By Marylyn B. Schwartz, CSP
RISMEDIA, February 2, 2009-It is a veritable alphabet soup of language out there relative to distressed sellers’ properties. There are foreign-sounding terms, made-up jargon, rules, policies, procedures; blah, blah, blah. No matter who you might happen to speak with, they know someone who knows someone who is an “expert” at handling one or all parts of the distressed properties’ options.
Well, to paraphrase the Trojans, beware of Greeks bearing gifts-especially when the gift bearers are claiming to be experts within a market segment fraught with pitfalls and legalities at every turn. Many are dilatants, few are experts. Rick Cowle (email@example.com), a highly experienced attorney who has handled hundreds of bankruptcies, short sales, foreclosures and mortgage modifications, is an expert. When Cowle speaks, he has experience, credibility and expertise on his side. His advice and counsel are sought by other attorneys new to “distressed property” issues.
MBS: Rick, you and I have worked with REO (real estate owned) properties and with sellers in all phases of foreclosure in the past. We’ve seen markets deal with the onslaught of short sales and foreclosures 15 years ago, but nothing comes close to what we are seeing today. The volume and rapidity of the properties cropping up is unparalleled. What advice do you have for the agents out there struggling to assist people fraught with problems?
RC: While it may be easier said than done, it is important to consult an expert. There are resources out there available to the public such as the Housing and Urban Development website, free credit counseling services, attorneys with extensive experience with distressed seller issues, etc. It is even possible to use Google to find attorneys who advertise their credentials as distressed property experts. The thing never to do is to give advice or guidance when you are not qualified to do so. Taking a three-hour short-sale class does not make one an expert on giving advice on the short-sale process. However, there is much that an agent can do in concert with an attorney. I always advise agents to help the seller find an attorney before they do anything else.
MBS: Sellers who are in financial distress fear that they cannot afford an attorney to assist them. They often simply “ignore” bank delinquency notices because they believe they are powerless to help themselves. Presented with such a scenario, what do you recommend?
RC: While I cannot speak for all attorneys, I know that many, myself included, have plans that take into consideration the sellers’ current financial realities and allow for ways to navigate the process with little or perhaps no attorney fees upfront. There are cases where attorney fees can be billed to and paid by the financial institution holding the lien. This is one part of the negotiable issues to be worked out. The ultimate cost to the seller can be far more damaging by non-action than by researching all options. If the agent plays a part in being a resource to the consumer, they indeed have value. Knowing what to do is less important than knowing what is available to help the consumer and guiding them to those resources. Just helping sellers to know what questions to ask or where to begin the process is invaluable.
MBS: It is no secret that even when sellers, or agents they have authorized to do so, try to contact the bank(s) in question, there is no guarantee that they will make any progress getting to the right people to help. It can feel like a black hole, and the level of frustration felt by everyone is enough to cause ulcers. What’s the right way to handle these roadblocks?
RC: There is no one answer that is right. Getting to the right people in the right departments is key in possibly preventing foreclosure. It is not going to be the mortgage department that will facilitate the process. The right department may be called asset recovery, loss mitigation, workout or something else. In addition, each lender will have its own paperwork requirements. Getting that package from the bank and completing the required documents is essential to even being heard. By hiring an experienced negotiator who works with most, if not all, major national banks, he/she will know what is required by that bank in advance and has forms on file for the sellers use. By knowing how to complete the necessary forms and doing so in a timely fashion, it could shorten the process for short sale approval by perhaps months.
MBS: What is a short sale for those readers who may be new to this?
RC: When the sellers owe more on their mortgage(s) than the value of their home, the sellers are in a shortage situation if they decide to sell. There will not be enough money to pay off the loan(s). The seller would need to come to the table with proceeds to satisfy the lien(s). That is not the same as being able to justify a short sale where the bank determines that the seller is worthy to be allowed to sell the home at less than the outstanding lien(s), and the bank will accept as their loss the shortage. In order to be considered for short-sale eligibility one would have to have a hardship such as divorce, medical expenses, job loss, death of family member or some similar life catastrophic situation. In addition, the sellers’ expenses must exceed his/her/their assets/income, they are behind on their payments and have no way to repay the bank. Simply owing more than the home is worth yet wanting to sell regardless of a lack of hardship is not a reason to apply for a short sale.
MBS: Let’s assume there is a hardship as stated above. What is the process for the agent/seller to follow?
RC: List the property at a price based on a detailed market analysis. The agent needs to be sure that they make other agents in the MLS aware that it is a possible short sale and that “all transactions including the amount of compensation, are subject to bank’s approval.” The fact is that even if a home is listed at market value and a buyer comes along and makes an offer commensurate with that value, the bank may not accept the sale. There are cases where the bank’s price opinion may be higher than the offer on the table, and the bank may counter or refuse the offer if it does not conform to what they believe is accurate. I often suggest that the agent take a video of the home to truly document condition as some appraisals are done without a full walk through. Without documentation it may be difficult to make the case to the bank about why the home is not worth what the bank’s appraiser determined. Agents should always meet the bank’s appraiser at the property and provide them with comps. They may not use the agent’s comps, but the documentation could come in very handy if a conflict ensues. This is not to be taken as gospel that any bank will debate with either an agent or an attorney. Some will, others will not.
MBS: What are the banks looking for relative to a buyer’s qualifications?
RC: In the vast majority of the time, the bank does not want to negotiate contingencies. Buyers who have another sale pending and need the proceeds from that sale in order to close on the next purchase are not likely to be considered. Banks take a dim view of buyers requesting concessions. Sales are always as is with no repair credits, except under very, very rare instances. While buyers can have inspections done, it is for their consideration only and not for negotiating any issues that may surface. I had an incident where during the processing of the short sale, the house suffered a freeze-up. I went back to the bank and renegotiated for the purchasers. We had to document the problems and estimate the cost of repair. That is the kind of rare occurrence I would consider presenting to the bank.
MBS: Are there some red flags that agents should be aware of before venturing into helping a distressed seller?
RC: Sellers need to be very cooperative with the agent and whoever else enters the process. Couples involved in a divorce and at odds with each other can present insurmountable challenges when it comes to being responsive and getting all documentation in the hands of the right people. The sellers must also be willing to do the required paperwork. This is time consuming and detailed. Anyone who won’t ‘dig out’ what is needed as proof of the claims being made is wasting everyone’s time. There are also transfer documents that require signatures. Once again, if there is more than one seller, and the two or more are not likeminded, raise the red flag and be sure the problems are cured before approaching the bank with an offer. We hear about short sales taking upwards of a year plus. That is usually because of problems with issues such as referenced above. Well prepared and cooperative sellers make both the attorney’s and agent’s jobs much easier.
MBS: Often homes will have more than one lien holder. In such instances, what happens when trying to process a short sale?
RC: I have had about a 90% success rate working through this very issue. I know that the high rate of success is due to being very familiar with the lien release process and how to approach banks relative to why taking the sale is in their best interest. It is often a delicate balancing act fraught with lots of back and forth negotiating. I would say that it would be nearly impossible to accomplish without the skills of a very experienced negotiator working on the sellers’ behalf.
MBS: What upcoming trends do you see within this segment of the business?
RC: Lack of knowledge on the real estate practitioner’s part while the number of distressed sellers continues to grow will only exacerbate the challenges of getting these properties sold rather than in foreclosure. Banks are not yet geared up for the breadth and depth of the problems, and many sellers are falling between the cracks who could otherwise have been helped. The market will soon be flooded with REOs as these homes process through the banks’ systems after the foreclosure process. Agents want to work this segment of the market yet few understand the breadth and depth of what is required and the time commitment. Banks need educated agents for REO listings.
MBS: Having managed and processed hundreds of REO properties, I could not agree more. As matter of fact, errors and omissions companies are now concerned about indemnifying brokers who do not require their agents to clear all REO listings with the company prior to seeking them out. It is a very litigious, slippery slope. Banks require all kinds of guarantees and bonding for persons who work on their listings… not for the faint hearted for certain.
RC: I could not agree more. The more people understand the whole process from first delinquency on the mortgage through to the REO stage, the less likely they are to want to take it all on.
MBS: There are times when second lien holders, or even first, will ask the sellers to sign an unsecured promissory note for part of the shortage paid by the lender on the sellers’ part. When does that happen and how often?
RC: If the lien holder(s) feel that there are assets forthcoming, they may take this step. We see this often with loans that are secured by PMI (private mortgage insurance). PMI companies are getting hit pretty hard with the number of bad loans that were secured by PMI and subsequently failed. They may try to recoup part of the indemnifying monies they’ve lay out if they feel there is a good chance to recoup part down the road.
MBS: There are so many other topics that we could explore at great length. Volumes have been written on the whole area of distressed sellers and properties. What would you say is the single most important thing an agent could do to help them help their sellers?
RC: Education, education, education. Read, take classes, join networking groups of like-minded practitioners, etc. We simply cannot know enough to help people who need good advice, guidance and support now more than ever!
MBS: Amen to that!
Marylyn B. Schwartz, CSP, is an expert in real estate and corporate sales training/management and team development. She is president of Teamweavers and a trainer for Leader’s Choice.