I’m a big fan of historic homes. They just don’t build them the same these days – the different styles, the colors, just the “attitude” of a historic home isn’t like the typical stucco and tile roofs you see throughout Phoenix suburbia.

Two of my favorite Phoenix historic homes areas are having neighborhood tours this month. These aren’t just home tours, they are neighborhood events. I’ve attended the Willo festival before and it was a blast. The Brentwood / Coronado tour is new:

The 2010 Willo Home Tour

What: 22nd Annual Willo Historic Home Tour and Street Festival

When: Sunday, February 14, 2010 from 10:00am – 4:00pm

Where: Willo Historic District – 3rd Ave & Holly Street, Phoenix (map)

Cost: $13.75 online in advance, $15 day of event. Kids 12 and under are free.

More Information: Willo Historic District site.

The 2010 Brentwood Historic District Tour (in the Coronado neighborhood)

What: Home Tour 2010: Undiscovered Coronado!

When: Sunday, February 28, 2010 from 10:00am – 5:00pm

Where: Brentwood Historic District – 18th Street and Willetta, Phoenix (map)

Cost: $12.50 online in advance, $15 day of event. (A portion of the proceeds goes toward renovation of East Virginia Street park.)

More Information: Coronado Neighborhood Association site.

Below are some listings of current homes for sale in these historic districts (not necessarily the homes available for viewing on the tours).

Willo Historic District homes for sale:

Showing properties 1 - 3 of 3. See more Willo community real estate.
(all data current as of 2/8/2010)

1. 
   517 W Wilshire Drive, Phoenix

   $250,000, 1,458 sq ft

   2 beds, 1 full bath
2. 
   542 W Lewis Avenue, Phoenix

   $225,000, 1,434 sq ft

   2 beds, 1 full bath
3. 
   305 W Cypress Street, Phoenix

   $460,000, 2,300 sq ft

   4 beds, 2 full baths

Listing information deemed reliable but not guaranteed. Read full disclaimer.

Coronado Historic District homes for sale:

Showing properties 1 - 2 of 2. See more Coronado community real estate.
(all data current as of 2/8/2010)

1. 
   3886 E Baranca Road, Gilbert

   $217,500, 2,309 sq ft

   4 beds, 2 full baths
2. 
   2530 N 8th Street, Phoenix

   $155,500, 840 sq ft

   2 beds, 1 full bath

Listing information deemed reliable but not guaranteed. Read full disclaimer.

So you get the call from your agent that the title company has received the loan documents and needs to set up an appointment. Lucky you!  If you are a first time home buyer, everyone tells you to "get ready to sign your life away" or "man is your wrist going to tired from all that signing" or "be prepared for a hour of misery" and so on and so on.  My goal with this post is to "dissect the loan package", and take away as much anxiety as I can.  I have over 6000 loan signings under my belt, and the average person may do 10 in a lifetime.  A skilled signer should be able to get you through the package in about 30 minutes.  

Every lender is a bit different, but the package I will dissect below is representative of most lender document packages.  Please bear in mind I am not a lender or an attorney, just a title guy that sees these documents every day.  Always consult your lender or an attorney for specific questions regarding any loan document you sign,  With the disclaimer out of the way, away we go!

Lender’s Instructions – These instruct the Escrow Officer and title company on how the lender wants the fees displayed on the settlement statement, how documents are to be processed, and where and when title policies are to be delivered.

Note – Borrowers promise to pay (actual language from the note – you are making a promise!) the principal of the loan along with interest on unpaid principal over a specific term.  30 years is the most common term.    Due dates, late fees, and how you will be notified if late are also detailed.

Deed of Trust- The 800 pound gorilla of the loan package. This is a "Security Instrument" for the lender.  What are they securing?  The amount of the loan provided to purchase the home.  What is being used to secure the amount of the loan?  That’s right, the property.  In Arizona, when this document records with the county, the transfer of the property is final and the house is yours!

Notice of Assignment, Sale, or Transfer of Servicing Rights – This document discloses who your lender has sold or transferred your loan to.  Many lenders do not service the loans they originate.  They sell them to banks and servicing companies that will then collect the monthly payment.  It’s nothing personal if your loan is transferred.  It happens most of the time.  If your loan is sold, the terms cannot change.  The only change is where the payment is sent.

Truth-in-Lending Disclosure Statement - Most confusing of the package the "TIL" ( a little insider slang for you) simply states that you did not get the loan for free.  You paid fees to a broker, lender, title company, etc in order to obtain the loan.  These fees are then converted into the APR.  Remember, the APR is not your interest rate.  It is a number created by the government to help you compare one lender to another.
Itemization of Amount Financed – This is page 2 of the TIL.  It is a breakdown of the fees used to calculate your APR.
Name and Signature Affidavit – You are swearing and affirming that your correct name is on the documents.  You also may be asked to affirm that variations of your name found in the public record are also you.

Initial Escrow Account Disclosure Statement – A breakdown by month of the amounts from your PITI (principal, interest, taxes, and insurance) monthly payment that are directed to your escrow account with the lender.  The lender uses these funds to pay your property tax bill, homeowners insurance, and if required, private mortgage insurance.  Disbursements from this account are also detailed.

First Payment Letter/Temporary Payment Coupons – Pretty self-explanatory…  This form breaks down the payment and shows the first payment date and where it is to be mailed.

Acceptance Agreement and Hold Harmless – You confirm that you accept the property and have done any necessary inspections,  The lender is also held "harmless" from any responsibility regarding the property or its condition.  

Borrower’s Certificate and Authorization – You certify you have provided truthful and accurate information to the lender and authorize the lender to re-verify any of that information.

IRS Form 4506 – This form is good for 60 days from the day it is signed and dated.  The lender may use this form to obtain copies of certain tax records, like W-2’s or 1040’s  directly from the IRS.  Why?  To compare the documents the you submitted with the actual documents on file with the IRS.  It is a fraud fighting tool.

IRS Form W-9  – You sign and date certifying you have provided the correct social security number.

Appraisal Disclosure – Let’s you know you have a right to a copy of the appraisal for their new home.
 
Servicing Disclosure Statement – Lender will provide to you the odds, if you will, of them retaining the loan vs. selling or transferring the loan to another lender.

Notice of Flood Hazards – Let’s you know if you are in a flood zone.  If you are (a rare occurrence in Phoenix Metro area), flood insurance will be required.

Errors and Omissions/Compliance Agreement – Basically a CYA from for the lender.  If they need help correcting the loan package, you agree to comply and help the lender.

Authorization To Complete Blank Spaces – Allows the lender, broker or escrow to fill in any spaces you may have left blank. This obviously does not include your signature!

Notice Regarding Furnishing of Negative Information – Basically states that late payments are bad!

First Lien Letter – Title company insures that lender will be in first lien position on the property.  

Occupancy Affidavit and Financial Status – You agree to occupy the home (if owner occupied financing is being obtained) and state that your financial situation has not significantly changed since you first applied for the loan.

Address Certification – You certify the address you want lender correspondence mailed to.

Credit Score Disclosure Statement – Lender is required to provide a credit score summation to you.

HUD-1 Addendum – You agree you have carefully reviewed the settlement statement disclosing all the fees in the transaction.

USA Patriot Act Form – Notary will acknowledge the types of ID used to identify you.

Quality Control Release – You agree to assist the lender if they do an internal review of the file

Tax Information Form - Filled out by Escrow Officer to provide lender with proper parcel number and mailing address for county taxes.

Loan Application – Called a "1003 or "Ten OH 3" (more cool lender slang), this is your loan application.  A final version is signed with the loan package.

As I mentioned at the start, your loan package may have a couple more or a couple less documents, but this is a pretty standard package.  If you are getting an FHA loan, there will be a few more documents strictly related to the FHA program.  Same applies to VA loans.  

Now, empowered with the knowledge of what you are about to face, you can go strongly into the title company conference room, securely knowing that you will tame the mighty loan package, and impress your escrow officer at the same time!!

About the Author: Bill Risser is an Assistant Vice President and Branch Manager of the Chicago Title – Gilbert office.   You can find him at ChicagoTitle-Gilbert.com and on Twitter at @billrisser, that is, when he’s not on a local golf course with his son, at the movies with his wife,  or tending to one of his four fantasy leagues (NFL, MLB, PGA, and NASCAR).

Jay’s Note: “Real Estate 101” is a new series where we’ll explore the basics of real estate buying, selling and investing. Definitions, explanations and of course opinions. If you’ve been here long, you already know many of my series fail miserably. This one should stick though as the material is endless. And it’s not just for those who don’t know a lot about the real estate process, there should be information aplenty for just about everyone. It would be silly to commit to a rigorous posting schedule, as that would just be setting myself up for failure. I betcha we’ll get 2 – 4 articles a month though. I’ll also go back through the archives as well as other industry blogs and spotlight some oldie but goodie articles on the Real Estate 101 page (accessible through the main navigation bar under the header).

Here’s a rough transcript of a call I got last night. Similar conversations happen multiple times a week. . .

Caller: I’m calling about your listing. . .

(95% of the time, it’s not our listing. Our sites show ALL homes for sale in the Phoenix area)

Me: That isn’t our listing, but I’d be happy to give you some information on it.

Caller: I’d rather speak to the listing agent.

Me: Mind if I ask you why? They represent the seller, and the seller’s interests. . .

Caller: I understand how real estate works. The listing agent won’t make as much money if you sell the home. They will discount their commission if I work through them.

Me: Maybe, maybe not. But you’ll have no negotiation position. It’s quite likely we could get the home for a lower price – saving you more than the thousand or so they might take off their commission.

Caller: That’s OK, I know how real estate works. YOU get more if I pay more.

So here is a guy that is convinced he can save money if he uses an agent that represents the other party in the transaction. The same agent who already has a fiduciary duty to the seller. If you are buying a home, don’t you want someone working with you and representing your interests?

Sure, dual agency is legal in Arizona (and many other places). Here you’ll need to sign a document saying you are OK with having limited representation. Read that again – if you are a buyer and you insist on working with the seller’s agent, you have to agree to limited representation.

Is limited representation worth “saving” a couple of thousand (at best) on a purchase of the size, complexity and cost of a real estate transaction?

Let’s take our caller for example. He was calling on a $190K home. So let’s say for the benefit of argument that the listing agent says, “Sure, I’ll drop my commission by 1% of the sales price”. I assure you he’s thinking on a full price offer (after all, he’s already working for the seller to get them top price). So that means the caller can now (maybe) purchase the home for $188,100 in theory “saving” the buyer $1,900.

Let’s do a little math:

Buyer is putting down 20%, and can get a 5.5% fixed interest rate 30 year mortgage.

With a purchase price of 190,000, the buyer needs $38,000 down, so he’s financing $152,000.

That would be a monthly payment of $1,021.

With a purchase price of $188,100, the buyer needs $37,620 down so he’s financing $150,480.

That would be a monthly payment of $1,011.

So what, exactly, is the buyer “saving”?

OK, they need to show up with $380 less of a down payment. And his monthly payment will drop by a whopping $10 a month.

(yes, over the 30 year life of the loan, that $10/month amounts to $3,600. Assuming of course, you really live in the home for 30 years.)

Worth it?

What if, with his own representation he was able to negotiate a purchase price of 5% under list (which is entirely possible in the Phoenix market, and many others).

190,000 – 5% = $180,500 purchase price. $36,100 down. $970 month. That’s $1,520 less down and a $41/month lower payment.

What if, with his own representation, he was able to get some seller concessions toward closing costs AND a lower sales price?

What if, with his own representation, he was able to get the seller to “buy down” his mortgage, resulting in a significantly lower payment across the term of the loan?

Do you really think an agent who represents the seller’s best interest is going to attempt to do this for you the buyer? Remember, you get limited representation. . .

Here’s a thought. Say you are interested in an REO property. During your inspection you find the home needs a new roof (water heater, A/C – insert expensive item here). Do you think the seller’s agent is going to go to bat for you? Think he’s going to risk pissing off the lender (his client) and possibly lose future listings from that lender? No, he’s going to say, “Sorry, REO’s are always sold as-is”. (Hint – sometimes a good buyer’s agent can get a bank to make major repairs, even if the home is listed as is).

Representation is important. We’re not talking about walking into Best Buy and purchasing a television. If that doesn’t work out, you can return it. And you’re not spending 200 thousand on a TV. We’re talking about a home purchase, quite likely the single largest purchase you’ll make in your lifetime.

Don’t you want someone representing you and only you and your best interests?

Stories like this make me physically ill. That it happened just a couple of miles from my home in Gilbert doesn’t help.

Gilbert Police lieutenant Eric Shuhandler was shot and killed during a routine traffic stop last night at the corner of Val Vista and Baseline in Gilbert.

Shulander was a 16 year veteran of the Gilbert police force and is survived by his ex-wife and their two daughters, 10 and 12. (East Valley Tribune article)

What those poor kids are going through today is unimaginable.

Thankfully, the two animals that murdered Lt. Shuhandler were apprehended after a 50 mile high speed chase in which the suspects fired on police. Both suspects were shot by police officers. They have non-life threatening injuries.

Too bad, as it’s going to be years before they get the needle they deserve.

I stopped by the site where Lt. Shuhandler was killed. 14 hours later the police are still there. Some people have already begun to leave flowers at the site.

Christopher A. Redondo (right in photo), 35, is believed to be the gunman. He spent nearly four years in an Arizona prison for aggravated assault and related charges and was released in June 2008 according to the AP in a  Washington Post article.

Daimen Irizarry, 30 is the suspected driver. He pleaded guilty to assault in Pinal County Superior Court in 2004 and was sentenced to probation. An arrest warrant was issued in 2006.

What a couple of sub-human losers. As far as I’m concerned, the death penalty is the only appropriate justice for these two.

Take a look at Redondo’s public record from the Arizona Department of Corrections.

Convicted of 4 felonies — child/adult abuse, aggravated assault and two counts of aggravated harassment. That’s what landed him in prison. While incarcerated, he was hardly the ideal inmate as there are disciplinary infractions including physical assault, disobeying orders, possession / manufacture of a weapon, disorderly conduct and rioting. Curiously, he was found guilty of rioting on May 4, 2008 – and released from prison the next month on June 27, 2008.

And 18 months after release he shoots a police officer in the head.

Something is terribly wrong with our justice / prison system.

Memorial Fund for Lt. Shuhandler’s Children and Family

A fund has been set up for the Shuhandler children and family. You can donate at any Wells Fargo Bank. The account number is 1359531975. It’s easy, trust me. All you need is that number.

Update: Lt. Eric Shuhandler was laid to rest on February 3. An estimated 3,000 people attended his funeral. The funeral procession was miles long.

Here are some photos I took of impromptu memorials at the site of the slaying, and the Gilbert Police Department:

I don’t know if this is ironic, funny or pathetic. Probably a combination of all of the above.

Today I get this via email (name/email changed to protect the “innocent”):

On Wed, Jan 27, 2010 at 9:06 AM, “Joe” <”joe”@gmail.com> wrote:

Subject: please remove

This comment comes up very high on google searches of my name and I am hoping that you would be so kind as to remove it. I am not sure why I would have used my last name – not a good move on my part.

http://www.phoenixrealestateguy.com/housing-panic-keith-vs-the-hound/#comment-39500

Thanks much,
”Joe”

My first thought was, “Wow, that’s an old post. I wonder what this guy wrote that he doesn’t want people to see?”

The post was written in November 2006.

Here is the comment in question:

Joe’s Full Name August 27, 2008 at 11:04 pm
This is utterly hilarious to read. My favorite part is Jay constantly trying to deflect the criticism of a post from 2006 – because it’s SO OLD.

I guess there really isn’t anything to be learned from history, at least not for the shallow.

Really, a simple, “We were wrong and should be much more responsible in the future and maybe even buy a calculator,” could have ended this thread months ago. But I guess that’s what Phoenix REALTORS are good at, deflections and blame shifting. Good luck everyone.

So approximately a year and a half ago, “Joe” writes a comment on my blog, personally attacking me. Now he doesn’t want people to Google his name and see what he wrote.

Why not? Afraid people will find your snarky attack… stupid? Afraid it demonstrates to anyone who should happen across it that you’re an ass?

Joe writes, “I am not sure why I would have used my last name – not a good move on my part.”

No Joe, what was not a good move on your part was being a jerk on the Internet.

You see Joe, Google never forgets.

One basic rule of humanness I abide by is, “If you are not willing to put your name to it, then don’t say it”. Joe apparently feels differently.

I was tempted to reply to Joe and say, “You attack me on my blog and now you want a favor? Why I’m just a irresponsible and shallow Realtor that is only good at deflections and blame shifting. So uhm, no. Your name stays.”

VERY tempted.

But I chose to take the “high road” and delete Joe’s name and avatar from the comment. There’s really no redeeming value in stooping to a troll’s level. I’m sure some out there will chastise me for removing Joe’s name. But hey, people make mistakes and it’s my blog so the name is gone.

I told Joe the comment would stand, but I’d remove his name.

His response to that was interesting:

Thanks I appreciate it. I run a blog that I get attacked for a lot too, so I know how you feel. I appreciate you taking the high road. Removing my name will be just fine.

Joe might want to take a gander at The Golden Rule.

There are lessons here

• Don’t be a jerk.
• Google never forgets.
• If you’re not man enough to stand by your statements then perhaps it is best to just keep quiet.
• “Better to remain silent and be thought a fool than to speak out and remove all doubt” (usually attributed to Abraham Lincoln).

*Sigh*

Anyone that has read this blog for any length of time knows that lousy listing information on homes for sale is a pet peeve of mine.

Here is today’s winner. It covers pretty much every aspect of what makes a Multiple Listing Service (MLS) entry wrong.

First, there is only one photo. It’s of the front of the home and the most dominant aspect of the photo is the SUV parked in the driveway.

The directions field normally contains, shockingly, directions to the home. Typically something along the lines of “Go south on Main ST, east on 1ST, home is 0.2 miles on left (north) side.

The directions for this listing?

“See Map”

The “Remarks” section is where the listing agent can put descriptive info on the home. It’s the only place in the MLS where the listing agent can “sell” the house. Sure, you often see flowery fluff like “Honey stop the car!”, and “I’m gorgeous inside!”, but more often you see language that describes the home and neighborhood. Both agents and potential buyers find the remarks section especially helpful in determining if a home may meet their basic needs.

The remarks in this listing say only, “Fabulous 3 bedroom w/ a den. North/South exposure. Great floorplan. Enjoy the easy care desert landscaping. Must see”

Not exactly helpful.

Then we get to the room measurements. The MLS has a place for dimensions for all of a home’s rooms. Handy for knowing in advance the size of the bedrooms, if your 9 foot sofa can be placed far enough away from your 60” plasma TV, that sort of thing.

Room dimensions for this home?

Blank. Zip. Zero. Nada.

The MLS allows the listing agent to enter the type, style and details of things like the roof, fencing, home owners association rules and utilities. That information on this listing says “see remarks” and, naturally, there is nothing in the remarks…

A woefully incomplete listing entry like this would by definition require a call to the listing agent for more information and details. So we’re treated to this gem in the “Realtor remarks” section:

Listing agent office hours Mon-Fri 7-4. Contact via EMAIL is best for response. Do not call agent on Sunday.  Don’t request more info until you have shown the home and are ready to write an offer. (my emphasis in bold)

I understand having office hours. Many real estate agents work ridiculous hours. It comes with the job. As a service provider, we have to be available when our clients are available. Given that a significant portion of the home buying population works Mon – Fri 8 – 5, a significant portion of the home buying population needs to see homes outside those hours. You don’t want calls after 4pm or on Sunday, fine. Then put the necessary info in the MLS so I don’t HAVE to call you. Attach a file to the MLS with details, do SOMETHING akin to your job that meets your responsibility to your client and I won’t need to call you.

But instead you’re going to tell me not to request more info until I’ve shown the home and have a client ready to write an offer?

Seriously?

Well good luck with that.

You see, I’m not going to even show the home because you’ve given me NOTHING to indicate whether it meets my buyer’s criteria. N O T H I N G.

What is a seller to do?

You shouldn’t even have to ask your agent for this but…

Make sure you see the actual MLS listing. Ask them to show you both the public version and the agent version. Make sure there are plenty of photos that display your home in the best light possible. Descriptive text, room dimensions, all that needs to be included. Ask your agent how they handle inquiries on the property. Find out when they are available to field questions from potential buyers and buyer’s agents. A good agent will likely tell you all this, and more, up front.

What do you do if your home is already listed and you think the listing information isn’t complete?

Talk to your agent. Express your concerns. If they can’t address them, then speak to the agents broker. The broker is the agents “boss” (not technically as agents are independent contractors, but the broker is legally responsible for the agents actions and is your first step in resolving issues with your agent).

Sadly, in the case of this woefully lame listing, the listing agent IS a broker / owner of their own brokerage. If that’s the case and they won’t fix things to meet your needs, your only recourse is the broker’s Realtor association or the State Department of Real Estate. Good luck with that.

And some folks wonder why real estate agents rank below used car salesmen in the eyes of John Q. Public. . .

For at least a couple of months, I have heard rumblings about changes that were going to be coming to the FHA program that were going to be “scary” and were going to make it “much harder” for people to qualify for an FHA loan.

Earlier this week, HUD issued a press release detailing a few of the upcoming changes to the FHA program – and while it is true that in the future it will make it more expensive for someone to get an FHA loan, my first thoughts after reading it were:

It could have been worse.

Highlights of the changes to the FHA loan program:

• The UFMIP requirements are going up from 1.75% to 2.25%
• For people who have a credit score below 580, the down payment requirements are going up from 3.5% to 10%
• Allowable seller concessions are going down from 6% to 3%

UFMIP Requirements Going Up

When you get an FHA loan, you are required to pay UFMIP (which stands for Up Front Mortgage Insurance Premium) and from time to time, HUD adjusts the amount they require to be paid. In the past, they have actually lowered the amount required to be paid – but due to the fact that FHA isn’t exactly flush with cash at the moment, they are raising the amount required to be paid.  There isn’t a way around paying this UFMIP when you get an FHA loan – but the good news is that if you don’t have the cash to pay all of it up front when you get your loan, you can finance the entire amount into your loan.

Low Credit Score = Higher Down Payment

For people who have a credit score that is lower than 580, the new down payment requirement will be 10% rather than the current 3.5%. While this may seem steep if you have a low credit score, the reality is that very few (if any) lenders are still doing FHA loans for people who have lower than a 580 credit score. My guess is that after this goes into effect, virtually no lenders will provide FHA financing for people with a credit score below 620.

Seller Concessions Reduced From 6% to 3%

In my opinion, this change possibly has the biggest impact. Many times when negotiating the price of a home, seller concessions can help the buyer actually be able to afford getting into the house. While it won’t be a deal killer every time, this will make it more expensive for buyers in many cases — and I expect that it will result in higher out-of-pocket costs to buy a home.

FHA loans are still gaining momentum as a financing option for many home buyers and I expect that these changes will not slow that down at all — it will just make it slightly more expensive to get an FHA loan. Which isn’t exactly great news for the housing market in general, but remember:

It could have been worse.

A couple of days ago I had an opportunity to stop by Steel Dreamz, a collector car sales shop located in Chandler.

The testosterone started to flow the moment I walked into the show room. If you’re a fan of classic cars and muscle cars, you have just found Nirvana.

Words can’t really describe Steel Dreamz. In addition to the absolutely stunning automobiles, the walls are covered with very cool signage from “back in the day”, there are antique gas pumps, a seating area that will take you back to a 1950s era diner and more.

It is, without doubt, “The Ultimate Man Cave”.

Here’s a quick video that Kristin LaVanway (one of the superstar Thompson’s Realty agents) did that includes an interview with Steel Dreamz owner Scott Cawley. Scott’s a great guy and I appreciate him allowing me to photograph his showroom and shop. Don’t worry Scott, I gently wiped off the drool I left behind on those amazing cars…

If you happen to be in town this week for the Barrett-Jackson or Russo & Steele collector car auctions, you should stop by Steel Dreamz at 260 E. Comstock in Chandler. (Note this is a new location, not on their web site yet.)

And for your viewing pleasure, here are some of the photos I took. They don’t do these cars justice…

Often us real estate types tend to forget that the real estate vernacular (I’ve always wanted to use ‘vernacular’ in a blog post) we are so accustomed to might be unfamiliar to many who don’t deal with real estate on a daily basis.

I know I am guilty.

We throw around words and terms like REO, Option ARM, fixture, encumbrance, and short sale like everyone knows what those terms mean.

However, not everyone does. This isn’t said to slight anyone’s intelligence – far from it. It is simply a function of if you don’t use these terms regularly, why would you know (or care) what they mean?

Enter “short sale”. . .

I’ve gotten no less than three emails this week from folks asking me exactly what is a short sale.

The short answer, no pun intended, is that a short sale is the sale of real estate where the owner owes more to the bank than the property is worth.

In the Phoenix real estate market, this is not an uncommon scenario.

For example:

Let’s say Joe Homeowner bought a home in 2005 for $300,000. He put 20% down, which amounts to $60,000, and he got a mortgage for the other $240,000. So Joe owes the bank $240,000. (Yes, he’s paid down some of that $240K principal in the five years he’s owned the home, but not much. For the sake of simplicity, let’s just say he owes $240K).

Now Joe wants to sell his home. So he calls his trusty real estate professional who tells Joe that his home will probably sell for $200,000.

But wait, Joe owes the bank $240,000. How can he sell his home for $200,000?

Well, he could sell the home for $200K, and write the bank a check for the other $40K. This probably won’t sit well with Joe, but it is an option (assuming he has 40 grand lying around).

Or, he could sell his home short – sell it for less than he owes to the lender.

The lender however, won’t like this.

Selling a Home Short

Joe Homeowner can’t just up and decide that he’ll sell his home for less than he owes on it. Lenders, and investors in mortgages, don’t take kindly to getting stiffed for tens of thousands of dollars.

Joe is going to have to prove to the lender that he can no longer make the payments. Yep, he is going to have to submit financial statements that demonstrate he can not pay the mortgage. Not that he doesn’t like making payments on a house that isn’t worth what he paid for it – but that he can’t make the payments.

Let’s say for the sake of argument that Joe has a legitimate hardship – lost job, medical expenses out of control, something along those lines. Depending on his lender (or lenders), he may or may not have to actually get an offer on his home before the lender will take a serious look at approving him for a short sale. Unfortunately, there is no standardized short sale approval process – it varies from lender to lender and sometimes even within the same lending institution. Consult a real estate professional for help in listing your home for a short sale. And make it an agent experienced in short sales. It is also not a bad idea to consult a tax professional, and quite possibly an attorney. Trust me, you don’t even want to attempt to go “For Sale By Owner” on a short sale. There’s no point in that, given that you won’t pocket a nickel on a short sale.

Let’s say your lender has indicated they may be receptive to a short sale. Yes, it really is up to them. They are the ones after all that will be taking the loss. They will have to approve any short sale offer that comes across the table. So now you’ve got your home listed for sale. . .

Buying a Short Sale

Buying a short sale is like buying any other piece of real estate.

But different.

Here are some things to note if you are considering buying a short sale property:

1) Expect a long wait. In a “traditional” sale (not a foreclosure or short sale), you make an offer, and the seller reviews it. Maybe you go back and forth on the price a couple of times, but an agreement to sell the home typically happens in a couple of days. Not-so-much in a short sale. You make an offer just as in a traditional sale, the owner of the home agrees to sell it, and now the offer gets sent to the bank. Remember, it’s the lender/bank that has to approve the sale price.  And that can take WEEKS. Sometimes MONTHS. If you aren’t in a position to wait for months on an answer as to whether or not the bank will accept your offer, then you really shouldn’t play in the short sale sand box.

2) Don’t expect the seller to make any repairs to the home. In a traditional sale, repairs are negotiated between the buyer and seller. In a short sale, the owner will not make any money on the sale. Hence, they are going to be completely reluctant to spend money on repairs. Plus, the owners are typically in financial distress and simply have no money for repairs.

3) The banks don’t give a damn about your personal situation. Selling a home is a very emotional experience – for real people. Banks are not real people. They have zero emotional investment in a home. All they care about is their bottom line. It means nothing to them that you’re a Veteran, that you are having a baby, that you’ve found your dream home. Nothing. They don’t care. You may make an offer, wait weeks for a response, only to find out someone submitted an offer after you for a thousand more and *poof*, you are out of the picture.

Yes indeed, someone can submit an offer after you, and have it accepted over yours. From the Arizona Association of Realtors Short Sale Addendum, lines 13 – 15:

Nothing shall limit a seller from accepting subsequent offers from subsequent buyer(s) and submitting the back-up contract(s) to the seller’s creditor(s) for consideration. All parties understand and agree that seller’s creditor(s) may elect to allow the seller to sell the premises only to the holder of the contract with terms and conditions most acceptable to the creditor(s).

Generally speaking, the banks play by their own rules. They are in almost complete control of the short sale process. Scary isn’t it?

4) Unrealistic listing prices. There are agents out there that list short sales at ridiculously low prices. Some of this may be due to ignorance, some may be agents trying to generate an offer and/or bidding war. Any list price on a short sale needs to be taken with a grain of salt. If it sounds too good to be true, it is. While banks often pull bone headed moves, they aren’t completely stupid and they aren’t going to approve a short sale significantly under market value. Many people think they can “steal” a short sale. Banks don’t take kindly to being stolen from.

In Short (if you call 1,325 words short). . .

If you can’t make your mortgage payments, a short sale may be an option. If you’re considering buying a short sale, bring the patience of Job and be prepared for significant frustration.

Anecdotally, we are seeing some banks respond in somewhat timely fashion to both short sellers and buyers. Loss mitigation officers, the poor slobs assigned to handle short sales for lenders, are overwhelmed with work. A good short sale listing agent can make a huge difference in pushing through a sale, but in the end, the ball is in the bank’s court. 

More on short sales from this very blog, should you be so inclined:

• The Short Sale from Hell
• I want to short sell my home! The banks not being fair!
• Short Sales and Stupid Lenders
• Do It Yourself Short Sale
   

I’m in New York City for the 2010 Inman Connect Real Estate Conference and RE Bar Camp NYC 2010. Couldn’t sleep, so I took a quick walk around my hotel, The Royalton. It was 3:00am, and 28 degrees outside so I didn’t last long. Here’s a quick look at midtown Manhattan at 3:00am. All natural lighting, hand held, with no re-touch or cropping (hey, it’s late…)

This city is truly amazing… the architecture, the people, the sheer size…