Some Sellers Think They Are ENTITLED To A SHORT SALE

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

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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Rainmaker
135,445
Jennifer Kirby
Kirby Fine Homes - Minneapolis, MN
The Luxury Agent

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.

May 05, 2008 03:45 PM #1
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Jennifer -

$60,000 in the bank is not necessarily a bar to a "short sale".  The arrangements will be that some portion of the sum may need to go to reduce the shortness, but a note payout is still a possibility -- or maybe the 60,000 is there for some-other reason - like medical needs of a specific malady, etc.

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 Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com

May 06, 2008 12:00 AM #2
Rainer
70,582
Matt Moxhay
Prudential Fox & Roach - Moorestown, NJ
Moorestown Real Estate

Richard- What about an owner occupied who has 2 mortgages on the property and the current market value won't cover both, only the first and a portion of the second.  He will need to short the second by about $30-35K: the total loan for the 2nd is about $45K.  He has ok credit and good income and wants to buy another home (for more $$) with his fiancee!  Wouldn't the 2nd lien holder want him to cover the short?  Technically he doesn't have the liquid assests to do this?  Is it even conceivable that he would be able to buy another home after "shorting" one?

May 09, 2008 07:34 AM #3
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Matt:

This is an often asked question.  We have found that properly approached, the lender can be convinced to allow a portion of the (2nd) mortgage to be moved to either other collateral or to an unsecured note.  What the other collateral may be is what has to be negotiated.  This can also be done without there being any "late" payments.  An additional key is that you need to show the inability to pay the lump sum short amount at closing.  With good credit and good income, the bad news is that you obviously cannot walk from the responsibility (strangely, I have seen exceptions - see the "bookends" part of BACK TO BASICS).

The key here is that he wants to get immediately into another house with his financee (boy, is THAT a mistake!).  What he may want to try is to buy the new house before he plays games with the existing house - if he can qualify for the new mortgage.  THEN deal with the first house - including taking a credit hit if absolutely necessary (which seems hardly justified for $35,000) under the circumstances.

Thanks for asking!

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 Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com

May 09, 2008 02:59 PM #4
Anonymous
Marie

Hi Richard: 

I know this post is somewhat older, but have you found banks are recognizing the premise that a "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."  I interpreted this to mean that lenders may become more willing to accept a short sale and take a promissary note from sellers who may not be able to demonstrate the traditional "hardship" in the form of deliquency.

 

I am certainly suffering from the same "indigestion" as many buyers, having bought two years ago and now upside down by $80,000 at least and sinking fast - I anticipate $100,000 upside down by the end of this year. My question is whether my lender may be interested in working with me on a short sale, despite my income which is more adequate to pay the mortgage and expenses each month.  I am a young 30s professional with no other assets, save for a small emergency fund of roughly three months salary, and burdened with student loans of $92,000.  I would be willing to accept a note for some of the difference, provided that the lender will forgive the majority of the balance.  Any hope?

 

Jun 16, 2009 02:23 AM #5
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Marie -

There is hope for you.  I just wrote an article that touches on this subject.  You can see it at

SHOULD I PAY MY MORTGAGE? SHOULD I STOP PAYING MY MORTGAGE?

Jun 25, 2009 10:15 PM #6
Rainmaker
1,079,273
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Richard, I linked to this post while reading your most recent - and my question was going to be about whether to stop paying the mortgage. We recently took a short sale and the Sellers asked us if they should stop paying their mortgage. We said we would never recommend that someone stop paying their mortgage, that they would have to look at their situation and make that decision for themselves. Then they told us that every other Realtor® they had spoken to had told them, off the record, to stop paying the mortgage.

Apr 24, 2010 11:46 AM #7
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Frank and Sharon -

I am squarely in the mindset the same as you - that the only person that can decide to pay or not pay the mortgage is the borrower. [See my later article SHOULD I PAY MY MORTGAGE? WHEN SHOULD I STOP PAYING MY MORTGAGE?]

As much information as they can tell me, the borrower always has MORE information, whether economic, family, health, or whatever, that has in integral impact on a strategic default.  Thus I try to feed them as much legal information possible before they make the decision.  But it is their decision to make.

Why do many Realtors say don't pay?  Well, I think a lot of the courses available teach the theory that it is easier to show a hardship if you don't pay.  I think that is right because it usually is easier.  But it is not necessary.  Even the revised HAMP and HAFA FAQ's state that you don't have to be late on your payments.  Thus, it is easier for the negotiator (often the Realtor) - but in the end it greatly and adversely affects the borrower.

Apr 25, 2010 01:29 AM #8
Rainmaker
34,902
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

Richard, is it possible for you to redo your BLOG table of contents so people know which article to read first, 2nd, and so on? Cheers.

Aug 08, 2010 10:38 AM #9
Rainmaker
280,033
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Harj - I have been fighting with some solution to this dilemma. Right now they are chronological based on when written, so if there are links in the article, it relates and links to a prior article.

Aug 08, 2010 11:23 AM #10
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