Suppose you are contacted by a seller who is adamant about doing a short sale and during your Q&A you find out that they can actually still afford their payments. How would you handle that situation? Has it happened to you already? I’d like to know what you said and if you continued with the transaction.
Let me share my most recent experience with a home owner who made enough money to pay his obligation.
In my market, a $400,000 house is approaching the upper scale and this seller bought it just over three years ago just before the “you know what” hit the fan. As I sat at his dining room table with him and his wife, he explained that he was behind a few months in his mortgage and that the lender had started the foreclosure process. I delivered my typical speech and began explaining the documents that he would need to provide to get the short sale started. Just as I was presenting the financial statement, his hand started shaking and he put down the pen he was holding.
Now, I’m pretty good at reading body language but anyone could’ve seen that something was going on in this man’s head. I looked at him and then his wife and saw that she was staring at the financial statement too. He then told me, “I don’t want to give this to the bank.” Of course I let him know that his lender wouldn’t consider the short sale without the statement. It was then that he told me, “I can easily make the payment but I’m not going to.”
He continued to enlighten me as to why he was considering a strategic default. As the seller explained, he obtained the loan with a minimal down payment and it was structured as interest only with an adjustable rate. Yes, you read that correctly … interest only and adjustable rate. Although it took him a few years to realize it, this seller was now aware that his principal loan balance hadn’t budged and his interest rate was soaring. Given the fact that he’d just had an appraisal on the house that showed it was worth much less than what he owed, he considered himself “upside down” and was looking for a settlement.
This is where I had to be careful with what I said.
The seller was looking to me to give him advice on what he should do. He told me that he’d asked the lender to restructure the loan but they refused. He knew he couldn’t refinance because he didn’t have the cash to offset the reduction in the home’s value. As he put it, he was stuck.
What I told him is consistent with what I’ve told others considering strategic default and what I will continue to convey to sellers in the future. In short, they must be truthful and honest about their intentions as well as their financial situation. The fact that this seller can continue to meet his obligation sets him apart from most home owners in default. The reality is that this educated, aware and sophisticated person knowingly and willingly entered into an agreement with his lender. Although I wasn’t there when he signed on the dotted line, I would assume he read and understood the documents.
Apparently, he didn’t. I refuse to be pulled into that “gray area” and I told him that. I also told him that his lender may still entertain a short sale considering that he would not continue to make payments. After all, they understand that agreeing to settle is better for them than foreclosing. Still, though, I could sense that this seller wanted to hide his financial status.
I left that seller with my contact information, detailed expectations and the financial worksheet. I let him know that I would pursue the short sale but only if we were Honest, Ethical, Legal and Providing full disclosure to the lender. He thanked me for meeting with him and said that he would be in touch.
I never heard from that seller again but saw that he listed his house a few weeks after our meeting. I can only hope that Broker approached the situation the same way I did.
If you’ve had a similar meeting with sellers wanting to pursue a strategic default, please let me know. I’d also like for you to take a look at some videos that we’ve put together that will knock your socks off. I think you’ll be amazed at what’s working now in short sales and what you shouldn’t do with short sales. You may also visit www.MikeBridges.info/agentvideos.
To your success,
Mike Bridges
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