The problem today is that there are so many foreclosure above fair market value. Core value of Real Estate is determined by what it will rent for. The prevailing thought is that rents will decline. As much as lenders lower interest rates to prop up prices the march of people walking away from properties continues.

A second thought is that since lenders are getting government bail outs they are less inclined to sell for cheap. They are thinking and maybe hoping to have the loans “bought” by the government. That process is complicated, but bought is a good term.

If you are buying a short sale or foreclosed property you are in most cases today paying what will be a going rate for the property of few months or a year from now. Prices are declining. You can buy fifty cents on the dollar and resell for a profit depending on what the bank is owed. Some foreclosures are still for seasoned loans with equity. Many properties are not selling period, so they do end up at auction.

All of that being said, and of course I could go on and on and on a deal is a deal if it makes sense. The best way to judge is if the property will rent for the mortgage payment, as some people are saying today, maybe a little less.

If you are short selling you need to be listed at what the bank will take which is in many cases eighty cents of the loan amount. The lender is interested in what they will “net” on the HUD1. For those agents thinking there is a commission involved remember all commissions are negotiable. I have been asked more than once to kick in a portion of, or all of my commission to make a deal work.

I have given up portions and in some cases only covered my costs. It’s all fair and legal. You are asking for a lender’s money. There are no guarantees. Yes a lender can go after a seller tooth and nail to prove a point. They have attorneys on retainer.

If the property sites, or seasons on the market at the given price of roughly eighty cents on the dollar the agent can lower after a couple of weeks, then again until it sells. The bank will to an independent Broker’s Price Opinion, BPO so you need to show cause including a listing history why it didn’t sell.

I could go on and on and on as most of you know. get an attorney’s advice, then get an agent who has done a bunch of these lately. Avoid the “one stop short sale shops.” They are usually buyer based investment groups who will drag the whole process out to get a good deal. If it goes into foreclosure they know another one will come along. It’s shady, and in most cases illegal in the State of Washington.

I mean as long as we’re rambling, why not me?

Ardells comments are right on. I am still likewise seeing people who are doing refis or anything else with appraisals above REAL market by 5%-10%. Banks are probably doing them in such a way to justify the refi.

The lender is managing risk. Each buyer comes with a different risk level. If someone has 40% down and an 800 credit score and lots of assets beyond income, the appraisal may be “pushed”, if not initially, then on appeal. If the buyer is exactly 20% down with a 720 credit score, little other assets and a salaried job…often the appraisal is coming in low, especially if it is the nicest house in the neighborhood due to having been remodeled, and little chance on appeal.

The lender isn’t really looking at the house as much as their investment in that house. They are determining and minimizing their risk factors.

http://www.raincityguide.com/2009/01/21/zestimate-vs-sold-price/

Ardell said…

“The appraisal industry is undergoing dramatic changes. Oddly I am seeing some properties over-appriasing by as much as I am seeing others under-appraise”.

Makes me wonder if it’s the “house” that is getting appraised…or the “buyer”.

I don’t know why anyone would do a short sale any other way.

Let me know if you have any questions.

The appraisal industry is undergoing dramatic changes. Oddly I am seeing some properties over-appriasing by as much as I am seeing others under-appraise.

As for Zillow, I can easily tell you exactly how Zillow is doing compared to closed sale prices, but I cannot see what those closed sales appraised for, as the appraisals are not of public record. You would have to assume that if they closed, they also appraised, but that is not always the case.

More and more in this recession, as in the last recession, buyers may end up increasing their downpayments to compensate for low apprased values.

I will evaluate sale price vs. Zillow value in a blog post, and then post the link here for you.

Hope you’re well. Good comments above, unfortunately, I missed them before I posted my comments above. I think you and Mukoh both make good points.

In re-reading my post I noticed a mistatement. I said “Under our deed of trust statute the lender may conduct a non-judicial foreclosure in order to regain possession of the property.”

This was incorrect because the lender doesn’t want “possession.” Rather, the lender wants to auction the property as soon as possible to get the proceeds from the sale or, if there are no bidders, to regain possession of the property so it can sell the property on the open market.

I have worked with distressed properties my entire life in Real Estate since 1972. We are in strange times. Banks react very diferently today from the way people have been taught.

Jill banks routinely go after assets if they have a clean loan, and a buyer they can get a judgment to collect against. Want to look up Mccourts case? How many banks are in there?

THey do not do it in typical situations with regular joe the plumber owner as it is not worth the fees and times to collect.

Be very careful about what you think you are learning from the internet. You need legal counsel and an advocate. Be very careful as either a buyer or seller of a short sale. I’m going to include foreclosures in this as well.

There is a ton of liability here. Your situation and circumstances are unique.

How close are appraisals coming to Zillow et al. estimates these days for closed sales? Any ideas?

Those are very good questions and should give readers some insight to why professional advice is a good idea. The link I posted earlier to the IRS page has some useful information that will shed some light on the answers. Unfortuately, I don’t have time to give a proper response to your questions.

You say “short sellers”. Is it a non-issue if the debt foregiveness is via Trustee Sale or Judicial Foreclosure vs. a Short Sale? Is there a distinction regarding the potential taxable income consequence of these three types of “sales”?

Is there a difference if the owner refinanced and the loan in place at time of foreclosure is not the original purchase money loan? Is there a difference if that refinance was a “cash out refi” obtained many years after the original purchase loan?

1) “Do you think that it would be better for the foreclosures to end up in a final users hands vs. an investors hands? If the bank is willing to give an investor a comparably “good deal”, why not just give it to the homeowner at that rate?”

I once saw the lienholder sell the property to the current “defaulted” owner, at the price they would sell it for at foreclosure. But it is rare, very rare, and there were extenuating circumstances. The problem with answering “better” is that from the standpoint of young people, lower home prices generally is “better” for the future. At my age, I hope for a better tomorrow for my children and grandchildren, so yes, I would have to agree that providing a better means for “end users” to buy these would be a good thing. But investors will simply lie, and pretend they are end users, or find “straw” buyers. That is one thing we learned from the last few years.

2) “Who is the Leo Nordine of Seattle?”

LOL…have to laugh at that one. How would you know that I know who Leo Nordine is? I once bumped him on a 72 hour clause, somewhat unheard of at the time. Matt Steel…perhaps? Still, aren’t the Matts and Leos primarily selling to investors? One thing that The Tim and others fail to recognize in the “dim” 4th quarter “sales” is that the Leo’s and the Matt’s of the world are selling approximately HALF of the property, outside of the mls system. Not sure if that’s true for Leo, but I’m pretty sure it’s true for Matt and others like him. Most people are not willing to assume the risks, EconE. They need their home inspection and resolution of the home inspection. “End Users” often need the process, that investors forego when buying at foreclosure. Might make more sense for a non-profit group to buy these at foreclsoure and make them available to end users. Perhaps “affordable housing” groups should…and yet, just aren’t interested.

3) Finally. Seeing that the banks are (seemingly) dictating the commissions for REO’s for the buyers agent…(Am I correct in assuming that they are lower than normal?)…”

It’s a non-issue. The average “savvy” home buyer pays less than the banks do. It really is a load of crap.

4) “I’ve seen 500k 1BR condos in L.A. bought for 289k at auction and then relisted for 499k.”

Now tell me if it sold and what it sold for. The ones I am seeing here do not have that kind of spread. There are costs over and above the price paid at foreclsoure. I am seeing the “end user” price to be substantially less than fair market value, in many cases, even though that price is higher than someone paid for the property at the foreclsure or trustee sale.

First and foremost, either one has a dramatically adverse effect on the borrower’s credit score. I read just recently that it immediately knocks 200 points off you score (although such a broad statement should always be taken with a grain of salt). The end result is that the borrower will have a very difficult time obtaining new financing (of any sort) in the future. Both will continue to appear on the credit report for at least 7 years. A mortgage expert could chime in on whether foreclosures last 10 years.

As for continuing personal liability, most home loans in Washington take the form of a deed of trust (DoT) and a promissory note (as opposed to a mortgage and a promissory note). Under our deed of trust statute the lender may conduct a non-judicial foreclosure in order to regain possession of the property but, by doing so, the lender gives up the right to seek a deficiency from the borrower if the property brings less than the amount owed at the foreclosure auction. The benefit to the lender is a much speedier and simpler process than that required by a judicial foreclosure (i.e., no lawsuit in superior court needed). If the lender wants to go after the borrower (e.g., if it believes the borrower does, in fact, have substantial assets), it can always skip the non-judicial foreclosure and proceed with a judicial foreclosure which permits auctioning of the property and then a claim against the borrower for the deficiency. It just takes a lot longer and involves additional redemption rights.

If properly conducted, a non-judicial foreclosure of a first position DoT wipes out any junior DoT’s (as well as many other sorts of junior interests) in that those junior DoT’s can no longer execute against the property (i.e., the collateral) so as to recover the funds they lent the borrower. However, the junior promissory note continues to be binding on the borrower and the junior lenders may proceed in court against the borrower for breach of the promissory note to recover the borrowed funds.

A short sale involves the lender agreeing to accept a reduced amount in order to release its lien on the property. Traditionally, lenders required the borrower to sign a new promissory note whereby the borrower agreed to repay the deficiency to the lender over some time period. These days more lenders are agreeing to waive this repayment requirement but the borrower should be careful to make sure whether this is the case in his or her transaction. Thus, whether the borrower will face continuing financial liability if he or she completes a short sale is a very significant factor and the seller should make certain he or she understands what will happen in his or her transaction before agreeing to complete a short sale.

Is there a chance that you could have an RE Atty do a guest post on SB regarding the differences between short-sales and foreclosures and the varying consequences for the borrower? Perhaps even compare and contrast different states, such as WA vs. CA as many of your price/time lag/etc. comparisons seem to be between these two states.

Ardell…

great posts. One question…do you think that it would be better for the foreclosures to end up in a final users hands vs. an investors hands? I read an article recently that said that these flippers on the way down actually slow the correction and maybe do more harm than good. I know business is business and what they are doing is legal…I’m just thinking logistics and what would be better for the “big picture”…economically speaking of course. If the bank is willing to give an investor a comparably “good deal”, why not just give it to the homeowner at that rate?

Who is the Leo Nordine of Seattle? I think that the RE agent that focuses on finding their clients foreclosures, rather than buying them for themselves and trying to flip (I see lots of this in L.A.) will end up being a top producer…and the word of mouth advertising would be invaluable.

Finally. Seeing that the banks are (seemingly) dictating the commissions for REO’s for the buyers agent…(Am I correct in assuming that they are lower than normal?)…if they are in fact low…can a potential buyer “tip” his/her agent if the agent truly finds them a good deal?

I’ve seen 500k 1BR condos in L.A. bought for 289k at auction and then relisted for 499k. I personally would rather give a Realtor 5-10% tip for finding one of those deals.

My understanding is that sellers will owe taxes on any amount “forgiven” by the bank, so it is hurting their own finances to damage the house if it lowers the price. Maybe they donot realize they still have some skin in the game?

Turns out I have a conflict for the meet-up tonight, but my lurking spouse is planning on attending.

I’m sure you know that most attorneys do not agree with one another on many points regard short sale vs. foreclosure. The “antideficiency” wording is now up to interpretation due to recent case law, and that case did not involve the 2nd lienholder being the same as the 1st. So for many…there is no case law for even an attorney to rely upon.

There is a difference between a “Trustee Sale” and a “Judicial Foreclosure” and the remedies available depending on which is used. Many states in this Country do not operate via “Deeds of Trust”. The tradeoff is supposed to be that the lender foregoes the ability to pursue deficiency, if they regain possession via Trustee Sale vs. Judicial Foreclosure.

The #1 issue for anyone who cannot make their payments to consider, is the hidden agenda of those who offer to assist them. An agent makes nothing if you go forward using the Trustee Sale or Foreclosure (lienholder’s option; not owner’s option). An agent makes a commission if they can talk you into a short sale.

Is there an attorney site or blog that outlines the consequence? Can’t this matter be dealt with generally in print somewhere that is available for all to read?

I am aware of several homes that were purchased at foreclosure and are now on market by the person who bought at foreclosure. The owners are not banks. Many are exceptional “values”. Where do we put these homes? Are they not the same as “bank owned” in that they are homes for sale that have gone through foreclosure, and re-entered the market immediately following the required wait period?

I would lump most vacant homes on market at asking prices that are substantially less than 2008 assessed values, in the same boat, whether bank-owned or not.

I agree, the low number surprised me too. As Ardell inferred, there may be a lot more REO homes that re listed without the keywords in there. And some are homes that banks are just sitting on. Also, I am aware that some lenders sell the REO homes on their own without listing them on the MLS.
So, how many REO homes are truly out there on the market?

Offer + Acceptance + Consideration = Contract.

I’d send in my offer with a check (appropriate “consideration” amount), and if there was any foot dragging on the part of the seller, the next correspondence they would receive would be notification of a lawsuit naming the owner, the agent representing the sale and the bank.”

———————

The answer to this situation isn’t found in contract law. There is an acceptance (your manifestation of an intent to be bound to the seller) and there is consideration (your money), but there isn’t an offer because the seller isn’t manifesting an intent to be bound to a specific buyer. That advertisement serves as a solicitation of offers (then, to form a contract, the buyer would offer, the seller would accept and the consideration would remain the money and the house, respectively).

So, there isn’t redress in contract law because there’s no contract, but it still feels like the short seller in your example is a bad actor. It’s also not simple fraud, because you’ve suffered near-/de minimus/ damages – your time spent putting an offer together due to a bad faith advertisement. The answer lies in advertising law, but I have to stop here because I can’t speak to that off the top of my head. I can fill in the details on that tonight.

These, my comments included, or especially, are opinions. Be very careful of what you think you are learning here. We all have opinions about short sales that are no substitute for legal advice concerning your particular situation.

From reading this thread it seems like there is no point in trying to get a short sale, because the bank will ruin you first. Far better off to just stop paying rent until you get kicked out. At least you get to keep your other assets.

2) The commission promised to the buyer agent is “subject to lienholder approval” and that is why mls members must advise other mls members that the commission stated to be paid, may be less than the amount shown. That is in the commission “field” and the “agent remarks” regarding commission, and a required agent to agent disclosure.

3) Some people “trash” the home because they added improvements since they purchased the home. If they bought and paid for all brand new stainless steel appliances, even new kitchen cabinets, from their own monies or on a credit card, they often take these things out and sell them separately to get moving money. They view these items as theirs, if they were not in the house at time of purchase.

4) On new construction and flip properties that are going to foreclosure, sometimes the sub-contractors break in and take out the things they put in that they were not paid for.

5) Most often the bank will not indicate the amount they are willing to accept until they have an offer. The mls has recently “complained” about agents who list at prices without knowing if the bank will accept that price, but practically speaking the owner and the listing agent have no way of knowing in most cases.

6) No agent is well versed in all aspects of every short sale, as it depends how much the seller owes, how close the property is to foreclosure, how much the house will appraise for, and different lenders will accept different amounts. Some want 100% of current appraised value, which may or may not be 80% or less of the amount owed.

7) Many companies who are hugely successful at getting short sales “done” are using tricks like getting an appraiser to provide a low appraisal, getting a home inspector to say there is a huge problem with the house, and other means to trick the bank into accepting a low offer.

First, the most recent analysis of Obama’s economic recovery plan, that includes adjustments for decreasing tax revenues puts the 2009 deficit at just over $2 trillion. Ouch! Think about that in the context of these two quotes:

“Monetary policy works by creating the environment for a renewed borrowing and lending cycle. This cycle would require that the debt to GDP ratio, which is already at a record level, grow even higher. Would such an outcome really be that desirable when the controlling problem of the U.S. economy is too much improperly financed debt? If the Fed were able to engender an increase in the debt to GDP ratio, this might merely serve to postpone the reckoning of the current debt levels while laying the foundation for an even more vicious unwinding down the road.”

In sum, more debt will only make it worse. The solution? Here:

“Summers goes on to say that the plan “relies on both government spending and tax cuts to raise incomes and promote recovery.” Obama adviser David Axelrod reinforces the notion of economic stimulus: “People need money in their pockets to spend. That’ll get the economy going.”
Will it? We think not. What the economy needed in 1933, and what it needs even more so now, is vast deleveraging: using assets to pay down debt. Like a household with finite income and too many credit cards, there comes a time when the piper has to be paid. Getting more credit cards only temporarily makes the problem go away, and surely makes it worse.”

Unfortunately, the FEDs think they have a really big credit card. They may be surprised to discover the bond market has put a limit on it.

This is not entirely accurate. Please see above comment #36. Rarely does a bank go to court in WA State to obtain a judgement. That’s only done of the bank decides to turn the deed of trust into a mortgage instrument. Most banks foreclose non-judicially which means there is no deficiency judgement.

A second mortgage is a different story altogether.

This is not entirely accurate. Please see above comment #37.

Next I will answer the question as it pertains to short sales.

Short sales are reserved for people who owe more than what their home is worth and MUST sell. If the homeowner did not have to sell, then the assumption is that he/she would continue to make their payments. So the assumption with all short sales is that the homeowner has no other choice but to sell.

Short sales are also reserved for people with NO MONEY. If the homeowner has money, then that’s a different kind of transaction. We call that, “seller brings cash to closing” transaction or, “making your downpayment in arrears.”

With a short sale, the homeowner is going to have to PROVE to the bank that they have NO MONEY. This means the homeowner must show bank statements proving that they’ve liquidated everything in order to make their payments up to this point. There is no fast and easy process to approve a short sale. It takes time.

Ira and Ray have addressed the Listing Agent problem and I can’t stress this enough: They’re both right. The listing agent needs to know several important steps and the above paragraph is one of them.

So what about 401Ks or IRAs you may ask? Well, as I mentioned above, short sales are reserved for people with no money. Aww, we shouldn’t have to make the homeowner liquidate his IRA, should we? Well, would you if you held the note? Someone with assets is not going to receive “Debt Forgiveness.”

If a homeowner has other assets, then the bank will ask the homeowner to sign a brand new unsecured note at closing to pay back the difference. If the homeowner owns another piece of real estate, then the bank will ask for the short selling homeowner to put a deed of trust on the other piece of real property and pay back the short fall.

If a listing agent fails to explain all this to the short selling homeowner, then the transaction could fall apart, wasting everyone’s time. The agent, the seller, and the potential buyer not to mention the people at the bank.

There are, I would guess, a certain percentage of homeowners who have the cash to make up the short fall but don’t want to tell the bank. Realtors, once they know about the extra cash, cannot take part in hiding a material fact from a lender. I have only met one Realtor who would consider this. All the other Realtors I’ve met wouldn’t touch clients like this. It’s not worth losing one’s license over.

Deed of trust type of foreclosure is different from foreclosing on a mortgage instrument. We should make the assumption that the vast majority will be a Deed of Trust. Now let’s further assume that the first lender is foreclosing. The opening bid at the trustee sale is the amount owed, plus interest, penalties, attorneys fees, and any other fees owing such as county real estate taxes. If there are no bidders then the home is deeded back to the bank using a trustee deed.

The homeowner is not pursued by the bank for any losses. The bank has the option of turning the deed of trust into a mortgage and taking the homeowner to court and trying to get a deficiency judgement handed down by the courts, however, this is really expensive for the banks. This is rare these days and would only occur if the bank has clear evidence that the homeowner 1) committed egregious fraud, and; 2) the bank has evidence that the homeowner actually has lots of money and would be able to pay the judgement. When going to court on a foreclosure, the homeowner has many more rights so again, the banks simply won’t do this very often at all.

If there is a second mortgage, the answer whether or not the homeowner is pursued becomes way more complicated due to a recent state supreme court opinion.

This comment is not legal advice. Homeowners needing legal advice should consult an attorney.

Post foreclosures though the previous owner can be held liable. It is only done when the bank can see some ready assets to go after post judgement.

You see Ira, those seem like low numbers to me. I look at the same things and have for the past six months and I don’t see a lot of Bank Owned properties compared to a year ago. Also Undisclosed sellers are always used for high end properties, or investors who own multiple properties. With the aavilablity of tax records the point is kind of moot, but still used for LLCs or Corporate owned.

Anony, if there is any “trashing” going on, it typically takes place when the house is going to be foreclosed and NOT on a short sale.

The owner is enraged that he’s being evicted and takes out his anger on the house, ripping out appliances, punching holes in the walls, and so forth.

Can’t tell a percentage, but of all of the single family homes currently on the NWMLS in all of the Seattle area from Dash Point and Federal Way on the south to Woodinville, Kenmore, Bothell on the north, to Vashon on the west to North Bend on the east, there are 164 listings with the keywords : lender owned, REO, bank owned, repo, or seller undisclosed. Of these 164, 27 are in Kent, 18 are in Auburn, 9 are in Federal Way, 9 in Renton. Within the City of Seattle, the vast majority are in the south end, 98118 zip code, and a bunch in my zip code just south of the city limits 98178….One is in Bellevue, two are in Newcastle, three in Sammamish, one in Redmond, three in Kirkland, two in Woodinville, one in Kenmore, one in Magnolia, one in Fremont, two in Ballard, one around Northgate, and a couple in the Central District.

However, the thing that surprised me about this is it wasn’t people getting kicked out of their foreclosed homes, it was people selling a short sale. If the article is correct, these are homes that the individual still owns, they have contracted a listing agent to try to sell it short, and they may still be living in the home. They are trashing their own short sale home before it sells.

Can anybody confirm that people are trashing their short sale properties while they are still on the market, or was the person quoted in the article just confused?

Agreed. That’s simple vandalism. If people made bad choices about their personal property, they shouldn’t take it out on the next owners.

http://www.youtube.com/watch?v=R1C4E3RUXc4&feature=related

While researching a comment a couple of days ago about WaMu I found Murphy Favre as:
Murphy Favre Housing Managers, Inc.
Murphy Favre Properties, Inc.

They were the in house investment branch of the bank. I’ve been thinking for a very long time that some investors will pool large numbers of properties, especially housing tracts in some areas as rentals, the way condo projects are now rentals.

I’ve seen this done on a small scale while some investors have waited out a market. This time may be a different story.

Jillayne, I’ll get on that. It may take me a little while, but I’m pretty curious. I know that there are a lot of REO properties not on the MLS, but how many are?

Jon, we are on the same page, but while bait and switch is a form of false adverstising, what the agents are doing is baiting with no switch. For it to be a B&S, the advertised product (ie the house) is not available.

Tim, appreciate the link to the old thread. It’s something I have thought about quite a bit lately. The ‘new on market’ topic is one that I am especially frustrated with. It’s great to see the guys at Redfin implementing features to accurately report how old a listing really is.