50 pm |
| conflicting interests. | | | | the lender agreed to stop the foreclosure sale |
| Capitalism is a wonderfully contrived system. It | | | | scheduled for 11.00 am next morning.But hey, it |
| hands not only the power-barons a potent array | | | | ain't over 'til the fat lady sings! Because the loss |
| of weapons with which to fight, but also the poor | | | | on this loan was $60,000, and because the lender |
| and destitute. Though the battlefield is nowhere | | | | had authority to settle up to $30,000 only, we |
| near even, double digit interest thrust too deeply | | | | had to wait for final word from the mortgage |
| down an indigent debtor's throat may precipitate | | | | insurance company, which we eventually obtained, |
| his "nuclear" retaliatory option - Chapter 7 | | | | but not without many hours additional work.As |
| bankruptcy. And so these two, symbiotically | | | | you see, the price of The Willows property was |
| entwined, are locked in an elegant dance, | | | | determined by the lender looking at the bottom |
| teetering between dividends and disaster, profit | | | | line - how much net it would receive. And in order |
| and poverty. One serious mis-step, and the band | | | | to get this number, all lenders in short sales |
| stops playing.Thus, from years of bitter | | | | request a "fake HUD-1" or a "net sheet" |
| experience, lenders have learned that it's often | | | | submitted simultaneously with the offer. In a |
| better (cheaper) to attempt to gain the | | | | normal real estate transaction the HUD-1 is drawn |
| cooperation of the owner and have him agree to | | | | up at the end of the transaction, after agreement |
| voluntarily sell and vacate his home, rather than | | | | is reached. - in a short sale the title search is |
| evict him under foreclosure. Lenders also | | | | performed immediately upon listing, even before |
| understand that the chance of ever recovering | | | | there's an offer, so that the figures can be applied |
| the money owed to them by the debtor is slim. | | | | to the net sheet as soon as needed.Terms: The |
| But many debtors choose not to sell because, | | | | most common terms distinguishing these deals |
| around the time they realize they will never catch | | | | are that the lender often requires terms such as |
| up on their payments, they often have another | | | | "sold as is" and "proof of finance or funds required |
| "Ah Ha!" flash of insight: that if they stop paying | | | | with offer", and to protect the seller, the realtor |
| their mortgage and just wait for the foreclosure | | | | should insert terminology indicating seller's |
| axe to fall (or better yet, engage in a hatfull of | | | | acceptance is subject to release from all liability |
| tricks to keep that axe at bay) they can live | | | | for debt. None of this is carved in stone, and I've |
| "rent free" for at least 6 months. So now the | | | | negotiated repairs and other concessions from |
| debtor turns from borrower to squatter, | | | | lenders. Each case is unique. Paper will suffer any |
| perceiving it to be in his best interest to prevent | | | | indignity - write the offer!Timing: The REO, |
| the foreclosure for as long as possible. And if the | | | | Foreclosure and Bankruptcy departments often |
| house, the lender's "security", should fall apart in | | | | appear to be understaffed and overwhelmed, so |
| the meantime, so be it.The solution | | | | don't expect instant responses. Some will take |
| The lender is in a position to offer the borrower | | | | weeks to reply. Make sure the buyer and seller |
| a very important concession for his cooperation: | | | | understand this. But once a deal is struck, the |
| to write off the entire debt if the borrower finds | | | | lender will often expect an unreasonably quick |
| a buyer to buy the house at a price and terms | | | | closing, and will attempt to penalize you with days |
| acceptable to the lender, within the time stipulated | | | | interest for closing after a certain date. This all |
| by the lender. This is the essence of a short sale. | | | | goes back to the net sheet calculations; because |
| Lenders set their own guidelines for what they will | | | | you have informed the lender how much it will |
| accept. They may say they need to get fair | | | | receive by a certain date, it then attempts to |
| market price, but will in fact often be prepared to | | | | hold the line at that date, even though they are |
| sell for much less. They do not want to chance | | | | generally very slow to respond. The Willows |
| selling this house at auction and risk receiving a | | | | lender, after having not responded to multiple |
| very low price. Or worse yet, receive a bid so | | | | contacts, gave us just 2 days within which to |
| low that the property does not meet their | | | | close! Fortunately we well prepared, but it was |
| reserve price, and they end up owning the | | | | very close.Closing Note |
| property. In this case the property is administered | | | | The tax consequences of short sales fall outside |
| by the lender's REO (real estate owned) | | | | the scope of this article. If you want info on how |
| department, which will then list the property with | | | | to handle competing offers, dual limited agency |
| a realtor. And the cycle begins again......The Lender | | | | within this environment, or need a copy of the |
| initially said The Willows house was worth | | | | net sheet I use, you may contact me.Update |
| $120,000, and wanted it sold at about that price. | | | | Here's a new twist. A couple of weeks ago I |
| It got the $120,000 figure from someone it had | | | | submitted a $235,000 offer to a lender on a short |
| hired to do a BPO. BPO is short for "Broker's Price | | | | sale, (Seller owes about $275,000) which the |
| Opinion." It is similar to a CMA (Comparative | | | | lender ultimately accepted. However, in it's |
| Market Analysis) and serves the same purpose: | | | | acceptance letter, at the very bottom of the |
| to arrive at a fair market value for a property. | | | | sheet, the lender stipulated that it retained its right |
| Most are done as a "drive-by," meaning that the | | | | of recourse against the seller/borrower (my |
| "driver" (usually a realtor, maybe an appraiser) | | | | client)! And this despite seemingly contrary |
| drives by the outside of the property, takes one | | | | language in the main body of the letter. I |
| to three photos and leaves. He then completes | | | | explained to the lender that the ONLY reason my |
| the lender's BPO form on-line and e-mails it with | | | | client had agreed to the short sale (and not to |
| the picture. Sometimes an "internal" is requested, | | | | jerk the lender around in the bankruptcy |
| in which case the realtor goes into the property, | | | | proceedings) was because he expected to obtain |
| takes about 3 internal and 3 external photos and | | | | a complete release from all liability at closing. After |
| sends these through to the lender with the | | | | a weeks or so of wrangling, attorneys etc, the |
| completed BPO form.When the debtor had | | | | lender "saw the light" and agreed to the |
| realized he would not be able to save his house in | | | | release.CMA |
| The Willows, he contacted me to see if I could | | | | Though the information provided is considered |
| help. He did not want a foreclosure on his credit | | | | reliable, it is not complete, nor warranted accurate. |
| report, which would have prevented him from | | | | Always consult your broker or an attorney.My |
| getting a conventional mortgage for three years. | | | | name is Neil Blumberg, real estate broker and |
| Even with a Chapter 7 bankruptcy, the wait | | | | recovering attorney (South Africa), currently |
| period is only 2 years from dismissal. He also | | | | residing in Louisville, Kentucky. I specialize in the |
| wanted to have his debt forgiven. I was able to | | | | arcane art of creative finance, and assist my |
| accomplish both these goals, saving him about | | | | clients buy and sell homes and investment |
| sixty thousand dollars.The short sale process | | | | residential and commercial real estate. Member of |
| As a Realtor, the first thing I did was explain to | | | | various real estate organizations including Real |
| my client all his theoretical options, including deed | | | | Estate Exchangers, recent service on the Greater |
| in-lieu of foreclosure, loan renegotiation and others. | | | | Louisville Association of Realtors Forms |
| He settled on short sale. I listed The Willows | | | | Committee and am currently Chair of the |
| property, and had him sign an authorization for | | | | Louisville Chapter of the Real Estate Cyberspace |
| me to contact the lender to see if it would agree | | | | Society. |