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PMI Company Wants To Have Seller Sign a Note

By
Commercial Real Estate Agent with Matthews Capital Markets NMLS 2415712

I received a question from a REALTOR today, who read:

A Realtor's Guide to "PMI & Short Sales"

Let's call her Susan.  She explains:

I have done several successful short sales in my career but recently felt the "sting" of the bank claiming they will submit our current offer on the table for approval... providing the seller agree to sign a note to the PMI company for 15K for 10 years at $125.00 a month. If he refuses they claim the short sale will be denied.

The outstanding loan balance is 132,000
Offer amount 117,500
Offer amount will net the bank 104,980
BPO 119,000

My seller is refusing to sign such note and sees no alternative except to file bankruptcy. In your experience, what are my chances or choices If can get the bank to agree to a lesser amount of say.....half of what they are asking for to satisfy the PMI company.

Susan, I see three options:

1- Calculate the net present value of the "note" the PMI company wants (using a 6% return, that number is about $2100).  Propose that the lienholder take a $2,100 hit to the payoff and offer that amount up to the bank).  You may have to contribute part of your commission and the buyer's agent's commission to get the first lienholder to agree to this.

2- Figure out the net proceeds to the bank if the home were to be acquired through foreclosure (and subsequently sold asa REO).  Sales costs, at $119,000,  would be about 8%, which is about $9,500.  This means that the "net proceeds" would most likely be $109,000...BEFORE foreclosure costs.  The first lien holder and the PMI company would probably split up those foreclosure costs so you're awfully close at the current sale amount.  Present these numbers logically to the first lienholder and the PMI company.

3- Walk from the deal and abandon the listing.  It sounds like the seller is ready to do just that and file bankruptcy in an attempt to eradicate the loss.  The threat of BK (or actual filing) may force both the lienholder and PMI company to look at this scenario differently.

DISCLOSURE:  I'm not an attorney nor do I play one on television.  You may want to seek advice from your Broker's counsel.  Most of the time, however, the PMI company is "playing chicken" with you; they want to see if you can help them "get a little something".  I think option one is a good one.

Comments (49)

Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

What I meant was, if the banks/PMI Co/MI/etc., are going to play hardball with short sale owners, tie them into long term notes to mitigate the bank's losses and still give the consumer impaired credit with a foreclosure on their credit report or a report of short sale on their credit report, what's the incentive for the consumer to play????

A foreclosure is the worst thing a consumer can have on their credit report. 

Most banks won't even discuss short sale until the consumer is 3 months or so in arrears thereby impairing their credit for years.

Lenn, this isn't a foreclosure situation.  The seller is requesting a short sale, in order to avoid foreclosure and bankruptcy.  Foreclosure and bankruptcy are a drastic option to a note negotiation.

I noticed that nobody suggested that the buyer pay $2,100 more than the agreed upon price to facilitate the PMI company's discounted note.  How come?

Jan 02, 2009 06:23 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

I think they should go back to the mortgage broker who originated the loan to make up the shortfall.

She's probably out of the business.  Why not consider a higher sales price with the originating mortgage broker to "kick-in" part of the $2,100?  I've had this happen before and am glad to share in the shortage with the agents and seller. 

My point is this; you're all ranting because your check got reduced.  Your check is eliminated and your client's credit is WRECKED in option three.  While I agree that this is not a good situation, successful negotiation is a give and take from all parties; a win/win/win situation.

Let me make this less painful for you.  Assume that the discounted note of $2,100 is accepted and the PMI company realizes that foreclosure MIGHT get them $1,000. There are seven parties to this transaction, all of which could "concede" $300:

1- The buyer increases the price $2,100. How can we find that buyer an extra $1,800 so that the original loan amount doesn't change?

2- The PMI company accepts $1800. (300)

3- The first lienholder shorts the payoff by $300 more. (600)

4- Both agents offer $300 (1200)

5- The mortgage broker credits $300 (1500)

6- The seller borrows $300 from a family member, friend, credit card, etc (1800)

7- The buyer pays $300 more, in downpayment.

This is REALLY a $300 problem (for seven parties) , now. Who wants to blow a deal for $300?

Jan 02, 2009 06:43 PM
Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

"I noticed that nobody suggested that the buyer pay $2,100 more than the agreed upon price to facilitate the PMI company's discounted note.  How come?"

For me, I've become wary of suggesting higher prices.  We have enough trouble getting appraisals for regular sales.  Once the bank has the BPO or appraisal for a property listing, how can we get a higher one just to "make the deal work"?

Asking the buyer to offer a higher price just adds another element of risk.  Buyers will seldom offer "more" in any transaction unless they are convinced that it's the only home for them and that there are multiple offers.  Even then it isn't easy.

Especially when they may believe that home values will continue to fall.  Isn't that what the media is reporting??

Jan 02, 2009 10:24 PM
Anonymous
William

Where is all the money GIVEN to the banks? Was it to shore up their balance sheets because they screwed up? We had a buyer offer full price cash offer (500K) and walked away because the bank did not respond for weeks!! That was enough...we are not doing short sales if full sales don't work!!Pitiful!!

Jan 02, 2009 10:36 PM
#34
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Brian, In a short sale we are submitting CONTRACTS not offers, to the lenders. We are not asking then to accept the contract we are asking them to accept a "short" payoff so a contingency can be removed from the CONTRACT and the deal can close. Anyone who submits and offer to the lender to see if they will accept it does not know how to handle short sales and is wasting time and clogging up the system.

The lender is NOT party to the contract(s)(listing or purchase). They do not control purchase price OR commission. They do have control over how much they will accept as payoff. If this figure is too high then a solution needs to be found. Part of this solution may be to have the seller sign a note or lower the expenses of the deal(commission). However lowering the commission in the deal does not mean the seller is off the hook for paying the FULL commission as agreed in the listing agreement. They can bring cash to closing to pay the difference and/or they can sign a note to the broker.

A broker should know before listing the property what lender is being negotiated with and how much commission they will "allow" almost all are 5% to 6% if there are 2 brokers and 4% of there is only 1 broker. Fannie Mae will allow 5%. Countrywide will allow 6% as will Wells Fargo and Washington Mutual. I just closed a CW and in addition to the commission I was paid 1% as reimbursement of costs to maintain the property for a total of 7%.

I also charge my sellers an upfront "marketing fee" to help offset my costs. 

The commission on a short sale is truly a non issue.

Agents are getting screwed on short sales because they don't know what they are doing. Sellers are getting screwed because they are hiring these agents.

Short sales are serious business and need to be treated as such. Sellers need to seek legal and tax advice and then hire a broker that understands the process.

My biggest frustration is lack of education on the part of folks trying to handle these transactions. The public is being harmed and that goes against every thing being a REALTOR(R) stands for

Damn......I think I just wrote a post :)

Jan 03, 2009 12:40 AM
Jim Shaw
Premiere Plus Realty Co. - Naples, FL
Real Estate Sales Associate, Naples Luxury Real Estate

Bryant Tutas is right, most agents don't know enough to be good agents in a short sale.

So, where do all of us uneducated agents go to learn this stuff?

Jan 03, 2009 01:57 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

For me, I've become wary of suggesting higher prices.  We have enough trouble getting appraisals for regular sales.  Once the bank has the BPO or appraisal for a property listing, how can we get a higher one just to "make the deal work"?

I'm not suggesting that the loan amount be raised or new appraisal be obtained.  If the sales price is raised $2,100, we just have a cash-to-close problem.

Short sales are serious business and need to be treated as such. Sellers need to seek legal and tax advice and then hire a broker that understands the process.

While Bryant's advice is excellent, it's not answering the question.  This agent is IN this situation RIGHT NOW.  How might she find a solution that salvages the transaction and the seller's credit?

Jan 03, 2009 02:29 AM
Bryant Tutas
Tutas Towne Realty, Inc and Garden Views Realty, LLC - Winter Garden, FL
Selling Florida one home at a time

Brain, Her solution is to negotiate with the bank. She needs to counter offer the PMI companies offer. This is a standard procedure in a short sale negotiations which is why my comment pertains to this discussion. If an agent has to ask this question they should not be doing short sales without supervision. If the PMI company will not budge then the seller can either accept it or be foreclosed on. If the seller can afford the $125 per month then they need to sign the promissory and be done with it. Unfortunately sellers feel they are entitled to a short sale and refuse signing these notes because they feel they can just walk away scot free. They are wrong. These issues should be discussed at time of listing.

Your advice to "Susan" is actually very good. You are presenting the PMI company with options to get this deal closed. The only thing I disagree with is throwing the commission into the equation. As Realtors, our job is to do the best job we can to help qualified short sale sellers salvage their credit. It is the sellers sole decision on whether or not to sign a promissory note to do so. Their willingness to sign a note needs to be established at time of listing so we don't waste our time trying to help sellers who are not wiling to help us.  

Good discussion Brian.

Jan 03, 2009 03:26 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Their willingness to sign a note needs to be established at time of listing so we don't waste our time trying to help sellers who are not wiling to help us. 

Ahh.  That's the black pearl here- Thanks, Bubba; I didn't see that

Jan 03, 2009 06:15 AM
Marian Gregor-Ann
Keller Williams - Ann Arbor, MI
Arbor area Real Estate

Hi Brian, As previously said, the way to assist 'Susan' is suggest she or a short sale negitiator actually Negotiate!  It helps when you know what to say & how to say it to get the response that really helps the seller.

Jan 03, 2009 08:09 AM
Anonymous
Barry Cunningham | Real Estate Radio USA

This is laughable. Let me get this right...

The stated facts:
*
The outstanding loan balance is 132,000
* Offer amount 117,500
* Offer amount will net the bank 104,980
* BPO 119,000

You are telling me that there is a BPO on this property that suggests that the buyer is purchasing this property at what amounts to 98% LTV and a discounted payoff of an OMG amount of 80% of the loan balance. Is that what I'm reading?

Who egotiated this deal? A newly licensed , wet behind the ear agent? OMG this is ridiculous! The problem here is a SEVERELY botched "negotiation". The bank's LM obviously knows they have a greenhorn on the hook who has completely blown this deal.

If the agent had competence this would have been addressed in their properly prepared short sale package.

If the agent is truly in a negotiation then decline the banks offer and counter. YOU ARE IN A NEGOTIATION!!! Act like it. There's not a bank on the planet that would let this deal die if it is a real deal.

What bank is it? What stage of the foreclosure is it? Is it a cash deal? So many questions and so many options...it's 2009 people...need to know your stuff here. Having these types of discussions at this state of the market means there are literally tons of agents out there playing "expert" instead of knowing what to do.

This deal is a no-brainer! Brian this is an easy deal for someone who knows what they are doing. Case closed...this is nuts!!

Jan 03, 2009 12:49 PM
#41
Lola Audu
Lola Audu~Audu Real Estate~Grand Rapids, MI Real Estate - Grand Rapids, MI
Audu Real Estate~Grand Rapids, MI ~Welcome Home!

Brian, I've read through the comments.  Excellent discussion and post topic BTW.  But, what Barry says at the end here has bothered me too.  What bank would walk away from this deal and allow the PMI company to jeopardize getting any money from a viable borrower?  We're dealing with a  rapidly depreciating asset.  The BPO and offer have established the current market value; the PMI company needs to deal with reality.  That's the job of a good negotiator.

Jan 03, 2009 01:39 PM
Anonymous
Barry Cunningham | Real Estate Radio USA

@ Lola...you are so right. Something stinks here and for sure someone is DEFINITELY dropping the ball. Negotiation skills being honed is a must in these volatile real estate times. No time to be winging it!

Jan 03, 2009 02:37 PM
#43
Paul Silver
Tiverton, RI
Rhode Island full service real estate firm

It would seem that banks are seeking to circumvent the regs regarding their involvement in real estate, and doing so by way of seeking to control the transaction even more than previously...

And we see this trend increasing over hte next few months... unless the new administration comes up with some more relevant regulations, and forces the banks back to the line between lending and dealing in reale state.

I also agree with Lenn about the banks renegotiating commissions... just nonsense... but as long as agents let them do so, they will.

Jan 04, 2009 04:50 AM
Josh Holt
RE/MAX Coast To Coast~ Dedicated to You! - Berwick, ME
Southern Maine and NH Real Estate - Your Source of Info on the Berwicks

Brian-

I had this situation come up not so long ago. I wrote a post about it and got some great responses. If the folks are going to declare bk, they might as well, sell the house and put the note in the bk.

What I really think it comes down to though, is that the sellers made a promise to pay back that debt. It is their obligation to pay it back. I'd be interested to see how 'Susan' makes out!

j

Jan 07, 2009 11:57 PM
Anonymous
Pete Elsner

Great post!  I am working a short sale right now along with doing some REOs for CW.  And man what a pain in the butt these are!  The left hand does not know what the right hand is doing!

http://www.PeteElsner.com

 

Jan 13, 2009 09:58 AM
#46
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Brian, this is an interesting and thought-provoking post and thread. I have been told that Sellers have been advised to sign notes - they're unsecured, so what can they do if they don't pay? Not saying I would advise someone (I too am not an attorney and I definitely do not play one on TV) to do that, but that has been mentioned more than once in conversations with other agents and consumers.

Feb 04, 2009 05:57 AM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Brian,

I missed this one all these months. I saved allot ofo typing.

Bill

Jul 15, 2009 10:01 AM
Vanessa Calhoun
PalmerHouse Properties & Associates, LLC - Atlanta, GA
Your Greater Atlanta Marketing Guru!!

Great Post! I agree, the banks are aware that they're dealing with someone who may not be very experienced in dealing with short sales. Again, if the note is unsecured.........

Jul 27, 2009 03:23 PM
KIMBER REGAN

I am dealing with a nightmare similar to the above, and would like to know if anyone has dealt with this situation, and hopefully found a successful resolutin to the problem...I am representing buyers' purchasing an upper end home in our community. Sellers are nice people, but going thru a difficult divorce.  Lender is Wells Fargo, and there is MI thru Radian Insurance.   We have been told thru the negotiator (using that term lightly, we feel like we are being blackmailed, and forced to pay ransome!), that the MI is requiring the Sellers to sign a $50,000 note to approve the Short Sale.  Needless to say, this is not gonna happen!  Talked to my buyers and the initially wanted the home so bad, that they were willing to pay $25,000 cash at closing to make it work.  Wells agreed, but found out today that no approval has been requested the MI; in fact, they were not aware that there needed to be a new HUD submitted because of the reduced appaised value.  But after checking their finances, the buyers realize that they were incorrect with their finances, and are short on the $25,000, and they will not let them make payments. 

 My Question: Has any one else been held hostage by the MI company?  The sad thing is that the loss mitigator from the MI company seems very nice, and most of the people at Wells do also.  But, we are having the problems with the negotiator, and keep being put back with her, and it seems like she will take pleasure if she can succeed in making this deal crash & burn.   Any ideas, or positive suggestions will ge greatly appreciated.  I am running out of time...

Apr 27, 2010 12:35 AM