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Short Sales - Who Wins and Who Loses?

People are out there hyping SHORT SALES like they are the solution to everybody's problems.

I don't think so.

If you are one of the losers because of a short sale you didn't "solve" your problem you just added to your problem.

So who are the losers, anyway?

The biggest loser is everybody that owns property in the area of the short sale. Short sales drive prices down.

You say the prices are already down and the short sale just recognizes that. NOT TRUE.

To really understand this phenomenon you have to look at who is buying short sales. It is NOT Mr. and Mrs. Average Homebuyer. It is professional short sale buyers. You know those guys: Ali Baba and the Forty Thieves. They've always been around. They buy business assets when the IRS seizes your business for back taxes. They pay "pennies on the dollar." They buy "cash flows" from ignorant people that would rather have it all right now and don't care how big the discount is. They show up at Bankruptcy hearings and probate sales, and any other place they can find somebody whose bones they can pick over.

So why are they the buyers of short sales? Because the way short sales are handled by the banks only these guys can buy them. They need all cash on a moments notice. They may have to wait months for the approval, but be ready and able to close in two weeks or less.

They want to pay 60¢ on the dollar, and then they want to turn the property quickly so they offer it at 85¢ on the dollar. This is from the currently already depreciated values. In other words they are pushing the price ever lower.

Everybody loses!

Then there is the hapless seller who just wants to get out. Little does he realize that the bank is going to "collect" documentary evidence from him (the seller) which just might incriminate him for loan fraud. Prosecution will be easy because the borrower supplied the necessary evidence himself.

Then there is the real estate agent that is just trying to make a living. They assist the seller in preparing for a short sale. They tell them what the bank needs to "process" the short sale. They don't know or care what this documentation might do to their client. Until the client gets prosecuted for loan fraud and the clients attorney wants to know why the real estate agent "advised" them to provide this incriminating evidence. Do you think Errors and Omissions insurance is going to cover you? Think again.

All the discussion is about whether or not the seller/borrower is going to be liable for taxes on the "debt relief." This is a puny issue by comparison to everything else.

Then the BANK is also a loser. They don't like to lose. They will find a way to take it out on all of us. Maybe they just won't do any more home loans.

Who loses then?

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Posted by Bill Roberts - "Baby Boomer" Retirement Planning on 08/09/2007 03:50 PM

Comments (32)

short sale, fraud, short sales, bank

32 Comments on Short Sales - Who Wins and Who Loses?

AUG

2007

All good points...but the loss on a short sale although still a loss is less severe than the loss in foreclosure.

Paul, I am an advocate of "work outs" and creative financing techniques. You just reminded me I need to put a link on this post to my other short sale posts.

Thanks for stopping by.

Bill Roberts

You're right, everyone is toting around the "short sale" as the end-all solution. I would like to see other options, but every time you try and look for other solutions, this is the one being hailed. A preferred lender friend of mine stated that short sales are not looking much better than foreclosures on their credit reports now. So yea, this isn't the "only" answer out there.

Lexa

Lexa, if you read through this post and comments and the linked posts and comments you will get a much fuller picture of the problem and solutions. Thanks for commenting.

Bill Roberts

It is the first time I read such a clear and complete post in regard to Short Sale. Thank you

Arina, It is my pleasure. Thank you.

Bill Roberts

AUG

2007

This is awesome Bill! I am going to rate this as a 5 and flag it for featured! I was curious about the fraudulent side of short sales. I think you may know but I have been in this market for only a couple of years. I would love to pinpoint the blame on other Realtors and mortgage brokers but really it's people taking a bunch of equity out of their home. I have said this before and will say this again ~ we are talking a TON of money. I would like to know where the money is and why they did this. There are no other apparent signs than fraud. I do realize there are some people out there who bought after 2004 and really have no equity. I am in the trenches, going out from listing appointment to listing appointment and find that a majority people who bought PRIOR to 2004 ended up refinancing and pulling cash out to their eyeballs and have nothing to show for it and are upside down in their house.

Renee, We (San Diego) were upside down in the early 90s. All those houses are now worth 4 or 5 times what they were in 1992. I think people need to "sit tight" if they can. If their payments are adjusting or heaven-forbid being re-cast they are going to have to "suck it up" and realize that time will cure them.

If they CANNOT wait and they really want to sell, they might be well-advised to try a "lease option" if they can get close to their mortgage payment.

You should not encourage a short sale. You can help them with one AFTER they know all the consequences. Be sure to get them to sign that you recommended they obtain legal counsel. Protect yourself.

Bill Roberts

OK Bill, you got me here - now let me respond... and this will more than likely be my only responce due to my extremely busy schedule right now.

First - Although not the perfect solution, short sales do help a lot of people. Maybe not everyone. What I object to in your post is the absolute language that you use throughout it.

Second: Ali Baba and the Forty Thieves sounds like racial profiling to me, especially since we are at war in two different middle eastern countries. I think you are treading on very dangerous ground here - but what the heck, I have blue eyes, so I am not taking this one personally.

Third: Wholesalers are a necessary part of our economy. Why is a RE wholesaler a bone picker, but when Nordstrom or Nike buys a brand label product manufactured by Children or 3rd world countries for a few dollars and sell them for $100 or more, thats OK, because we look good?

Just like the other investor groups that you demonize as vultures -they all have a valuable role in our society and modern economic model of a free democratic society.

Fourth: Your description of why the wholesalers are successful is fairly accurate. The banks want to close right away, once they negotiate a price - which may start out asking around 60 cents on the dollar but will end up closer to 70 to 75 when the deal is done.

Yes I agree, the banks are causing this problem for themselves. The reason the public cannot take advantage is lack of cash. A lender will not hold the deal open for an extended period once the negotiations start - it may be 30- to 90 days before a price is agreed on, and yes, the banks want their money right then, in essence. So, because the investor is being asked to commit to placing the purchase money in reserve at the beginning of a transaction and hold it for extended periods, yes they want to see some reserve on it. Wouldn't you?

FIFTH: When a home is appraised for a fair market value, distressed sales are not considered as legitimate comps in the appraisal process. So, if a home sells in foreclosure at 80 cents on the dollar, it is not having a very large impact on the neighborhood.

SIXTH - Here you go with your absolutes. Here I am really starting to take your comments very personally because I am very focused on this market. This statement of yours is as asinine and ridiculous as if I said every one with the first name of Bill was fat and lazy. You just might take that personally!

Now Have a Blessed Day,

John Occhi, Hemet CA REALTOR®
Mission Grove Realty

Well John, as you know I am "fat and lazy" (have you been talking to my wife?) so I don't think that was a fair comparison.

I'm taking your objections in reverse order. I never said anything about foreclosure. The 80 cents on the dollar price I am referencing is a "market price." It is what the short sale dealer sells for to dump the house fast. And YES this does impact appraisals.

OK so we agree on the way the banks are actually exacerbating the problem. Good.

Comparing these dealers in short sales with legitimate manufacturers is what is assinine.

And there was absolutely no racial slur when I said "Ali Baba and the Forty Thieves." At one time in my life I had reason to attend several government auctions and there was a group of bidders that followed the auction circuit and they were referred to as I said. It is also a reference to a childrens story in case you forgot.

And your very first statement that short sales help a lot of people is the essense of my argument. They hurt far more than they help.

I'm really sorry that you can't or won't see it for what it is.

Thank you for giving your arguments. That was all I asked.

Bill Roberts

P.S. It is NOT a matter of which side our butter is on, but rather what is better for everybody.

An interesting post and one that sounds like you and John had a lovely afternoon communicating about with each other.

I have never really been in favor of the short sale concept but it exists for more important reasons that my not favoring it. I have even done a few.

When life deals someone misfortune, someone else will standing in the wings to take whatever opportunity might exist. I can't speak for how far into the past this practice has existed but I know it will continue for the foreseeable future.

Whatever they are called, they are there, johnny on the spot.

As a point of reference, NAR lobbied unsuccessfully to change the practice of issuing 1099's for the amount of the shortfall paid the lender. They did not feel this was onerous at the time that bill was written some 10 or so years ago. With the advent of lenders that allowed many people to qualify for loans that couldn't afford, also brought new elevated numbers in the to mix.

Back when, you had to qualify at a minimum of 7% irrespective the actual fixed rate. That was a practice no one liked but it set standards that at least disn't encourage default right out of the chute.

There are no easy answers here and certainly a one size fits all argument does not answer the myriad of possibilities that exist today.

I think you post contains some great material and some useful ideas needed to protect the hides of the innocent. The shame of it all is that a large share of the problem was driven by greed and a larger share by stupidity. I suspect the solution will likely end being in the exact same proportions.

Well William, this is THE TOPIC of our time, unfortunately. I don't like to see innocent people hurt. I don't mind seeing the bad guys hurt mind you.

The problem (the biggest problem) is all the innocent bystanders hit in the crossfire.

People's equity getting wiped out by downward spiralling prices. It's obscene.

Everybody talks about the 1099 issue as if it was really a problem. It is not. If they took cash out they deserve a 1099 for debt forgiveness.

If they didn't re-fi and take cash out a good CPA can get the IRS to disregard the 1099. A loss does not equal a gain.

Thanks for contributing to this blog.

As you may recall it was at a short sale workshop that we met and you introduced me to AR.

Bill Roberts

I do indeed remember. I wish we could all fix the mess but we can't . We can only help when someone wants help. There are some alternatives to prospective short sales but the best ones may be yet to come. I am not holding my breath mind you, but these loans need to be refinanced in such a way that more of these homeowners can stay in them. I certainly am not going to tell lenders how they do this, they would know better. But I hope that most of these will be able to remain. For the many that can't, this may be the only course of action.

William, it is going to depend on what they want to do. If they just want to run then maybe the short sale is an option. If they need to sell but aren't too far under water then maybe some sort of creative solution is called for. Next time you get one that is questionable I'll be happy to look at the scenario for you if you like.

Bill Roberts

AUG

2007

Excellent discussion and topic. As a "victim" of a short sale back in the 90's I know first hand the pain and anguish that goes into such transactions. We bought at the top of the market, which was fine because we were both well employed. We didn't plan to move. My husband lost his job during the recession and we kept on making the payment on my salary. When the five year ARM adjusted we tried refinancing but the appraiser on drive by said that we didn't have an ocean view and the appraisal would not come in. The original note was an 80/20 and we put $50K into the house. We could still afford the payment as underwritten on my salary, just not the "new adjusted" payment and our lender refused to add the difference onto the back end of the note. While our friends who had California banks had no problem working out creative deals with their banks we had to put our house on the market and let it go into pre-foreclosure. Our hairdresser of all people, told us to stop making our payments as they were killing us. He said, your house isn't worth what you paid for it, you can't keep living for a house.

We bought for $399,000, sold in short sale for $242,000. Our personal loss was $150,000.

Had the bank been willing to be "creative" no one would have lost. We would have weathered the storm., brought the loan current and refinanced out of it when the market came back. Instead some number cruncher who didn't understand the devistation of the California market thought the streets of California were lined with gold.

The shortsale did kill the comps of the neighborhood and some neighbors were very upset with us.(like it was our fault).

I'll never forget the day we closed escrow, - it was awful. We had these ceramic duck towel holders in the kitchen that were attached to the cabinets. A friend had given them to me and they were (are) very special. Because they were attached to the cabinets I figured that they were fixtures and couldn't take them. I was crying and fixated on these stupid ducks, it was bad enough that I had to lose a house that I really shouldn't have had to lose. My Realtor went into the house after escrow closed and took down the ducks and gave them to me.

Two years later the market returned and the neighbors house for close to $600,000 - very similar house.

IMHO, the only reason to do a short sale is if the homeowner can't make any payment at all.

Creative financing would go a long way to saving this market.

On a positive note, our decision to stop making the payments gave us enough cash to put into another house that was owned by an "Angel Investor". She wrote a 2 year AITD, we made payments to the escrow company who made the loan payments. In that manner we were able to recover some of our loss - we got lucky!

Hi Kate, Thank you very much for telling your story. I hope some of these people that are "pushing" short sales read what you have to say. It is a sad day for all of us that some people see opportunity in short sales rather than the huge cost to all of us.

I realize that for some people there may be no alternative to a short sale but we all have to make that the "exception" rather than the rule.

Bill Roberts

We are in no way pushing short sales. We have 3 listings now that will have to be short sales. One is an investor who bought at the peak of the market and got caught in the fall. He owes more than he can get for the condo. The lender has told us each week to drop the price X amount. They do not want the property back. In the condo development there are 49 listings and 26 of them are in foreclosure. We have the lowest prices unit and still no action. This was one of those apartment/condo conversions that should never had happened. We kept our clients away from there. We have agent friends and colleagues who bought in there and now can not even rent their units out. There is no elevator and people here do not want to climb stairs. The people have stopped paying their condo dues. This has led to problems for the condo assoc. to keep up with repairs and maintaining the property. What a mess this has created!

Now our sweet lady client who has to short sale two properties; we are trying to help her save at least one so she can have a place to live with her 4 kids. She was a victim of a tenant who was a scam artist and never paid rent on a mortgage of $2,000 per month. However, in the end , she was never qualified to become an investor. We were not her agents on the sale.

Sometimes we have to use a short sale if there is no other way. Brighter days are ahead! Katerina

Katerina, you are right on two levels: brighter days ARE ahead and sometimes short sales are the only solution.

It is a crying shame however. All of us are paying for this mess, not just the perpetrators. Did you read the story from Kate? It has a quality and feel of your Stated Income story.

Thanks for telling about the condo complex there. Too many "bad" people did too many bad things during the price run up frenzy of the last few years.

Bill Roberts

Bill, Yes, I read Kate's story. Her story is also important for people to hear. Katerina

AUG

2007

Thank you Katerina, I think that I shall encourage her to post it to her blog.

Bill Roberts

AUG

2007

Bill thanks for linking me to your blog. I understand the implications that a short sale will have on the market as a whole. I believe that these lenders brought it upon themselves by making the availability of funds easily accessible. Unfortunately people kept cashing out but the economy has benefitted as a whole because of this phenomenon. Well we must remember that business cycles is a proven theory and what goes up must come down. Unless we can convince the rest of the renters to buy.

When I go to a listing appointment I try to see what my sellers intentions truly are and if there is any chance of refinancing in order to re-amortize their loan and get into a lower payment. I also try to convince them to lease the property out. This way they can benefit from owning real estate in the long term. Try to treat it as a piggy bank. Many times the difference that they have to come up with is too much. I blame this on the option arms or pick a pay programs. People just kept making the neg am payment rather than mixing it up. Obviously any market is going to have its losers and there's always going to be the winners on the other end of the transaction.

My question is, does anybody really know how bad a foreclosure reflects on somebody's credit opposed to a short sale?

Mario, to jump to your last question first, we will see over the next couple of years. The word right now is that most credit grantors are looking at short sales or deed in lieu the same as a foreclosure, and why not?

You mentioned in your blog that you couldn't get an answer from the bank. It appears that there are a handful of banks (mostly the really big ones) that have determined that it is better to "go all the way" to sale rather than negotiate a short sale. Their reasoning is that 80% or more of NODs get resolved priop to sale. The "odds" are in their favor to collect more money by "not blinking."

I hope you get a chance to read my other short sale posts also. The information is good, but the ensuing discussion is even better.

Thanks for coming.

Bill Roberts

Hey Bill.....

I've been away, so let's change that, and let me jump in the game. Let me start by saying that Kate you are a treat, because you let us see the real you.

The responsible people like Kate never see it coming, yet when it happens they are willing to anything possible to remedy the situation. The world is not merely black and white, but rather multiple shades of gray. Are your customers REALLY doing everything they can like Kate indicated she would do in order to be able to ride it out? This is not a question for Bill as I suspect I know his answer but rather to everyone else who takes the time to read this blog.

I'm going to give you a scenario that I actually discuss in my book as I believe this client really did do everything that was necessary AND it did NOT hit his credit, so there should be no concern as to what the impact could or may be on his credit record. This happened about 4 months ago, so it is very recent!

Spouse walks out, and decides its over, and he can handle all of the bills. Since she was never on the mortgage its no issue for her. He makes about $80-$90K per year, but cannot afford the monthly payment on a $600K mortgage alone. He has worked hard to be as responsible as he can possibly be, but realistically he cannot maintain the house, the car, and help his kids who just entered college. Aside from the house and the car, he does NOT carry any consumer debt at all. 780 Credit score. Decent savings in a 401K. Lists the house for $640K which seems more than fair. After commissions and assistance with closing costs he nets ZERO! Bottom line: the home won't sell for $600K. Hmmm.....he tries something drastic and gets an offer for $550K, so he is really about $75K in the hole because of commissions, etc. He accepts, and this is where the fun starts. He is still terrified that he is going to screw his credit by doing this. Little ole creative me decides to contact the loss mitigation group at a major lender to explain the situation. The lender agrees to the following, as the borrower was willing to work with them, and be personally accountable.

The lender agrees to accept terms to pay the $75K deficiency at a rate of $149 per month (this is what he could realistically afford) until the debt is paid off. My calculation is oh, about 41 years. The bank agrees to do this at ZERO interest. The loan is unsecured, and does not reflect the short sale status ANYWHERE on his credit report. The client is flexible, as well as personally accountable, and did what was necessary to survive. The bank is happy as they're not taking a loss aside from the interest they will not collect which is still pretty close to the interest they would've gained over a 30 year term.

You have to wonder why he did this. To me its very simple: He stood for what he believed in, and he let his character show. He will carry this lesson, and can teach his kids who are in college that their word is their bond. He is a living example. How many others would just walk away? He is the exception, but really should become the norm. Imagine how much easier it would be if we knew what people stood for?

I hope that others think of what is occurring, and humble themselves to not live beyond their means OR in the case that it was unforseen (my father in law just required a lung transplant) and the bills have been horrendous, that they plan for a future by not spending everything they have today......

Bill, glad to see you back. And you are right Kate is a remarkable person. She is going to post her story on her own blog very soon.

Your client was lucky to have you as (as what? mortgage consultant? real estate broker? what?) an advisor and intermediary. The "Bank" did the sensible and pragmatic thing. They will probably accept an offer to "discount" the note when he is out from under.

I hope you are getting him into another house so that when the market rebounds he rebounds with it.

Thanks for you story.

Bill Roberts

Bill

I did it as a mortgage consultant, helped him negotiate the deal, and structured the deal for the new home. I couldn't stand to profit from that one, so I handed him a Visa Gift card to help with him remodeling the new home (or whatever else he may need). I included his story in my book as a way to let the general public know that you can work around these things, and they CAN happen to anyone.

Its funny....now as an author, I feel it is even more important that I help others get from under the bondage of losing their homes whenever possible. The media has been really cooperative thus far. Wish me the best in my personal quest!

Bill, of course I do. It must be great to have a book out. I've written a little book on "Buying a Business" about half of which I've posted here on AR a chapter at a time. I tried selling it on eBay with no success. I'm currently writing a book on retirement planning for Baby Boomers. I've posted some excerpts here but I haven't completede the book yet.

Good luck with your book and good luck with your quest.

Bill Roberts

AUG

2007

Very insightful post... never looked at quite that way. The Ali Baba and the forty theives analogy was what really got me thinking of how true your post is. Gotta look at it the matter very objectively, the good and the bad sides of the shortsales process.

Vincent, thanks for commenting.

Bill Roberts

I have the exact same question: "Does anybody really know how bad a foreclosure reflects on somebody's credit opposed to a short sale?" As far as the other implication would be that:

The IRS charging you as income for the remaining portion of the loan.
The lender will charge you also for the remaining portion of the loan.

So you and up in debt and with compromised credit for 7 years...

Arina - a shortsale is still treated as a foreclosure on your credit. In most cases the original debt is above $150,000 so there are no time limits to it appearing on your credit report. Usually it will fall off after 10 years, but the FCRA laws allow for debt that is valued at higher than $150,000 to stay a credit report indefinitely.

Arina, yes there are consequences to either a foreclosure or a short sale. I personally don't see enough advantages to short sale for anybody to walk down that path.

Kate I just got your note about your story. I'm going there now and I will post a recommendation to read it if you permit.

Bill Roberts

JUL

I find John Occhi's comments to be stupid, objectionable, immature, off base, off color, off topic and off hand I'd say his racist remak brands him as such....it takes one to know one... What a Dork!

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