Will New Government Short Sale Intervention Help?

The US Treasury announced some new/clarified guidelines for short sale lenders last week. This announcement was made with the intention of stepping up pressure on lenders to execute short sales more quickly and give them incentives to do so. I’m not sure the US Government really understands what is happening on the ground as it relates to short sales. I’m sure these incentives will not hurt, but I really doubt they are going to help streamline the process that much. I’ve blogged a ton about short sales over the past few months and I’ve been working with short sales since this all started in 2005/2006.

I’ve been in the real estate business through all of the ups and downs and turmoil of the last three years and I’ve got the battle scars to prove it. I remember when we made fun of the agent in our office that took a short sale listing. I remember thinking “I’ll never do that”. Boy was I wrong! Turns out, that agent (who is no longer in the business) was on the cutting edge of a wave that has yet still to break completely.  I say this just to give some context to my comments and demonstrate that I do speak from experience.

It doesn’t take a genius to figure out the main issue with short sales is the amount of time they take to get approved. When a buyer has to wait 3-4 months for a response to an offer, they get tired and move on. When the answer does come and the buyer is gone, you have to start all over again or at least go backward a few steps. I don’t think the government is going to be able to do anything about that issue.

I was talking with a short sale negotiator at a major lender the other day who told me she was handling 400 files at a time. How can one human deal with 400 files and do it quickly and effectively? They can’t. So, unless the gov’t is going to help lenders hire more people and provide the support systems to handle more employees, I don’t see how this is going to get solved.

The other piece of the puzzle is, in order for the lender to receive the gov’t incentive they have to agree to forgo/forgive the deficient amounts on both 1st and 2nd trust deeds. I think the forgiveness part is going to be tough for investors to swallow. At this point there is a ‘one-action’ rule in California. In other words lenders have one chance to collect a mortgage debt. Of course it is more complicated than that, but for the sake of this post, I’m not going to get into it.

So, if a lender grants a short sale they basically agree they are going to accept the short sale proceeds and not try to collect any more from the borrower. The way lenders get around the one-action rule is by making the borrower sign a short sale approval letter that basically says ‘we reserve the right to try and collect money from you in the future. Unless the seller/borrower signs that letter the short sale will not be granted, the property proceeds to foreclosure and that is that. In the foreclosure the 1st lender gets what they can, the 2nd lender gets nothing, but since the 2nd lender has not exercised their one-action, they will then try to collect. When the 2nd lender tries to collect the borrow declares bankruptcy and the 2nd lender gets nothing.

So, it would seem to make sense that lenders would agree to not try to collect and take the gov’t money to go away, but I’m not sure I see that happening in many cases. I think the loan amounts and the deficiencies are just too high and banks are just to big and bloated to really make this work. There are also other complicating factors. If the loan in question has private mortgage insurance attached to it, there is another layer of approval the short sale has to go through. If the 1st and 2nd loans are with different banks (as they often are) the lien holders may not cooperate with each other. Even when the loans are with the same bank, the underlying investors are different, so the 1st and 2nd may not cooperate on those either.

I hope I’m wrong. I hope this latest effort gets things moving more quickly and easily on short sales. However, I think we’re just going to have to continue to wade through this mess together. There is going to be ongoing cleanup efforts by government and the banking industry for years to come. In the mean time, if you need short sale help or advice, I’m here to help!

Bank of America Leaves Buyers/Sellers Waiting

As many of you know, I am a short sale expert. I have been working with short sale buyers and short sale sellers since 2006 when the whole real estate meltdown began to unfold. During that time I have been able to help many sellers get out of bad situations and get back on the road to good credit and healthy financial lives. I have also been able to help many buyers get into amazing properties at ridiculous prices.

For sellers a short sale represents a way out that is a much more palatable option than foreclosure. For buyers, short sales are really the only properties that sell under ‘market’ price. In fact of all the properties sold in San Diego County this year; bank owned properties have sold at an average of 101% of their listed price, while short sales have sold for 94% of list price. Given the median home price in San Diego the 7% difference could represent a substantial savings for a buyer!

Many people think this is still a hot buyer’s market and they should be able to get a property at a significant savings over the ‘market’ value. Based on current market data homes in San Diego do not sell below market value (or even list price) in most cases.

All of the preceding information is only designed to set the stage for what I really want to talk about, because I don’t want what I’m about to say to be taken out of context or for someone to think that I’m just saying this based on little experience. When I tell you Bank of America is a corporation who’s behavior borders on criminal and hurts their customers, those who work with their customers and the company itself, I’m not kidding. I’ve dealt with B of A on many short sales on both the buying and selling side of the transaction and I can tell you without a doubt that B of A is the worst bank in the history of the world!

The level of incompetence that is displayed by B of A’s short sale department is phenomenal. The duplication, triplication and quadruplification (if that is even a word) is unbelievable. If you or I tried to go out into the world and do business this way, we would never succeed.

I have customers who have not paid their B of A mortgages in over two years, who are still waiting to find out if their short sale or loan modification will be approved. B of A just keeps them hanging and hanging on with endless requests for documents and changing guidelines. These people are not deadbeats. These are good people who got swept up in bad situations. In many cases people were initially told by B of A to stop making the payments, only to be told later to resume paying. Once a borrower has missed a few mortgage payments, the hope of catching up is slim to none.

I’ve had B of A tell people to get out of their home because they were going to foreclose, only to have them change their mind and then tell the borrower they qualify for a loan modification. So, the borrower applies for a loan modification only to be denied because they no longer live in the property. That is what I mean when I say ‘bordering on criminal’. Yes, the borrower defaulted and probably deserves to loose the property, but they don’t deserve to be treated this way. If you are going to foreclose a property, just do it. Don’t leave people hanging on month after month, year after year.

I was on the phone with B of A about a short sale earlier today and needed a question answered. The person on the phone a)couldn’t answer the question, b)couldn’t transfer me to anyone who could answer it and c)couldn’t tell me if there was anyone in the B of A corporation who could answer it. Being totally bewildered by the lack of competence displayed by the person I was talking to, I hung up, dialed back in and talked to someone else. Same response. Don’t know, no one here does know and I don’t know who would know. If it weren’t somebody’s financial future on the line, I’d think this was funny.

The bottom line is, when someone approaches me about a short sale on either side of the transaction and I find out the lender is B of A my advice is simple. Run. If you are a buyer, find another property to buy. If you are a seller, just leave the keys in the mailbox and find somewhere else to live.

Of course, the above statement is made somewhat sarcastic. I would never turn a buyer or seller away. If there is a problem to solve I will try to solve it. When it comes to B of A; however, the problem is going to be compounded by 75% of what it otherwise would have been.

Upward Pressure On Home Prices

There is a serious issue of supply and demand going on in San Diego Real Estate right now. The issue is, there isn’t much supply and demand is through the roof! In a normal economic model the result of this supply vs. demand would be obvious… prices would have to increase. In general this is what is happening in San Diego right now, but these natural market forces are being held in check by the dreaded appraisal.

Appraisers have been and continue to be under so much scrutiny from every direction they are slow to respond to this lopsided supply/demand curve.

Let’s look at a real-world example of what I’m talking about. As of today in Mira Mesa (San Diego, 92126) there are only 12, 2-bedroom condos on the market. That’s right I said 12. At the same time there are 42, 2-bedroom condos pending (in escrow) in the same zip code. This means there is about a one week supply of 2-bedroom condos in 92126 at the current rate of absorption. Surrounding zip codes are in very similar condition with regard to entry-level inventory.

I am working with a 1st time buyer who is qualified to by up to $260,000 and would like to by a 2-bedroom unit in the part of town I’m talking about. Recent sales in the 92126 zip code for 2-bedroom units are around $225,000 on average. We wrote an offer on a unit over the weekend that came on the market at $227,800. We are one of 20, that’s right 20 offers. The offers range from $235,000 – $250,000. The problem is many of these offers are going to be contingent upon an appraisal to verify the value for the lender. We offered $240,000 because I felt I might have a chance of justifying that value to an appraiser based on the upward pricing pressure being created by the current supply and demand.

Of course, the appraiser is going to look at the last few closings and tell everyone the unit is only worth what the last similar unit closed for. However, this isn’t really fair to buyers who want to get in but don’t have a ton of cash to close the gap between the appraisal and the price being offered. You see if the property doesn’t appraise for the price offered the buyer is on the hook for the difference or the seller has to come down in price. In this market with 20 offers on the table, the seller is not likely to come down in price, they are more likely to go to the next buyer and see if they are willing to cover the appraisal gap. It is 100% certain someone will be willing to cover the gap and the seller will wind up getting $240,000 – $250,000 for their unit. Once it closes, then it becomes the most recent comp and my poor buyer who is only qualified for $260,000 is out of luck. Because now the next unit will list for $240,000 or $250,000 and will sell for $250,000 – $270,000 because the supply is still low and someone will be willing to pay it.

My point is, in order to keep this process somewhat fair for buyers who don’t have huge piles of cash lying around. Lenders and appraisers are going to have to become more in tune with the basic economic forces of the current market. The upward pressure on property prices, especially at the entry level is staggering. If the current trend continues we are going to see double digit appreciation in the next 12-18 months without a doubt. I say, LET IT APPRAISE! GIVE THE FHA BUYER A CHANCE TO GET IN AND LIVE THE DREAM!

I keep hearing the same things from people when I make the statement about 10-15%. People say things like ‘it will never be like it was’ or ‘I don’t see how prices are going up that much’. I tell people that this is simple econ 101. Supply and demand is the name of the game. If you don’t believe me now, check back with me in 1 year when the 2-bedroom unit in Mira Mesa I just spoke about is selling for $280,000 – $300,000. It is coming back and coming back FAST!

How To Get Your FHA Offers Accepted!

Going FSBO Saves Sellers Money?

Well they are at it again. For Sale by Owners and discount brokers are coming back into the home selling market. Now that the market is improving there are a good number of equity (normal) sales in inventory. Since prices are still down, these equity sellers are trying to squeeze every dollar they can out of their homes, which is totally understandable. I’ve got absolutely nothing against anyone who wants to save money. I love to save money. The truth of the matter is, going with a discount,MLS entry-only broker or FSBO can cost a seller thousands of dollars! “But I’m saving thousands of dollars by not hiring a full service agent to sell my home…right?” WRONG! No offense to anyone, but unless you’ve sold dozens of homes recently, you don’t know what you are doing. Little things you don’t think about will cost you money.

I recently sold a FSBO property to a buyer client of mine and we got the property for $25,000 less than we should have been able to because the owner didn’t know what they were doing. They were the nicest people in the world, but they had no clue how to sell a home. “But I’m getting free advice from a family member who’s got a real estate licence…” So what! If your family member doesn’t live and work in the area where you are selling, they don’t know how to properly price your home. Improper pricing is the biggest mistake FSBO’s make. They usually go to high and wind up dropping down, but in the case I spoke of earlier, they went too low and could have sold for much more than they did.

So, let’s crunch the numbers. A $500,000 house that is listed FSBO will cost the seller only 2.5-3.0% of the purchase price to pay the buyer’s agent. So, they save the listing agent’s commission… right? WRONG! If a good agent who knows how to market the property and negotiate the deal can get you $525,000 or $535,000 for the property you’ve actually lost $10,000 – $20,000 by selling yourself. The same goes for discount brokers. Discount listings are viewed by the public as discount properties and sell for less!

So, if you are thinking of selling or wondering what your home is worth. Do yourself a huge favor and talk to a real, full-time, professional Realtor. If you think one is giving you the run around, then talk to two. You’ve invested years in your home. Isn’t it worth an extra couple of hours to know you are getting the most out of it when you sell?

More On Short Sales

I spend a lot of time bloging and talking about short sales. Why? Because there are a ton of them in my market (everyone’s market) and they are going to be with us for another couple of years. One of the things I’ve noticed recently is that banks are getting tougher and tougher with regard to what happens with the deficiency which is left once they approve the short sale.

My favorite target is always Bank of America. Why? Because they are the biggest and the worst. They take forever to get a short sale approved and because they make the borrower sign a letter which basically says they are still responsible for whatever is left over after the short sale is done. Even in cases where the borrower has agreed to carry a promissory note for part of the deficiency the bank is still saying, we may or may not come after you for everything you ever owed us.

The problem is, people are backed into a corner. They have no choice but to sign these short sale letters because it is either that or a foreclosure, which is much worse. With all the money the federal government has put into banks in the last 12 months, I would think they (the feds) should step in here and say “wait a minute people”, “if you we are really going to help people, let’s let them out of this deal and get them on with their lives.”

Going through a short sale has already decimated a borrowers credit rating for at least two years. Let’s not let the banks compound this by slapping huge collection judgements on people. These huge judgements are only going to force people into bankruptcy which will just prolong the financial agony for years to come.

The bottom line is whether the banks just forgive the debt or whether they try to collect and then force the borrower into bankruptcy, the result will be the same for the bank. They are never going to get their money. So, why spend several years and several more thousand dollars even trying. Let’s clean up this mess and get this economy moving once again….

Changes to Truth in Lending Act will impact closings!

What’s the deal with short sales?

I probably get more questions about short sales than anything else. A short sale is anything but. From start to finish they can take anywhere from 3-6 months depending on the banks involved. I tell people a bank owned sale is just that, the bank owns the property being sold. A short sale is a ‘bank involved’ sale. So, the owner of the property is still a human being, but they can’t really sell the home without the ‘OK’ from the bank. The home owner owes more than the home is worth and they have to ask the bank(s) to forgive whatever portion of the loan can’t be paid off with the proceeds from the sale.

So, why does it take so long? The short answer is, there are too many people asking the bank for a short sale at the same time. Banks have done what they can to staff up for short sales over the past couple of years, but the demand is far out-pacing the lender’s resources.

The long answer is, mortgages are packaged and sold to investors after the loans are made, and depending on who owns the loan the short sale approval can be difficult to obtain. The red-tape involved with one of these sales is endless. If a borrower asks Bank of America for a short sale, the file goes through intake, phase 1 negotiation, phase two negotiation, investor approval and then escrow. The amount of time it takes to get through each phase of negotiation can be anywhere from 15 business days to 45 business days depending on the work load.

So, if you are a buyer and you want to buy a property being offered as a short sale, you need to be aware it is going to take a while. However, as a buyer, there are ways to short cut the process. I’ve worked with buyers where we submitted an offer on a short sale, had approval in 7 days and closed escrow 30 days later. The way to accomplish the feat I just described is by picking a buyers agent who knows what questions to ask the listing agent about their short sale.

If you find a short sale that has been previously approved and the original buyer got tired of waiting around, you can benefit from their impatience. In order for this scenario to work, your buyer’s agent has to be aggressive and make a ton of phone calls on your behalf.

The preceding is a very broad-brush explanation of the process. If you want more detail, we’ll have to spend some time talking.

Have a great weekend!

The Wave of Foreclosures…

One of the most common questions I hear about the market lately is regarding the alleged “wave” of foreclosures that is supposed to wash over us and keep prices from going up and allow everyone who is currently looking to buy a home. Up until now, I have not seen the wave and have no indication there will be one on the horizon. I stay in pretty close contact with several major banks and none of them are indicating to me they are holding onto a secret stash of properties. In fact with inventory at the current level in SD county (below 10,000) active units, it would take one heck of a wave to make a difference. I more than anyone would like to see this wave, grab my Real Estate surfboard and ride it because I have lots of buyers who need properties now.

I am not suggesting there aren’t hundreds or even a few thousand homes in the county on the verge of foreclosure, but the banks don’t seem to be in a huge hurry to take action. In fact many, if not all major lenders are encouraging troubled home owners to attempt short sales. There is a lot of lip service paid to loan modification, but that doesn’t work for most. If anything, there is going to be a flood of short sales over the next 24-36 months, but not really a wave. If you know anything about short sales, you know they are anything but short. Short sales are long and painful. Many lenders have stated they are going to truncate the process and make it faster, but I have yet to see that in any meaningful way.

I like everyone else will keep watching for that wave, but it may never come….

Home Markets Around the Country are Stabilizing!

I posted an artice on my Facebook page this morning from Reuters. The article is referring to data compiled from MLS systems in several western states. The data shows what I’ve been saying for months now. Home inventory is decreasing. Now that the national media has reported it, perhaps people will pay attention. If you are on the fence about buying or are thinking about selling a home and buying another, now is the time.

According to the Reuters article inventory in Las Vegas, Phoenix, Los Angeles, Bakersfield and several other major western cities is down. In fact the inventory in Los Angeles is down over 50% year-over-year. I know just from looking at the local MLS data that San Diego home inventory is down around 30% from last year at this time.

I hate to quote anyone at Zip Realty, but their CEO, Patrick Lashinsky, said, “If the number of home listings continue declining and buyer interest and activity remains strong, we should see sales prices and home values increase as we head into the fall,”. This is essentially what I’ve been telling people for months.

Many people ask me things like “what about the wave of foreclosures that is about it hit?”. With home inventories down 30-50% it is going to take a heck of a lot of foreclosures to make a dent. Prices are on the way up. The sooner we wrap our brains around that fact, the sooner I can get you a great deal on a property right now!