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Who Has a Right to a Short Sale?

Who Has a Right to a Short Sale? by Bill Roberts

There is a lot of whining and crying going on in this industry about how hard banks are making it to do short sales. Some say it is as if they don't want to do the short sales and are pushing the borrower into foreclosure without any other option.

Then I just read and commented on a post by Toby Tobin entitled "PMI, The Mortgage Industry's Dirty Little Secret" where he says banks aren't cooperating with workouts and short sales because of the PMI policy they have.

I say "So What?" The bank has a right and a duty to mitigate its losses any way it can and to do it in its own best interest.

If the private mortgage insurer will only pay in the event of a foreclosure that will tie the hands of the bank as far as doing a short sale is concerned. Also, if the insurer has written a policy for 30% of the loan amount the bank could recover most of their losses by foreclosing rather than by accepting a short sale. Wouldn't you do the same if it was your money at risk?

It seems to me that short sales only benefit the real estate agent. They get paid if the short sale goes through. The seller walks away with nothing. They can't take anything from the sale. Their credit is already a shambles. Credit reporting agencies will be treating short sales and deed in lieu of foreclosure the same as a foreclosure. Don't these real estate agents feel any fiduciary duty to their clients?

The buyer might get a "good deal" if he can swing the terms of the short sale: ALL CASH IN 15 DAYS from the bank's acceptance of the final short sale offer. Good luck on that one. But from the buyer's standpoint it probably makes more sense to buy an REO where he has time to arrange financing than try to negotiate a problematic short sale.

The bank doesn't want to loser money. They are only going to agree to a short sale if the mortgage insurer will pay them if they lose money on the loan if they don't foreclose. How are you going to know? Since this is confidential information between the bank and the mortgage insurance company, you will never know if the short sale is even possible.

My title is "Who has a right to a short sale?" But a better question might be "Who wants to do a short sale?" Not me!

If you are looking to invest in real estate or you need to get out of a "sticky situation" give me a call. There are plenty of opportunities in the real estate market right now. Bill Roberts (619) 244-4610.

Posted by Bill Roberts - "Baby Boomer" Retirement Planning on 10/30/2007 02:49 PM

Comments (34)

short sale, bill roberts real estate, real estate investing

This post has been included in California Information San Diego County, CA Information

34 Comments on Who Has a Right to a Short Sale?

OCT

2007

Bill, the realtor gets paid but it's well deserved if they successfully negotiated a short sale. One assumption that was paid is that the sellers credit is shot but that doesn't always have to be the case. You can have a couple going through a divorce but the market has turned on them and the only way to sell is a short sale.

Mario, I think you will find that the short does in fact affect their credit. Thanks for commenting.

Bill Roberts

Bill,

Good post. Like Mario, I come from the other side of the fence. An agent correctly earns their commission on a short sale. The transaction envolves three parties rather than two. Also, a short sale can help the seller if it allows them to exit gracefully and earlier, thus cutting their losses and allowing them to move on with their life. Better to get out three or four payments behind rather then eight.

Toby Tobin

Toby, I've been down this road before. It probably is better for somebody to be "foreclosed" eight payments down, with most of that money still in their pocket. The hit to their credit is the same. With most of eight payments worth of cash I could put them into a nice lease option where they can become property owners again even with the foreclosure.

Bill Roberts

Bill, I gave up on short sales this year. I have had some success with them in the past but they usually involved small local banks who truly did not want the property back. Right now they are just a pain in my rear end and not worth the time and effort. The sellers I do have who are in preforeclosure are mostly just throwing in the towel, packing up and moving on. They don't have any equity to try and save and the stress of prolonging the inevitable is just not worth it to them.

BB, personally, I think that is the best all the way around. Maybe they can save up a little cash while the foreclosure plays out. Best of luck to them and to you. Thank you for commenting.

Bill Roberts

OCT

2007

Bill: First of all, I applaud your post. This is good, tell-it-like-it-is, information. Short sales are difficult to deal with but can be worth it to the right agents. In today's market, some cannot afford to be picky. Also, I slightly disagree with the credit issue. Although there isn't much of a difference between short sales and foreclosures when it comes to the credit report, the credit score will take a slightly bigger hit with an actual foreclosure. On the other hand, your cash in hand point is well taken. :)

Bill -your post is very informative, especially since I have never done short sale. I thought it's better for sellers, since it does not damage their credit as bad as foreclosure. There are a lot of agents here on AR doing short sale. Are they helping the sellers or not?

I do short sales but I do it only if it is right for my seller. Because I also do bankruptcy work, I get the "sellers" and that is one of the options I bring to their attention. I bring up several options, short sales is just one of four, negotiating with the bank to reconstruct the loan is always first. If that is not successful, I give them the options, short sale, foreclosure, bankruptcy (they usually come to just discuss if they should do a Chapter 7 and move on) but if they don't have a lot of other debt, that is usually the last thing I recommend. I give them the information on all options so they can make a better decision for their individual situation. A short sale is for some but not all. I have turned some down because I did not feel it was the appropriate solution.

NOV

2007

Bill great post. I like your style. Best of luck and keep doing what you do.

Hi Rich, The credit issue is a biggie. It seems that the CRAs are on to short sales. The word is that the new algorithms treat short sales the same as foreclosure in computing the FICO score.

Thanks for commenting.

Bill Roberts

Faina, I feel that the primary beneficiary of a short sale is the real estate agent. The buyer might also benefit, but I don't think short sales help sellers and they might actually hurt the seller if he purchased with a stated loan.

Bill Roberts

Stella, You can make your case for short sales, but I don't think you will be able to convince me that they are ever the best chooice for a seller. If they can't do a workout or sell to somebody who can and will take over their loan then foreclosure is a good option (at least in California where they won't be subject to a deficiency).

Bill Roberts

Vincent, Thank you very much.

Bill Roberts

NOV

2007

Bill - In Virginia they would owe the deficiency. A judgment would be issued. So that is why a short sale might be beneficial to the homeowner. In California, if they aren't subject to a deficiency then foreclosure would be the answer for the seller. A short sale would not be necessary because the question would be "How does it benefit the seller?"

Stella, my point exactly. I'm really sorry to hear that you are still in the dark ages in VA. To get a deficiency judgment in California (on a purchase money loan) the lender would have to forego the sale under the trust deed and go for a judicial foreclosure, a time consuming and costly process. Most lenders opt for the simple sale by trustee and move on.

Bill Roberts

In Virginia - A Bankruptcy has to be filed. It would be easier if the house got foreclosed on and move on. There really isn't a reason I can think of to do a short sale there. I guess the Realtor is the only one that wins in those situations. I am curious how the banks feel about that and if there is not difference to them unless they are getting more than what it would sell for on the foreclosure block.

Stella, The banks factor in the holding cost plus the transactions costs to what they think they'll get if they are able to sell it. they will probably have to make repairs also. The Loss mitigation department of the bank knows what it is doing (in most cases) so the buyer of a short sate isn't going to get the house for a lot less than he could buy an REO for. The bank will "win," you can count on that and the seller will lose.

Bill Roberts

NOV

2007

Bill- I would love to always agree with you, but ... Here in our market there would be hardly any homes for sale if no one did short sales. In most price ranges if you look at ten homes on the market in a specific area, 8 of them will be short sales. The sellers need to move on and the short sale is an viable option. I do not think it is fair to say that they only benefit me, their agent. We do have a lot of listings that are short sales. The credit will fall more on a foreclosure than on a short sale. They are passing a provision to have the IRS not require the lender to 1099 the short sale seller if they are owner occupied. We sit down with our sellers and explain all their options. Many people here have too much pride to go into foreclosure. The bank would own our town practically if that were the case. We have offers on two of our short sales as we speak and it is a win/win for the seller, the buyer, the lender and for us. We work hard for our sellers especially in short sales. We also work with buyers in buying short sales. Well, if you have a buyer here, you will have a very limited inventory of showings if you do not show the short sales in many neighborhoods. Katerina

NOV

2007

Katerina, I am opposed to short sales on many grounds as I have written about extensively here on AR. Your situation in your area doesn't affect my reasons or conclusions. Most of these short sellers will rue the day they agreed to the short sale because their credit will be affected the same as if they were foreclosed, they will walk away with less money than they would if they were foreclosed, and some of them will be prosecuted for fraud against the lender and they have voluntarily given written "evidence" against themselves to the lender. But the agent does get paid for a successful short sale.

Bill Roberts

Katerina, There is an option for these people who want to do the right thing and save their credit. Most lenders will accept an "offer" that includes a low interest or no interest note for the deficiency. This way a "short sale" is avoided, but the buyer gets the house at the lower market price.

Bill Roberts

Bill- One of our sellers called me from my AR blog and told me that he wanted to short sale. He spoke with both his attorney and his accountant. I am getting in writing from his lender that they are waiving their rights to file a deficiency judgment and the ways and means committee approved a bill wherein he will not be 1099'd. He also checked out the credit implications and found out that his credit rating would drop by 200- 300 points on a foreclosure but in a short sale it would only drop 80-100 points. He has renters in his place that want to buy his house and they are going to buy the house on a short sale. Katerina

Katerina, I would advise you to talk to an attorney first yourself. This does not sound like an "arms length" transaction. I would be very leery of helping with it.

As for the credit hit, I believe that that is out-dated information. CRA's constantly up-date their algorithms. They "know" that a short sale is an alternative to foreclosure and the lender still loses money.

They produce credit scores so that lenders can make "educated" determinations on the credit worthiness of the borrower and the likelihood of the loan being repaid in full. Don't you think that they (the lenders) want to know about a short sale? Don't you think that they will look at it the same as a foreclosure? The CRAs produce credit scores for the benefit of their customers. The lenders are their customers. the borrowers are not.

Bill Roberts

BTW the issue of the 1099 means nothing to me. A borrower with a purchase money loan (not a cash out re-fi) will have the deficiency waived by the IRS upon application from the tax payer's accountant. A loss is not a gain.

Bill- It is my listing, the buyers have their own agent and attorney. I talk to my attorney about every short sale listing we get and work on. The lender has already suggested that the tenants buy the house for fair market value which is making this a short sale. Fair market value on this house is less than what he paid for it 2 years ago. He had to relocate because of his job or else he would have just stayed in the house. I guess we will find out how it hurts his credit score. Katerina

NOV

2007

Katerina, Good luck.

Bill Roberts

NOV

2007

I have one short sale - and we're basically holding off any foreclosure until the seller can get with a bankruptcy lawyer to discuss Chapter 7 and Chapter 13 filing ... we're keeping the property active on the market to keep the lender at bay until the seller can decide what course of action is best for her situation.

Re: the mortgage insurance - many of the loans that are defaulting do not have PMI - the loans are 80/20 loans and the second noteholder is left with nothing but a defaulted note.

NOV

2007

Rita, You need to careful what you admit to. Keeping the lender at bay is NOT your legal duty. If you have it listed, it is to try to find a buyer. Be very careful.

Bill Roberts

NOV

2007

PMI companies are over a year behind on paying out the insured loss. So, banks are still negotiating short sales even if the file has PMI. It is a joke. Trust me, my business partner has sat in on several retained asset management meetings and reviewed their monthly losses and recoveries. The PMI is not very quick and in some instances the lender takes what they get.

-Trent Chapman

JAN

2008

Hi Bill, Interesting point you make about the credit impact from a short sale. I've been told by a number of lenders that it is perceived as being "proactive" and although it hurts the credit rating, its not as bad as a foreclosure. Are all these lenders misconstruing the truth???

Lola, The first thing that a lender looks at is the credit score. The credit score algorithym is secret but we can "see" some indications that it is being treated the same for all three eventualities: foreclosure, deed in lieu of foreclosure, and short sale. In the final analysis they are the same and the recipients of the credit score (the banks) want to know if a prospective borrower will pay or if there is a chance that the loan will go bad.

Explain to me why a lender should look favorably upon someone who did a short sale.

I noticed that you did a few posts on short sales. Are you still actively pursuing short sales?

Bill Roberts

Hi Bill, The Short Sale posts came out of a very amazing education I got due to being asked to sit on a task force for our local board exploring the implications for our market. Boy, every time I came out of those meetings, I was floored by something else! I did a series of posts about some of the things I learned during those meetings and some other posts to help buyers understand what they were facing when considering purchasing one.

Right now, approximately 10% of our Board Sales listings are short sales and more than 35% of the closings in December were short sale or foreclosure related. That leaves 90% of listings that are NOT currently short sales and 60% of homes going to closing without going through this nightmare. I've made a decision NOT to pursue this kind of business in 2008 much like I decided NOT to deal with sub-prime buyers and the adventuresome mortgage process.

With regard to the credit score taking less of a hit...I've simply heard this from many lenders. When I have asked why this is the case...I'm told that it shows that the buyer is being proactive. That's why I was intrigued by your statement.

Lola, I'm glad you made the decision not to participate in the short sale process. I would have liked to attend those classes you went through. One can never have enough education, if for no other reason than to know why not to do something.

I think that those lenders who told you that were disengenuous. You know enough about lending to know that it is credit score driven (except possibly FHA and a few very special programs).

Bill Roberts

Yes, Bill...that's my point...the implication was the credit score was not marked down as much. I've always told clients that I don't have access to their credit scores after the transaction and that each bank may do things differently...hence the title of the series "The Wild, Wild West of Real Estate." It has been my experience that there is no rhyme or reason to how banks treat short sales...sometimes, it feels like the right hand has no clue what the left one is doing.

Lola, You may want to have an arrangement with a mortgage broker that could get a tri-merge credit report for those clients. It will have each bureau's score. What they don't want to do is get their own score because it will NOT be a mortgage score. Consumer scores are calculated differently. The average cost to the mortgage broker for the credit report is about $15.

Good luck.

Bill Roberts

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