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TOO MUCH MONEY IN THE BANK TO DO A SHORT SALE? - ECONOMIC LOGIC

This week I spoke with several people that wanted to do a short sale of investment property that is upside down in value. They are sick and tired of the short fall on rental income (if they are lucky to have a renter that actually pays rent) vs the mortgage payment, taxes, insurance and maintenance costs.

The "short sale" phenomenon is giving some upside down investors the belief that they can get out of the mortgage by getting the property sold for less than the mortgage indebtedness and the bank will share in that loss.

I have spoken in the past about the theory of shared appreciation mortgages but I have yet to see anyone bring that type of mortgage to my attention in the short sale process. A shared appreciation mortgage is where the bank shares in upside appreciation of the property in return for some other risk cost reduction on either the cost of the mortgage or even on the downside for downside protection of the borrower. Shared appreciation mortgages are always limited to mortgages on investment commercial property. [Note: the summer of 2008 brought housing stimulus and foreclosure relief - supposedly, and those programs indeed use shared appreciation for residential mortgages - but let's see if those plans get off the ground.]

The main threshold for unburdening oneself from a burdensome mortgage is the ability of the borrower to weather the current depressed real estate market. The lender looks to the "ability to pay" more carefully than any other aspect of the short sale process. Borrowers that can honestly and fully document the inability to pay are the most likely candidates for a short sale. But the key here is to honestly and fully document the inability to pay the ongoing costs associated with the property.

Ability to pay is very complicated. Ability to pay is not just a decision not to pay. Ability to pay includes the ability to mortgage other owned properties, liquidate currently illiquid assets, shift application of income, and other financial issues. True ability not to pay is an involuntary situation - not a voluntary situation.

Ability to pay is also determined by the lender through the "hardship letter". This is the letter to the lender from the borrower setting forth in sufficient detail (and backed up by documentation) why there is an involuntary inability to pay the costs associated with the property.

Not paying the costs associated with the property is not just a situation where the mortgage payment cannot be made. It does not matter if you can pay the principal and interest but cannot pay the condominium fees, or the real estate taxes or the insurance or for replacement of the roof that leaks and makes the property inhabitable. Look at the borrower's responsibilities in the mortgage document and you will see failure to pay or do all of these things are material grounds for default of the mortgage and its foreclosure.

So now that we have taken this long road to the title of this discussion, what is the answer? What is having too much money (or assets) to do a short sale? Unfortunately there is no real answer. When there is no real answer I like to look to "Economic Logic". I like to think that economic logic is used by the mortgage lenders in making loss mitigation decisions and for the most part, as you get higher up the ladder of decision making with the lenders, economic logic becomes more important and eventually becomes the driving force in decision making.

Economic logic can apply to an illiquid borrower with plenty of assets - all illiquid, and thus no current ability to properly service the mortgage and no ability to pay the shortfall if there were to be a sale under the amount of the mortgage. In such situation the lender should analyze the other borrower properties and position itself with junior liens on so much of that other property that has equity, thus allowing the instant property to be sold and the mortgage released. This is just good business -- but getting to the level at the bank where Economic Logic can be applied is a real problem in and of itself.

Economic logic does not apply to a borrower with liquid assets. That borrower will not get any short sale relief from the lender and trying is a waste of time. Such borrowers should not abandon hope. Modification of a mortgage is a viable option to the lender and borrower and should always be explored. In addition, a short sale is possible, but the borrower should expect a cost to the sale, such as a substituted collateral, an unsecured note, or even full payment of the short fall. There will still be huge savings to such a person in the form of no more real estate taxes, no more insurance, no more maintenance, no more utiliites, etc. At worst, the ecomomics of "paying up" can have a big benefit to the short seller.

Economic logic should always be looked at by borrowers seeking relief from bad financial decisions - but being logical when it is your own money can be difficult. Seeking the advice of an experienced attorney or financial advisor is strongly suggested.

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.

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Posted by Richard Zaretsky, Florida Real Estate Attorney on 02/09/2008 12:31 PM

Comments (38)

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Originally posted at: Z's Legal Short Sale Blog: TOO MUCH MONEY IN THE BANK TO DO A SHORT SALE? - ECONOMIC LOGIC

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38 Comments on TOO MUCH MONEY IN THE BANK TO DO A SHORT SALE? - ECONOMIC LOGIC

FEB

2008

Richard, Have you found that if the borrower owns other property with equity that the shorted lender will ask to put a lien on those properties?

Dan -

Yes. But you have got to suggest it.

Regards,

Richard Zaretsky

Richard,

Great post! I get so tired of those investors who try to take the easy way out and do a short sale. What happened to morals and ethics?

FEB

2008

Richard, This is a great post and I will bookmark this one. I had a client the other day trying to do a short sale. I explained to them that would have to disclose a lot of financial to prove their financial outlook. I told them just because your house value went down doesn't mean you don't pay anymore. The banks want to see your ability to repay the loan.

Richard, thanks. I have a client now who refused an offer to sign an $8,000 note to complete a short sale and avoid foreclosure. I can't figure out what he was thinking. (He wasn't my client at the time...I'm working with him now and I think he understands things better.)

Whatever happened in this country to the notion of "Personal responsibility?"

There is the hardship letter that is usually required. Some banks will let you take an unsecured note at a low interest.... I work with short sale clients a lot. Most of these people are honest people that got in over their heads. I have very little sympathy for an investor with liquid assets trying to get out from under....

Dan

Believe it or not - I know about that case from one of my clients in your area. This is a huge educational undertaking and we professionals are all responsible to do the educating.

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

I have to say this site has been more informative than any other in trying to get an understanding of what I am dealing with at this point. So, thank you Richard.

I am one of those investors who made a bad investment decision, and now I just want to pay the piper and move on. Its not easy finding reputable people to help you when you are in another state, especially contractors. I am still in search of a realtor to help me "unload" this property, but I will make up the deficit with equity line on my primary. I am curious what other options might be available if the shortfall is more than I can do on my equity line.

MAR

2008

Richard, have you visited the site http://www.youwalkaway.com ? I can't figure out how they make the claim "Your lender WILL NOT be able to collect any deficiency or loss they may receive by you walking away"

I called them and asked them if they operate in Florida too and yes they do. I just couldn't get a straight answer as to how they keep the borrower from being hit with a deficiency judgement or other recorse.

Your thoughts?

Very interesting post. We just had a client turn us down after he found out that his 80K in equity on another property might be at risk on a short sale. He would rather have his 'investment duplex' get foreclosed on for about a 20k 'short' that is needed. Some people need to take responsibility for their decisions in life.

MAR

2008

Matt

Check on your state laws. For instance, in Florida if you opt for a foreclosure instead of a short sale, the lender is entitled to get a "deficiency decree" which is a final judgment for the difference between the judgment of foreclosure and the higher of the amount the property sold at the foreclosure sale or the appraisal value at the time of the foreclosure sale.

Therefore in a foreclosure you end up with 2 judgments against the borrower: (1) the foreclosure judgment and (2) the deficiency judgment. The deficiency judgment entitles the lender to garnish wages, sell assets, attach bank accounts - all being a real mess.

Plus with 2 judgments you get a double whammy on the credit scrore and since one judgment is actually for collection of money, the ability to borrow is kaput.

My recommendation is if the short seller has assets, negotiate a deal where the lender takes some alternative collateral or even no collateral in return for a promissory note for the difference. This avoids the 2 judgments and headaches for years down the road for the borrower.

Wendy -

Too good to be true? NO scenario in a short sale or foreclosure is a good one for the borrower. The borrower is ALWAYS on the loss side of the column. The question is how long is that column.

There is relief for borrowers in certain circumstances, but these circumstances are mostly about total insolvency. Yes, you may not have to file for bankruptcy, but that is for certain already insolvent borrowers where the lender will not even bother to get a deficiency judgment. If the borrower shows assets or earning ability, you can bet the lender will prepare themselves for the judgment - this is because even if the judgment cannot be collected today, there are investors out there that will pay ten cents on the dollar for these judgments. If the judgment is for $20,000 or more, isn't it worth while to spend $500 with the foreclosure attorney to take the last step - producing $2,000 for the lender for a net gain of $1,500?

My guess is that the "qualifying" aspect is the key, and determining you "qualify" is a function of the company. You can take it from there............

Richard...A very good post..so many of the foreclosures I WAS working on were from investors that got upside down and wanted an easy way out...when it came down to getting them to sign all the docs, they would refuse to sign off, because it would involve a second fraud or uncover the first loan fraud by doing so...We as Reators need to be very upfront with the sellers before we take on listings and start the short sale process...A ton of time can be wasted..the short sale process should START with completed documentation from the seller, including a listing agreement..then you may proceed, anything less, and you have just agreed to market the home for the lender, free of charge

MAR

2008

"Economic logic does not apply to a borrower with liquid assets. That borrower will not get any short sale releif from the lender and trying is a waste of time."

No it is not a waste of time. The problem with the logic of many is that they are on the defensive with the bank. It is very doable for someone with assets to get a short sale done, and without giving up any of the client 's financials.

> I explained to them that would have to disclose a lot of financial to prove their financial outlook. I told them just because your house value went down doesn't mean you don't pay anymore. The banks want to see your ability to repay the loan.

What they want and what they get are two different things. Furthermore, if you as an agent tell the borrower that they must give up their financials to the lender as the only way to get a short sale done, then the argument can be made that you have breached your fiduciary duty to your client and acted as the agent for the lender, who is also the one approving your fee.

>the short sale process should START with completed documentation from the seller

If you require this without consent of counsel, you are setting yourself up to be sued.

San Diego -

I hope you don't understand what was being said - because if you did then you are proposing to conspire to commit bank fraud along with your client, for mis-statement of financial condition.

Don't confuse fiduciary responsibility with ethical conduct. Your responsibility as a real estate broker acting as the seller's agent with the lender is to provide complete and truthful information. Knowingly withholding information to see if it gets by is a bank fraud crime if the lender is a federally insured lender or if the loan has any government funds (or sub-agencies) involved (and I may be too limiting here as the exposure may be broader). It may also include mail fraud.

If you are uncomfortable doing the short sale negotiation and set up work, let an experieinced attorney handle it.

Richard, I only work with an experienced attorney. You have completely misunderstood my comments.

I am not saying that anyone mis-state information. What I am saying is that it is possible to negotiate a short sale without providing financials, and it is not the role of the agent to do the bidding of the lender. The financials do not have to be part of the negotiation, and if an attorney is part of the negotiations, they shouldn't be.

Your claim that assets would preclude someone from completing a short sale are incorrect.

San Diego -

Let's just say that based upon my 25 legal years of experience both working with the lenders, as a lender, and for the borrowers, I respectfully disagree. Possible, yes, likely (ie: percent success rate), no.

Richard, lets just say that in the past week I have seen it done twice.

The story from San Diego MLS seems to be incomplete. What do you say to the lender when they ask for the financials of the borrower? Oh, look a bird!! What do they accept as a reason that the financial information is not provided?

MAR

2008

No. The correct answer is "Oh look. A lawyer who wants to see your (the lender) RESPA compliance on every facet of this loan in addition to verifiable proof of ownership and right to foreclose on this loan."

You would be surprised at the number of times the lender response is something along the lines of "how can we work this out?"

Just another reason why agents who negotiate short sales without the assistance of attorneys are taking big risks. The number of lawsuits against agents who screw up short sales because they don't know what can be negotiated is going to be huge. Richard's excellent post on a negotiated settlement vs deficiency where he explains that many can be resolved for 5-15% is a prime example.

Suing agents is a growth industry if you are a lawyer.

San Diego makes a good point about going into the short sale process with your guns fully cocked.

"Fully cocked" means that you have done the homework necessary to see if the lender on the subject loan did their loan in full compliance with RESPA and TILA. This is especially important on loans less than 2 years old. The smallest infraction can be cause for unwinding the loan and giving back all up front fees to the borrower.

The other side of the problem (that the bank knows as well) is that unwinding the loan means the borrower who was wronged must pay back the full principal of the loan. In this market of over leveraged loans, paying it back is not an option to the borrower.

The inability of the borrower to pay back the principal because the property has depreciated in value is the dilemma in the TILA and RESPA enforcement arena today -- quite a change from the slew of such suits back in the early and mid 2000's.

MAR

2008

Richard, what is your experience in seeing requests for a short sale to lenders where the seller has assets but offers, up front, to sign a promissory note for the difference? Scenario is that the seller must move out of town for a job and their home is worth $150,000 less but they are willing to sign a promissory note for the $150,000 with the lender approving a short sale. They do not have $150,000 to bring to closing.

Lynn -

This is a classic example of economic reality for the lender - and a terrific solution to a problem. Key issues are what is the financial situation of the seller/borrowers? Is the promissory note going to be wallpaper? Is their situation such that they don't care if they get a 1099? Is the lender insistent on a note? What other collateral might they have that can be secured? Lenders now a days are seeking some outside the box solutions when the right alternative hits them between the eyes (sorry, near misses don't count).

We have dealt with several similar situations, Lynn. It just makes sense rather than the foreclosure route. Besides, the lender (or whomever they sell the unsecured note to) can enforce the note later on. It is cheaper and surer than a try for a deficiency judgment after a foreclosure judgment.

JUN

2009

Richard,

I have a property which I purchased in 2006 for $310k. I owe $288k. I am behind 2 months. I never lived in the property. It was rented for 1.4 months for $1,500 a the renters are no longer in property. I can no longer keep paying a mortage with escrow for $3,200 and the interest rate is 8.9 fixed. Countrywide gave me a good faith estimate of 7% before purchasing the property and at closing it was 8.9 and signed the papers.

I thought this investment could be my retirement in the future.

Can you give me an advice?

Thanks

JUN

2009

Nancy

Thanks for reading.

The discrepancy in the mortgage interest rate given vs. quoted can be a significant violation of federal rules (TILA) and could be used as part of a platform for revision of the loan terms. Additionally, your change in income vs. costs of ownership of this home could qualify you for your lender's modification procedures.

A good real estate attorney that deals with loan workouts in your area should be able to assist you in this matter - or you could call them yourself and try to see if you can get a modification that suits you. Your interest rate is presently very high and we have seen reductions to less than half of what you have. That would make a big difference!

JUL

2009

I have a unique situation. I have a 1 bedroom condo I purchased before I was married. I now have a wife and a 10 month old in a negative equity situation. All my neighbors are selling for nothing which is hurting my value on a daily basis.

My wife is unemployed, laid off two weeks after returning from maternity leave.

We have no debt, making the mortgage payments okay, but we cannot stay here due to space issues and further deterioration of the condo market in this area.

Equity . . . bought for $321k, owe $313k and its probably valued around $300k although neighbors are going to sell for much less in the coming months and thus dragging my value down with it. We have $36k in savings, but the negative equity, realtor commission, and transfer tax is going to be about $32k.

I have never been late for anything and have immaculate credit. If I was aproved for a short sale and agreed to pay the deficiency . . . does that include the realtor fees?

Any suggestions would be greatly appreciated. My realtor isn't well versed in this, but she's pushing it because she wants her money? That is something that needs to change . . . the realtors incentive to help is driven by money.

Thanks,

-Dave

JUL

2009

Dave - I assume you meant your home is negative equity and your new baby is doing just fine! The numbers would work like this (numbers approximate and depending on what State you are in:

Sell 300k, less commission 18k, less selling costs 2k, less title expenses 2k less prorations 2k means net to lender 276k. Deficiency is therefore difference, being 24k plus 13k = 47k. Lender, if they want you to pay the deficiency, could ask for it in cash, by no interest promissory note, or some combination.

Hope this simple explanation of the formula allows you to apply your particular numbers.

AUG

2009

Hello Richard,

Six months ago, I went with a Loan Modification company and paid $1,500 to help me modified a loan on a second home. The company keeps telling me that they still working with the mortagage company for negotiations. Last week I faxed them a copy of the foreclosure papers I was served and have 20 days to answer. They told me not to answer and they will not answer either.

The papers are from the State of Florida and it clearly says that if I do not respond on time, I could lose the case, my wages, money and property.

It has passed 10 days now and still waiting for this company to tell me somthing.

I think I should answer. Can you advice? Thanks Nancy

Nancy -

HIRE AN ATTORNEY IN FLORIDA (us or anyone else) TO RESPOND -- IMMEDIATELY!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! -

DEC

2009

Hello Richard,

I want to thank you for your advice in other issues I had with Loan Modifications.

Currently, I have a tenant that is not paying the rent on a house which is currently being processed for a loan modification. I had posted a 3-day-Notice on his door which he careless. Then I personally hand to him a letter stating an eviction that will take place if he does not pay and it's consequences. He still do not care. His contract is ending this December but, he has violated the contract. He is responsible for paying water. The only problem is that water is in my name and ussually hand him the bill. The city will turn the water off soon.

Do I need a lawyer? What can I do?

Thanks,

Nancy.

JAN

2010

Nancy

Most court clerks have self-help forms for basic landlord tenant issues such as eviction for non-payment. See the clerk and evict your tenant if he has not already moved out. You can also sue him in small claims court if he did vacate but left you with money still due to you.

For simple matters the judges are fine with dealing with parties that are not represented by an attorney. Don't be afraid to try this part of the American Justice System on your own. You will learn a lot and likely it will be a rewarding experience.

JAN

2010

My tenant refuses to leave the property and I will file an eviction as you adviced. The water bill is on my name and the tenant is responsible for giving me the money to pay his water bill. He has not done it for 2 months. Is it legal to let the water shutoff by the city without me calling the city?

Thanks,

Nancy.

Thanks,

Nancy.

JAN

2010

Nancy

This depends on the language in the lease. If you are merely acting as a conduit for this responsibility of the tenant to the water department, then you are not obligated to pay the water - he is via delivery of his money to the utility by you.

If the lease says that you are supplying water via the utility department and he is to reimburse you for the charges, then you gave to pay the utility department and seek reimbursement (or eviction or both) from the tenant.

Check with a local real estate attorney for a review of your documents and the precise answer in your particular jurisdiction and set of facts.

FEB

2010

Hello Richard,

Can I take possesion of a rented house after the lease has expired and the tenants have left the property and there is no water in the property, no one is living in the property, but the tenant still have a couch and speakers only in the property and a car without a license plate in the driveway?

Tenant refuses to answer phone calls.

Please advice. Thanks, Nancy.

Nancy

The answer is yes and no. Most states have specific laws regarding the possession of abandoned property and you need to abide by those laws to a "T" or you could be in worse trouble.

But those laws generally provide for the notice to the last known address of the tenant and posting on the door of the abandoned premises that the keys/locks have been changed and where to call to get entry to the personal property. After the statutory time you can then remove or sell or dispose of the unclaimed property. The location may be off site from the rented property location (especially useful for the car). Be sure to consult with an attorney on this issue immediately as you don't want to make a mistake.

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Richard Zaretsky, Florida Real Estate Attorney

West Palm Beach, FL

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Richard P. Zaretsky P.A. - Board Certified Real Estate Atty

Address: 1655 Palm Beach Lakes Blvd, Suite 900, West Palm Beach, Fl, 33401

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