Real Estate Investing

Although short sales have become fairly commonplace in the last year, lenders have parameters that must be met to qualify to sell a home “short” of the payoff amount.  Parameters that *most* banks require, that is.  Some still don’t pay attention.  In a very illuminating post by Pacita Dimacali, an East Bay, North CA real estate agent in Alameda, one specific lender gets a pretty powerful dressing down.  She also writes on ActiveRain what conditions are defined as “hardship”:

HARDSHIP conditions include, but are not limited to:

Unemployment
Reduced income
Divorce
Separation
Medical bills
Too much debt
Death of spouse
Mortgage payment increases
Business failure
Job relocation
Illness
Damage to property
Military service
Incarceration

A friend of mine qualifies at least four of the 14 items listed here, but also deals with this bank that’s mentioned as being one of the worst for short-sales.  I think she’s bound for foreclosure before they ever get the paperwork done for a short-sale.  I hate that she’ll go through this, but she is not alone - there are a lot of people who sympathize with her position. In fact one commenter wrote (regarding the bank),

I know many say had our all-wise government just let the banks go ahead and fail it would have caused world-wide disaster. Well, I wish they had stayed out of it and let the chips fall where they may. No one comes to my aid or yours if we make bad decisions. As for the world-wide disaster, I think the banks are causing it themselves right now.

They do not care. That’s all. The top brass got their bonuses and that’s all that really mattered.

Read the entire article along with the comments.  Very very enlightening and I’m all about informing the consumer!

First… what is a short sale?  It’s not a “fast” sale like the name would lead you to believe, but it’s a sale caused when a homeowner is in distress.  Perhaps he or she lost a job, had a medical problem that wiped out savings and income, or an adjustable rate mortgage went so high up they could no longer afford the payment.  Maybe the home is located in an area labeled by FHA as a declining market so they can’t get out of the home what is owed on it.  In any case, the owner can’t make payments for a compelling reason, so the mortgagor agrees to allow the home to be sold FOR LESS THAN THE AMOUNT OWED on the loan.  They are SHORT the loan payoff, so it turns into a short sale.

In today’s economy, we see many many many homes on the MLS that are marked “short sale” and along with these increasing numbers are increased incidents of short sale fraud.  Typically, some people who are “short sale experts” know the bank will take “X” amount for the home.  They line up an investor to purchase the home at the reduced price, all the while marketing it for a higher price to someone else.  They’ve effectively tied up the property with their sales contract until they find a buyer.  Then they’ll close with the new buyer first and use the proceeds to then close on their original deal with the bank/mortgage company.  And they pocket the profits.

Now I’m no short-sale expert so in my mind these details may be muddy… but if this is how it works - and this is how it was explained to me - that is short sale fraud plain and simple.

Here is an excellent outline from fraudproblem.com about this scam. 

People say they are “helping” homeowners by negotiating a Short-Sale.   However these people are investors, who are trying to obtain a home for less than market value.  Their goal is to convince the homeowner that they can…..”help” solve the foreclosure or sales problem.

Here’s another article published early this summer in the San Francisco Chronicle.

The FBI is currently investigating more than 2,100 mortgage fraud cases, a 400% increase since 2004, says the Center. The frauds includes sale-leasebacks, quitclaims, stripping homeowner equity and misleading homeowners into signing over deeds.

Read more: http://www.sfgate.com/cgi-bin/blogs/ontheblock/detail?blogid=58&entry_id=41652#ixzz0Qce9X8Fy

Selling agents are positioning themselves wide open for future litigation if they participate in one of these types of deals.  For the homeowner, caution is also advised because they may still have a tax liability on the debt that was forgiven.  No matter how you look at it, any type of FRAUD is wrong and could do far more harm than the immediate benefits you think you’re getting.

Each week my company publishes a newspaper insert for our local paper featuring homes, open houses, and auctions.  Usually the editor also features a local charity (e.g., United Way, Elephant Sanctuary, etc.) that I don’t pay a lot of attention to.  I know, my bad.  I should be more sensitive to the needs of charity.  This week, however, the feature story was about avoiding foreclosure and my neck loudly cracked due to the speed of pouncing on the article.

The article is packed with good advice and since I’m all about sharing the good stuff, I’m passing it on to you.  First, credit where credit is due:  Janet Mills is broker of the Rutherford Office of Bob Parks Realty and wrote the article from information provided by Thom Scott of Fusion Real Estate Consulting.

If you are a home owner behind on your mortgage payment, you first need to be in touch with your lender.  Don’t put your head under a rock and hope the problem goes away - it will not.  By keeping an open line of communication with your lender, they should be more willing to help you through the problem times.  If there’s no way you can ever get caught up on your loan, however, a short sale is a better option than foreclosure.

The Short Sale results from a negotiation with your lender. This is often helpful to both lender/seller when the value of the property is equal or less than the money owed and the owner can no longer afford the monthly payment.  The negotiation involves setting  a reasonable market price; the owner and the lender agree to accept the price the market will bear. This can result in less than the amount owed on the property.  This will create a deficiency, i.e., a remainder on the loan that will not be paid off by the sale.  The lender can forgive this deficiency, or it can be recorded as an amount owed by the owner to the lender.

Forbearance is another option closely related to the short sale.  This is also negotiable with the lender to reduce the amount of your monthly payment for a defined amount of time - and you won’t be reported as being late or deficient to the credit bureaus, according to the article.

Forbearance will require all the same documentation and information as the short sale, plus a detailed budget showing all income and expenses for the household. However, it can work to the owner’s advantage. While the homeowner is making the newly negotiated payment and if you have negotiated correctly, the bank is reporting that you have made your payment on time. You are actually building positive credit while you work yourself out of a difficult situation.

When people are in a state of financial distress, they often don’t reach out for the help that’s available to them.  We urge you to make some phone calls for help… your lender is a great first step or find a financial advisor who can also help you find solutions.  A simple search on Google for “Financial Advice” brought over 15 million links.  Reach out.  Get help.