I had just too many borrowers that "should have known better" in the office this week - so I feel very conservative just now - just to the right of Bill O'Reilly.
We do a lot of short sales in my law and title agency offices. They come in from all sources - Realtors, referrals, lenders, friends, developers. Some borrowers have one investment property and some have eleven, and all the numbers in between. Most are upside down and don't want to put more good money (if they have any left) into a bad investment.
When they ask us to negotiate with the lender to lower the payoff we naturally ask them what their financial situation is today and what savings and other credit they have that could be used to pay the shortfall in the cash flow of the property. We also need to know what resources they have to pay the resulting cash needed to clear title at the closing.
It is just amazing the number of borrowers that have other assets (ok, not necessarily "liquid" assets) and are just belly aching about their "financial indigestion". "Get the lender to share in my loss," they ask. I then ask, "What was your arrangement with the lender on sharing the profit you expected to make?"
Now I don't want to seem insensitive, but you would think that a borrower would understand that they are asking for a retroactive sharing partnership with the bank, and probably they are asking the bank to take a loss while they pocketed a borrowed profit through over-leverage of the property. This does not apply to every short seller for sure - but I see enough in this class of borrower that makes you wonder who was guiding them amongst the real estate and mortgage brokers that lead them to this concept of real estate investment.
This brings us to Economics 101 - if it does not make economic sense to invest then don't do it. "Economic sense" is unfortunately a subjectively defined phrase. I like to think it means that using basic unembellished accounting principles will the property support the investment being made by providing reasonable return vs the risk. Unembellished means regular old IRR (Internal Rate of Return) without the accellerated tax depreciation, leverage borrowing, and cash out financing scenarios.
The unembellished part is what is most often overlooked by the borrower. They focus on the embellishments. They see or believe inflated appraisals and aggressive lending practices as a way to finance out and use the additional cash to buy a car or another property that they do the same thing again - never realizing that they put themselves into an "infinity loop" that they cannot escape.
Never the less, a short sale is still a solution for them, since like the infinity loop they are stuck in, the short sale and deficiency note payment plans will likely be in the lender's best short term economic interest. Even though the borrower may not be the insolvent seller that helps define short sale qualification, the combination of the seller's financial indigestion and being stuck on the infinity loop is recognized by the lender as a problem not only for the borrower, but the lender as well. The sale of the property is still - using Economics 101 - in the best interest of the lender - with a lot of weight given to the "velocity of capital" (which means that a dollar in hand today is better than a dollar ten cents in a year).
As I see it, the only way off the borrower's infinity loop is going to be winning the lottery - or bankruptcy - or a really good faith attempt to negotiate the best terms for a short sale with the lenders.
Copyright 2008 Richard P. Zaretsky, Esq.
Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.
Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com. See our easy to find articles at Need Short Sale and Modification Information? - These Articles Probably Answer Your Question
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I had a home owner ask me the other day if they would qualify for a short sale. When I asked them about their numbers, I learned they had $60,000 sitting in the bank. They wanted to know how they could "hide" the money so the bank wouldn't get it. I let them know that during a short sale, they have to give documentation of their assest, bank account activity, etc, and that if they had the money, then the bank would require them to use it to pay back the loan, before the bank would take a loss. Needless to say, they were not too happy with my honesty.