$8K Tax Credit Closing Deadline of Nov 30 Could Slow Interest in Short Sales

Kary brings up an excellent point here. 

“One other agent short sale issue is going to pop up shortly, if it hasn’t already, but it will be a buyer’s agent issue. The $8,000 first time home buyer credit needs a property to close by November 30. Making an offer on a short sale property, without advising a first time homeowner of the risk of not closing by the deadline is probably malpractice. It’s sort of a “suitability” issue for real estate.”

It’s not outside the realm of possibility that falling in love with a short sale today means the transaction may not close by Nov 30, 2009.  I suppose there might be a chance that the tax credit will be extended or even expanded.  Yet many homeowners with Option ARMs were given verbal assurances that they would be able to easily refinance. 

I wonder what life is going to be like inside loan servicing during the month of November, when the pressure will be sky high to get these short sales APPROVED so the buyers can make the closing deadline?

Short Sales and REOs to Finally Become a Search Field in the NWMLS

Courtney Cooper broke the news on Easter.  The Northwest MLS has voted to add a required field: “Third Party Approval Required” and “Bank/REO Owned.” From the NWMLS (no link): 
“NWMLS is excited to announce two new required fields; “3rd Party Approval Required

Short Sale Listings: Leaving Out Key Details Is Like Telling A Lie..

[Editors note: It’s always exciting to introduce a new author to RCG… and today I’m especially excited to introduce Courtney Cooper of Cooper Jacobs as the newest RCG contributor!  Far from a newbie, she’s been running an entertaining blog on ActiveRain for over a year now (and racked up tens of thousands of points in the process!), so I’m pretty sure she’ll have no problem making her impact on the RCG community.   Welcome Courtney!   ~Dustin]

Hello RCG!

Thanks Dustin and ARDELL for the encouragement! I am a huge fan of RCG and look forward to what lies ahead!

Pushing openness with short sale listings…

A lot has been written on Rain City Guide and elsewhere about short sales in the Seattle area, but 2008 had me working with far more buyers than sellers and one sentence kept popping up: “that house is a short sale

Is Excise Tax Payable on Short Sale Debt Forgiveness?

The Washington State Department of Revenue (DOR) seems to think so.  Background: At an Escrow Association of Washington (EAW) meeting on Nov 13, 2008, Mel Kirpes and Steve Bren from  WA DOR spoke at a regional dinner meeting where it was announced that when there is a short sale, the DOR considers the debt forgiven as additional consideration above the contracted sales price between the parties and that the DOR will be pursuing the home seller for payment of the excise tax. (Reference is a EAW letter dated Nov 25, 2008 from EAW Director Cindi L. Holstrom)
Naturally this had a chilling effect amongst escrow officers.  The DOR responded on Dec 12, 2008 in a letter from Gilbert Brewer, Assnt Director of the DOR:

RCW 82.45 imposes an excise tax on the sale of real estate unless specifically exempt from statute. “The measure of the tax is based on the total selling price of the property conveyed. The incidence of the tax is usually on the seller.  However, if the tax is not paid in full, the tax (together with any interest and penalties) becomes a lien on the real property. This is mandated by RCW 82.45.030 …which defines “selling price” as the “true and fair value of the property conveyed.” If a property has been conveyed in an arm’s length transaction between unrelated persons for a valuable consideration, a rebuttable presumption exists that the selling price is equal to the total consideration paid or contracted to be paid to the transferor, or to another for the transferor’s benefit….”total consideration paid or contracted” to be paid as including “money or anything of value, paid or delivered or contracted to be paid or delivered in return for the sale, and shall include the amount of any lien, mortgage, contrat, indebtedness, or other incumbrance, either given to secure the purchase price, or any part thereof, or remaining unpaid on such property at the time of the sale.”

Since there is an exemption from real estate excise tax in the event of foreclosure or a deed in lieu of foreclosure (see WAC 458-61A-208) this DOR opinion may unfortunately motivate homeowners to consider foreclosure a more viable option. Perhaps the home seller’s Realtor can negotiate with the lender to pay for the additional excise tax lien as well.  However, then that extra amount paid by the lender may also be subject to excise tax.
The Seattle King Co Assoc of Realtors and Washington Realtors believes DOR’s position is incorrect and problematic.  On Jan 8, 2009, The Northwest Multiple Listing Association posted a notice to their real estate agent members as follows:

RCW 18.86 requires agents to advise their clients to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise.  This duty exists in every transaction but is particularly important in short sale transactions where unique legal and tax issues exist.”

We’ve been saying the same on RCG for many years now. Short sales are way more complex for real estate agents than the average transaction and homeowners are best served when they have retained their own legal counsel to help them understand the lender paperwork as well as this current DOR trainwreck. You may be thinking, “homeowners in financial distress can’t afford an attorney.” However, some attorneys offer low cost options for homeowners facing foreclosure.

January 13, 2009
Department of Revenue: “After receiving extensive input from interested stakeholders and industry representatives about the nature of these transactions, we have carefully reconsidered how real estate excise tax statutes apply to these unique transactions [short sales]….we now see that these short sales are distinguishable from other transactions involving the forgiveness of debt because the seller negotiates separately with the lender for any debt reduction/forgiveness, apart from the actual purchase and sale of the property.  As a result, the loan forgiveness is not “paid or delivered in return for the sale” of the property, as required by RCW 82.45.030.”   Margaret J. Partlow, Senior Policy Counsel, Dept of Revenue. 

(Hat tip Rhonda Porter and Kary Krismer.)

Translation: We are not going to require sellers to pay excise tax on the debt forgiveness  with a short sale.

40 representatives from escrow, title, real estate, attorney, and short sale faciliator companies showed up in Olympia to help educate the Dept of Revenue. Thank you, Escrow Association of Washington, for bringing this to our attention and taking on the state head to head.

Short Sales – Another "Buyer Beware" Aspect

How does a seller price a short sale listing?

An email from Trulia pointing to a post titled Short Sale Saga, reminded me to write a post on the topic of how a buyer’s offer can be “used” to determine the list price of a short sale property. Back in December of 2007 when I wrote the post “Should You Buy a Short Sale?” , I didn’t touch on this aspect of the various “difficulties” you might expect to encounter, as the buyer of a short sale property. Today, the likelihood that the seller may be USING your offer to determine a list price, would be more commonplace than it was back in December of 2007.  While this may seem inappropriate from the buyer’s perspective, let’s look at the facts.

Say a seller has his home on market at $625,000 and owes $580,000.  The seller doesn’t have to show it as a short sale at that price, as he needs an offer at $575,000 to “clear the table”.  After 90 days on market with no offers, the owner wants to reduce his price, but would have to show it as a short sale.  Does he reduce it to $549,950 or $499,950 or what?  The seller has no idea what the bank is willing to take, and the bank won’t tell the seller until there is an offer on the table to look at.

The minute the seller is forced to say “short sale” of even “possible short sale”, the seller is going to get a lower offer than if he did not have to disclose this information.  The asking price has to be low enough to get an offer, and the price may be “false advertising”, leading the buyer to believe the seller has any info as to what the lender will take.  If the seller reduces the price to current market value, and the buyer offers full price, the buyer will feel duped (as in the Short Sale Saga) into thinking that a full price cash offer should be acceptable.

If a buyer submits an offer of 80% under market value, the seller should accept it.  Why?  Because that offer becomes the means by which the owner learns what the bank is willing to accept.  In the above case, let’s say the seller decides to list the house at $549,950 and the buyer makes a cash offer of $100,000.  The seller should accept it, leave the property on market, submit the $100,000 offer and get an answer from the bank.  The bank rejects the offer and says they will not accept an offer of less than $430,000.  The seller has learned, via the buyer’s offer, that he can list his house at $450,000.  The seller used the buyer’s offer to determine the list price that matches what the lender is willing to accept.

Here’s what I think.  I think all short sales should be listed for $1.00. By doing so, the seller is making a clear statement that he has no idea what the acceptable offer price will be, and the buyer is on notice that the seller can’t provide that information.  Until that time, the only short sales I have seen where the owner and seller’s agent are making any commitment to the asking price, are the ones who used a buyer’s offer to get a price from the bank.

Using the buyer’s offer to determine list price, under the current system, seems to be the only way for the seller to proceed. Many buyers being disappointed by the current system is not acceptable.  Offering the property at $1.00, and letting the buyers decide what to offer (vs. full price of a “fake” list price) seems to be a better alternative to the way we do it now.

Leave the gun; take the cannoli

My friend Geno reminded me today that some are in the “leave the gun; take the cannoli” stage of the real estate market.  It also reminded me of the stark differences between 2008 and the last time I participated in this same kind of market, which was in 1990 and 1991.

I remember leaving the gun and taking the cannoli in Yardley, PA. when I was working for one of my two favorite brokers, Frank Mancuso, also one of my two favorite Franks.  I was working with a nice young family, relocating to Yardley from somewhere else, trying to find a good value in a turning market like this one.  We “targeted” a house where the owner had been relocated by his company too.  We truly held a gun to the head of the “relocation company” during initial negotiations, and then picked the carcass clean at time of inspection in a second round of negotiations.

The similarities?  Only those who really wanted to sell, or HAD TO sell, were selling.  The deepest discounts being the vacant houses where the owner had already moved on, and there was no chance the owner would be coming back.

The differences?  The reasons why people “had to” sell.  Tim’s story yesterday reminded me of when Buddy Ryan was canned by the Eagles in 1991 and everyone in the office was wondering who would be selling his house.  Needing to sell your house in a bad market, especially when the vultures perceive that you NEED to sell it, can be an awful place to be.  Still when the sellers are highly paid people or relocation companies, no one’s wasting any tears.  It’s when the carcass to be picked looks like the family depicted below, that you take pause.

Truth is, people trust professionals to NOT let them, or encourage them to do, what will hurt them. So when you take out the gun and put it to someone’s head so that you can leave with the cannoli…at least look them in the eye when you’re doing it.  Maybe talking someone into doing a short sale is like pulling the plug on someone that was just about to be saved.  Think about that before telling people a short sale is their only or best choice.

The only difference between buying a short sale and buying a foreclosure is whose head is at the end of the gun, and whose cannoli will taste better in your mouth after all’s said and done.

Quick snap shot of recent Snohomish Co. Notice of Trustee Sales (foreclosure)

Spending time at the Snohomish Co.  excise tax and recording office today afforded me the opportunity to pull some records on current Notice of Trustee Sales recorded from Sept. 1, 2008 to today.   There were more than the 36 in my sample before I became restless and bored with basically the same theme that I knew would play out.

All were purchased within the last 4 yrs, most of the sample from 2006, one in 2008.    One was for $3 million in arrears, another for $1.28 million in arrears and even one at $56,000.00   So, foreclosures are affecting all property types and income strata.

Here’s the tally of when the homes were purchased in my quick sample:

2004: 2

2005: 4

2006: 18

2007: 11

2008: 1

Lenders represented (again no surprise):

WaMu, Countrywide (several), Flagstar, First Franklin, AEGIS, Homecomings, GMAC, Indymac, Everhome Mtg, HSBC, EMC, Wells Fargo, First Horizon (now Metlife), Greenpoint and US. Bank.

Side note: Short sales are taking 60-90 days from the sampling we are closing in our office.  It is UNREALISTIC for agents to expect anything sooner.   If it happens sooner then great, but do not expect quick responses.  On Monday, we received approval/clearance on a short sale from a Purchase & Sale agreement signed around from this past JUNE.

It is not terribly efficient to have borrowers lock in interest rates two months prior to receiving short sale approval.  We are seeing this happen.  The downside for the borrowers in this volatile mortgage market speaks for itself.

Why do banks take so long to approve a short sale?

This question comes up over and over again from Realtors, homeowners and homebuyers everywhere I go. A one sentence answer doesn’t exist for this question. If you truly want to know the answer to the question, “why” continue reading.  This means you will have to take a step back from your particular emotional situation enough to really listen to what’s being said because everyone wants their deal approved NOW. 

Banks are under no obligation to approve your short sale.  I know what you’re thinking, reader. You’re thinking, “Well if the G.D. bank would just approve my short sale faster, they wouldn’t be losing so much money!”

Let’s start at the beginning. A homeowner is said to be in a short sale situation when he or she owes more than what the home is currently worth, is in default and must sell.  Traditionally, homeowners agreed to pay back the difference between what was owed and the sales price. The short sale seller signed a new, unsecured note at closing and promised to pay back the difference in regular monthly installments.  The only cases where the debt was “forgiven” was for true financial hardship cases where there was absolutely no way the homeowner could ever repay the difference. An example would be the untimely death of one of the breadwinners. But that was then.

In today’s politically charged, loan modifications for all, HoHo, let’s-dump-everything-into-FHA environment, homeowners in a short sale situation today are receiving debt forgivness and even temporary tax exemptions on top of that.  Don’t worry, the rest of us tax payers will pick that up for you.

The first step in figuring out why your short sale is taking so long to be approved is to inquire about whether the homeowner is asking the bank to forgive the difference or if the homeowner is gainfully employed and able to pay back the difference.  This all must be proven and documented to the lender’s satisfaction.  If the homeowner is asking for debt forgiveness, the short sale will take longer to approve if the bank does not have all the required documentation.

Thought question: Why would any lender approve a short sale, especially one that requires debt forgiveness, unless there is proof that foreclosure is imminent? Answer: They won’t.  Lenders have to weigh the costs associated with the short sale proposal against the cost of foreclosure.  If a homeowner has not yet defaulted on their loan, the bank has little motivation to approve the short sale. Why not wait for a better offer to come along?  (Note, homeowners reading this article should always consult with an attorney if you are selling short, in default, or will be in default on your mortgage loan(s).)

All loan servicing departments have processes in place for dealing with short sale approvals.  They may not have fancy computer systems so that everything is automated but maybe that’s a good thing. Look where automated underwriting got us.

Next step: Homeowners must prove that they do not have the money to make up the shortfall. This means sending in copies of all bank statements, tax returns, w-2s, and other supporting documents to verify that the homeowners is financially insolvent. Short sales are reserved for people with NO MONEY. 

Gentle reminder: The new sale must be an arms-length transaction.   Another common problem that lenders must watch for is when the real estate agent on the transaction happens to be the “assigned” buyer on the purchase and sales agreement.  The lender is not going to be thrilled in paying a real estate commission on that kind of transaction. Further, there are plenty of foreclosure rescue scams happening nationwide. Lenders scrutinize short sale offers to look for signs of fraud.  Tanta reminds us:

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn’t be. There cannot be.

Next, everyone who is patiently waiting for the bank to approve the short sale must now realize that once the bank says “okay” to the short sale, there very may be a long list of investors who own pieces of this mortgage loan. Each and every investor will have to give their approval for the short sale.  We enjoyed many years of growth in the real estate industry and the overall economy thanks to the invention of Residential Mortgage Backed Securities.  RMBS made millions of dollars for many people.  The downside to securitizing mortgage loans and then selling off slices of each mortgage to different investors is that when it comes time to tell the investor “you’re going to have to take a haircut” that investor gets to have a say in the matter.

Calling loan servicing and yelling at them over the phone will get you nowhere.

I would like to be first to predict that the next meltdown will be loan servicing.  But perhaps my prediction is so obvious as to not be much of a prediction at all.  How much longer can they sustain this level of stress and pressure, with their current staffing levels, while the banks are facing enormous losses?  Of course when that meltdown happens, I predict our government will step in and mandate harsher regulations on servicers, which will be passed on to the consumer in the form of higher interest rates.

Loan servicing use to offer what it said: “service.”  It was treated as a cost center on a bank’s balance sheet.  Over the past 15 years, servicing became a “profit center” and the highest expense, namely labor, was cut to achieve profit goals.  This is one more lesson in underpricing. The cost of “good” loan servicing in which phones are answered and files processed smoothly, would have cost us all way, way, way more on the retail end, than what we paid. 

Let’s say we could create instant loss mitigation nirvana today.  All phones are answered on the first ring, all short sales are approved with no questions asked, no documentation required, no proof of hardship necessary, no proof of financial insolvency needed, and all Realtors receive their full 6% commission. 

The consequences of not performing due diligence at the loss mit stage are disaster for all of us. Compare this to the current nirvana we just left behind: A world where anyone could get a mortgage loan with no verification of ability to repay, with massive fraud still being uncovered.  We need to do it right this time, and it takes TIME to do proper short sale loss mitigation.

What do Governor Gregoire's actions mean for local Countrywide employees and short selling homeowners?

Is Governor Gregoire just a little too late in regards to Countrywide’s lending tactics? Aren’t we merely days away from the Bank of America takeover?

As I drove back to the office today after teaching yet another short sale class, I heard the news on KIRO 710 AM that Governor Gregoire is seeking to pull Countrywide’s lending license because of an investigation that uncovered predatory lending practices aimed at minorities.  WA State will fine Countrywide 1 million dollars for discriminatory lending practices and attempt to collect an additional 5 million for back assessments due.

From Governor Gregoire’s website:

DFI is required to examine every home-lender licensed in the state of Washington. The agency conducted its fair lending examination of Countrywide last year. At that time, DFI looked at roughly 600 individual loan files and uncovered evidence that Countrywide engaged in discriminatory lending that targeted Washington’s minority communities. The agency also found significant underreporting of loans during its investigation.

“The allegation that Countrywide preyed on minority borrowers is extremely troubling to me,

Question from today's short sale class

Realtor: “Jillayne I have nine short sales going on right now and,”

Jillayne: “Wait a sec, did you say NINE short sales?”

Realtor: “Yes, and here’s my question. One of my clients refinanced her Redmond home and took 89,000 cash out. Then she bought another home in another state with that cash. Now she wants to do a short sale on her home here in Redmond. It looks like she’s going to be short about 100,000. The lender on the Redmond home can’t go after her new home out of state, right?”

Jillayne: “Short sales are for homeowners in financial distress with no assets. The lender being shorted will ask your client to sign a new note/deed of trust in the amount of the shortfall and this new deed of trust will be recorded against your client’s new home.”

Realtor: “Yes, but their home is out of state. The shorted lender can’t do that, can they?”

Jillayne: “Yes, the lender can do that.”

Realtor: “But the home is in another state.”

Jillayne: “Your client is going to have to prove that they do not have any other assets. Just because a piece of real property is not located in Washington state doesn’t mean it’s not an asset. Washington state is not that special.”

Readers, why should lenders just randomly “forgive” the shortfall for all homeowners wishing to sell short? Especially homeowners who took cash-out equity loans to buy other real property. Surely there are some hard luck, true financial distress situations going on nationwide, but this is not one of them.

Besides, I thought homes in Redmond were holding their value.

Reminder: Homeowners selling short and/or in foreclosure should always obtain legal counsel. Google your state bar association to get started.