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Yes, even in swanky Vienna, VA there are real estate short-sales.

As the process has been allowed to pickle over the last few years, banks have come up with strategies to streamline the process. That sounds like good news but I still have to advise home buyers that these are tricky transactions that will require patience and some hard work.

I say tricky because real estate short sales are never “final” until the current mortgage lender “approves” the HUD-1. Yes, I am talking about the HUD-1 that you will get on the day you close or settle on the property. If they need to make a change or don’t approve it then you may have to wait a day or two.

Wait? But my lock will expire!

Here is my advice for home buyers: Make sure your interest rate lock doesn’t coincide with the planned closing date. If you have to change your rate or lock, then you may be subject to the “cooling-off period” mandated in the HUD guidelines. You are responsible for knowing about this.

Yes, Vienna Real Estate does feature short-sales

Recently some friends of mine bought their rental home in Vienna when it was offered as a short sale. From my point of view the situation looked grim because the next step by the bank is foreclosure, but the deal went through and they purchased the home. Yes, a percentage actually work out.

But some clients recently put in an offer on a Vienna townhouse listed as a short-sale, and that negotiation was a slightly crazy experience. It seems that the streamlined Bank of America short sale system known as Equator required some extremely sensitive information be submitted with the offer. This information included the buyer’s Social security number and date of birth. Say what? They were already submitting a Wells Fargo approval letter based on a credit report, so are they planning to pull credit too?

I used to work for a Fortune 100 listed company that had “work-flow” procedures in place, so I understand why B of  A would implement a “work-flow” system to speed up short-sale transactions. My problem is that this requirement was a non-negotiable requirement of the submission process.

Please beware of the advice that I saw on the Internet to just “make-it-up”. Making information up is called “fraud”, and fraud will land you in jail.

You must have their Social Security Numbers?

Sharing this type of confidential information was just a little too much for me to stomach. I advised my clients to tell B of A to take a hike and move on to another property. Identity theft is a huge problem and consumers need to do their best to control who they give information to. Equifax is a credit monitoring company and I suggest reading their advice and blog if you have questions about keeping your confidential financial information secure.

There is a lot that is up in the air in a short sale transaction because the seller is asking the bank or mortgage holder to agree to sell at a loss (and banks hate to show a loss). Many short sales do work out but remember to understand your contractual obligations, watch the “lock” on your mortgage rate, and know that your deal will be up in the air until the seller’s lender approves the HUD-1 just before your closing.

(Update from original post: As we were hashing out the details on the short-sale offer that was the inspiration for this blog post, the listing agent called to tell me that the bank had foreclosed on the house. This situation is not unusual because the seller will have only a short time to try and salvage their reputation before the bank decides to cut their losses. At this point, the house is the responsibility of the “trustee” and sooner or later will wind up in the bank’s REO Department.)

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As the closing date approached on one of my recent listings in Fairfax, VA, my clients who had moved due to a job-loss informed me that they had not made mortgage payments for the past few months. Now, when I am filling in my listing paperwork there is a section where I have to ask, “Are you current on your payments?”

The truthful answer last November was, “yes”.

But moving and renting a new place out of the area takes money, and it is easy to picture the financial strain on any family’s budget.

So, there we were approaching an early March settlement and the truth finally surfaced requiring me to recalculate the Seller’s net proceeds. Proceeds? Well, like many folks, this client was upside-down which means they owed more than the property was worth and they knew that they would have to bring cash to the table to sell the home.

But now it was “x” + 5 months of mortgage payments!

Home Sellers bring money to the table to close the sale

Are you thinking that they should have done a short sale? If you have read my posts on the subject you may know why I’m not a fan of pushing sellers into that mine-field of possible deficiency judgments. I do have to warn you of these things! Here is another opinion.

The new numbers were still do-able thanks to some help from their family, and we were headed to settlement as planned until… the buyer’s agent called to say there was a glitch in the sale of his client’s place. Yes, we understood it was contingent on that sale but things had looked firm until the 11th hour.

And, at that 11th hour we got the notice withdrawing from the contract. We were back at square-one now with a looming foreclosure situation.

But then, within a week, the same agent called back to say, “their financing has been approved and we are closing today, is your place still available because my client wants to buy it?”

Obviously the answer was yes! Are you still following this roller coaster?

The Homer Seller’s emotional roller coaster…

Since the old financing had expired and the buyer had to “re-lock” his rate, the new RESPA rules require a “cooling-off period” of seven days before a loan can be closed.

So there we were, on hold with everything teetering in the balance… and then the F-bomb dropped.

Phone rings: “This is Doug,” I said in my upbeat, breezy, yet professional way.

Client: “Hey, I just got a letter from my mortgage company’s law firm saying they are going to FORECLOSE if I don’t get my account up to date, paying $17k-something before April 1, 2010.”

Doug: “Wow, that’s right when you are gonna close. You are really going to need a Virginia real estate attorney to check this out, so why don’t you give John a call at …”

To make a long story short, the attorney advised him to pay the amount to catch up and then sell the place as planned at the end of March. My client took this advice and Fed-Ex’ed a certified check to the mortgage company’s law firm in Maryland.

“Received” they told him the next day and that they would notify his big city mortgage company he was “reinstated” and in good graces.

But, that law firm never sent the check to the big city mortgage company, and my client’s account continued to be flagged “FORECLOSURE”.

So, there we were on March 31st and all set to close, buyer was ready, seller was ready, but the existing mortgage company said “no” because the account was still flagged as a “FORECLOSURE”.

Folks, this is one example how everything can fall apart at the last minute. When you read about the government relaxing rules to make the process easier whether it be a short sale or a foreclosure, please keep in mind that these are unique, often complex situations where human error can cause the whole situation to go beyond the point of return.

If you are interested, I will write another post telling the story of how this situation ended. Anyone?

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When people sell their home for less than they owe on their mortgage it is called a “short sale”.  And these can give short-sale-sellers the impression that the agreement to repay the amount borrowed has been satisfied, and that it is time to move-on like in a traditional sale.

You pay, you stay… if you don’t, you won’t

Some of my buyer clients have bought these “short sale homes” at below-market prices which was very good for them. Buyers kind of walk away with a really good deal… if they are patient and can wait months for a written response from the bank, which has to agree to the short sale.

I have heard “real estate experts” on WTOP radio or the “TODAY Show” giving pretty flip advice about trying for a short sale if you are upside-down  (industry jargon meaning: the mortgage is greater than market value). Okay, time for my observation that should be discussed with an attorney because it is a good possibility that the bank will come after the short-seller long after the sale closes.

You’re still on the hook!

You see, when the bank sends over the short sale approval letter to be signed by the buyers and the sellers, it spells out that the bank agrees to take “x amount” for the mortgage. And if there is a home equity or second mortgage, accept “x amount” for that too.  My buyer clients have been eager to sign-on because the letter always includes an expiration date for this “short-sale deal”.

But, short-sale-sellers need to read it carefully because it will also include a sentence that says that the seller is still responsible for the debt, like, for example, the bank will accept $1,000 instead of the $35,000 owed to get the house sold. I have seen home sellers sign whatever was put in front of them thinking that their problems have finally come to an end. Or have they?

The home seller’s risk is a deficiency judgment

I always thought this was odd, and my suspicions were confirmed recently when I read an article by real estate attorney Harvey S. Jacobs in The Washington Post, and it’s an article worth reading. He pointed out that banks can use “deficiency judgments” to aggressively get their money back… and these baby’s are good for 12 years! Take a look at this article

I have an excellent real estate lawyer in Northern Virginia to recommend to people considering a short sale because you need some legal advice before you decide to sell your home as a “short sale”.

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It has taken a couple of months, but you are now walking up the stairs and into your new home. It’s actually a little bigger than you thought and you can’t wait to paint the kitchen, replace the carpet, get the FiOS set up, and turn in the keys at the old place. Maybe even take a dip in the pool!

Nice story, but this is the type of mental image that I want my home buyer clients to have in their minds before we start looking for houses. Setting a goal is important and visualizing the ideal or “perfect scenario” makes it  seem a little less intimidating.

Home buying is a rough sport at any level:

• first-timers
• move-up
• retirement (move-out).

The primary complaint that I hear from today’s home buyers is… there is nothing to buy! Well, there are homes to buy depending on the region of the country you are in, and many of those homes may be short-sales (where the seller is asking the bank to forgive his loan for less than he owes) or foreclosed homes (a bank is the owner and seller). In either case, these homes may have issues like needing a lot of updating or fixing up, being sold strictly “as-is”, or the sale is a long-shot to ever get to settlement.

Even with the $8,000 first time home buyer credit, a home that needs all new appliances or carpeting isn’t that attractive. And a first time home buyer may understand why some homes went into foreclosure, like homes overlooking the Beltway or backing to an industrial area. And many people feel uneasy about buying anything for $400,000+ strictly “as-is” – yes, they ain’t fixin’ nuthin’.

Okay, these scenarios may have scared some of you away but for the person looking for a good home at a discount (from even 1 year ago) and a mortgage rate around 5% then this is the perfect opportunity. Yes, the affordability index is off the charts.

I tell clients to not get emotionally attached to any home until we have completed the home inspection. This is always a contingency included in my client’s offers because our contract specifically states that “the Purchaser may void the contract” after the inspection. It is make or break time… we have a contract, is it still worth it? If not, then we submit the notice to the Seller declaring the contract void and the home buyer is back looking for better options.

By having a clear picture of what you want the end to look like, making the decision to move on to another home will be much easier.

Lots of space, finished lower level, big bedroom sizes. But it took a lot of work, time, patience, and a couple off-hand prayers. Took about 2 months (fast) but almost 30 days without any response to the offer! Bought in 2009.

My thoughts on the short sale process are further expressed here…

A few month’s ago I put together a post on real estate short-sales and what to expect, but now feel that it takes a tremendous leap of faith from everyone involved to get one of these done. I believe that these clients submitted three short-sale offers before getting this home.

Here are my random musings…

Are you still looking into that crystal ball?

You know, like when you were searching for the bottom of the market, the lowest interest rate to refinance, or if the economy is sending a signal of a turn around.

In the April 27^th issue of BusinessWeek, there was an article titled “What Good are Economists Anyway?” that really put the screws to high-profile economists for missing the current downturn in the world economy and housing sector. BW can pick some hot topics, but I feel it is probably better for everyone to get out the crystal ball to look at the future instead of the mistakes of the past.

Many real estate web blogs are filled with dry statistics provided by the local MLS, Realtor Association or RealtyTrac. These are very important to economists and real estate obsessed nerds, but ask the average home buyer who is actively searching for a home or home seller waiting for an offer and then you will get a different picture, quickly.

Every market across the United States, such as Northern Virginia, Austin, Chicago, Las Vegas,  Phoenix, Portland,  San Antonio, San Diego or Seattle, has a set of distinct personalities. In addition, these personalities can seem schizophrenic to an economist sitting in an academic setting. While the market in Phoenix or San Diego may be losing value, simultaneously the Austin market may be seeing slight price appreciation. That is why real estate will always be local, almost neighborhood by neighborhood specific, and invisible to interpretation by celebrity economists.

Over my past 18 years in the business, I have met agents from all over the country traveling to training events in Seattle, Denver, Austin, Boston, Atlanta and Philadelphia. And I do my best to touch base with that network to give me insight that may benefit my clients here in Northern Virginia. The data may be not as academic as what you see in official reports, but should be an excellent peek into the “ground-floor” of the real estate business.

What you did not see written into the comments section is this home is a short-sale that needs the lender’s approval. Someone in the sale is coming up short, and that, my friends, is where the current mortgage lender (the bank) gets involved. And I mean really involved because the seller is asking the bank for permission to sell at a loss.

Basically, the seller is on his knees, praying that the bank will agree to solve his problem.

A lot of people now owe more on their homes than the homes are currently worth, especially after the market made a giant 180º turn starting in 2006. The situation was aggravated in 2008 as many people began to lose their jobs. Combine that with some exotic mortgage programs based on increasing value models and you can see why the house of cards collapsed into a smoldering heap of despair and destruction. Too vivid?

A short-sale is a pre-foreclosure attempt to sell, and to preserve the seller’s credit (FICO) standing since foreclosures kill a reputation. And unlike stock sales that are short, you cannot itemize a loss on a home on your tax return.

Short-sale properties are often too good to be true because banks hate to take a loss of any kind. Offers on short-sales are low priority taking a month or four to get a response. Some banks never respond.

Personally, I have only had one of 7 short-sale contracts work out. In baseball that would be a batting average of .142. Most agents are still batting 0, and tell their clients not to waste their time. Actually, that may be excellent advice.

If you are considering buying a short-sale to be your next home, understand the uncertainty going in, make your offer as flexible as possible so you can back out if you find another home, and keep looking. Banks are trying to sell these homes before they have to foreclose (which costs banks 10k’s+), so there are bargains out there for those of you with the patience and understanding that this is anything but an easy transaction.