This week Bruce Norris joined once again by Lance Martin. Lance is broker/owner of Coldwell Banker Pioneer Real Estate. He has been in the business since he was 19 and is usually involved in short sales and REOs.
If you look up the word short sale in 1985, Bruce said he is not sure you would find it anywhere. California does not have those a lot. There certainly was the market for it, and Lance wondered how many properties did one truly have that were upside down in 1985. This is a very unusual segment of time that we have right now. Right now everyone knows what a short sale is, but that is really not the California that Bruce and Lance grew up in. Lance is also not sure everybody knows what a short sale is because he did do a lot of short sales in the 90s. At that time the equity spread was not as severe as it is now. However, the short sales of the 90s were certainly not the same short sales that we are doing today or even 4-5 years ago. Almost everybody out there, no matter what kind of property they have, is a candidate for an approved short sale when they bought their property, whether it was owner-occupied or non-owner occupied. This was not the case in prior years. The criterion was fairly good, and now it is crazy.
Lance said about some of his landlords on his property management site doing short sales that this was not really an option, even four or five years ago. They were not granting short sale approvals on non-owner occupied properties. Bruce said he has not heard of too many investors get them, but this is now prevalent. Lance said he does not even think the hardship is as much of a requirement as it was in prior years. Investor properties with multiple rentals are being approved for short sale transactions all day long. What is interesting about the hardship is we went from stated income to stated hardship. There was a feeling of, “Okay, what do we need to say? Oh yeah, that’s us.” It used to be that your hardship letter actually had to have some type of hardship, whether you lost your job, had health problems, or had been relocated. Now the hardship is basically writing a letter saying you got caught up in this real estate market the last few years and that is the hardship. In this case, this means everybody qualifies.
Bruce said if he was a buyer, made an offer on a short sale, and spoke on what the process was like two years ago, he might not get an answer until six months from now. This would make him never interested in making a second short sale offer because he would automatically assume he would be long gone by the time the answer came down the pike. Comparing doing a short sale today to doing one a couple years ago, you really don’t see much difference. It takes 6-10, maybe even 12 months from start to finish for the whole process. We may have shaved a month or two off, but that’s about it. Lance said he has one going on right now that took almost seven months to get an approval, when before it may have taken 8-9 months. This has soured a lot of the consumers and frustrated a lot of the owners since they want to know whether they are going to be able to get out from under the property. The buyers do not want to have to wait 7-8 months not only to close escrow but also to find out whether or not they will accept the deal. Their whole life is on hold waiting. This is also true with the real estate community. You take a short sale listing, and you were maybe going to be paid 10 or 12 months ago, but there is a big maybe there.
You really do not have a lot of choice if you are a buyer in the marketplace. The standard sales are a small percentage, and the REOs are there, but the larger percentage of inventory on the market right now is short sale. Bruce said as both a lender and a servicer, the part that is hard for him to understand is why there is a holdup. He wondered if we are not being able to talk to somebody who has authority to answer the question. Lance said this might be some of the holdup, but to be fair some of the blame should be pointed toward the real estate community. It is really easy for buyers, sellers, and agents to put 100% of the blame on the banks, but about 50% of the delay and the timeframe is because of the banks, the investor, and the process they have to go through. A lot of these delays are self-inflicted. Several negative factors include realtors not really understanding the process and taking short sale listings, banks requesting certain documentation and the agents themselves taking way too long to check the box and get the documentation out, and even the sellers taking way too long to put the packages together and getting the information that the bank requires. About 60% of our problems are self-inflicted. You have the sellers not doing what they need to do to get the documents or the agents doing a poor job working with the bank.
If you are a client who is upside down and a candidate for a short-sale approval, there are different steps to go through in the process. The first thing to do would be for the seller to sit down with the client and go through what will be required. This includes financial information, bank statements, tax returns, and hardship letter. You will also need an asset balance sheet and give them a profit and a loss. A lot of sellers do not want to do this, and some do not want to do it because they are providing documentation which might be contrary to the document they initially provided when they took out the loan. This could be a little problematic. Lance said he is also advising the sellers of the timeframe and to be prepared for this to take 6-9 months. If you are not prepared to stomach that, then you are not going to do well for the short sale process. Obviously there are credit implications; and generally speaking it is going to be much better for sellers to do a short sale now that the property is going through foreclosure. Most of Lance’s clients who have come to him on a short sale basis are behind and have not made payments for months. Lance said as a seller he would also prepare the client to write a check. Not all the short sales are approved with the seller walking away completely scott free without having to write a check. Lance would prepare them for when they get to the close of escrow, the bank or association will require the client to write a check. Somewhere down the line a seller does have to come up with some money. If Lance’s client is not prepared to do this, then he is probably not going to take the short sale at all.
The checks written would possibly make up some of the principal. You may have a second trust deed, and the bank may come back, approve it, and say they will write off a certain amount but they need the client to give them a check for another amount. They may also possibly want you to make payments on a certain amount for a certain amount of time at 0% interest. There are thousands of different scenarios that you can run into with the short sales, especially with the second trust deed holders. Bruce asked if he had a second, and that second was part of a purchase money transaction, and this is discounted, the IRS really doesn’t have a way to bill you for forgiveness of debt. Lance said this was correct. There was legislation passed a couple years ago that is in effect through 2013, possibly longer, which effects if the lender is approving a short sale going through the system, there is no deficiency and you will not have to worry about the 1099 coming through the system for debt forgiveness. There is some confusion on this since this was not always the case. However, with the way it stands right now the worry of the 1099 coming in for debt forgiveness from the IRS is not on the table right now. This could apply to whether it was purchase money or owner-occupied with a refi. The old rule used to be if it was purchase money, then you were basically exempt from that. However, this was not necessarily the 1099; this was the lender coming after you for deficiency. However, with the new rules in play, as far as having to pay tax on the difference with the 1099 or debt forgiveness, this is all out the window right now. Bruce said this is only good until January of 2013, although Lance said it would not surprise him if it was renewed.
Bruce is a servicer of a lot of loans, all of them being private money, and when he hears comments about the servicers’ interest and the lenders interest sometimes being in conflict, he has a hard time understanding this. Bruce wondered if this was true and what conflict there is. Lance said this is something you hear a lot, but he is not certain. Lance described this as one of those inside baseball things that he has been trying to figure out for the last few years. A lot of times you will hear people ask where the disconnect is. Servicers are pointing fingers at mortgage insurance companies or at the lender. Lance thinks there were some incentives put in place with some of these proposals over the years that actually incentivizes the servicers to keep these in the process longer. However, Lance said he was uncertain about the problem this would create on a day-to-day basis.
Bruce said he has heard of transactions where someone did a short sale, and being induced by the lender by getting sometimes $35,000 to do a short sale. Lance said Chase is probably out in front on this. Lance has had clients come in with letters that initially you would look at and think they could not be accurate. However, they were actually indicating that if they cooperated and were interested in doing a short sale, they would pay them $10-$30,000 at the close of escrow. Chase has been really aggressive, and to Lance’s knowledge this program is still out there. Lance said he has had at least two where Chase called him with a seller on the other end of the telephone, introduced him to the seller, and said how at the close of the escrow the sellers get $30 grand and if he could help them out. This is something they are aggressively pursuing. Bruce wondered what the rationale behind this is.
Lance said he personally thinks in a lot of cases this a way for Chase and other banks to clean up some of their bad portfolio. The lend-agreeing robo-signers who are still out there probably have a way to identify the files where the paperwork is not exactly perfect. Lance wondered how easy it would be if you could identify that, go to the people, give them money to pump them into a short sale, and in the long run consider how much of a money-saver this is for the banks. Now you have a brand new set of loan documents, a brand new deed of trust, and all the t’s are crossed, i’s dotted, and the lend agreeing signature is not on them. Lance has heard different things from different people on the street about there being a targeted effort in that regard, not only with doing the short sales, but also with doing refis. You may have a bad loan with banks like Bank of America, or maybe the paperwork is messed up. You get the phone call from the bank who tells you to go ahead and refi it, and they will drop your rate a point, no cost, appraisal, or escrow. What happens when you do this is you get a brand new set of loan documents that they are probably not going to lose. Now they have them in hand, and if there was a problem with the loan documents previously, it is no longer an issue. The lender is not usually doing things that are not in their interest, the amount listed prior is a lot of money to give away.
Bruce wondered if the lenders have concluded that a short sale nets them more than any other method of getting rid of an upside down property. Lance said he does not know if they have concluded this or not. If you looked at the overall time it takes, Lance generally would think that it would not, but he knows the general rule is it is financially in the lender’s interest to do a short sale as opposed to going through the REO process. The part that does not make sense is that if that were truly the case, you would think they should be able to speed it up a bit. Maybe just the sheer volume of properties in the system is just such a magnitude that it is challenging.
Bruce wondered when Lance receives a listing that is going to be a short sale candidate, is there a flurry of offers and if it is at that point he attempts to see what the lender will do or if he makes the attempt prior to the listing. Lance said it depends. B of A has a good program out there and is trying to do things like a pre-approved short sale process where you can do a little bit of the process in advance. Generally speaking, however, you list the property, and with the inventory being as low as it is in today’s market you are going to get offers. Lance takes them into the seller and will pick the one that is highest and best and the one they think they have the best chance of closing. They will then get this into the bank, whether it is through their portal system or however method you need to get it submitted to them. You then hurry up and wait and hope that the buyer is going to stick around through the process and that it will not take 6 months to even get an approval. On the opposite side, if you finally do get an approval and you do have a buyer that is still ready, willing, and is able, you would now think that the buyers would take that six months to get in all their loans and get everything good and ready to go. Lance has a couple going right now where he had the short sale approval with the bank more than 90 days ago, and now the buyer is struggling. They had 9 months to get themselves wrapped up, packaged, and ready to go, and they apparently did not do anything in that 9-month window. They waited until they got the approval process.
Bruce said they are starting to see in the hard money loan business a very big increase in short sales that are being purchased by investors. It would seem to Bruce that they were not the original offer, but an all-cash secondary offer that came in after the fact. Bruce wondered if that is what Lance is seeing happen. He said he does not know if he can see a lot of this right now, but he does think there is a huge opportunity there. Specifically, there are some banks that are now allowing substitute buyers. This means someone would be in escrow with someone else, and it takes 9 months to get an approval and to get the loan that someone just gave up. Up until last summer, you would have had to start the entire process over again. Now, the banks are saying that is silly and they have the short sale approved at, for example, $150,000 and the property is put back on the market; three days later you have an investor who comes in with all cash. They are basically letting that new buyer start the process or more or less substitute for the buyer who was originally in there. There is opportunity here. You do have to do your homework, keep an eye on the MLF and develop the relationships.
Lance thinks there are opportunities for investors and traditional owner-occupant buyers to get some good deals on the short sale if they have the patience and don’t have to move into that house to have a birthday party 30 days from now. It is like a pipeline or a factor. You load it up, and a certain percentage of them will work.
Bruce wondered what some of the reasons are that short sales get denied even now. Lance said there are still the value issues. You get an offer at, for example, $150,000, and the appraisal comes in higher, so there are struggles with this. This is one of the biggest challenges Lance has seen in that they are just not able to get the value agreed upon. If you are a buyer, the house is worth$150, and you know you are going to have to wait 9 months, you are not going to offer $150. You are instead going to offer much less than that. The people in charge don’t care and are going to accept it. The seller does not care if the short sale is $10,000 or $110,000. They are not going to be paying taxes on the difference on all the rest. Then you get the cold flap of reality when the bank goes out and does their appraisal. Most of Lance’s experience in his office with transactions failing happens when the appraisal comes into play when the buyer is not willing to meet the bank’s appraisal, whatever it happens to be.
There are other issues. Some of the issues used to be seller issues. The seller had money or the bank wanted the seller to come in and write a note to pay off a little bit of the second over time, but the seller said no. There is not as much of this going on right now. The bulk of it really is value arguments. Bruce wondered if loan mods are qualified in the same manner and if they are increasingly easier to get. Lance said he is not sure since they purposely stay away from these in the office. What he does know is with the information he is seeing it appears that the loan modifications are just playing such an insignificant role in the overall numbers. The ones that are being done according to data Lance is receiving from Bruce is the percentage of failure is high, and people fail half the time.
When Lance is doing a short sale, Bruce wondered about when somebody funded an FHA loan back in 2009 and is now upside down, the lender has a kind of guarantee on their loss. Bruce wondered what their inducement is to cooperate with a short sale. Lance said this is interesting and that the guarantee on their loss applies in regards to an actual foreclosure. When you are dealing with the short sale process where the property has not gone through a foreclosure, the procedure behind the scenes including how much of the loss is insured and who is taking the loss is battled out between HUD and the originating lender. A bigger thing is that only a month or two ago some new legislation came out that is basically going to force these banks to give sellers answers 60 days from the time of the short sale being pushed forward. The real estate community was cheering it, and if you knew anything about the process you would think it was fantastic since there is now legislation in place that will force the lenders to give an approval and/or denial within 60 days. Everyone cheered it and thought it was great, but then they started thinking about it a little bit more. If you really think it through the concern is an obvious one: Now the lender, by law, has to give an answer within 60 days. However, if they are not prepared on day 59 to give an answer, then what will the answer be? The answer is going to be a denial. Now, in hindsight, no good loss will go unpunished, and what we thought would be good laws for the industry to push the short sales through the pipeline faster will probably only result in more denials.
To find out more information on Lance’s business, go to www.cbpre.com.
For more information about The Norris Group’s California hard money loans or our California Trust Deed investments, visit the website or call our office at 951-780-5856 for more information. For upcoming California real estate investor training and events, visit The Norris Group website and our California investor calendar. You’ll also find our award-winning real estate radio show on KTIE 590am at 6pm on Saturdays or you can listen to over 170 podcasts in our free investor radio archive.