How-to Monday: Short sales
Associated Press photo
If you're looking for a house to buy or checking out your competition because you're selling, you've probably started seeing these words: "Short sale." It sounds like a wish to sell quickly -- and in essence, it is -- but more importantly, it means the seller is trying to get rid of the house for less than he or she owes on it.
When they work out, short sales can be a deal for buyers and a relief for sellers in danger of foreclosure. But they're complex. Short sales require the lender's OK, and there's no incentive for the lender to approve an offer if it thinks it can do better by foreclosing and selling the house itself.
Negotiating short sales isn't like negotiating regular sales, said Andrew Lehr, an agent with ReMax Signature in Baltimore. He can't simply take buyer offers to the seller. These are called "third-party approval" transactions for a reason: The lender looms large.
"You're ... dealing with a third party that can be in a whole different time zone, so the communication is not as effective," said Lehr, who's representing a short-sale seller in Dundalk and a variety of would-be short-sale buyers. "I always try to educate people putting offers in on short sales that it could be a drag-out process."
Yes, you heard that right. Short sales are not, on the whole, short. So many loans are owned by Wall Street investors nowadays that there are really four parties involved: The buyer, the seller, the mortgage servicer and the note holder.
The other wrinkle is that most anyone buying from a homeowner facing foreclosure must abide by the state's foreclosure rescue fraud law, said Phillip R. Robinson, executive director of Civil Justice, a nonprofit legal-help group in Baltimore that specializes in real estate matters. Resell the house within 18 months, and you must give at least 82 percent of your profit to the previous owner.
Speaking of foreclosure rescue fraud, Robinson says any homeowner in trouble should talk to a nonprofit housing counselor before signing anything. (You can find a list HERE.) There are a lot of scammers out there just dying to take advantage of you while you're down.
"Get a Realtor and go to one of the state-approved housing counseling agencies that will provide free advice -- independent advice," Robinson said. He recommends agent or legal representation for buyers, too. "Make sure you're not getting involved in a transaction that's illegal in some way."
Here's some good news for short-sale sellers and anyone else facing foreclosure: Thanks to a new law, you won't have to pay taxes on the amount of the loan your lender forgives in 2007, 2008 or 2009. Up 'til now, the IRS treated that vanished debt as income. (There are some exceptions -- it must be your primary residence, for instance -- so you'll want to get professional help.)
Have a short-sale story? Comment away.
Comments
Interesting on the 18 month resale clause. What if the new buyer gets in a snafu and has no choice but to sell? Is it fair they would have to give 82% of potential profit back to the previous owner? I guess the Maryland government doesn't think their is a risk to buying foreclosed properties. I think this law will prevent a lot of would be investors which only compounds the lack of buyer problem. Go figure, Maryland government is anti free markets.
Posted by: Kevin | February 4, 2008 8:30 AM
Jamie,
Mr. Robinson's comment about giving back 82% of the profit is not correct.
The 2005 foreclosure law is, in my opinion, poorly written and extremely ambiguous. In addition, I don't think it has anything to do with short sales.
However, one thing in the law is clear (at least in my non-lawyer reading)-- the 82% rule only comes into play when the buyer (usually an investor), allows the owner to stay in the house by renting it back with the promise that they can repurchase the house when the owners clear up their financial problems. In the law, this is called a "reconveyance."
If the buyer then reneges and sells the property to a third party within 18 months, then 82% of the profits must go back to the original owner.
The law is supposed to prevent scam artists from getting the distressed owner to sign over the deed with the promise that they could buy it back.
In this scenario, the crooked buyer then finds a technical excuse to break the contract and sell the house at a profit to someone else.
If the homeowner in foreclosure sells the house and moves on, the new owner is free to do anything they want with the house with no obligation to the previous owner.
As president of a local investors association, I know that our organization offers classes and seminars on how this law can affect our members as they conduct their real estate business.
Posted by: Alan Chantker | February 4, 2008 9:52 AM
Hi, Alan -- Phillip Robinson tried to weigh in earlier today, but our blog server has been wonky (and not in the policy-wonk sense), so his comment disappeared into the ether. I do know there's been a ton of debate about what, precisely, the law requires.
Posted by: Jamie Smith Hopkins | February 4, 2008 4:55 PM
Let's make sure everybody understands the fact from the fiction when it comes to real estate investing.
First, in the hundreds of cases that we have reviewed since the Protection of Homeowners in Foreclosure Act (PHIFA) was passed, not ONE ever complied with the law in at least one material aspect.
Second, if you are a foreclosure purchaser under PHIFA and you resell the home within 18 months you are required to share 82% of the profit from the sale with the homeowner you saved from foreclosure. PHIFA is written very broadly and the point of the original blog was to say, anybody who gets into this market and doesn't know what they are doing will potential face criminal and civil penalties of PHIFA.
Third, in our review of the courses that are being taught, none actually explain anything relevant about PHIFA and merely exact huge fees from people who want to do the right thing and be honest investors. Almost all the classes teach the students how to target homeowners in distress who are "rich" in equity and the tricks by which you can get them to convey that equity to the investor. The single most common trick is the false promise that someone can buy their house back or stay in the house longer than they would have been able to do so in the first instance.
Fourth, every Maryland court that has issued a written opinion has found PHIFA to unambiguous and clear. Those who think the law prevents them from stealing someone else’s equity are quick to complain. However, no court has agreed with this position.
Finally, investors or potential investors who want to get involved in these transactions would be wise to only work with a realtor who specializes in short sales. Better yet, I would recommend only get involved if a certified housing counselor is advising the homeowner in distress. These simple suggestions will help ensure that investors will be involved in legitimate transactions and avoid in most cases the pitfalls (criminal and civil) of PHIFA.
Phillip Robinson
Civil Justice Inc.
Posted by: Phillip Robinson | February 4, 2008 9:16 PM
Jamie: I do short sales in Maryland and I can't tell you the number of times I have seen people just give up on their home after ruining their credit and/or borrowing money form loved ones to keep making their payments.
There is a real crisis going on here . .and I can't wake people up. It doesn't make sense to take houses away from good people. .when they are going to be paying the same amount somewhere else to live!
Those houses are being sold to cut prices anyway and the new buyers are paying now LOW normal monthly notes.
Sorry to vent on you like this,. I have 16 short sales and 20 on the way and it really gets frustrating sometimes.
Thank you
Fernando Herboso
http://www.ReallyNiceHomes.com
Posted by: Fernando Herboso | July 4, 2008 12:57 PM