Editor’s note: With the collapse of the subprime lending market leading to tightened credit, many are wondering what happens to the millions of loans that are expected to default or more importantly, what happens to the homes and the people who bought them. In this four-part series, Inman News looks at what the lending industry is doing to help people get out of loans or get back on their feet and how some real estate agents are making this their specialty. We’ll go in-depth on short sales, REOs and forbearance programs.
Editor’s note: With the collapse of the subprime lending market leading to tightened credit, many are wondering what happens to the millions of loans that are expected to default or more importantly, what happens to the homes and the people who bought them. In this four-part series, Inman News looks at what the lending industry is doing to help people get out of loans or get back on their feet and how some real estate agents are making this their specialty. We’ll go in-depth on short sales, REOs and forbearance programs. (Read Part 1, Part 2 and Part 4.)
Real estate agents and homeowners considering a short sale of a property should be aware of potential problems that can occur and common mistakes to avoid.
In testifying before a congressional subcommittee looking into subprime lending in March, John M. Robbins, chairman of the Mortgage Bankers Association, noted that some two-thirds of all mortgage loans are securitized and sold to Wall Street investors. The third-party companies that service these loans must often abide by agreements with investors that limit their ability to modify loan terms or approve short sales.
While some agents might chalk up their problems in closing short sales to a lender’s inflexibility, problems can also originate on the other end — with borrowers and buyers.
Potential roadblocks to a short sale also include:
- Low-ball offers
- Second mortgages
- Borrowers’ finances
- Deals that generate a profit for sellers
- Mortgage fraud schemes
Mortgage and real estate industry consultant Jeff Corbett — known for his blog, The XBroker — says it’s best to approach lenders with a purchase agreement in hand, with “good hard numbers” that back up the offering price.
A frequent mistake among beginners is “low-balling the bank right off the bat,” Corbett said. “You’re much more likely to achieve success (with a substantiated offer) than if you say, ‘I’m going to whack 20 percent off the assessed tax value,’ which is a popular, but not very successful approach.”
Corbett recommends seeking out an experienced loan processor who has worked with mortgage brokers, and understands the process.
“A lot of the people inside the banks won’t deal with unsophisticated individuals who don’t know the ropes,” Corbett said. “That’s probably where the frustration is coming from” among agents who have hit seemingly insurmountable obstacles in negotiating short sales.
Unlike a conventional sale, where only the buyer’s ability to repay a loan is at issue, a short sale involves demonstrating that the person currently in the home is insolvent or unable to continue making his or her loan payment.
Borrowers can expect their lender to ask for a stack of documents, which may include tax returns and paycheck stubs, bank statements, and proof of any hardship the borrower is experiencing, such as unemployment.
Lenders will also want to see a purchase contract signed by the borrower and buyer, a completed loan application or loan preapproval, a copy of the transfer disclosure statement, preliminary title report, and an estimated closing statement.
It takes 15 to 18 hours for husband-and-wife team Steven and Tiffany Wright of HER Real Living in Gahanna, Ohio, to get all of the seller’s financials together.
“We supply all the documents for the lender and do what’s like a reverse mortgage — (we) de-qualify them,” Wright said. “They’re unqualified to where they can’t afford the property they got themselves into, (and) the debt outweighs what they’re bringing in.”
A short sale is even more complicated if there are “piggyback” second or third loans.
“If you buy a property (with piggyback loans), you’re still subject to those other liens,” Corbett said. “If it’s a first, you get clear title.”
But the presence of second or third lienholders is not an automatic deal killer, Corbett said, since those lenders know “they are staring nothing in the face” and may be willing to negotiate.
Erwin said the purchase contract will stipulate that the sale is based on the lender’s approval.
“I submit it to the loss-mitigation specialist (of the lender) and let them decide if it’s a go or if they’re going to counter,” she said.
If it’s a go, some lenders will insist on a 5 percent cap on commissions. Erwin said she usually charges 6 percent — 3 percent each for the buyer’s agent and herself. In cases where commissions are limited to 5 percent, she takes the smaller, 2 percent cut.
Although investors often approach distressed borrowers directly, many lenders will only participate in short sales if a Realtor is involved, Erwin said.
“They know we’re credible; they know we are licensed. We can easily be traced,” Erwin said. “A lot of mortgage companies will not do a short sale unless it is Realtor-represented.”
Still, even among Realtors, experience counts.
“To try to call the bank and have them explain it to you is probably a waste of time,” Kruse said. “The real estate agents that do this, for the most part, they want to corner the market. They don’t want to give up all the secrets.”
Like Erwin, Kruse recommends that those who want to get into short sales take a continuing education course. There are many good two- to three-hour seminars available, he said.
“I think the educators are realizing people need to know how to do this, because it’s coming on like a freight train,” Kruse said. Informal sources of information include blogs and agent networks such as ActiveRain, where Kruse maintains an informative — and entertaining — blog detailing his exploits in the colorful world of distressed property management and sales.
While there’s plenty of good advice available online, “the truth is, you’re never really going to figure it out until you go through one,” Kruse said. “It’s a baptism by fire, because each lender uses a different program.”
Realtors can also become willing or unwitting participants in fraud perpetrated by unscrupulous “investors” who approach homeowners who have equity in their homes but are having difficulty making their loan payments.
Melissa A. Huelsman, a Seattle, Wash.-based attorney who represents mortgage borrowers in disputes with lenders, said she has had several cases involving short sales where Realtors participated in attempts to cheat homeowners out of equity they don’t realize they had.
“I have friends that are Realtors, and I’m not bashing them at all, but they are salespeople, and they don’t always stop and think about what’s happening,” Huelsman said.
Realtors should be wary of short-sale transactions that misrepresent a property’s true value to lenders, allowing buyers to walk away with the borrower’s equity.
“Whenever (Realtors) get into a situation like that, they say, ‘Well they were going to lose the house to foreclosure anyway,’ ” Huelsman said. “Well, maybe not — they might be able to refinance or get the loan terms renegotiated, or if they have equity, there might be money left over after a foreclosure sale. If the house is sold, you are entitled to that money — Realtors very often don’t know that.”
Of course, there are many reputable investors using short sales as a legitimate tool.
Wright said he works with a group of investors who buy homes in “pre foreclosure,” fix them up, and turn them around into rentals, using the MLS to help sell the properties.
Some buyer’s agents don’t want to work with the properties because of the limitations some lenders place on commissions.
“A pretty good percentage of foreclosures is in these new subdivisions,” Wright said, particularly where builders used in-house financing and appraisals.
Investors can pick up homes that sold for $165,000 or more for as little as $120,000, he said, turning them around and doing a lease option.
Wright said he and his wife work with preforeclosure properties full time, and have about 70 listings in inventory currently.
Their main competition is not other Realtors but private investors whose “main interest is to get properties for 50 cents on the dollar. They can basically out-and-out lie to people. When they can’t get the property for what they want to get it for, they fall off the face of the earth. They leave the seller hanging, and unfortunately they get a foreclosure on their credit report.”
These days, Wright said, “Everybody and their brother” is trying to buy foreclosure properties. “Ohio is pretty much the national capital of foreclosures.”
Some, he said, are amateurs who have only attended a seminar or watched a video about real estate investing.
The Wrights subscribe to a legal paper that publishes foreclosure filings, and send letters to homeowners whose homes appear in the publication.
“I’m telling them that even though they’re upside down, chances are I can still sell the property,” Wright said. “My letter beats the certified letter they get from the sheriff, typically three days before the sheriff.”
Within the first week after a public notice of foreclosure, homeowners tend to receive a flood of mail. “They generally get 150 letters in the first week, from very neat written stuff to a piece of notebook paper stating, ‘I buy houses,’ ” Wright said.
While short sales aren’t for everybody, those who have found success in the field say the rewards are great.
“If you are willing to do your due diligence, and know the ropes of the county you’re interested in, you can make it into a very lucrative business,” Corbett said.
Kruse agrees there’s money to be made, but it’s not easy money.
“I’ve been doing this since ’96 … and I’ve never known any other way to deal with real estate,” he said of his experience selling REO properties and doing short sales. “I think that many Realtors think that this is a great business to be in, but if they get into it they will realize it’s very difficult. I have the benefit of never having known anything else.”
One thing to keep in mind is that short sales and REO sales are cyclical. Kruse said he’s made a good living because his company is diversified — helping lenders liquidate not only real estate but commercial businesses, machinery and equipment.
“I think the people who do only residential REO and short sales will probably do very well over the next 1 1/2 or two years, but if they don’t diversify, they’ll get stuck in a position where their business starts to decline,” Kruse said. “I really think this is a cycle that’s going to be a couple of years, and with any luck it will be back to real estate as normal.”
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