Real Estate Investing

Homes in default are up 140 percent from 2006.  One-third of all home loans that closed in 2006 were considered subprime loans - or loans given to buyers with a credit score of less than 680.  The number of homes entering into foreclosure is expected to top one million this year, with 60 percent of those being subprime mortgages, according to Freddie Mac.

Yesterday at our sales meeting, a speaker from a title company gave us these facts and figures in an effort to help prepare real estate agents for what is expected to be a flood of short sales.  Why would a lender forgive part of the homeowners debt through a short sale?  Because on average, if a lender puts a home back on the market it will cost $62,000 for them to sell it.  If a lender can stand a loss of just $10,000 they’re in.   Further, many times a lender will offer the seller/homeowner CASH to leave the home in good condition - ranging from $1000 to more than $5000.

A pre-foreclosure sale (PFS) might be an option when a home is worth less than is owed and the homeonwer has demonstrated financial hardship (loss of job, flat out inability to pay because ARM went sky high, medical problem, etc.).  But if a homeowner is in trouble, they’ll hae to submit all required documents proving this information within a very specific time-frame.  If they’re an hour late, the short-sale (or pre-foreclosure sale) could be over before it even begins.  Also for a PFS to work, if there is a second mortgage (a junior lender), they will have to be agreeable to accept little or nothing as a result of the short-sale.

Things You May Not Have Known

Everything is negotiable in a preforeclosure sale!  You may be able to preserve your credit rating - or at least not take a nasty dive - if you negotiate it and if you’re NICE.  The average drop due to a foreclosure is 250 points, the drop to a preforeclosure sale is 100 points.  But if you negotiate how it will be reported, the credit score drop could be as little as 25 points.

If your home does go into a preforeclosure sale, it will have to be appraised.  Ask the lender to pay for the appraisal - they generally will if you just ask.  If you have an escrow account with the lender, be sure also to ask for a refund of your insurance and taxes that have been paid.  Technically, that money should be yours so the mortgage holder should not hold it.  If they resist, talk to a tax or real estate attorney so they can clearly explain your rights.

There may be tax implications if your home is sold as a short-sale.  Uncle Sam considers the $20,000 in loan forgiveness as earnings, so you might owe taxes on the $20,000.  Again, talk to a tax expert for advice about this.

Want to buy?

If you’re interested in buying a short-sale home, the Pensacola Real Estate News site has some great information.  Karl quoted someone from the Active Rain community about short sales,

“Here in Florida many of us agents have been throwing cash and buyers at the short sales to no avail. There are not enough processors.  What I am being told is that they cannot find enough “qualified” people to make decisions and that the board of director’s only meets once or twice a month to make these decisions.”

Do your homework before selling or buying a home through a short sale!

Most excellent photo from the Pensacola site.

At Wexzilla.com, James Wexler is calling for a ban on all non-approved short sales.  Having experienced the nightmare of a short sale, I have to agree with him that banks often cause their own problems and make incredibly bad business decisions.  Sometimes they cut off their nose to spite their face.

First, what is a short sale?  According to Real Estate Webmasters,

A real estate sales transaction executed with the understanding that the seller will payoff their lender less than what is owed on the property.

This “deal” for the seller is often accompanied by multiple problems.  For example, the lender may choose to issue an IRS 1099-A form that shows the deficiency as income which the borrower may have to pay income taxes on.  So if the seller owes $100,000 on a property that sells for $90,000, the IRS will count that forgiven $10,000 as income and depending on your tax bracket, you may be out another $2000 next April 15th.

An agent in my office was working with a buyer who wrote a good offer on a short sale.  Four months later, the bank still hadn’t given them an answer on whether or not they’d accept the offer, so the buyer walked away.  This is similar to what James at Wexzilla was saying,

• The buyer offered $260K.
• The offer was not accepted.
• The bank accepted a lesser price offer.

The bank said no because the buyer offering MORE money was buying through an FHA program.  You’d think with the Feds guaranteeing the loan, they’d jump at accepting them.

In my humble opinion, the banks holding these foreclosures are doing just as much harm on property values as the person who didn’t pay their mortgage and lost the home.  I know there are mountains of paperwork and endless committees that mull the decisions, but I’d advise the slow banks to pull their head out of the sand and move these properties before they become a blight on the neighborhood.

When I first heard the word “short sale” at the beginning of my real estate career, I mistakenly thought it meant the sale was going to be fast.  Actually a short sale means the lender will accept *less* for the home than what is owed in the current mortgage, so they’ll be short the loan payoff.

I listed one house as a short-sale and it was approved in advance of the home going on the market.  The seller had a heart transplant and his wife was a secretary.  He was unable to work, but stayed home to care for his two young daughters who in fact helped care for him a lot during his recovery.  When a low income family has to decide between feeding their children and paying for a serious medical condition or making a house payment, making a mortgage payment becomes the third choice.

In this case, when the contract was received we had to write a counter that stated the offer was accepted by the seller but the lender had to review and accept as well.  I had to submit a net sheet to the lender that outlined how much repairs would cost, termite inspection and treatment costs, seller closing fees, broker commissions, and any other expenses.  The net sheet, contract, and other supporting documentation was reviewed by the bank’s facilitator and then passed to the board for final decision.  Thankfully, the mortgage company was very cooperative during the process, which still took two months to play out. 

I was one of the lucky ones in my office who basically had a smooth short sale transaction.  Another agent submitted a contract for a short sale.  The bank has not taken action on the offer for THREE months.  The last I heard from the agent, who has since left my company to open her own office as a broker, her buyer was giving up and finding another property.

Given the glut of foreclosed homes on the market, I would expect banks to jump when they receive a fair offer on a home.  When they drag their collective feet, it has a negative impact on our local real estate markets.  The house is likely sitting empty - an open invitation for vandalism and abuse - which will bring the value down.

Another agent writing at Active Rain told about how he finally began calling the lender every hour asking for a decision.

Unfortunately, like many prior, the lender “misplaced” the faxes and emails I was sending. We also didn’t get to chat with the “negotiator” (I use negotiator loosely with this lender because of their inability to communicate very well,) until the end of April. The last time, prior to yesterday, I talked to the lender was May 2nd! I was supposed to get the approval that day or within a couple of days from then.

And John Occhi of Hemet, California wrote a wonderful piece after he attended a class on short sales.  He has a lot of class notes packed in his post (including a disclaimer that his notes could be written wrong, etc.).  Here’s one note I thought was interesting - especially the bold headline,

BANKS DO NOT INITIATE SHORT SALES. SELLERS & AGENTS DO:
The above Beneficiaries (aka “Bennies”) are always negotiated with by the seller, or assisted by the agent. Lien holders rarely agree to 6% listings. Commissions can range from 1-5%, depending a number of factors.

Meanwhile, if you think you might be interested in buying a short sale property, be aware that it may take a long long time.

Photo from here.