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