Short Sales - A Common Question

Short Sales:  A Common Question
by John Occhi, Hemet CA REALTOR
Mission Grove Realty 

Aside from my ActiveRain blogs and responding to questions that are left in the comments of the articles I write, I often receive email messages from people who for whatever reason do not want to post thier question in a blog article.

A common question I receive has to do with investors, as a matter of fact, I believe I have now answered this very question at least 3 times this week, that I received through email contacts from my ActiveRain blog.

Let me post the specific question I received just a few short hours ago...

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John,

You seem to be the short-sale King. I have learned a lot from you about the subject.

Here's my question:

Will a lender consider a short sale on investment property if the Seller has equity in other properties? Can the Seller be forced to sell the other property or would it be subject to a lien for the amount forgiven by the lender on the short sale?

Also, must the Seller have basically NO MONEY in any bank accounts. Or, must the seller only show that they can no longer afford the mortgage payments?\

Thanks for taking your time to answer.

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So, let me address this point by point...

                                                           

First I want to thank you for the compliment, however the title KING is a bit overwhelming and while I certainly do appreciate your respect for the knowledge that I share, I am very humbled to think of myself as KING of anything...even more humbeling is that others would consider me worthy of such honor is extremely humbeling.

So, by all means, please continue to read my blog - go ahead and subscribe to it if you'd like and add me as an ASSOCIATE and write a few nice words about why you have selected me as being worthy to be your Associate and I will return the favor.

As far as your question, you have to understand that an investor is just that...an investor who by the very nature assumes risks that most Americans are not willing to assume.  These are the people who dream of making a million dollars in a year by investing in real estate.  Well, they should do more dreaming at night and not watching so many late night infomercials.

                                                          

Although real estate investors are a very important part of my local Hemet real estate business right now, and they should be a part of yours too, I do not have much sympathy for them when a deal goes south.  It's not like they were going to send me a bonus check when they sell the property...let alone share the windfall with wither the bank or the IRS...so exactly why do I or anyone else feel sorry for them when an investment does not work out for them?

This has been pretty much the attitude of the mortgage lenders until very recently.  I now have one of my own investor properties listed as a short sale -still no buyers, but a great little 2+2 on a very deserible Hemet street for only $200K.  I have heard of other investor short sales being accepted...so, like the rest of our industry it is changing very rapidly.

The second part of your question has to do with liens and deficiency balances.  Well, the jury is still out on this - it is definitely way too early to tell.  If there is only a first mortgage that had not been refinanced then in all likelihood there will not be any pursuit of the deficiency balance in either a short sale or foreclosure situation.

However, if any cash has been taken out of the property then the lender has every right to go after the deficiency, if its collection had not been negotiated away during the short sale negotiation.  Just think about this for a moment.  A homeowner (investor or primary residence) bought at the right time and after 2 or 3 years cashes out $100K and buys a boat.  The loan resets for a much higher interest rate and then the market value crashes.  Now the borrower decides they want to walk away rather than pay the higher payments...and they walk away with a $100K boat, free and clear.  Why wouldn't the bank come after that borrower?

I just use the boat as an example - an extreme example...or is it?

                                          

My guess is if the banks don't go after these 'cash-out' borrowers than they will be condoning a huge white collar crime that the tax payers will end up covering.  Sorry - but that is the way it is.  Even if the banks don't pursue these directly, they can still sell the notes after a short sale or foreclosure, if the debt has not been properly negotiated.  Having a dozen years in the collection agency industry, owning 2 different agencies I can tell you that bad debt is bought and sold all the time for pennies on the dollar.  Even though they may no longer be secured with real property, most are very recent and most will have loan applications with verifiable assets to attach - such as jobs.  I'll pay a nickle on the dollar for that kind of paper all day long.

The third part of the question has to do with the homeowners assets.  Again, please put yourself in the seat of the mortgage company that is losing its shirt right now.  For any hardship to be accepted, there must be a true hardship - having money in the bank that would inconvenience the borrower to pay the bank is not typically considered a hardship.  Again, the question begs to know if this is a cash back situation.  If it is - then by all means pay the bank and declare bankruptcy if you have to.  But please, there are a lot of Americans much needier than your investor client and we can't seem to take care of them.  But now we have a group of people who have controlled small amounts of wealth and we are going to start singing the blues...I think not.

I do not mean to sound harsh, but lets understand what a short sale is all about.  A primary residence can no longer be afforded by the family that lives there, who has suffered and continues to endure a hardship - loss of job, illness, injury and even death...no a bad business decision. The ONLY way for the family to avoid foreclosure is to walk away from thier home, allowing someone to come in and buy it for pennies on the dollar and knowing as the law stands today that they will inherit a huge tax consequence with the IRS if the difference between their loan amount and net the bank receives after the property is sold comes up short.

I am certain this is NOT the answer you were hoping for but please understand that Katrina victims are still living in sub-standard trailers more than 2 years after that disaster...it sounds like your client has a nice place to stay and money in the bank too.

Let me step down from my soapbox now.  Believe it or not, but I am a Republican...but there has to be some social justice in our society.

                                         
Now Have a Blessed Day and God Bless all of the Gulf Coast Katrina Victims!

Have a Blessed Day,

by John Occhi, Hemet REALTOR®  
Mission Grove Realty  

All Content Copyright Protected © 2007 - John Occhi, Hemet CA REALTOR®