My apologies to a recent visitor who I missed in chat .  Their question was:

Is there a particular type of loan that is most likely to receive a pre-approval price without an offer?

The real answer to this question is that Pre-Approvals don’t really exist.  Each lender is different, each loan servicer is different, and each investor is different.  The type of loan really has no bearing on whether or not an investor will evaluate a property prior to there being evidence of home owner distress.  Sometimes lenders will tell the home owner what price to list the house at, but this is extremely rare.  So rare, it’s not worth thinking about.

Until your creditor has evidence that you are in financial distress (missed payments, application for loan modification, etc.) they have no reason to put any effort into a solution for you.  Truth be told, any “solution for you” is really a method by which the bank will attempt to collect as much money as possible before losing you and your secured asset.

The best way to kick off the short sale approval process with your lender is to present them with all of the facts, including a valid offer, all at the same time.  It’s like serving a tennis ball.  Whack it in their direction with conviction and facts (like, this ball is traveling fast and if you don’t react you’ll miss it) and they’ll have to respond in order to minimize their losses.  That’s something they are interested in doing.

The type of loan product that you originally secured has absolutely no bearing on whether or not your home should be approved for a short sale or not.  What it CAN affect are the potential legal and tax implications as a result of an approval.

So essentially, no.  There is no particular type of loan that is more likely to receive a “pre-approval” over another.

As I encounter short sale listings from the buyer’s perspective, I run across many different variations of the Short Sale Addendum to the Purchase Contract.  More often than not, in the additional terms and conditions of the short sale addendum, there are redundancies in language that confuse the contract.

Upon reading one such “custom” addendum, I was inspired to clarify the basics of a boiler plate Arizona Association of REALTOR®S Short Sale Addendum as it is written.

Shall we begin?

Lines 1-4: Identity

As with all other contract documents, this section outlines the Buyer, Seller, Property Address and Date.  Pretty simple, yet often left blank by lazy real estate agents.

Note:  A bullet proof contract will be complete and should indicate the level of excellence your agent strives to achieve.

Lines 5-6: Definition

“The following additional terms and conditions are hereby included as part of the Contract between Seller and Buyer for the above referenced Premises. (See how important it is to be thorough.)  Delivery of all notices and documentation shall be deemed delivered and received when sent as required by Section 8m of the Contract.”

Pretty simple.

Lines 8-15: Short Sale Contingency (condition)

“Buyer and Seller acknowledge that there is more debt owing agianst the Premises than the purchase price.  Therefore, this Contract is contingent upon an agreement between the Seller and Seller’s creditor(s), acceptable to both, to sell the Premises for less than the loan amount(s) (“short sale”).  Buyer and Seller acknowledge that it may take weeks or months to obtain creditor(s) approval of a short sale.  Nothing shall limit a Seller from accepting subsequent offers from subsequent buyer(s) and submitting the back up contract(s) to 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 creditor(s).“

Again, quite simple, and quite clear that to lift the contingency, only one thing needs to happen and that’s that the seller and seller’s lender come to an agreement regarding the short sale.  This information, contrary to popular bad-habit in the real estate community, is not incorporated into the purchase contract and therefore neither the buyer, buyer’s agent nor brokerage, nor buyer’s lender need to see the details of this agreement.  Many people have a hard time grasping this concept.  You’ll notice the stricken lines.  This provision is in the addendum by default, but quite honestly, leaving these terms in causes huge headaches and essentially makes your offer as a buyer quite worthless.  In order to show a buyer that a seller means business, I always advise this modification.  We don’t want to give the lender any say over which contract will be approved, and we certainly don’t need to submit more than one offer to a scatterbrained lender at a time.  That would prove disastrous and very confusing on their end.

Line 16-20:  Documentation to Creditor(s):

Seller shall submit to creditor(s) a copy of this Contract, including this and other Addenda, and any other documentation required by the creditor(s) for approval of this sale within five (5) days after Contract acceptance.  Seller agrees to diligently work to obtain short sale approval and will promptly provide the creditor(s) with all additional documentation required, including an appraisal, at Seller’s expense, if required.  Seller instructs creditor(s) to provide approval status updates to Broker(s) and Buyer upon request.

What the…okay, this outlines one very important aspect of real estate contracts.  Notice that contractually, your agent is not the one responsible for handling this task, yet it is what we offer you as a service because we are familiar with it, and we know that you don’t have the time nor patience to learn the process, and quite frankly, most people would give up before getting the job done.  So we do it for you, but you are still the one responsible for making sure it happens.  This is why it is absolutely critical that you respond quickly to any requests we have for documentation from you as you are contractually obligated to perform.  If we ask for something from you that’s critical to fulfilling these terms, we’re doing so because we’re looking out for your best interests, and you need to trust that, and provide us with what we ask for quickly.

That wraps up the first half of the Short Sale Addendum:

• Identity
• Definition
• Short Sale Contingency
• Documentation to Creditor(s)

In the 2nd article in this series, I’ll go over the following topics:

• Terms Upon Acceptable Short Sale Agreement
• Buyer Cancellation
• Legal and Tax Advice
• Unfulfilled Contingency

And finally, I’ll wrap it up with the section that ends up causing the most confusion because of the many variations that agents write:

• Other Terms and Conditions

Debt forgiveness is a beautiful thing both emotionally and relationally.  The mathematics of it are not so friendly.  Why?  Because of the IRS and because the Tax Relief act of 2007 is coming to an end.

How The Money Flows When Borrowing

When you buy a house with a loan, a lender agrees to purchase the item with their money with the understanding that if you don’t pay them back, they get to take whatever has secured the note.  In this case, your house is the security.  So, if you don’t pay them, they can sell the house and recover their investment, or a portion thereof.

Since the money used to purchase the home isn’t really handed to you, the buyer, it doesn’t feel like income, and as long as you pay back the note, it won’t be considered income.  But, if the lender decides at any point to forgive you of the balance of the remaining note, it would be the same mathematically had they simply written you a check to buy the house directly from the seller.  In that case, the money would have come directly to you and would be considered income.

The Idea of Phantom Income

So, when debt is forgiven, there’s a sort of “retroactive” income (many people call it phantom income) that is applied to you in the form of a form 1099-C (Cancellation of debt) statement.  If you don’t know now, you’ll soon know that a 1099 is a tax form that declares income.

Why does the lender issue the 1099-C?  Because every money transaction has two sides to it.  The lender is taking a loss which they must report to the IRS in order to deduct it from their taxable income.  Their loss is your gain.

What?  Yep.  Their loss is your gain.  Think about it.  Their original plan was to make a boat load of interest (their gain) over 30 years or 15 years, or whatever, as you paid back your loan.  They weren’t planning on losing their money.  But, since they have lost it, they get to deduct it.  Since they’ve forgiven you, the balance forgiven becomes income to you in the tax year in which the forgiveness takes place.

Yikes!  What Does That Mean?

It means, in short, that you may or may not owe income taxes at your tax rate on the forgiven debt.  Here’s an example:

You buy a home for $300,000 and you faithfully pay for a year.  During that year, the value of the house falls to $225,000 and you lose your job.  You can no longer make your payments, and you go into default.  Your REALTOR®, who happens to be an experienced short sale agent in your area, helps you sell your house for market value, leaving you with an agreement with your lender to write-off the remaining $75,000.

Well, the bank isn’t just going to toss that money aside without a tax benefit, so they file a 1099-C to show that you were the original beneficiary of the money that was used to purchase your home.

Suddenly you’re staring an additional $75,000 in annual income for the year, which may or may not be taxable based on your current circumstances.

Enter the Tax Relief Act of 2007

In 2007 a law was passed that offered protection against owing income taxes on forgiven debt provided you met certain conditions.  That law expires on December 31st of THIS YEAR.

Why is this important?

If your home is underwater, and you’re experiencing financial hardship, you have a little more than 8 months to list, market, and short sell your home to avoid paying income tax on debt forgiveness.  Unless our powers that be extend this provision, short sales, many of which are inevitabilities that home owner’s don’t yet realize due to emotional paralysis, will become very costly to the home owner.

Are you hearing me?  Some of you have been sitting on the decision to short sale for a few years now…and every penny you’ve spent on your house is lost…

…the longer you wait, the more it will cost you.  if you don’t act quickly, it may cost you even more that you ever imagined.

Thus, the importance of acting now must be emphasized.

Sometimes a home owner will hire a real estate agent to sell a house as a pocket listing.  This means that the home won’t be advertised on the MLS.  It happens when an agent may have a buyer for a home before the property needs any marketing, and ultimately saves time and effort which equates to savings.

In a market like today’s market, if I have a buyer who is eager to buy and a seller who hasn’t yet listed their home with me, I might connect them together, take the listing, and then facilitate the transaction, never having to publish the property on the MLS.  In some cases, the nature of the pocket listing (it’s called a pocket listing because the brokerage has it in their back pocket, so to speak) is such that it remains off the MLS for a specific period of time before being published.  These details are all negotiated at the time that the listing employment contract is created.

Often the house is added to the MLS while there is already interest in it, and sometimes offers have already been written for the property based on the connections that the listing agent had prior to publishing the house for sale.

When this happens the house goes on the market, but can, regardless of the showing instructions (such as 48 hours notice for tenants) already be under contract before anyone gets to see it.  Ultimately it’s in the best interest of the seller to expose the property to as many people as possible to generate backup interest.

Today, this can be frustrating, because new listings don’t seem to be all that new.

True, it’s a hot market and there’s not much for sale, but does that mean you should hop on board and list your home for sale?  Not necessarily.  It’s true that you, the seller, are in control right now, and it’s true that you’ll probably have an offer on the home within days if not hours of listing it for sale.  However, it’s also true that we’re heading into a period of price increases based on the activity we’re seeing.  How long will this price increase last?  Nobody knows.  We do know that the annual ebb and flow of the market suggests that the price increases will wane, flattening out towards the summer months, then falling off until this time next year when it all happens again.

What you really need to do is examine your financial situation.  If you’re upside down by 60-70% or so, then what are you waiting for. Short sell your home.  There’s a tax benefit to doing so as long as you close escrow by December 31st of this year, and if that’s the direction you’re headed anyway, why wait?

If you think you’ll recover enough value that it doesn’t make sense to short sell your home, then stick around a while.  Values will not come back to what they were in 2004/5 any time soon, but if you find yourself in a situation where you have 10-20% equity, then you’re on track to an eventual refinance to get you out of a bad loan product, assuming that’s what you’ve got.

My philosophy regarding real estate is to buy and hold, forever.  As long as the purchase of your home was a wise financial decision (most were not) then you should be in a great position to eventually pay off your home and turn it into an income property, and you should not sell it.

The choice is up to you.  One thing’s for certain.  You can definitely sell in today’s market.

Here we go again.  The market is going bonkers, today…not 2 months from now, not 2 months ago…today.  Right now.  It’s bonkers so much that I’m having an extremely difficult time competing against multiple offers for the clients that I have who are looking to buy.

What’s It Going to Take to Buy A Home in Today’s Market?

That’s the billion dollar question, isn’t it.  Here are some statistics updated today at 11:13 AM that might give you an idea of the state of the real estate market in Phoenix and surrounding ares.

There are 14,772 homes on the market.  That includes ALL listings in ALL areas covered by the Arizona Regional Multiple Listing Service (ARMLS).  In 2005, when bananas were falling out of the sky, we had about 5,000 on the market.  In 2009 or so, there were 85,000 homes on the market.

If you know anything about supply and demand you’ll easily be able to identify that we are nowhere near a buyers market.  We’re in a seller’s market where the seller calls the shots through the negotiation process for price and repairs.

Of those 14,772 homes, only 11,449 are single family detached homes leaving 3325 condos, town homes, apartment style homes, gemini, etc.

Of the 11,449 single family detached homes, 1,250 require short sale approval, 82 are what some people call “pre-approved” short sales, 1,255 are owned by a bank, 71 are HUD owned homes, leaving a grand total of 8,791 homes for sale.

So what IS it going to take to buy a home?

In a market like this, if you’re serious about buying a home, you’re going to have to let go.  Let go of your ideal location.  Let go of your ideal criteria.  Let go of everything you have in your mind that determines what you will or won’t accept in the house of your dreams.  Why?  Because you simply don’t have much to choose from right now.  There are far more than 11,449 buyers out hunting for a property, and word is spreading fast regarding scarcity.  When this happens, there’s no longer a need to create urgency…it creates itself.  The moment the national media breaks the news that “you’d better get out there and buy” it will be too late.

You’re going to have to be on the computer night and day waiting for new listings to show up, and when they do, you don’t have the luxury of waiting until the weekend.  You’ll find yourself taking paid days off, sick days, or simply skipping out for lunch to hopefully see a home that just came on the market.  And for those agents who once had a life?  Leave it behind for the time being.  You’ll be writing contracts and submitting them at 11PM at night or 2AM in the morning…whatever it takes to get your offer in front of the seller before they accept another.

Money!

If you don’t have your financing in order, forget it.  You’ll need to come in with a strong offer, a large earnest deposit, down-payment, and a completed Pre-Qualification form.  Got cash?  Even better!  Can you close quickly?  Awesome!

If you’re lucky enough to open escrow on a property, don’t expect the sellers to do any repairs.  After all, the ball is in their court.  They have a line of people just waiting at the chance to purchase the house with cash, as is, waiving the appraisal and the inspection.

Man This Sounds Great, Should I Sell?

Last week I had the pleasure of hearing Michael Orr, founder and creator of the Cromford Report, an extremely comprehensive up to the minute charting system that shows exactly what’s going on in the real estate market.  The focus of his presentation today was mostly North Scottsdale, but he touched upon some very clear facts about the real state of Real Estate in Phoenix.

Let me touch upon the basic market cycle before I continue, and I’ll add a simple reminder as well.  Mainstream media, while accurate at times, is typically WAY behind where we really are.  If you want to know what’s REALLY happening in the market, then you need to tune in to a blog like this one.

The image below is the basic cycle of emotions that people go through in an economic market.  We’re all familiar with every part of this chart.  Mainstream media places us somewhere between Capitulation and Depression.  We in the real estate industry, see things differently.  I personally find myself already at Optimism after some of my recent observations.

Here are some key points that Michael made today at the Pinnacle Peak RMS meeting.  Many of them involve busting through some of the myths that people believe right now.

Fact #1:  Phoenix is a unique market compared to the rest of the nation.  We lead along with a few other markets, but we’re not like the rest, so national news does not apply in a general sense.  We have to rely upon market data to determine what’s happening.

Fact #2:  Urban sprawl creates a unique pattern in this city.  The market here moves much like the ripple of a pond, only in reverse, where the outlying areas experience the most movement at the highest speed in both upward and downward trends.  Lower valued properties in the sub 250K range experienced the highest decreases in value, and during the coming recovery will experience the greatest and earliest increases in value.

Towns like Paradise Valley continued to increase in value while the outlying cheapest areas fell like rocks.

Fact #3:  There is a massive disconnect between what’s actually going on in real estate and what people think is happening in real estate.

Fact #4:  Foreclosures exist always, and they grow in line with the population.  The number of trustee sales has dramatically fallen compared to 2009 which was the highest year.

Myth #1:  There is another wave of foreclosures coming.
Truth:  In states where there is actual judicial foreclosure, this may be true because of the backlog of cases that go through the court systems.  In Arizona we have Deeds of Trust which require no judicial foreclosure process should a home owner default, therefore the process is much faster.  We do not have a huge wave of foreclosures coming.

Myth #2:  Shadow Inventory is the 800 lb gorilla in the closet.
Truth:  Nobody can agree upon what “shadow inventory” is.  In fact, when asked, nobody in the entire meeting believed that prices were declining.  Granted, there are areas where prices are weaker, but the long term trend is a bounce-back.

Myth #3:  60% of homes in Phoenix are under-water.
Truth:  When asked about the value of a home, two Realtors responded with answers that differed by $175,000 for the same home.  The value of the home is determined by what someone will pay for it.  It’s impossible to measure the under-water statistic because in order to do so, one needs to know the value of the home, and also what the remaining balance on the mortgage is.  Unfortunately, most people have no idea how much their payoff is…including Michael Orr, as he stated, “we all know how much we borrowed, but most of us have no idea what we owe now.”  In fact, hardly anyone in the meeting admitted to knowing the balance on their own mortgage.  So how could one come to the assessment that any percentage of the valley is under water?  In Arcadia, only 11% of the homes are under-water.  Other areas of town, such as Southwest Phoenix, experience 80% rates of negative equity.  The bottom line is that it’s different in almost every area of town, which is part of the unique nature of our market.

Two forms of Trustee Deeds

There are two measures of trustee sales.  There are the trustee sales that are purchased by private buyers at auction, and there are trustee sales that go back to the bank which lead to REO or Bank Owned properties.  There are two things to note about these.  The first thing is that the number of trustee sale notices overall has decreased.  The second thing to notice is that the number of private sales as a percentage over bank recovery is increasing, which means more and more private buyers have entered the market.  In fact, in Phoenix, roughly 30% of all homes are paid for because of how much cash has been infused into our market.  As a result, the REO market is declining very quickly, starting again at the bottom end of the market and moving up to the higher priced properties.

Foreclosures next year are not going to be a significant enough part of our market for it to be newsworthy.

Unusual

Currently our supply is down dramatically.  As of this moment, there are 18,651 single family homes for sale in the Arizona MLS (Search here).  Of those, roughly 6,862 are short sales waiting for approvals.  That leaves 11,778 homes to choose from.  Only 1,113 of those homes will require short sale approval, while 1,164 are either HUD owned or Bank Owned for a total of 2,277 distressed properties on the market.

(Note:  A few days have passed since I originally drafted this article.  Stay updated by subscribing or bookmark my site so you can stay on top of what’s happening.)

When you become someone’s client, a unique and confidential relationship is formed where information exchanged between both parties is done so with privacy and care.  For instance, when you take out a loan from a bank you start a relationship with them…a master / slave relationship.  This is becoming more and more evident every time your bank makes a change “designed to aid” you as a client.

In the world of short sales, we have what is known as the “3rd Party Authorization.”  This is when you, the borrower, authorize a 3rd party to speak to the bank on your behalf.  It’s not a power of attorney, but it’s similar.  You give someone else somewhat limited access to your identity in terms of your relationship with the bank.

In a relationship where you are the client, usually you’re always right (the only exception in my opinion is at a bar after said customer drinks too much.)  You make the rules.  Why?  Because you hold the power to be their client or not.  The bank cannot force you to be a customer.

A 3rd Party Authorization is as simple as a statement to the bank, in writing, signed by you, that you are authorizing person a, b, and or c etc., to speak on your behalf about your account.  In fact, you can even call the bank and conference in a 3rd party who can then speak on your behalf for that phone call only.

Bank of America is issuing a new 3rd Party Authorization form specific to Short Sales which will soon be required.  Apparently they are calling it a “standard” form, but if you ask me, a standard spans many brands and companies and is not specific to one.  This new 3rd Party Authorization form is BofA’s form, not a standard form.  If they really wanted to develop a standard they’d work with other banks to come up with a true equalizing standard.

(Note:  As I’m writing this, I’m thinking about some of the other “practices” in the Short Sale world that don’t make sense.“)

There are two notable points about this form.  The firstly, it’s specific to Short Sales.  It’s not a general 3rd Party Authorization.  Secondly, the form requires that, in terms of Short Sales, all parties MUST either be a licensed real estate agent, or attorney.

The form can be found here, if you’d like to review it.

Okay, I’m not going to go into detail about the decisions that banks make that don’t make sense.    That’s not what this post is about.  Rather, as I think about the new Bank of America Short Sale 3rd Party Authorization form that is soon to be required, I am reminded of a few other things that we cope with in short sales that don’t make sense, such as the following:

One Must Be Licensed

Someone, somewhere said that in order to negotiate a short sale payoff, one must be either a licensed real estate agent or an attorney.  This makes no sense to me.  A real estate sale and a debt settlement are independent of each other.  When you sell your house, the proceeds satisfy the security against the property.  If you owe more than your house brings, payment of the difference is negotiated by the seller and the seller’s lender.  This is the short sale.  In my opinion, the only part of the transaction that requires a real estate license is the sale of the home.

Hypothetical:  What if the seller of the home puts his house on the market as a For Sale By Owner property, finds a buyer, then negotiates with his lender a short payoff of the note, and closes the deal without the use of a real estate agent?  Does he need to be licensed to do so?  Does he need to be an attorney?  This would be absurd.

Hypothetical:  A seller of a distressed property who is horrible at negotiating has a buddy who he knows is great at handling people on the phone.  He puts his house on the market without the use of a Realtor, gets an offer, has his buddy conferenced in on every call to the bank, and closes the sale for less than is owed.  As a thank you, the seller, after receiving his next paycheck, takes his buddy to San Diego for the weekend…clear consideration for the help he gave.  Does his buddy need to be licensed?

It seems the difference between needing a license and not needing a license is consideration.  What doesn’t make sense to me is what a real estate license has to do with settling a debt.

Expiration Dates on Approvals

I suppose I can understand that a lender, after issuing an approval, would want to create urgency to ensure that the deal is closed, however, it doesn’t make sense to put a time limit on closing a short sale for a property that has no pending trustee sale date scheduled.  In fact, closing deadlines are already set by the purchase contract and the Short Sale Addendum to the Purchase Contract.

If we miss the closing deadline due to the buyer’s lender having some sort of problem along the way, and there’s no pending auction date, what difference does it make to the bottom line if we close a week later?

Actually, there is a small difference if there are prorated taxes involved, but if the original HUD-1 that was submitted for approval placed closing far enough out, then the taxes will already be padded, and as a result, if closing happens earlier than the original HUD-1 states, the bank will actually increase their bottom line.

Buyer’s Agents and Lenders Asking for Approval Letters

While it’s been common practice for seller’s to provide buyer’s agents with approval letters, it’s not necessary.  The only argument I’ve heard FOR this practice is that the approval letter is like the Pre-Qualification letter, and as such, should be provided as evidence that an approval has actually happened.

Screech!  The contract isn’t written that way.  While the Pre-Qualification is indicates as an included document on the purchase contract when the buyer submits their bid, the Approval Letter is NOT an incorporated document.  It can be written into the contract as a required document, but it’s not part of the standard contract.  The only evidence that a buyer needs to prove that the short sale has been approved, is the AAR Agreement Notice which is specified in the Short Sale Addendum to the Purchase Contract.

Lines 22 and 23 are clear:

Agreement Notice:  If Seller and Seller’s creditors enter into a short sale agreement, the Seller shall immediately deliver notice to Buyer (“Agreement Notice”).

That’s it.  It doesn’t say “THE” Notice…it says notice, and that’s what the Agreement Notice is, which states:

Seller hereby delivers this Agreement Notice to Buyer pursuant to lines 22-23 of the Short Sale Addendum to the Contract. Seller and Seller’s creditor(s) have entered into a short sale agreement pursuant to which creditor(s) have authorized Seller to sell the Premises to the Buyer for less than the loan amount(s) secured by the Premises (”Short Sale Approval”).

A mini rant for the day may shed a bit of light on one of the multitude of ridiculous requests we get from the lenders when negotiating short sales.

I am negotiating a short sale for a property located in Laveen, Arizona, recorded on the tax records as being in Laveen, not Phoenix.  Due to the fact that the lender who wrote this loan in the first place got the city wrong on the note, the processor assigned to the file continually flags the file as inconsistent and repeatedly rejects my documentation because the tax records, which are the correct records, don’t match theirs.

This is a common occurrence in the Short Sale world.  Banks reinforce the notion that they are unable to properly think through the possibilities surrounding the myriad of potential turbulence surrounding a real estate transaction to come to a rational and logical solution.

So, for today, I’ll be changing files, and modifying documents, hunting down parties for signatures, etc., and none of it has any bearing on the bottom line to the bank.

An explanation of the process to expect when you stop paying your mortgage, including information about Trustee Sales in Arizona.

A recent report was released by Scott Modeer, loan officer for Arizona Bank & Trust regarding the timelines involved in purchasing a home after going through financial hardship.  The information contained in this report is obviously a snapshot of the market now and may change in the future depending on what our government decides.

If you’ve experienced a foreclosure, short sale, or bankruptcy, the following information may help you determine when you might be able to qualify for a new mortgage so you can be a home owner again.

This is a general guide, and the answers vary depending on the type of program you choose.

FHA Loans

• Foreclosure: 3 years.
• Deed in Lieu of Foreclosure: 3 years. (Deed in Lieu is foreclosure.)
• Short Sale:  3 years (in some cases, if you weren’t delinquent on the original mortgage, this may be waived.)
• Chapter 7 Bankruptcy:  2 years.
• Chapter 13 Bankruptcy: 1 year.

(Editorial:  Isn’t it counterintuitive to think that if you simply blow off your debts and file bankruptcy that someone would be more willing to lend to you again earlier than if you do the right thing?  Gross.)

VA Loans

• Foreclosure: 2 years.
• Deed in Lieu of Foreclosure: 2 years.
• Short Sale: 2 years.
• Chapter 7 Bankruptcy: 2 years.
• Chapter 13 Bankruptcy: 1 year.

USDA Rural Housing Loans

• Foreclosure: 2 years.
• Deed in Lieu of Foreclosure: 2 years.
• Short Sale: 2 years.
• Chapter 7 Bankruptcy: 2 years.
• Chapter 13 Bankruptcy: 1 year.

Fannie Mae/Freddie Mac Conventional Conforming

(Editorial:  Notice how the government programs are convoluted with ridiculous if/then conditions.  They never make any of this simple.)

• Foreclosure: 7 years.
• Deed in Lieu of Foreclosure:
  2 years if financing ≤ 80% of the new property’s value; 4 years if financing 81-90% of the new property’s value; 7 years if financing > 90% of the new property’s value.
• Short Sale:
  2 years if financing ≤ 80% of the new property’s value; 4 years if financing 81-90% of the new property’s value; 7 years if financing > 90% of the new property’s value.
• Chapter 7 Bankruptcy: 4 years.
• Chapter 13 Bankruptcy: 2 years.

Jumbo Loans

• Foreclosure: 7 years.
• Deed in Lieu of Foreclosure: 7 years.
• Short Sale: 7 years.
• Chapter 7 Bankruptcy: 7 years.
• Chapter 13 Bankruptcy: 7 years.

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If in fact the reports are correct, and I believe they’re pretty close, then nearly 50% of the home owners in Phoenix and surrounding areas are upside down in their homes, owing more than their homes are worth.

That’s not to say that everyone is grossly under water, but underwater is underwater.  The degree to which you’re under water will vastly impact your decisions regarding your future, and affect the outcome of a possible need…the sale of your home.

Life continues to happen, and that means that for who are able to make their monthly payments, a shift in circumstances may mean the need to sell their home and reconfigure their lives.  If their house is upside down and they need to sell, they’ll have no choice but to sell the house short of what they owe their lender.  If they have to sell, they’ll either need to cover the difference out of pocket, or ask their lender to take a loss.

The answer to the question, “how long will short sales be around” depends on the rate of growth in the real estate market and the rate of appreciation in resale values.

Let’s take a look at an example of one person’s situation in a highly desirable area of Scottsdale.  Originally purchased at $115,000, this Scottsdale town-home appraised at $240,000 one year prior to the height of the market.  A neighboring property with an identical footprint sold for $319,000.  When the market tanked, the values dropped to their current range of $100-120K.

Why was the home appraised when it was?  For the purpose of taking out a Home Equity Line of Credit (HELOC) which ultimately raised the amount owed on the property from $115,000 to $200,000.

With a town home valued at $100,000 and a mortgage balance of $200,000, there’s a HUGE gap to bridge before the home has any equity.  So let’s look at an example of what happened to this particular condominium.  We’ll look at it first from the “What If” angle.

What if the housing bubble had never happened?

The figure above assumes a 4% annual appreciation.  The town home, purchased in 2002 for $115,000 gradually increases in value to an approximate value of $169,000 by 2012.  Not bad, considering by then the amount owed on the home would be about $88,000.00.  The green line represents the balance owed on the property, which should gradually decrease over time.  In this illustration, there’s no evidence of a bubble, but the bubble was the only reason a line of credit was available, so the green line should continue to decrease.

But that’s not what happened.  In reality, the following illustration shows a more accurate picture of what’s going on.  The current value of the property is $100,000, not $169,000.  So, by shifting the blue line to the right, we get a more accurate picture of how long it will take to break even on the property.

As in the previous figure, this assumes a 4% annual appreciation, but this time we’ve added the bubble, and shown that the value of the property TODAY is $100,000.  Based on this, we can assume that it will be another 7 years before this house is worth what is owed…if 4% is the rate of appreciation and the home owner continues to make payments to the principal balance.  Obviously longer if it’s lower, and shorter if it’s higher.  Either way, this house is under water for a while.  Another factor to consider is the number of interest only loans that cause that green line to remain flat.  I haven’t illustrated that, but if you flat line the loan balance, you can imagine how long it will take for the blue line to reach the green line.  In fact, the property may cap out at a certain value and never be worth what is owed.

What This Means

This means that if there is ANY reason that this home owner would need to sell the home (and life happens) then the sale will be a short sale.  The conclusion drawn from this is that Short Sales will be around for a while.

Dear visitor 789738098.  I just saw that you had posted a question in my online chat and I was away from my keyboard so I wasn’t able to answer you, but I’ll be happy to address this question, as it’s a common concern.

Property taxes always take priority over any other liens.  When you took out your loan to purchase the home, most likely your lender set up an impound account to hold a portion of your monthly payment to ensure that your taxes were paid on time.  The lender will typically pay that bill for you out of the impound account rather than letting you be responsible for the payment.  Why?  Because property tax liens are a priority, and if you don’t pay them, whomever does pay them, be it the state, or an investor who has purchased a tax lien, can foreclose on the property.  Lenders would be crazy to let you get behind on a few thousand dollars per year to risk losing what you owe them, which is typically hundreds of thousands of dollars.

If you have fallen behind on your mortgage payments, that also means that your impound account isn’t growing either, so when tax time comes, the lender doesn’t have your funds with which to pay the bill.  But, knowing that a tax lien could cost them a fortune, they will still pay the tax bill to keep that from happening.  You still owe it, unless you negotiate it away through a short sale.

In order for any property to change hands, title must be clear of all clouds.  Tax liens are clouds on title.  If your lender approves a short sale, that approval will be based on a HUD-1 that includes clearing up your property tax bill.  There’s no way around it.  The bill must be paid, and if you don’t have the money, the lender will have to pay it.  They don’t have a choice.  They’ll either pay it through the closing of a short payoff, or they’ll pay it when they sell the property after you lose it.  The latter simply costs them more money in the long run (which is why short sales are win win for everyone anyway.)

So, if your taxes aren’t caught up when you bring an offer to the bank, rest assured the net payoff will take into account the past due taxes.  In fact, in many cases, during negotiations, the bank pays the most recent tax bill which in affect changes the numbers on the HUD-1 in your favor.

Short sale approval letters are settlement agreements written by the home owner’s lender setting forth terms and conditions that the seller must meet through the sale of their home.

Most have an expiration date requiring that the settlement agreed upon be paid by that date.  Although it’s of little consequence, in my opinion (as it’s a debt settlement between the seller and seller’s lender), they also stipulate the name of the buyer on the agreement.

This would naturally mean that any settlement agreement would be invalid if the buyer stipulated were to cancel the transaction.  However, since the most important factor to the investor who owns the note is the net payoff, an approval tips their hand to the dollar amount they’re willing to accept, regardless of the buyer.

Sometimes a lender will be pro-active about the prospect of a short sale, and will “pre-approve” a sale amount and terms that will be acceptable to a future buyer.

So, a pre-approved short sale is one of the following:

1. It’s a property that has previously had an offer that met the investor’s payoff requirements but has lost its buyer-OR-
2. It’s a property that has been given a pre-approved price without an offer.

A house is only worth what someone will pay for it.  Period.  If the investor has pre-approved a short sale that has not yet had an offer, it’s likely they’re unrealistic about the asking price, so the 2nd example above is less likely to be a success, but still possible.

On the other hand, if the property has already been approved based upon a contract that was previously submitted from a qualified buyer, then the terms of that deal can be used to attract a new buyer.

Buyers who find short sales opportunities in the middle of this scenario are often pleased to find that it takes a fraction of the time to acquire a new settlement agreement from the lender.

A common question.  I’ll do my best to answer it for you.

When a real estate transaction closes, there is a document created called a HUD-1 Settlement Statement.  The HUD-1 is a spreadsheet of sorts that outlines the flow of money for the two parties involved in the transaction.

Who are the two parties?  The buyer and the seller.  On the HUD-1 there’s a buyer column and a seller column.  The buyer comes to the table with money for the purchase.  Costs are calculated for each party, and the bottom of the HUD-1 will show two important numbers:  1) Cash to/from buyer, and 2) Cash to/from seller.

You’ll notice we haven’t mentioned any aspect of the short sale yet.  The reason for that is because the lender involved in the short sale, in other words, the investor who holds the note on your mortgage, is not a party to the real estate transaction.

They are a party to the settlement arrangement with their client, the SELLER.  What?  Yep, that’s right.  The agreement between the seller and the seller’s lender is an independent settlement arrangement designed to make the agreement between the buyer and the seller work.

Huh?

I know.  It’s a bit confusing.  When there’s a lender who is owed money on a home that a seller is selling, at closing, some of the money that the buyer is bringing to the table goes to pay off the loan against the house.  If the value of the home is more than the amount owed (the home has equity), then the seller will most likely receive what’s left over after paying the lender and paying closing costs.  However, if the value of the home is less than the amount the seller owes, then the seller won’t receive anything.  Moreover, the seller’s lender probably won’t receive full payment on the balance of the remaining loan.  The only two solutions to remedy this is for the seller to contribute cash to bridge the deficiency gap at closing, or ask the lender to take less than is owed.

In other words, a Short Sale.

If the lender isn’t getting fully paid, then who pays the closing costs?  Bingo.  That’s the original question, isn’t it?  Who pays the commission on a short sale?  On the HUD-1, the line that shows how much the lender is getting at closing is calculated after all associated costs are subtracted from the sales price.

If a home is closing at $100,000 and $150,000 is owed, there are closing costs.  We negotiate with the bank to take $100,000 minus closing costs.

The basic answer to the question is:  The Seller pays the commission, but because there’s no money left over after paying off the lender, the lender backs off enough to allow the buyer’s new funding to pass through to the seller, thereby satisfying all fees.

Who’s eating the cost?  The investor is ultimately eating the closing costs.

On many short sales, there’s a point at which the bank will tell us that the seller is required to come to the table with cash or a promise to sign a note for a certain amount of money.

In a specific example, a home owner has been told that they are on the verge of an approval, but until they either pay $3,500.00 cash or promise to repay $7,000 in cash over 120 months (that’s 10 years,) the approval will not be issued.

What’s Presented

The bank will typically represent that the mortgage insurance company who holds a policy on the note is asking Wells Fargo to ensure they get a cash contribution before they’ll pay the claim on the loss from the short sale.  They’ll say that it’s their request.

What’s Really Happening

Sometimes the MI company does request cash, but remember, the bank is in the business of getting your money in their pocket, and they’re not beyond using the ruse of a mortgage insurance company request to ensure you pay them so they recover more of their losses.  So more than likely, the MI company has has NOTHING to do with the request.

The bank is telling the seller that the mortgage company needs a cash contribution, but the mortgage insurance company never told the bank that they needed it.  This is a tactic that negotiators use which I contest is converted to incentives paid to negotiators for bringing in more money for the bank.  The bank is still going to file their claim with the mortgage insurer to recover a vast majority of the losses, but the insurer will be none the wiser that they’ve just squeezed the seller for even more.

How I Handle This

I call their bluff.

As a “private investigator” for short sale approvals (that’s basically what we are,) I hunt down the truth.  A simple friendly phone call to the mortgage insurance company will easily reveal whether or not the bank or servicer is telling the truth.  When we learn that there was never a request, it means we have more information than they’d like, and that’s how one wins negotiations.  The person with the most information wins, every time.  (It’s also assumed that that person has walk-away power.)

What if they actually did make the request?  That’s okay too, because that can also be negotiated away directly with the mortgage insurance company provided the details can be “worked out” as they call it.  If the seller has no money, and no room in their budget for a promissory note payment (in our example $7,000 ÷ 120 months = $58.33 per month) then there can be no contribution.

Now, in light of the situation, $58.33 per month is a small price to pay for the mess that we’re cleaning up, but it’s absolutely unnecessary, and likely to be defaulted on.  The notes are usually proposed at 0% interest, and $58.33 per month to a behemoth of a bank is less than peanuts.  It’s not even peanut dust.

So, if it comes down to blows, and the MI company absolutely won’t budge, then a payment might be wise just to make the problem go away.  You can see that we do everything we can to make sure that this is never the case.

(This is the final article of a 5 part series entitled Short Sale Basics)

The Gap

If the net payoff on a given HUD-1 for the sale of a home does not meet the standards set by the investor as a percentage of the BPO (Broker Price Opinion) then there will be a gap.  For example, if the $100,000 offer yields a payment to the lender of $90,000 after all costs are calculated -AND- the lender is willing to accept no less than 88% of the BPO -AND- the BPO is reported to the lender at a value of $110,000 then $90K suddenly becomes 81.8% of the BPO (90 divided by 110.)  The bank will not approve the deal unless it’s 88%.  This is a general estimate and close to what many banks accept.  If 88% is the magic number, then  it means we need to bring the bank $96,800.  We’re $6,800 short.

Closing the Gap

(Often confused with the concept of counter offers in a short sale, and not always a step in every short sale process.)

There are many ways to close this gap.  One way is to continue to negotiate with the bank to prove the buyer’s offer is more realistic than the BPO report claims to be.  This is done through a BPO dispute.  It doesn’t work every time, and sometimes there’s not enough time before the house goes to auction to achieve this goal.  In some cases the market has changed enough from the time the offer was submitted to the time the bank evaluated the BPO that the buyer’s offer no longer stands up.

Another way to close this gap is to have the buyer raise their price.  This is a sensitive direction to go considering the buyer may simply walk away if they hear any talk of raising the price.

Yet another way to do this is to adjust the HUD-1, legally, to be as accurate as possible.  You see, it’s common to submit a HUD-1 with padded costs to the seller in order to have wiggle room to negotiate once you reach the stage of closing the gap.

Commission reduction is an option, but it’s the last option because we work very hard to obtain approvals for our clients and since the seller is typically not coming out of pocket at all because they’re in the middle of a financial hardship, we aim for a full commission as allowed by the bank once they approve a lower net payoff.

One last option is to have the seller come to the table to close the gap.  This is tough to do, but often can save a house from foreclosure.  This is more common when we see people strategically defaulting on their homes as they intentionally quit paying their mortgage and begin stockpiling the payments.  If this is you, my advice would be to set that money aside and consider it not available to you and to be used solely in aiding the process of short selling.  After all, the two major concerns for a seller are whether or not the lender will be able to pursue them for the difference between what the sale pays the bank and what they owe, and whether or not their tax situation will yield a tax liability for the deficiency.  The two simple questions are, 1) will I have to pay taxes, and can they sue me?  These can only be answered by the corresponding experts in those two fields…a real estate C.P.A. and a real estate attorney.

In Closing, the bank’s perceived market value of your property compared to the net payoff as a result of the sale will determine whether or not money needs to come to the table to get the deal done, and often times the bank is wrong, which is still mind-boggling, as the process of foreclosure will cost them far more than closing the gap.

As I’m reading through the latest predictions for the upcoming market conditions, I’m taken aback by one of the statements.  In an article written by Jed Kolko, Chief Economist for Trulia.com entitled What the Cyrstal Ball Says about the housing market in 2012, he points out the probability of rental rates increasing, and that it would be a bad thing.

I believe the reason that it is perceived as a bad thing is part of the core of the financial problems we have in this country.  The reasoning is this.  If rental rates increase, and housing prices decrease, then it creates a great environment for buyers, “but only for prospective buyers who can afford the downpayment and qualify for a mortgage.”

I apologize if I’m completely out of my mind, but what kind of buyer do we want?  Do we want to encourage people who cannot afford a home to buy a home?  And what about cash buyers?  There’s no mention of them, and they do exist, in droves.

As a real estate agent who doesn’t believe borrowing money is part of a sound financial plan, I have a hard time with the topic of mortgages.  There are great deals out there, but we shouldn’t be waiting until someone wants to take advantage of a good deal to counsel them about the principles of money…mainly saving, which is what’s required to build up a down payment.  If you haven’t figured that out by now, then you might want to consider re-signing your lease until you do.  If you’re thinking about buying a house, know that a down payment is going to be part of the equation.  Plan your life around a 20% down payment and your long term costs will be much less than if you go with a more “creative” financing plan.

As my financial coach Dave Ramsey always says, “creative usually means too broke to buy a house.”