The Phoenix Area Foreclosure Experts

Short Sale or Roulette - which has the better odds?

Short Sale or Roulette - which has the better odds?

I constantly get buyer clients asking me about the pros and cons of short sales. In fact, I've received so many questions I created a short sale page on my website and I refer clients to that page.  I'm sure I'm not the only realtor who has done that in this market.

I'll tell you that I've had my share of successful short sales, both on the selling and buying side. I've also had my share of short sales that have blown up because 1.) a HELOC demanded a promissory note and the seller refused to sign it OR 2.) a bank wouldn't let go of an unreasonably high BPO. [Side note: If the realtor who did the BPO for my short sale on Desert Cove Rd in Glendale is reading this -- your BPO WAS too high and the house sold for $10,000 less as a REO] Since I have a fairly analytical mind (which can be a curse in a marriage) I decided to see if I could figure out the statistical probabilities of a short sale closing escrow.

My bachelor's degree is in business administration and I did well in quantitative analysis.  However, I did not want to create a thesis.  I was just seeking a simple way to convey the success rate of short sales to my clients. Here's what I came up with: divide the number of closed short sales in one month by the combined total of the closed short sales plus the canceled short sales.  Expressed mathematically:

closed short sales / (closed short sales + cancelled short sales) = % of success

I used only canceled short sales and not those that "expired" or were "temporarily off market."  I reasoned that expired short sales could simply be re-listed, were generally caused because the listing realtor lost track of time, and that most of them received an extension.  I did not count those that were "temporarily off market" because they would probably end up as either closed or canceled.

Here's my conclusion based on 12 months of statistics from the Arizona Regional Multiple Listing Service: There is a slightly better chance closing a short sale than winning at a roulette table. Remember that roulette has a 50% chance of winning if you play either "odd/even" or "red/black."

The 12 month chart shown below illustrates that an average of 53.7% of short sales close. Read the chart in this manner: "4,150 foreclosures sales (bank owned and short sales combined) occurred in February 2010.  1,438 of those sales were short sales.  1,167 short sales were canceled in February 2010.  Therefore, 55.2% of short sales were successfully closed in February 2010." You will also note that the success of short sales has been greater in the last six months than in the first six months of the period.

I can already hear all of the short sale experts across America claiming a much higher success rate.  I have a higher success rate too. However, I present these numbers for your information or your humor -- whichever you prefer.  Actually, I kind of like the roulette analogy and have already used it twice today.  Next time a client asks you if they should consider buying short sales say to them "red or black?"

Selling Your Home

Home Buyers, Mortgage, Inspectors, Credit

Phoenix Foreclosures - March 2010

Should I refuse this Chase short sale listing?

Am I wasting everyone's time if I accept this Chase short sale?

The seller has a first and second mortgage with Chase. Both mortgages are purchase money mortgages. The would-be sellers tried doing a loan modification over the summer but they gave up because the result of the loan modification was a "higher" monthly payment. Go figure that one. My potential clients did not make their July 1st payment after the loan modification failed. However, they waited until one week ago to ask me to short sale their house. Take note of the fact that the loan is 149 days past due.

I received authorization to talk to Chase about the potential short sale yesterday. Fortunately, and because the sellers tried a loan modification, Chase never sent a notice of default and there are no foreclosure proceedings in process. The first mortgage would not talk to me about the second mortgage and sent me on a long hunt to find the correct number to talk to the second mortgage department. Here is what I found out after six phone calls/transfers:

• the "home equity collections department" handles the second mortgage until it is 119 days past due
• the second mortgage was still residing in the home equity collections department because of the attempted loan modification
• my phone call brought attention to the fact that the loan modification process is over and my potential clients are simply delinquent
• the home equity collections department will no longer talk to me because the delinquent loan is past the 119 day marker
• they said the account was being sent to the "recovery" department (oh oh) as of November 1
  

I was able to talk to the recovery department about the prospect of a short sale. The recovery department, which of course is not nearly as much fun as the collections department, was much more serious about the matter. Here I was told that the focus of this department was to recover as much of the $52,000 balance as possible. I was told they would start out by asking for between 50 to 60% of the balance to approve the short sale.

I don't know my sellers very well, but I do know that proposition doesn't stand a chance. Faced with such a large amount, my sellers would forego the short sale process and let the property go into foreclosure. After reminding the person in the recovery department that Arizona is a non-deficiency state -- and that there was no real benefit to Chase in letting this go to foreclosure -- the person on the other side of the phone gave me these options:

1. convince my potential client to bring some money to the table
2. Hope that the first mortgage (held by a different department of Chase) would do more than allocate the standard $3000 to the second mortgage; this "recovery department" person suggested that perhaps the first mortgage Department of Chase could allocate $20,000 -- $25,000 to the second mortgage Department to make a short sale work

I reminded this person that no one wanted to waste their time by taking a potential buyer through the short sale process and then finding out that the second mortgage Department (excuse me -- the recovery department) would nix the sale. I also reminded him that both departments were in the same company and that he was simply talking about an exercise in accounting.

This recovery department person seemed to be unfazed. He suggested that I take the short sale listing, find a buyer, present the contract and short sale package to Chase and "see what happens."

I really don't consider this to be "profound" or worthwhile advice.

Anyone have any experience with this situation and Chase (JP Morgan)?

Understanding the short sale process

Phoenix area homes for sale

Help understanding the mortgage short sale process -- Part 5 of 5 -- Phoenix Foreclosures

DO MORTGAGE SHORT SALES REALLY WORK (Phoenix Foreclosures)

(HELP #12)

Part 4 of 5 on Active Rain 5

We sometimes hear people say how the short sale process isn’t worth the time and rarely works. That is not our overall experience and we have several practices to help ensure a successful short sale process.

First, we prescreen all short sale information. This means collecting and reviewing the homeowner financials (including Hardship Letter) so there are no surprises in the process (like $20,000 sitting in the homeowner’s bank account). This also includes going over ramifications of the short sale process with the homeowner (i.e. possibility of a 1099C, a soft note on the 2nd and that any liens on the property will need to be paid). For example, if a homeowner has a home equity line of credit the mortgage lender will most likely ask for a “soft note” (loan for a portion of the balance with easy terms) to proceed with the short sale (more in HELP #13). It’s a big help to know upfront if the homeowner absolutely refuses to comply with such a short sale condition.

Second, we consistently follow up and nudge the mortgage lender(s) to move forward for a successful short sale process. We know lenders move slow with short sales, but when we find a short sale package has “disappeared” we move quickly and replace whatever they lost in the process. Consistent follow up is important when the short sale process is not moving forward in a timely manner with the mortgage lender(s).

Utilizing these practices will guarantee a much higher short sale success rate. We can attest to that!

BEWARE OF THE NON-PURCHASE MONEY SECOND MORTGAGE

(HELP #13)

If you decide to pursue a real estate short sale, be aware of the "non-purchase money" 2nd mortgage. A non-purchase money mortgage is one used for more than the purchase of the house. For example, a HELOC ( home equity line of credit) is a non-purchase money second mortgage. A HELOC may have been used to consolidate debt, take a vacation, or buy a new boat/car. In other words, the mortgage loan was for more than the house. In contrast, a purchase money second mortgage was taken out at the time of purchase process and used exclusively to buy the house.

Lenders holding the note for a HELOC are less likely to let the homeowner walk from the short sale process without repaying a portion of the loan. They know the homeowner will still enjoy the benefits of their debt consolidation, vacation, or new boat/car long after they sell their home on a short sale. Therefore, they feel the homeowner should take more financial responsibility. How? By signing a promissory note for up to one half of the second mortgage. Many times these promissory notes will be "zero" interest loans for up to 15 years to help the homeowner complete the short sale process.

Here’s the real problem: if short sale homework is not done up front to determine the intentions of the non-purchase money second mortgage lender and homeowner, we could find a short sale buyer only to learn the second mortgage requires a large promissory note. If the homeowner refuses to sign it the second mortgage holder will not sign off on the short sale process and the house will go to the trustee's sale.

LEGAL IMPLICATIONS OF THE SHORT SALE PROCESS

(HELP #14)

Consult an attorney/accountant for longer-term effects before completing a mortgage short sale. Although we are experienced short sale experts, we are not qualified to give legal or tax help associated with the process.

The IRS formerly considered debt forgiveness as income. However, legislation (October 2007) has reversed that rule. Additionally, ARS 33-729 and ARS 33-814 protect a homeowner from a mortgage lender deficiency if:

• the property is less than 2.5 acres
• is a 1-2 unit dwelling (dwelling means someone lived in the property)
• “purchase money” was used in the mortgage process
• the property is sold at the trustee’s sale (A BIG REASON TO APPROVE A SHORT SALE because if the mortgage lender rejects the short sale they cannot collect a deficiency)

Additionally, the IRS will not collect the ‘forgiveness’ tax if ANY condition applies during the year the forgiveness occurred (The Mortgage Forgiveness Debt Relief Act and Debt Cancellation 2007):

• it was the homeowner's primary residence for two of the last five years and “purchase money” was used
• the homeowner can prove insolvency (more debt than assets)
• the homeowner completed bankruptcy (and debt was discharged)

Part 4 of 5 on Active Rain 5

* Home Sellers * -- see mortgage short sales we successfully sold

Help understanding the mortgage short sale process -- Part 4 of 5 -- Phoenix Foreclosures

BROKERS PRICE OPINION, or BPO for SHORT SALE PROCESS (Phoenix Foreclosures)

(HELP #9)

Read part 3 of 5 on Active Rain

The most important fact the mortgage lender needs to know is how much the short sale property is worth? Most mortgage lenders hire a real estate agent/broker to help evaluate the short sale property. This evaluation process is called the broker’s price opinion or BPO. The BPO is one of the largest hurdles to clear when completing the short sale process. Our goal -- after submitting your initial package to the mortgage lender -- is to get them to order this evaluation and provide additional comparable sales to insure it is accurate.

The agent/broker will call to set an appointment to complete the short sale BPO. We meet the agent at the home and develop rapport. We share how comparable sales and other factors affect the short sale properties value. If handled correctly, some agents will actually disclose the price they submit to the mortgage lender. This is a huge help because most mortgage lenders will not disclose the ACTUAL amount of the short sale BPO. They want to get the most money from the process for their mortgage investor.

HOW WE HANDLE THE SHORT SALE NEGOTIATION PROCESS

(HELP #10)

Here are some highlights that help negotiate a short sale process. Every mortgage lender and negotiator has a different approach when it comes to handling the short sale process:

• We are patient, yet persistent and helpful with the mortgage lender on the short sale
• We reinforce to the mortgage lender how a short sale helps save many costs associated with the foreclosure process: attorney’s fees, eviction procedure, delays from borrower's bankruptcy, damages to property in the process, etc
• We work to convince the mortgage lender how it's in their best interest to approve the short sale by accepting less money now
• If the mortgage lender responds with a higher short sale counter offer, we ask open-ended questions regarding their opinion of the validity of the short sale BPO to draw out more information
• We ask if they agree with the agent’s assessment and how it was obtained
• We expect a mortgage lender will actually accept between $10,000-$20,000 less for the short sale than stated

CAN SHORT SALE OFFERS BE REJECTED?

(HELP #11)

This is a familiar process: The mortgage lender receives the short sale BPO from the agent. It's higher than the offered sales price, so the loss mitigator requests that the contract price be increased. If this happens we:

• send back a "counter-to-the-counter" with the original offer price; we send additional comparable property information to prove why the mortgage lender should accept the original short sale offer
• send pictures of the neighborhood
• send copies of newspaper articles with “bad housing news”
• send a bid for repair estimates

We ask the following questions regarding the short sale BPO and process if the mortgage lender still thinks the short sale property is worth more:

1. Are the comps an acceptable distance from the short sale property?
2. Are the comps of comparable size?
3. Does the square footage of the BPO match the original appraisal?
4. What is the interior condition?
5. How much allowance is given for the deferred maintenance?
6. How high is the crime rate in the area?

These questions can help figure out if the agent did a good or bad short sale BPO. Then we can submit more information to the mortgage lender to prove their BPO is incorrect. As a last resort, we can ask the mortgage lender if they will accept an independent FULL APPRAISAL for review.

Remember that the mortgage lender wants to avoid the process of the buyer filing bankruptcy. They also desire to unload unwanted property without taking a huge loss. We will always help move the short sale process forward.

How to short sale part 3 of 5 on Active Rain

How to short sale part 5 on Active Rain

Help understanding the mortgage short sale process -- Part 3 of 5 -- Phoenix Foreclosures

SHORT SALE ITEMS YOUR MORTGAGE LENDER WILL HELP PAY (Phoenix Foreclosures)

(HELP #6)

Read part 2 of 5 on Active Rain

The lender(s) will usually pay for the following costs associated with the mortgage short sale process:

• Escrow fee (homeowner’s half)
• Owner’s title policy
• Mortgage Recording fee’s
• Short sale reconveyance fee
• Overnight mailing fee for the payoff
• Real estate property taxes and prorations
• Real estate commissions
• HOA dues and fee’s

If the HOA has placed a lien on the property, some mortgage lenders may allow $1,000 to be paid towards this lien to complete the short sale. We will negotiate with the HOA to reduce their fee’s and accept this money as payment in full. We will help remind the HOA they will receive nothing if this home goes to the foreclosure process and is sold at the trustee's sale! The short sale process will help them!

Mortgage lender will NOT HELP pay for the following short sale costs (see NOTE below the list):

• “buyer” closing and mortgage costs
• home warranty
• buyer’s mortgage appraisal
• buyer’s inspection
• any repairs to the short sale

NOTE: as of 2008 short sale process rules have changed. How? Mortgage lenders are now generally willing to help pay for the first two items on this list. Mortgage lenders are now more willing to negotiate details regarding a short sale. The bottom line is: if the mortgage lender wants the property off their books they will negotiate during the short sale process! Ask us how any recent changes can help the short sale process.

HOW WE HANDLE LOSS MITIGATION DEPARTMENTS

(HELP #7)

We will call the Loss Mitigation Department at the mortgage company and ask how long the short sale approval process will take once a complete short sale package is received. We fax all the short sale information discussed above. We include a fax cover page stating "this is a NEW SHORT SALE PACKAGE." We also request that they process an interior BPO, or Broker Price Opinion (this is an advanced form of a comparable market sales report).

The more complete the short sale package, the greater the homeowners chance for success in the process. The Loss Mitigation Department will be more willing to help us. There is only ONE opportunity to impress the mortgage lender with a strong, complete, and well organized short sale package! It's important that we do this process correctly the first time.

Once we have sent in your short sale package there is usually a one week wait (minimum) before calling the mortgage lender to learn which loss mitigation specialist is handling the file. The Loss Mitigation Department at the mortgage lender is busy -- if not highly overworked. Loss mitigators usually each have between 80-300 short sale files on their desk to process at one time. The loss mitigation specialist will be our contact for the duration of the short sale process. Our goal is to help the lenders short sale mitigator to work with us in the process. How? We provide as much short sale information as possible. This will help them with the short sale process and will ultimately help the homeowner. We show the short sale mitigator our expertise by sending them a complete mortgage short sale package and by being organized. We let them know we understand how busy they are with short sales and appreciate the valuable time they are spending to help the homeowner’s short sale process.

COMMON SHORT SALE PROCESS MISTAKES

(HELP #8)

3 common mortgage short sale process mistakes

1. Sending in a low-ball short sale offer that we know the mortgage lender will not accept.
2. Unfamiliarity with the short sale process. Mortgage lenders are busy and don’t have time to explain the short sale process. We show them how we know the process.
3. Not determining the intentions of a second mortgage lender, if one exists. Second mortgage lenders have the right to disapprove the short sale so we work quickly to learn their requirements.

Part 2 of 5 on Active Rain

Part 4 of 5 on Active Rain

Help understanding the mortgage short sale process -- Part 2 of 5 -- Phoenix Foreclosures

Help understanding the mortgage short sale process (Phoenix Foreclosures)

WHY HOMEOWNERS SHOULD DO A MORTGAGE SHORT SALE

(HELP #4) Read part 1 of 5 on Active Rain

A short sale will be reported as “loan paid NOT as agreed” on a credit report. The number of 30, 60, and 90 day late mortgage payments before the loan payoff does not help and can be more damaging than the short sale process.

The foreclosure process will affect the homeowner’s credit report for between 7-10 years. A Deed in Lieu of Foreclosure (owner signs the house over to mortgage lender to avoid the foreclosure process) has less of an effect on their credit then a foreclosure. However, the mortgage short sale has the least affect on their credit. To summarize:

1. Foreclosure process (most effect on credit)
2. Deed in Lieu (less effect than foreclosure)
3. Short Sale process (most help preserving credit)

Many homeowners who participated in a short sale process were able to purchase another home within 2-4 years, depending on other credit issues. Additional benefits of a short sale to the owner include:

• helping get the short sale home sold and mortgage paid off
• mortgage lender accepting a discounted payoff from the short sale
• no out-of-pocket cost for the short sale process to the owner (mortgage holder will help pay all short sale costs)
• no worry about house and mortgage after the short sale

ITEMS YOUR MORTGAGE LENDER WILL PROCESS

(HELP #5)

Here is a list of items needed by most mortgage lenders to help complete the short sale process:

• Letter of authorization allowing us to help process the short sale on your behalf
• Hardship letter to inform how you have been affected by:
  o Family illness or injury
  o Job relocation
  o Job loss or significant income loss
  o Divorce or split of domestic partners
  o Adjustment in mortgage payment or unforeseen increase in living expenses
  o Anything else life can throw at a person
• 2 months pay stubs for each homeowner on the loan
• 2 months bank statements, all pages, for all accounts
• 2 years tax returns
• Comparative Market Analysis
• Listing agreement
• Short sale purchase contract and all counter offers
• Buyer’s LSR (loan status report) for the short sale process to show prequalification for purchasing the property
• Short sale settlement statement from the title company showing how the mortgage lender’s net proceeds are affected after all short sale costs are paid

Read part 1 of 5 on Active Rain

Read part 3 of On Active Rain

Help understanding the mortgage short sale process -- Part 1 of 5 -- Phoenix Foreclosures

HELP UNDERSTANDING THE MORTGAGE SHORT SALE PROCESS (Phoenix Foreclosures)

(HELP #1)

How to understand the process: a mortgage short sale is an arrangement between the homeowners and the mortgage lender(s). A short sale occurs when the mortgage lender or investor accepts less money than owed and considers the debt “paid in full,” thereby permitting the sale to occur. The difference between the amount owed and what the mortgage lender collects on the short sale is known as the deficiency. Mortgage lenders in other states have tried to obtain judgments for the mortgage short sale deficiency and others have forgiven it. Fortunately, Arizona is an anti-deficiency state which will help to preserve your financial health after the short sale process. See legal implications of the short sale process

Note that the word “mortgage” is used in this information but “deed of trusts” are used in Arizona.

WHY DO MORTGAGE LENDERS ACCEPT SHORT SALES?

(HELP #2)

• The mortgage is in arrears
• Property condition is poor
• To help a homeowner with hardships defaulting on a mortgage
• The area or neighborhood has depreciated
• The mortgage lender’s shareholders are concerned with excessive defaulting mortgages; By accepting the mortgage short sale process, the mortgage lender can help themselves by avoiding a lengthy, costly foreclosure process. A foreclosure results in the mortgage lender owning the property (known as real estate owned or REO). REO’s are a liability, not an asset; too many liabilities will cause any business problems

HOW LONG IS THE MORTGAGE SHORT SALE PROCESS?

(HELP #3)

How long will the process take? This is a complicated question that depends on both the homeowner’s and mortgage lender’s situations. The first thing consideration during the short sale process is whether the homeowner has received a Notice of Default (NOD). NOD’s are sent to homeowners 90 days after missing their first mortgage payment. This process ends with the house being sold at a Trustee’s Sale 90 days after the homeowner receives a NOD (unless payments are made). Mortgage lenders can delay the mortgage foreclosure process if the homeowner has a valid contract for sale on the home.

Average short sales can be anywhere from a 2-6 month process from the time of the accepted purchase contract. It is unclear why or how the mortgage short sale process takes that long, but the most common answers seem to be:

• increasing numbers of short sales are keeping mortgage lenders very busy
• mortgage lenders who are already losing money are unlikely to hire additional help to process short sales

A short sale can be processed in less time, but is dependent on the mortgage lender and how quickly they respond and process it. It’s definitely important to get the mortgage lender all short sale information they require. As short sale process specialists we constantly follow up and help the mortgage lender process the file.

Part 2

Previous post about Tempe foreclosure

Real estate short sales increase to 22.8% of the total Metro Phoenix foreclosure sales in July 2009

22.8% of the 6,289 Metro Phoenix foreclosure sales in July 2009 were real estate short sales.  The remaining 77.2% were REO property  (bank owned). Total sales in July 2009 (including normal sales)  were 9,128.

The chart indicates that REO sales peaked in May of 2009 with 5,862 sales.  When expressed as a percentage of total Metro Phoenix forealosure sales, you can see REO property has been on a steady decline since January 2008 (and even before that).

In contrast, real estate short sales have be gaining momentum since January 2008. They began with a mere "6" sales and have blossomed to 1,435 sales in July 2009.

Real estate short sales can provide excellent purchase opportunities.  However, anyone pursuing them should be prepared for a two to five months close of escrow as they wait for the lender(s) to agree to the purchase amount.

Real estate short sale -- short sale problem lender-- EMC mortgage Corp.

Stubborn lenders can get in the way of completing a real estate short sale. EMC Mortgage Corp. turned out to be such a short sale problem lender.

I had five offers on a real estate short sale in the Glendale, Arizona area from May - July 2009. The offers came in over 2.5 month period.  Each offer was rejected by EMC Mortgage Corporation. The idea of a real estate short sale is to stop foreclosure and reduce the impact on the owner's credit. It also helps the lenders by reducing their foreclosure costs and limiting the build up of bank owned properties acquired at the trustee sale. Of course, the completion of a real estate short sale to stop foreclosure requires the help of a realistic bank or lender.

Lenders base their opinion about the value of a property on what's known as a BPO (broker price opinion, or a scaled-down version of a full-blown appraisal). EMC Mortgage Corporation received a BPO from a local realtor that convinced them this property was worth between $100,000 -- $115,000.  They received this BPO in late May 2009.

First of all, the BPO came in way too high.  I found between six and seven properties within 1 mile with an average selling price under $85,000. What turned EMC Mortgage Corporation into a short sale problem lender is their refusal to evaluate more recent comparable market sales.

Each of the agents submitting offers for their clients did their own comparable market sales and submitted offers under $85,000 for this real estate short sale.  My sellers promptly agreed to each sale and I forwarded the contracts to EMC.  Each time EMC Mortgage Corporation counter-offered with a sales price of $99,000.  Each time I forwarded recent comparable sales that indicated $85,000 was a top notch price for that house.

My comparable market sales were indisputable and I wanted to stop foreclosure on my clients. EMC Mortgage Corporation held on to that erroneous and high BPO from late May 2009 and refused to look at the more recent sales. The fifth and final offer came three days before the scheduled trustee's sale.  This offer was for $80,000.  EMC mortgage Corporation rejected the offer and foreclosed on the property.

I am confident this property will sell for less than $85,000 when it switches over to the REO property division of EMC Mortgage Corporation. EMC mortgage Corporation gets my vote --and the vote of my clients -- for a short sale problem lender.

Metro Phoenix foreclosures -- real estate short sale listings continue to rise -- May 2009

Real estate short sale listings surpassed REO property listings (bank owned) for the first time in the Phoenix area real estate market. It appears more people are trying to avoid foreclosure and protect their credit rating as much as possible.

The chart shows 15,630 Metro Phoenix foreclosures to begin May 2009.   6,600 (42.2%) were REO property and 9,030 (57.8%) were real estate short sales. Although the total number of all Metro Phoenix foreclosures listed on the market dropped 4,326 from April 1,  short sales have been increasingly popular over the last 12 months.

Many realtors and potential buyers have tried to avoid real estate short sales over the last few years.  The reason: the excessively long time it takes to close a deal.  I've written about this many times on this blog, but the average time it can take to close a real estate short sale is between three to five months -- compared to 30 to 45 days for a normal sale.  There is no logic to this lengthy process, except to say lenders have been very busy handling the workload.  Also lengthening the process: various levels of lender management approvals, different opinions about property values, buyers and realtors not submitting all the forms required by the lenders, and different opinions about acceptable levels of losses on loan portfolios. 

Lenders claim to be working to shorten the process.  They are aware of the growing number of real estate short sales and are trying to manage their losses on the front-end -- as opposed to the back-end (the foreclosure process and trustee sale).