Yikes.  That’s probably the first thing you’re thinking.  We just received this thing called a “Notice of Trustee’s Sale” and we have no idea what went wrong (“except that we stopped paying our mortgage a few months ago.”)

AHA!  That’s the problem.  What’s happened is the bank has taken action to recover the home to cover the note.  The fact that the note is greater than the value of your home, most likely, is irrelevant at this point.  The bank is going to take your house back.

The good news for you is that the bank doesn’t really want the house.  They want as much money out of the house as possible, but they don’t want the house because it costs tens of thousands of dollars for them to auction it, take it back, maintain it, re-market it, and sell it.

The real error in the entire situation was the fact that you didn’t recognize that you needed to have this house on the market a long time ago.  The banks will tell you that you need to miss payments in order to put your house on the market and have a short sale approved, but this is not true.  With a true hardship, whether or not you can pay your mortgage today or not isn’t important.  What’s important is whether or not you are headed for the dreaded foreclosure in the near future.

If you are, then you don’t need to miss payments.  In fact, if you are able to keep up with the payments, you are more likely to be able to down-size by buying another home after this process.  The key is whether or not you are keeping up to date on all of your payments.

So, what do you do now?

You’re headed for foreclosure.

• You can re-instate and get caught up, which will cost you more than the amount you’re behind
• You can walk away from the house and experience turmoil, have a larger than required deficiency, and potentially face future law-suits and high tax liabilities;
• or you can attempt to buffer the losses and have your lender release you from your note by selling the house!

But we owe more than the house is worth!  Right, that’s why it’s a short sale.  You’re going to bring a market value offer to the lender, and you’re going to get them to approve it and allow the sale.

It happens all day long in this market, and it’s going to keep happening for years to come.  Short Selling your home is the best preventative measure you can take now that you KNOW you’re being kicked out.

I’m on a bit of a tirade today as I work through a few short sale issues and personal banking issues that shouldn’t exist.

I have a firm understanding of my value to a large corporation.  It’s purely monetary, and I’m just a number.  To further exacerbate the problem, one of the companies mentioned in the title is owned by the Government, and the Government is the last entity on the planet that I place my trust in.  The only thing that I can trust in is my own ability to survive.  I am 100% responsible for 100% of my actions 100% of the time.  Period.

Things don’t happen to us.  They are a result of choices we make, and today, I choose to shift my entire financial strategy from big bank, to small bank.  Here’s a simple illustration of what drives me to be suspicious of big banks.  I recently noted two independent tweets from the “team” of twitter support people at both Wells Fargo and Bank Of America.  Let me first disclaim that I don’t believe that either bank has genuinely taken an interest in supporting their customers through twitter for any other reason than to appear as though they care.  There’s no possible way for them to support all of their customers through twitter.

A recent Tweet fromWells Fargo:

@jimgoodman I work for @Ask_WellsFargo & saw ur tweet. (I also replied to @corkz.) Plz follow & DM with the details. We want 2 help. ^JR

…and now a similar response from Bank of America:

@RealScottsdale I work for Bank of America. Were you able to find a resolution to your Equator question? ^km

Perhaps they care, perhaps they don’t.  It’s possible that they both follow a basic protocol that has organically grown through the phenomenon known as Twitter, or it’s possible that they have both hired a 3rd party support organization who answers questions based on a list of policies and procedures.  It could be that they are just hiring whomever to “do it the way the other guy does it.”

Either way, the only responses I have ever received from the “support” department from a lending institution has been something to the tune of, “I work for the bank, so I can help you, I hope we helped.”  No real help is being offered.  They’re simply fielding tweets to gauge customer perception, and they should probably already know that the amount of bad comments will inherently outweigh the good comments, because that’s how people work.  People will always tell 10 people how terrible something is before they’ll tell one person how good something is.

GRRRR.  Good bye big banks!

Dear Wells Fargo,

After nearly 20 years of banking with you, I am leaving.  I will be finding someone else who cares about me more.  I will find someone who doesn’t charge me to hold my money, who doesn’t rip me off when I use the ATM that’s part of the “network,” who doesn’t eat up my money every month at a rate of return that makes what you pay me look like a fee in itself.

I will find someone who makes decisions based on who I am as a customer, not as a number.  I will find a company who is in touch with their client, and who doesn’t hire a team of people to “handle customer service issues” through one twitter account with canned responses.  I will put my money where I can shake the hand of the people connected to the pulse of the company’s culture, who understand and believe in the vision of the company, who aren’t sheep, controlled by a corporate attitude.

Bank of America?  No.  Chase?  No.  Citi?  No.  Don’t worry Wells Fargo, I’m not going to leave you for another famous bank.  I’m going for the bank next door, cause she’ll care more, and we can raise a family of children named Benjamin, Lincoln, Grant, Jefferson, and Washington together.

When I deposit my certificates of appreciation, I do so trusting that you appreciate it, and so far, you have not appreciated me.  So, farewell.  I’ll never come back.

Last year in Maricopa County, there were roughly 35,000 single family homes that sold.  That number almost matches the prior year.  Of those homes sold in 2009, 12,975 of them were Short Sales.  That’s 37% of the market.  That’s HUGE!  Most of those can be attributed to the sub-prime mortgage crisis and subsequent market crash.

While there are reports that have surfaced about the market improving, prices on the rise, etc., one of the more important topics that needs to be addressed is the impending wave of 5-year option-arm “smart loans” that will be resetting this year.  During 2010, I believe that we will see a huge influx of foreclosures in the 400K+ market.

In 2005, buyers were qualifying for homes that were twice as expensive as they could afford because of products that had interest only payments with huge adjustments on the horizon.  At the time, people believed that real estate just continued to go up in value, so it seemed to make sense to purchase a $400,000 home based on income that would qualify you for a $200,000 home, in the hopes that within the next 5 years, the home would be worth at least $600,000.  That’s not what happened.  Now homeowners in the jumbo and luxury market are as stuck as the rest of us, being completely upside-down in their homes.  As a result, they are trapped with a ticking time bomb.  As soon as those 5/1 ARMs reset, they’ll be headed for foreclosure, and the 2nd wave will begin.

I would encourage you to watch this video created by Jonathan Jarvis which explains why our market experienced what it did, and also makes a great case against borrowing money.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Short Sales are a tricky beast.  There are two sides to the argument when it comes to paying off a loan that you’ve promised to pay.  The first argument is that you’ve signed a promise to pay and you have a moral obligation to do so.  The second argument says that the lenders took advantage of us, so why should be pay them back?  They are the cause, right?

It doesn’t exactly work that way.  When you signed the note on your home, there was no clause within it that stated that you promise to pay “when the market is good.”  You signed a promise to pay no matter what.  Let’s face it.  I think we all can take a step back and say that we’ve learned a huge lesson about borrowing money in this day and age, and the lenders have clearly taken a step back to re-evaluate how they lend money.  So, it’s arguable that both parties are at fault for the disastrous market conditions.

That doesn’t release you from the obligation that you agreed to.  So, what are you supposed to do now?  Repay, or walk away?

That all depends on your financial outlook.  If you are in a position of financial distress, and you’re headed towards an inevitable foreclosure, then you’re probably a candidate for a Short Sale, which is the best option for you because it’s not really walking away.  It’s asking the lender for permission to sell for less than you owe. Foreclosure is what happens when you simply don’t pay. Foreclosure is not an option, it is a symptom.  People who don’t pay their mortgage lose their homes.  People that walk away from their homes, lose their homes.

It’s critical that you determine whether or not you qualify for a Short Sale.  A short sale allows you to move on with your life with the permission of the lender.  The lender agrees to release you from the note, and release the mortgage, and in most cases, you can walk away with peace of mind and a bright outlook on your future.

Why would a lender allow this?

Banks don’t want real estate.  They want money.  They lend money to make money.  Without cash, a bank goes out of business.  We’ve seen this happen time and time again.  When you quit paying your mortgage, and the bank reposesses your house, they have to spend thousands upon thousands of dollars to maintain the house, prepare it for sale, and sell it.  It will cost them more to foreclose than it will to allow you to sell it for current market value.

You have a moral obligation to pay your debts.  You signed a promise.  When you walk away, you are invalidating your credibility and as a result, regaining trust in you as a borrower will take years.  Don’t walk away without attempting to sell the property, and make sure you hire someone who knows what they’re doing.

Reinstatement

Bring your loan current.  Contact your lender, let them know you’re going to get caught up, and you’ll be able to remove the Notice of Trustee’s Sale and your home won’t go to auction.  Make sure you and your lender are on the same page, and that you get everything in writing.

Forebearance

Contact your lender and work with them to come to a temporary repayment plan.  Keep in mind that this also needs to be in writing.  Bank collectors are not friendly people and what comes out of their mouths is usually not true.  Forbearance is a temporary solution, and it will ultimately benefit the lender over you, but for now, it may relieve a cash-flow problem.

Refinance

Find a better deal.  The ability to do this hinges on your ability to qualify, and the value of your property.  If you owe more than it’s worth, you won’t be able to refinance without bringing the new loan to value ratio within an acceptable range.  This will mean coming out of pocket to bridge the gap.  Not many people can do this, so it may not be an option for you.

Loan Modification

It’s possible, but not likely.  Over 60% of those who attempt to modify don’t even qualify.  The rest manage to arrange something with the lender, but rest assured, it will be in the banks best interest, not yours.  Loan modification doesn’t usually solve the long term problem.  Prinicpal modification is extremely rare.  Don’t bet on it.

Sell the Property

If your payments are too high, sell the house.  If the home is worth more than you owe, you’re going to solve a huge financial burden in your life and you’ll have some cash left over.  Most people in this situation don’t think to down-size, but if you have equity in your home, and your income is such that you’re headed towards financial difficulty, sell the house.  Downsize and live within your means.

Rent the Property

Renting out your property may be a good option for you, but I would encourage you not to carry unnecessary risk in your life.  Renting out, while you’re renting, is a risky proposition because there are costs associated with being a landlord.  If you’re in foreclosure, you still need to be current with your lender to stop the auction process.

Short Sale

Even if you owe more than the property is worth, you can sell the home.  Most lenders will allow this to avoid the extensive costs of foreclosure.  It’s in their best interest to do so, and if you haven’t caught the tone of this message, I’ve been quite clear about the banks.  They typically only do what’s in their best interest.

Deed in Lieu

This is when you voluntarily hand over the keys to your house, much like when you voluntarily hand over the keys to your car.  The problem with this is that it doesn’t solve the problem.  When you hand it over, the bank, who is not in the real estate business, will have to pay the associated costs of selling the house, and that means that every penny that doesn’t cover your loan is a penny they’ll chase after legally.

Bankruptcy

Stupid.  Bankruptcy is something that you should only consider if you’re forced into it. It will slow the process down, but it will not prevent foreclosure.

The process of selling a home short of what you owe is simple in concept, but very difficult emotionally because it involves you and your home, and your prospect of foreclosure, and your finances.

As a short sale expert, it’s my job to first market your home, and second, negotiate with the lender so you don’t have to.  Banks listen to us because our job is to circumvent their B.S. and we’re not emotionally invested in the financial situation, and because we know the market and they don’t.  We are invested in you and your success through this process.  We know the facts and we get the job done where the job can be done.  Banks don’t really listen to their customers.  In fact, they’ll use tactics to frighten you into emptying your retirement accounts to stay afloat until all of your money is gone and you’re truly realizing the hardship that was inevitable anyway.  They know that most Americans feel held hostage by their “credit scores” and they’ll use that to keep you paying your mortgage even in the face of financial hardship.  As long as they get their money…

It’s best that you allow your Certified Distressed Property Expert the room to do the job you have hired them to do.

Through the process, you will be hounded by your lenders, you will be called, you will receive letters that may cause you to freak out.  You may even start searching for alternate solutions in desperation.  Don’t do this.  It’s critical that you give your short sale expert room to work.  There’s a process involved and deviation from that process is the first thing that will slow the process and in some cases prevent success.

Sometimes the job cannot be done.  You need to know this.  A short sale is how we attempt to prevent foreclosure.  Banks do it because it saves them money.  Foreclosure is expensive for them, and they don’t want to own houses, they want to play with money.  However, the clock is ticking, and there is no guarantee that we will be able to achieve an agreement with the lender.  We do it all day long, and have been very successful at it, but nobody can guarantee that it will work.

What I can guarantee is that if you aren’t 100% trusting of your realtor, and you find yourself seeking alternative solutions, of which there are none by the way outside of finding someone else to start all over again, then you’ll be saying to your agent, “I don’t think you’re able to do the job, so I’m going to have someone with more clout, more experience, or more legal knowledge tackle it.”  As a result, your agent may resign the listing to take on more loyal and trusting clientele.

A good agent will know when he in over his head, and a good agent will resign from the job if he recognizes that he can’t solve your short sale problem, whether it’s truly unsolvable, or it’s because you aren’t giving him or her the room needed to do the job.  If you feel like you need to seek outside help, such as an attorney, then feel free to do so, but I would encourage you to read my story about “Attorney Negotiated Short Sales are Still Just Short Sales” so you understand why they offer this service.

What does it take to negotiate a short sale?  That’s easy.  It takes a home owner who wants to sell their home.  It does not require a lawyer, a REALTOR, or any other special entity.  There is no requirement for certification, licensing, or any special degrees that are required to talk your lender into accepting a payment for less than you owe.

The Path of Least Resistance

Attorneys don’t have any more power to negotiate your short sale than you do.  What they do have the power to do is charge you a retainer up front to do exactly the same thing that you can do.  Now, as a short sale expert, I can tell you that you do not want to be the one handling the negotiations.  It is time consuming.  You’ll be on the phone constantly with your lender hounding them for information.  You’ll be taken away from your work, your family, and your peace of mind.  You’ll make roughly 60-90 phone calls and will be bullied by them.  Regardless of the fact that you could do this yourself, you would be crazy not to hire someone else to do it for you.

So Who Do You Hire?

Well, that’s completely up to you.  But hiring a CDPE Realtor is your best and least expensive avenue.  Through the process you are going to have questions that need to be answered.  You’ll have questions that involve deficiency judgments.  That’s when the bank holds you responsible for the difference between what you owe, and what the home sells for.  Those questions are answered by an attorney.  You’ll have questions about your tax liabilities.  That’s what your CPA is for.  Then you’ll have questions about selling your home and negotiating with the lender.  That’s what your Certified Distressed Property Expert is for.

So Who Negotiates With the Lender?

The CDPE Realtor handles this for you.  Why?  Because he or she is paid at close of escrow and does not charge you up front.  If you hire an attorney to negotiate your short sale, you will pay a retainer before anything comes of it.  If the lender doesn’t agree to the sale, you cannot recover that money.  CPA’s just don’t do this type of work, so you wouldn’t ever hire them for anything other than tax advice.

Why are Attorney’s Selling Negotiation?

Because there’s a market for it.  But you still need a Realtor to list your property and negotiate a contract price on your behalf.  Also, because the attorney gets money up front.  They also give you no guarantee that they will succeed.  Just because they’re an attorney does not give them any more ability to negotiate with your lender than anyone else.  They aren’t “forcing” the banks legally to accept less than you owe, but because they’re “attorneys” there’s some sort of mystical magical power that people think they have as opposed to a Realtor.  They’re just doing what your CDPE Realtor has been thoroughly trained and is well-qualified to do for you.

Note:  It is absolutely critical that your Realtor know how to manage a short sale.

If you’re going to sell short, don’t you want someone who has your best interest in mind?  I don’t charge an up front fee to do the same job better than they can.  Take the path of least resistance, and least financial risk.  Leave the legal issues up to the attorneys.  Leave the sale negotiation up to us.

Today I was asked a question by an agent who represented a buyer on a short sale listing that I negotiated recently. She is currently representing the seller, and was curious to know how to handle the following scenario.

The 1st has approved the sale of her client’s home short of what is owed, and the 2nd has also given the go-ahead under the condition that the owner pay the balance to the 2nd.  Here’s the question:

Q: I have a question that has just arisen with my current short sale. The 2nd lien-holder has approved the short sale; however, my client just got notified that she’ll still have to pay back the full balance. Is there any recourse or because it’s an “unsecured” debt, they have the right to request that. Please advise, thank you soo much.

Here’s my answer, and remember that I am not a CPA, nor am I a Tax Advisor, nor an Attorney:

The following objective information is based on my observations in the marketplace and cannot be considered tax or legal advice. Please consult an attorney or tax advisor if you are concerned about these very real details.

The second lien holder has a right to request whatever they want, however, since the property is headed towards foreclosure, and I assume that this is the case, the 2nd knows that they will get nothing out of the deal.

There are many variables that contribute to the expected requests of the 2nd. For instance, was the 2nd part of the original purchase on an 80/10/10 or other “creative” product? In other words, was it purchase money, or was the 2nd taken out later as a HELOC. In the case of a HELOC, it’s more likely that the 2nd will require the owner to sign a note for the balance of the loan in order to remove the lien.  A HELOC is not only tied to the property, but to the person, so it much more closely resembles an unsecured debt, because the money that can be drawn from that line of credit can be done so in the form of cash to be used on anything you choose.

Since the HELOC is tied to the person, even in the case of a foreclosure, there is a high likelihood that the lender will have legal recourse and will probably pursue you in the future for the balance.  In the case of unsecured credit extended to an individual such as a credit card, personal loan, or HELOC, it’s commonplace for lenders to settle for less than the balance, but only after exhausting all in-house and 3rd party efforts to collect on past due balances.  This is the key in settling for less than you owe.  The balance must be past due enough that the lender sees there’s no other option but to accept a fair settlement.

They’re basically saying, “hey, we will allow you to sell the house, we’ll release the lien, but you still owe us the money, so in order for us to release the lien, you need to sign a personal guarantee that you’ll repay the loan.”

There is a moral issue in this scenario.  If the money that is owed on the 2nd was not purchase money, and it was cash out of the house used to finance other purchases, other real estate, cars, boats, toys, gambling, food, or whatever, then the borrower has a moral obligation to repay these debts in a reasonable time frame, if not on the pre-determined schedule presented by the lender.  If the borrower refuses to pay, they are opening themselves up to legal problems, and will have an 800 pound gorilla in their financial future until it’s cleared up.

If the 2nd was purchase money, then you’ve reached a point where you need to continue to negotiate with the lender, because current tax laws may protect the buyer from a deficiency judgment, and debt forgiveness may actually become a reality on that loan.  Many times, in fact in most cases, the approval process is drawn out until the final hours prior to trustee sale.  The thought process behind this is for the 2nd to wait as long as they can before letting the debt go for pennies on the dollar.  In that time period, some home owners’ situations improve and they are able to get back on track.

In every case that I have dealt with, the 2nd, in a purchase money mortgage, gives in, because they won’t get anything if they play “spiteful lender.”

Have a question for me?  Ask!  I love helping you understand the process, because it helps the entire industry to be educated about how Short Sales work.

It is estimated that most American Families can only maintain their current living expenses for 60 days or less when their income is interrupted for any reason.

My financial counselor, Dave Ramsey, provides a 6 step plan to financial success.  The first step is to sock away $1000.00 in an account that’s very easy to draw upon in times of emergency while you work hard at step 2.  The reason it’s only at $1000.00 is because the debt that you may be carrying, which is knocked out in step 2, needs your full financial attention before you build your full emergency fund of 3 to 6 months living expenses.  That’s step 3.

If your monthly expenses are $2000.00, then you need to have $6000.00 – $12,000.00 in reserve just for emergencies. This money should be in an account you have quick and easy access to, and should be used ONLY for true emergencies.  A prom dress is not an emergency and niether is a vacation.

If you don’t have this, you are like most Americans with a mere 60-days worth of reserves.  To make matters even worse, a majority of those people will rely on credit card limits to continue to carry them past the 60-days, which will send them diving into a spiral of financial defeat.

That is distress.  So, what are some of the causes of financial distress?  Hopefully the following 16 points will give you a greater understanding of what causes the distress that you may be right in the middle of.

1.  Payment Increase or Mortgage Adjustment

Currently, this is the most common reason for financial distress.  Billions of dollars of bad loans were written during the most recent real estate boom, and many of them were “creative products” designed to bring borrowers who couldn’t normally afford to buy a home into the home-buying game.  Now that those products are adjusting, the result is typically a payment that the borrower can no longer afford.  The tragic part is that the terms of the loan make it clear that the adjustment is part of the plan, yet most home owners do nothing to prepare for the change.

2.  Loss of Employment

No income?  No payment.  If you lose your job, in most cases, unless you’re fortunate enough to receive a severance package, you are without income immediately.  This will suddenly become a source of seemingly insurmountable stress.

3.  Business Fails

For the self-employed, your income depends on your skills as an entrepreneur, and the market you’re in.  Without a solid contingency plan for your business finances, the loss of your business also means the loss of your income.

4.  Unexpected Damage to Property

“It will never happen to me.”  Sure it won’t.  When there’s damage to your home, it will cost you.  When your insurance company fails to provide for the full amount of your claim, you’ll be left filling the gap, which in many cases exceeds 60 days reserves.

5.  Death of a Spouse

One of the most devastating life experiences is the loss of a loved one, especially if they were the primary income earner in the family.  This is why it is critical that you have a plan in place and have proper life insurance for your situation.  If your primary wage earner dies, it’s just like losing your income, instantly.

6.  Death of a Family Member

When a family member who is not earning income dies, it is emotionally devastating and the ripple effects will spread throughout every area of your life, affecting your work, your business, and your relationships.  This can produce undue stress and affect your earning ability.  It may even lead to needing to support survivors which will increase your costs.

7.  Severe Illness

No insurance for that cancer diagnosis?  Good luck covering your costs with 60-days reserves.  Illness can lead to extremely high medical debt and loss of income during recovery.  Disability insurance and health insurance are two very important planning products that you need to consider to avoid distress as a result of severe illness.

8.  Inheritance

Believe it or not, an inheritance isn’t always a blessing, especially if it’s happening in the midst of grieving from an unexpected family death.  If you inherit a home that isn’t paid for, you inherit the debt and the expenses of keeping it up as well.  Your 3 to 6 months of reserves will need to be much higher now.  Even if the property you inherit has significant equity, carrying the cost of maintaining it and paying the remainder of the mortgage may lead to foreclosure.

9.  Divorce

This is an extremely common reason for distress.  It can be an emotional and expensive situation to be in.  Spousal support, child support, attorney’s fees, etc., can all lead up to distressed finances.

10.  Separation

One step below divorce is separation, and it can strain a 2 income earning household as housing costs will typically double, and now the person left holding the big house will no longer be able to afford it.

11.  Relocation

Sometimes your employer will require that you move, which may mean you’ll have two households to maintain.  Again, your costs just doubled, and even though you may be able to rent out your current residence, in this market, it’s unlikely that you’ll be collecting more in rent than you’re paying in mortgage payments.  Your relocation may end up adding an entire household’s worth of expenses.

12.  Military Service

Except for relief provided in very specific situations by the Servicepersons Civil Relief Act (SCRA), military service can lead to unexpected financial issues.  There are thousands of service personnel who have had their periods of active duty unexpectedly extended and are now suffering a tremendous amount of financial pressure.

13.  Insurance or Tax Increase

With only 60 days of expenses on hand, if that annual tax bill goes up, or an unexpected increase in insurance premiums occurs due to a claim, you’ll be draining that reserve much faster, and that can cause distress.

14.  Too Much Debt

Mortgages, Credit Card Debt, Auto Loans, Student Loans.  These are all weighing millions of Americans down.  If you graduate, you now have additional payments to make if you haven’t deferred your student loan payments.  Your credit card rates may be unexpectedly increased, etc.

15.  Reduced Income

There’s always the possibility that your commissions will be less than they were last year due to the economy, or your company may scale back and reduce bonuses or even reduce your salary.

16.  Incarceration

How are you going to make a living from the slammer?

Many of these are no-brainers, but the key to avoiding the distress that results from any of these is to have a plan, make sure you have the right insurance in place, pay off all of your debt, and keep a healthy emergency fund of at least 3 to 6 months living expenses socked away.

Most of these are things that “will never happen to me.”  Well, that’s just not true.  You never know what will happen from one day to the next, but you can be sure that if you have a plan, you will not find yourself looking for a way out of foreclosure.