As the Realtor® industry enters into 2011, there is little question but that short sales are going to be around for a while. It will take at least two more years as excess inventory from all sources – banks, distressed owners (current and non-current with lender), unsold new construction, new condos, and sellers waiting on the sidelines – depletes itself. However, this is not the only factor causing the current glut of real and shadow inventory. Significantly, the employment picture and general overall confidence in the state and national economy must improve substantially. The consumer exuberance during the holidays does not – in my opinion – necessarily translate into good news for the housing market. It says, at best, that the retail segment of our economy enjoyed some good news for a change.
The bottom line for short sale transaction is that for the foreseeable future, they are going to remain a significant part of many Realtors®’ book of business. Avoiding these transactions is a luxury reserved for the very few. For those Realtors®who saw short sales as a good marketing opportunity early on, they are to be congratulated. However, for those thinking about dipping the veritable “toe in the water,” it’s not too late. I say this because the conventional wisdom about short sales a couple of years ago – if any existed back then – is ancient history. Much has changed for 2011:
- Banks have come to accept short sales, and in so doing, they have streamlined their protocols in dealing with them;
- With the foreclosure fiasco in the fall of 2010, many lenders are seeing their REO inventory inflate, which suggests they may be more receptive to short sale approvals;
- With each new short sale, Realtors® are gaining more experience;
- Thanks to the Internet and other sources, the public is becoming more educated about short sales;
- Today, the typical homeowner confronting a distressed transaction (i.e. short sale, deed-in-lieu, or foreclosure) is generally not the old “sub-primer” or “flipper” of 2004-2007 who acquired their home with easy credit, no money down, and a “liar loan;”
- Today’s distressed homeowners are our neighbors and sometimes ourselves. Many had significant equity at one time.
- The demographics of short sale candidates now spans the entire population from young people to retirees.
These facts suggest that as short sales become a significant part of the housing inventory, agents need to sharpen their skills more than ever if they are to distinguish themselves from the competition. However, sharper skills do not necessarily mean knowing more of the technical aspects of the short sale transaction, such as taxation, promissory note liability and related issues. Rather, good short sale Realtors® will have the following skills today:
- Being intimately familiar with the seller’s specific community: How many short sales are there? How many foreclosures? How long were they on the market? What was the spread between the listing price and sale price?
- Combining expertise, quiet confidence and an ability to relate to the internal trauma that most distressed homeowners are going through – even if they don’t always exhibit it.
- Knowing, understanding, and relating to each different demographic is essential: If they are retirees, their retirement savings are paramount; if they are young marrieds, their desire to move on and start or enlarge their family may be important; getting into the right school district before next fall can be important; if they are struggling with domestic relations issues, emphasizing consensus (and not taking sides) is essential; if they are high earning executives (and we are seeing more and more of them), they will expect the highest degree of professionalism; and the list goes on. When developing your bedside manner, one size does not fit all.
- 24/7 availability is the norm – especially when the transaction reaches critical stages such as the offer, counteroffer, bank negotiations, and closing.
- If the sellers have retained legal counsel, it is important to keep the attorney in the loop.
- At vital points in the transaction, clients have heightened anxiety that is best relieved when they are not left to wonder what’s happening. E-mail updates are essential – even if it is only to say, “I’m still waiting to hear back from the bank.”
- In football and short sales, forward progress is the name of the game. A little yardage is better than none at all. Remember that your version of progress may be different from your client’s. After you obtain the listing and have a full understanding of the seller’s loan picture you’re ready to move forward. Don’t let any grass grow. Obtain contact information for all lenders, make or attempt contact, and keep the client informed.
- Educate the client on what to expect. Discuss the hardship letter; the necessity of submitting complete financials; explain the negatives associated with the short sale process – especially the waiting. Explain what the BPO means and how it can affect the lender’s willingness to approve a short sale. Explain the closing process and why the HUD-1 is important to the lender. Explain why everything has to be on the “top of the closing table.” Never become complicit in hiding information from the lender.
- Don’t over-sell and under-deliver.
- Having one or two short sales does not make you an “expert.” It only means you’ve closed two short sales. A trial attorney with two trials under his/her belt is certainly not a “trial expert.” But being an “expert” is far more than the number of short sale closings (or trials), but the skill with which they are handled. I would rather have completed two trials where my clients raved about me to others, than four trials where my clients said nothing.
Now here comes the hard part: Avoiding the temptation – perhaps drawn from a year or two’s experience – to give legal or tax advice. While you may believe you know these areas, do you really want to put that hat on? Remember, if you do, you cannot take it off. Once you begin “advising” your clients on these matters, you cannot avoid liability by reciting the standard mantra, “But I’m not an attorney….” Of course you’re not an attorney. You’re a Realtor® acting like an attorney. Your distinction will fall on deaf ears if you proceed to give legal or tax “advice.”
In order to underscore the importance of the distinction, let me list some technical issues/questions that I believe are critical from a credit, legal and tax perspective – but are not necessarily critical to how a Realtor® handles a short sale transaction:
- How long has the homeowner lived in the home?
- Is it their true “primary residence”?
- Do they currently reside there?
- How long have they actually resided there?
- If they have a second lien, when was it taken out?
- Were the first and second lenders the same or different?
- If different, was the second lender an “affiliate” of the first lender?
- What were the funds used for from the second lender?
- Is the property now a rental?
- Have they reported it to the IRS as a rental?
- If a rental, are the rents paid to the lender?
- If a rental, is the property going to be listed?
- Is this a second home?
- If a second home/rental property, is there a risk of capital gain tax upon debt forgiveness?
- What is the basis (or adjusted basis) in the second home or rental?
- What is the seller’s current FICO?
- Is their consumer credit (e.g. charge cards, car payments, etc.) good?
- Is the seller’s FICO important for their job (e.g. obtaining security clearances)?
- Understanding what type of debt is legally most harmful to the distressed homeowner.
- If the sellers are contemplating divorce, is one going to retain possession?
- Will that person be solely in charge of handling the short sale negotiations?
- If there is an attorney involved on behalf of the seller, do they know what they are doing – and will they let the Realtor® handle the negotiations with the lender?
- Does the seller have a good CPA or accountant who is familiar with debt cancellation issues under IRC 108 and gain avoidance issues under IRC 121?
- Is the seller insolvent from an income tax standpoint?
- Is the seller a bankruptcy candidate?
- Is the property in foreclosure?
- If so, who is the successor trustee?
- Can the sale date be postponed?
- Is there a contact that can be made with the lender’s legal department?
In addition to the above list, let me point out a serious technical trap that can create serious risk for Realtors®: Based on my experience, I have seen many lender short sale consents for both first and second liens that contain ambiguous or vague language regarding the remaining deficiency liability. It is certainly not ambiguous when the lender says that it “reserves the right to pursue the deficiency,” or words to that effect. However, many lenders are not as up-front, especially those holding second liens (since they are at greatest risk should the first lender foreclose). I have seen some Realtors® opine to seller-clients that it “appears” the bank will not pursue them after closing. But from my review, the terms of the lender consent is frequently not nearly so clear. Ambiguity is the lifeblood of lawsuits.
The best value Realtors® can bring to their short sale transactions is to focus on putting the deal together, keeping it together, educating their clients and meeting their expectations. It is also essential that the seller be in communication with good legal and tax advisors. All of this is a tall order, and not an easy job. Understanding what you should know and what you leave to others is the hallmark of a true professional.Posted in Deficiency Liability, Foreclosure, Lenders, Miscellany, Real Estate General, Real Estate/Distressed, Realtors, Tax Issues, Trust Deeds | Tagged Bankruptcy, Banks, Credit Scoring, Deed-In-Lieu, Deficiency Liability, Distressed Transactions, Foreclosure, Lawyers, Oregon, Promissory Notes, Short Sales, Taxes, Trust Deeds