How To Buy Or Sell A Short Sale

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Adam:
What exactly is a short sale?

Bill:
So a short sale, it's a real estate transaction, right? Where the estimated proceeds from sale are going to be insufficient to cover the homeowner's mortgage liens and closing costs. So everyone's probably heard the term an underwater house or underwater mortgage. Another common industry term is upside down. Basically what it's referring to is a property that is not worth what the homeowner owes on it. What happens in the short sale ... In a regular transaction, the homeowner would have to cut a check at closing. They'd have to bring the difference, themselves, to closing. In a short sale, the bank eats the difference. So my clients don't have to bring that check. They get to break even, when they should be spending money.

Adam:
Doesn't sound like a bad deal.

Bill:
No.

Adam:
So one of the other misconceptions I hear a lot is I might ask a client, a buyer or seller, or just the general public, if they're familiar with what a short sale is. They say, "Yes, of course, it's just like a foreclosure."

Bill:
Yeah, no. I mean, they're completely ... Well, they're related, but completely different at the same time. So most of my clients are in some stage of foreclosure, because they're not paying their mortgage, they're experiencing the stress, they fall behind on their mortgage, and the mortgage company starts foreclosure. What a foreclosure is, it's the mortgage company enforcing their rights, under the note mortgage.

Bill:
They're basically initiating a legal proceeding to get a judge's order to sale the house at a sheriff sale. At that sheriff sale, the mortgage company uses the proceeds to reimburse them of the loss they incurred by the homeowner not paying their mortgage. Right? The short sale is a voluntary transaction. Right? The short sale is the homeowner saying to themselves, "I'm in trouble, I need to get rid of this house." They're selling it, for the most part, on their own terms. Moving on their own terms. The bank has to approve the price, but the homeowner gets to avoid foreclosure by doing a short sale. That's one of the main benefits.

Adam:
Got it. Fantastic. So like I said, what we're going to do today is talk a little bit about what a short sale means for a buyer, and what it means for sellers. We're probably going to talk longer about sellers. So let's start off with buyers first. As I said, we're going to try and dispel a lot of misconceptions here. One of the things that we run into very frequently is a buyer might be shopping for a home online, on a website like Realtor or Zillow, and they find a property with a very attractive price. Sometimes, sometimes in the listing there might say, "Third party approval required." There is no other indication that it's a short sale. That buyer will call their real estate agent, or call me and say, "Hey, I want to go put an offer in on this house right away. Look at this price, it's unbelievable."

Bill:
Well, the buyer has to understand in that situation, the price is coming from one of two places. It's either coming from the listing agent's own mind, because they feel that's what the house is worth, and they feel that's what the mortgage company, the seller's mortgage company is going to agree to. Or, that price is actually coming directly from the seller's mortgage company. Because either the realtor or the homeowner has done some background work, and the seller's mortgage company gave them a suggested listing price.

Bill:
But the buyer needs to understand, when they're making their offer, even if they're making it at the full price offer, it doesn't mean the seller's mortgage company is going to agree to it. Right? In every short sale, first you need to get the seller to agree to your offer. They're the ones, they're the gatekeeper, right? They're the ones who have to decide, this offer is good enough to present to my mortgage company for approval. That's step number one. Then the mortgage company has got to approve it. So the list price that they may see on Zillow or Realtor.com is just coming from either the listing agent or a suggested price from the bank. It's not a guarantee.

Adam:
Got it. Makes sense. I'll add one of the things that we do when we're talking to a buyer is I can typically notice on the MLS if it's an approved or unapproved short sale. So if I see that it says unapproved, it's pretty fair for me to tell the buyer that they can completely ignore that price. Correct?

Bill:
Yeah. I mean, they should go in with what they feel is a fair price. I mean, they don't want to come in too low, because then they're just wasting their own time and money. If they're buying a short sale, they should come in with a strong offer, but one that they still feel they can make money with.

Adam:
Understood, understood. Buyers often ask, if they have some familiarity with short sales, a lot of times they think that this is going to be a forever process. I know that there is no exact answer to this, but how long would be a good assumption for a buyer to kind of put into a short sale, or wait around for that property?

Bill:
Sure, you're right. Look, every short sale is different. Different banks, different lenders. Even the sellers are different, right? Some sellers are extremely enthusiastic, and gets you everything you need right away. Some drag their feet, and they're not great with technology, and they take a while to get you what you need to process the transaction. But most of our short sales are probably done in three or four months. If it takes longer than that, something is wrong. Either someone is not cooperating with my office, or something happened to the mortgage company, or the loan got transferred to a new bank halfway through. So absent some extreme circumstance, most of the short sales are done in a few months.

Adam:
Okay, makes sense. Talking about price again, how does the bank actually arrive at the price that they approve the sale at?

Bill:
Sure. So at some point, during the short sale process, usually after a complete package is submitted on behalf of the seller, the mortgage company or mortgage servicer is going to do either a BPO, which is the acronym for broker price opinion, or they're going to do a full blown appraisal. Sometimes they'll do both. This is the bank's way of doing evaluation to determine what the house is worth. They're not going to believe me, or the listing agent, or the seller, or the buyer. They're going to do their own independent evaluation, which is either the BPO or the appraisal. In a lot of ways, that could be a life or death of your short sale, depending on what that comes back at.

Adam:
That's kind of in a way the bank doing its own due diligence.

Bill:
Yeah. It's really not that much different than the buyer side, right? The buyer is going to appraise the house too, to make sure they're lending the correct amount. Same is true when you're getting rid of a loan as well.

Adam:
Mm-hmm (affirmative). Got it. When a buyer is entering into a transaction like this, at this point, they're pretty understanding that the seller is behind, at the very least, on their mortgage payments, and probably other debts as well. Buyers want to know, are they going to receive clear and marketable title, or are they going to be responsible for some of this debt that the seller hasn't paid?

Bill:
Sure. The buyer needs to be smart, right? The buyer needs to have title insurance, obviously. Even when they're paying cash, you got to get an owner's policy. Obviously, when using a mortgage, you're going to get a lender's policy, but you should also get the owner's policy as well, anyway. So the title insurance policy insures that you're getting clear and marketable title. But that could be different than the buyer assuming you're paying certain things. So it's not that uncommon in a short sale for the buyer to have to come out of pocket to cover small items that the seller's mortgage company won't cover.

Bill:
So for example, if I have a client representing the seller, I have a client who has a $300 water bill. My client doesn't have the money to pay it. Their mortgage company refuses to pay it. So now we're $300 away from closing this deal. Most buyers are going to see that they're getting a good deal, and will cover the $300 difference. But they need to be smart. When they're signing the contract, they need to make sure there is nothing in writing that compels them to pay for those items. When I'm representing the seller, I give the buyer the option, in writing. You have the option of paying these or walking away. Some attorneys may be a little more stringent when they're representing the sellers and say the buyer is compelled to do so. So they want to make sure they at least just have the option.

Adam:
Got it, got it. Okay. It sounds like already that all of these are going to be different. So there is these intricacies to each transaction that buyers are going to have to pay attention to. Last but not least, while we're talking about buyers here, Zillow is one of those websites that most buyers tend to use. We might be talking about a short sale, and they'll call me and say, "Adam, on Zillow, it says that this property is not a short sale, that it's a pre foreclosure." I know from using Zillow that when they say pre foreclosure, that means that a lis pendens has been placed on the property. So that's kind of Greek to most buyers. What does that mean when there is a lis pendens on the property?

Bill:
Yeah, it's just putting the public on notice that the property is involved in litigation, that's all.

Adam:
Got it.

Bill:
I mean, what it means to me is a foreclosure started. Right? The complaint had been filed. But it's just a legal document, or it's a legal pleading, showing that the property is involved in litigation.

Adam:
Got it. While we're talking about it, I'd add to that, whatever price you see on that website on Zillow, again, is actually, at this point, the zestimate, which is even further from the truth than whatever asking price that the listing agent, in this case, chose.

Bill:
Yeah, true.

Adam:
Yeah. For sure. Now we'll dig into the sellers a big, because this is probably what is going to be more of an experience, and somebody might be doing a little bit more research on, is if you happen to be one of those individuals that has a financial hardship, and you need help, a short sale might be the best avenue for you. You can talk to this, Bill. I know as agents here, we really often see a short sale as an area where we can really help a seller out of a difficult situation. Sometimes these are some rather sad stories. But doesn't it all start with a seller having a financial hardship, or homeowner, I should say?

Bill:
Sure. I mean, there is many different hardships out there. Things happen to people. Obviously the present situation aside, people go through divorces, people lose jobs, people lose overtimes. Businesses fail, people pass away. These are all pretty substantial hardships that most people, if they end up going throuGH them, they're not going to be able to keep their primary residence, or even a second home. So typically, when someone is looking to do a short sale, they've experienced some sort of negative financial or life changing event.

Adam:
Got it. Is there a quick answer to the pros and cons of going the route of a short sale versus going through foreclosure, or maybe even a bankruptcy?

Bill:
Well, sure. The benefit of doing a short sale over the foreclosure, I guess even the bankruptcy, too, is probably the most lenient on your credit, or it's probably easier to recover from a short sale than a foreclosure or a bankruptcy. Also, the danger of letting your house go to foreclosure, or mailing your keys back, as a lot of homeowners like to say, is if the bank forecloses, and it goes to sheriff sale, if your home is in fact underwater, there is going to be a balance owed after the foreclosure is finalized.

Bill:
The scary part about foreclosure is that the mortgage company, in New Jersey and Pennsylvania, where I'm licensed to practice law, the mortgage company can sue the homeowner for that balance. It's called a deficiency lawsuit. While they're not common, the threat of it is still very real. If it were to happen to a homeowner, it would be a substantial, life changing, event. Bankruptcy gets rid of the mortgage debt. But it doesn't get rid of the house. So it does protect the homeowner from that deficiency suit. But it doesn't get rid of the property. In a lot of cases, if the homeowner has abandoned the property, they're still going to need to do their short sale anyway, even after the bankruptcy, just to accelerate the disposition of it.

Adam:
Interesting. Got it.

Bill:
Sorry, not to cut you off, Adam.

Adam:
No, go ahead.

Bill:
When you're doing a short sale, you're going to get something in writing stating that the bank has forgiven that deficiency. That's really what you want, that piece of paper in your hand saying, "We forego the right to pursue the collection of any balance."

Adam:
Interesting. Okay. So is there any reason why a homeowner that is behind on their mortgage shouldn't try the short sale route first, before just allowing the house to go to foreclosure?

Bill:
Except in extremely rare circumstances, no. Almost always going to be in their best benefit to do the short sale.

Adam:
So given that, what is the advantage of using an attorney to negotiate the short sale for you with the bank, as opposed to just trying to do it on your own? Or I know there is real estate agents that try to say that they'll do this, and there is other third party companies who are not attorneys nor real estate agents that try and service these as well.

Bill:
Three big reasons, that I preach on using a law firm or an attorney to help with your short sales. Number one is the time factor. Right? I mentioned that most of our shot sales are done in four months. But you don't understand how much we do ... Well, the public may not understand how much work goes into that four months. You literally have to be chained to your desk. You can't be out showing houses. If you're a homeowner, you can't be out grocery shopping. You have to be at your desk, waiting for that bank to call. If they're not calling you, you need to be calling them. These phone calls can take an hour or more of sitting on hold, and going through the steps, talking to different people.

Bill:
So an agent's time is much better spent showing houses, and getting buyers, and getting listings, right? Agents aren't getting paid extra to sit in their office and be chained to the desk. Homeowners, they should be at work, or they should be doing something better than sitting on hold with a bank. They also, a lot of homeowners may not have the technology needed to deal with the mortgage companies. I mean, you're going to need high speed scanners, you're going to need big printers, copy machines, because you're scanning and sending hundreds of pages to the bank. Another major benefit is, especially for agents, is you avoid the unauthorized practice of law. Right?

Bill:
As an agent, doing a short sale doesn't necessarily mean you're acting like a lawyer. But your client is going to have questions for you. They're going to ask you, "Adam, should I keep paying my mortgage? Adam, am I going to owe the bank any money? Adam, is the IRS going to try and tax me on it?" Even if you're 100% certain you know the answer to those questions, you shouldn't be answering them, because they are attorney questions and accounting questions. Realtors who try to answer those, even correctly, are subjecting themselves to the unauthorized practice of law, which could subject themselves to liability.

Bill:
The biggest reason, I think, to use law firms for having short sales, at least when it comes to us, is that I'm free. There is no charge to the realtor, there is no charge to the distressed homeowner. I don't ask the buyer to pay our processing fee. I get paid by the seller's short sale mortgage company, by the short sale lender. I only get paid if we go to closing.

Adam:
Yeah. That's exactly what I was thinking as you were explaining that. If I were a homeowner or a seller, I'd be thinking, "Well, great, I'm hearing how much time you spend. But how do you get paid?" So it's not going to cost the seller a dime.

Bill:
No.

Adam:
So before that, is the process correct, for a seller to contact you first? Is there some type of interview or consultation to say, "Hey, you know what? You have the type of hardship that might qualify for a short sale? We should proceed with this?" Or are you able to tell them, "You know what? It seems like you're still employed, you make enough income, there is no sense in even following this?" Is that something that you can initially give?

Bill:
Yeah. Yeah. I mean, typically, once ... If a homeowner finds me online, or if an agent refers a homeowner to me, and they want a consultation, again, it's free, right? So take advantage of it. Yeah, I'll go over their hardship, I'll go over the legal issues, whether to pay their mortgage, or if they're still current. I talk about the deficiency, I talk about the IRS tax issue. I kind of review their hardship to see how strong it may be. So yeah, it's a good introduction to me, just letting them know we know what we're doing here, and we're here to help you in your time of need, for sure.

Adam:
Great. I will add, just through my experience, that one of the things that we like working with a firm like yours is just the experience level. You've probably dealt with a large lender like Wells Fargo, for example, hundreds, if not thousands of times. Where, any homeowner, it's going to be their first time, very likely, dealing with this process. So even though they're not paying for it, that experience level is just invaluable.

Adam:
With that said, I'll also add, too, the same thing on the real estate agent side. When we list a short sale, I will often have a seller analyze the listing agreement, looking through the commission fee, and the charges, and question all of them about the commission fee that they want to pay. But the reality is that same way with your fee, their lender is going to be covering that cost, and it's not going to cost the seller a dime.

Bill:
Correct, yeah. Any short sale, the seller's mortgage company is going to cover what they believe to be necessary closing costs. So obviously they're paying the realtors, because they require realtors to be involved in the short sale. So they're paying the realtor's commission, and it's almost always going to be 6%. They're paying the attorney, because the attorney is doing the transaction. Then they'll pay real estate taxes, and most of the time, municipal water and municipal sewer. Sometimes they'll pay other liens as well. So yeah, the realtor's fees are covered as well.

Adam:
Perfect. Could you give us a quick example, we keep talking about a financial hardship, and I heard you earlier talk a little bit about divorce, and maybe unemployment. What's your typical financial hardship?

Bill:
Typical financial hardship, the ones I see the most are death, death of a borrower. So a spouse dies. Or divorce, divorce is a big one. When my parents got divorced 25 years ago, they sold all of the real estate, you split the money, and you moved on your separate ways. It doesn't seem like that's the way of the world anymore. Now people are getting divorced, and they're being forced into a short sale situation.

Bill:
So divorce is a big one, too, because just like death, you're essentially going from one income to two. I mean, two incomes to one, right? Job loss, business failure, and reduction of income are the other real big ones. A police officer loses overtime, a guy who goes out and starts his own business selling stuff on eBay, and it fails, these are typical things that we'll see. It doesn't mean it's all encompassing. I mean, I have situations where I have clients, they're still working, they're still making the same money, but their second investment property, the tenant stopped paying, destroyed the house, and moved out. Now, that's not as strong a hardship as say death or divorce, but it's something we've worked with in the past successfully.

Adam:
Makes sense, makes sense. I'll add to that, too, in talking about experience level, I see where a homeowner sometimes, they might be in a very difficult situation, because they did lose a spouse. Now they're dealing with the grief of that, and on top of it, they can't make their mortgage payment, and now they're going to try and go to Wells Fargo, or any other big bank, and negotiate this on their own. I don't want to keep beating a dead horse, but this is why you should have a professional take care of this for you, and it's not going to cost you any more money.

Bill:
I completely agree. Let's not forget, it's not just Wells Fargo. Typically, there is second mortgages, home equity lines of credit, there is child support judgements, there is judgements for doctor's bills, there is judgements for credit cards. There is IRS liens, there is New Jersey state tax liens. Each of these has a different procedure and different parameters for being settled. If you don't know them, you're not going to get it done.

Adam:
So that's all a part of it. If I had, for example, what we call a first and a second. You have your primary mortgage, and maybe you have a home equity line of credit, or some other type of debt. This is all part of that process, right?

Bill:
Yeah, absolutely. You need to know how and when to call the second mortgage company. You need to know what to say to them, you need to know how much money they're typically going to get. While, to me, that's a pretty routine procedure, to a homeowner, it's got to be another planet.

Adam:
Absolutely. So I'm going to throw one curve ball at you, because we've run into this a few times recently, where we see a typically elderly homeowner who got a reverse mortgage. What we call they've actually outlived the reverse mortgage, and they cannot pay it back. Is that something that can fit into a short sale situation?

Bill:
So we've done plenty of short sales on reverse mortgages. They are, from my standpoint, no different than any other real estate. The process is exactly the same. It's paperwork, it's following up with phone calls, it's getting the closing. It's really, to us, no different than a non reverse mortgage short sale.

Adam:
Perfect. If I'm a homeowner, and I'm in this situation, I have a hardship, and I'm considering going down the road of a short sale, what are the first steps? Is that not paying my mortgage payment, calling you, calling the real estate agent, getting it on the market? If I wanted to be proactive in this, what should the first step be?

Bill:
You definitely call an agent or call me. Call you, call me, one or the other. Those are ... Because we're going to put each other into contact. We're going to ... I'm going to make sure they contact you and vise versa, because we both play integral roles, right? They can't do the short sale without you, because you got to put it on the market and sell it, and they shouldn't be doing a short sale without me, because I need to give them the advice they need to move forward. So it doesn't make a difference who they call first, but as long as they have both professionals lined up, I think they should do that before doing anything else. They should do that before even calling their own mortgage company.

Bill:
You can't trust your mortgage company. You just can't. I mean, if you call your mortgage company, and you're still paying your mortgage, and you said to them ... Quarantine and this present situation aside, if you call your mortgage company and say, "I lost my job, what do I do? I need help." They're going to look at your file, they're going to say, "Well, sir, you're still paying your mortgage. When you can't pay it anymore, call us back." Well, the homeowner is going to read between the lines, default on the mortgage, and then call the mortgage company for help. They're going to get the runaround from the mortgage company, they're going to try doing it themselves, and then seven months later, when they're seven months behind on payments, now they're calling me and you. They would have been much better off calling us from the start, rather than their mortgage company.

Adam:
Absolutely. Yeah. We've had experiences before where we've gotten that phone call, and I look it up on the sheriff auction website, and it's two weeks from sheriff auction.

Bill:
Sure.

Adam:
That happens sometimes. I'm sure it happens to you much more frequently. I assume there becomes a point in time where there is no turning back. Right?

Bill:
Obviously, when there is a sheriff sale scheduled, and again, present situation, you don't see many anymore. But when there is a sheriff sale scheduled, it really makes my job near impossible to get done. Because at that point, the foreclosure is complete, or near completion. The incentive to do the short sale for the mortgage company has dissipated, and it puts a time crunch on my office that a lot of times we just can't do. But we don't turn those clients down, we still try. Just the chances of success are greatly reduced.

Adam:
Makes sense, makes sense. So now, one of the things that we do hear about is that if your debt is forgiven, and we're successful in this, and you short sale the property. Now am I going to have to pay income taxes on that forgiven debt?

Bill:
So the answer is maybe, but probably not. Here is what happens. Forget short sales for a second. This is just an IRS law, right? The IRS considers canceled or forgiven debt to be income. So thinking outside of the short sale realm for a moment. If you owe your Visa card 15,000, and you can't pay them anymore, and you settle with them for five, right? That means they're canceling 10,000 in debt. According to the IRS, that is income to you. You will get a 1099 for it. 1099C, to be exact. The C would stand for cancellation of debt income. The IRS would expect you to pay taxes on that 10,000 difference.

Bill:
Now let's look at mortgages, which are obviously usually a bigger difference. If I have a client who owes Wells Fargo 200,000, we do a short sale for 150. The $50,000 is going to be canceled, my client is getting a 1099C for 50,000. Now paying taxes on 50,000 could be pretty substantial. Right? I could make the argument that I saved you 50 grand, so you owe the IRS 15. But if people don't have the 50 to give Wells Fargo, they probably don't have the 15 for the IRS either. The good news is ...

Bill:
The reason I said maybe, but not likely, to answer your question is because the IRS realizes how unfair this rule is. They provide giant loopholes to help you avoid it. I'll briefly mention what they are. But any particular homeowner who is more concerned than that or doesn't feel with certainty they'll qualify should talk to their tax professional, because they're the ones dealing with the issue, not our firm. The first exemption is called the mortgage forgiveness debt relief act. The mortgage forgiveness debt relief act is valid for debts canceled for the rest of this year.

Bill:
So come 2021, I can't promise this law will be in effect anymore, and it does have a prior history of expiration and extension. The mortgage forgiveness debt relief act will cover a principle resident sale where the money that was borrowed was used for the property. So if you borrowed money from Wells Fargo, you put it on your principle home, and then you did a short sale, you're covered. You don't have to pay tax on the difference.

Bill:
Second exemption is bankruptcy. Anytime debt is canceled in a bankruptcy, it's not taxable. So if I have a client who was in trouble with their debt, they filed a Chapter 7, eliminated all of their debt, and then realized they need to get rid of the house too, and do a short sale, they won't have to deal with the tax, because the mortgage was canceled effectively in their Chapter 7 bankruptcy.

Bill:
Then the final exception, or exemption, which is also the most complex, is something known as insolvency. Insolvency is a financial term that indicates a person has more debt in their life than they do assets. We've all heard the term net worth before. Especially people who are very wealthy will brag, "I'm worth 12 billion dollars." We want our clients to have a negative net worth. Not a negative 12 billion, but negative 100,000 or so. The more insolvent they are, meaning the greater the difference between their debts and assets, the more likely they're going to be able to avoid paying tax on what the bank forgives. I've done thousands and thousands of short sales, Adam, maybe five or 10 of my clients have paid this tax.

Adam:
That's great to hear. That's really good to hear, because again, like you said, if they can't afford to pay the mortgage, how are they going to afford to pay these additional income taxes for their forgiven debt? So that's fantastic. Talking about good news, and this is something I see really exciting, I know it doesn't happen all of the time. But I've seen it happen a few times, where in a short sale situation, the seller has gotten their mortgage forgiven, and they've actually walked away with a check. I think you call that relocation expenses, is that correct?

Bill:
Yeah, relocation incentive is the exact term that we use. It's the bank's way ... It's a seller's mortgage company's way of thank you for doing a short sale, and not walking away from the property. Or it's way of saying, "Here, here is some money to go relocate, and start your future." Although I know you know as well as I do, those amounts do vary greatly throughout the years. As of right now, the typical amount that homeowners will get is $3,000. It's typically only paid if they're occupying the property. They have to still be occupying it at the time of the settlement. The amount is typically $3,000.

Adam:
So if you're listening to this, in our market right now, the average rental is $1,500. So that's literally your first and last month's rent, or your first month security deposit gets you into that rental, that place that you have to go. Right?

Bill:
Sure. Yeah. It's really nice the banks do it. It really gives people the help they need to move on, when they do, in fact, grant it, of course. It's never guaranteed. But when they do give it, it's a very nice thing to do.

Adam:
Yeah. I mean, to me, when I think about this, and I think that somebody is in a difficult situation, they get their mortgage forgiven, and they might actually walk away with enough money to get them into wherever they're going, whether that be a rental or somewhere else. It gets them to where they need to go. To me, when that all works out, I know it doesn't work out every time, it's just fantastic. Given that, one thing that we didn't talk about is we're talking about all of the good news for a seller and why a seller might want to do this. Why would the bank participate in this versus just going through the foreclosure proceedings and taking ownership of the house?

Bill:
Sure. I mean, look, the average foreclosure, the exact amount I forget, it's at least a year if not more, especially in New Jersey. During that year, if the homeowner is not paying the mortgage ... Remember, the mortgage company has got to pay the real estate taxes, they got to pya the homeowner's insurance, and they got to pay their attorneys to foreclose. So we're talking about tens of thousands of dollars that it's going to cost the mortgage company to carry the property during a foreclosure.

Bill:
Then when the foreclosure is over, if it's not purchased by a third party at sheriff sale, it becomes an REO property, meaning the bank now owns it, and now they have to sell it. You never know what turn the market is going to take. So a lot of times a mortgage company will feel it's in their best interest to liquidate the property. That's exactly what the short sell allows them to do, to liquidate it and cut their loses. A lot of loans, FHA loans, for example, have insurance on them. So the mortgage company is going to get reimbursed for their loss anyway. So a lot of the times, the short sale is going to be preferential to them from a financial standpoint.

Adam:
Makes sense. So last thing I'm going to ask if I'm a seller, we briefly talked about this before, I wanted to dig a little bit deeper into, not only how do we arrive at the best listing price to bring the house onto the market at, but how does the bank also arrive at their approved selling price?

Bill:
So from a listing agent standpoint, the agents that I work with, that close the most short sales, are the ones who list and sell the property for the right amount, right? Their advice and my advice is to list it and sell it for what you feel is fair market value. Don't accept offers that you feel are a waste of time or too low. List it and sell it for what it's worth. Maybe you're wrong, maybe you think the house is worth 250, you list it for 250, and you get no foot traffic. But you know what to do better than I do.

Bill:
If you're not getting foot traffic, you lower it. Maybe every two weeks, every three weeks, whatever Adam thinks, I would trust him, say lower it. You do that until you get a solid offer. The agent who do that will close the most short sales. The agents who list it at 250, and then accept the first offer for 125 are going to complain that short sells never close, and don't realize that it's their fault. The mortgage company, the seller's mortgage company, how they arrive at their accepted price, well, we mentioned earlier they do a BPO or appraisal, right?

Adam:
Correct.

Bill:
Based on that amount, there is a discount, or a percentage off of that that they'll allow. Now certain loan types, such as FHA mortgages, again, that number is known. Right? So if I'm working on a FHA short sale, and Bank of America appraises the house at, let's say, $100,000, I know, because it's an FHA loan, that Bank of America needs to then net $88,000. Right? Because their typical rule is, they need to net 88% of their appraised value. That's known.

Bill:
But if you're dealing with a mortgage with, say, TD Bank, where TD Bank actually owns that mortgage, and it's not FHA, or VA, or Fanny May, or Freddy Mack, TD Bank is never going to tell me what that number is. That number is secret. It might be 81%, it might be 90%. You never really know the number. I think it's fair to say that, at least based in my experience, the numbers are typically somewhere in the 80s, no matter what kind of loan it is, whether it's Fanny, Freddy, FHA, it's typically going to fall in the 80s somewhere. Sure, you might get lucky and find some sort of hedge fund that owns a million loans, and they want to liquidate at even less. But those loans are few and far between, because most are Fanny, Freddy, FHA, and VA.

Adam:
I'm glad you mentioned that, because I know the typical homeowner is not going to look this up. But when I was looking into Fanny May guidelines, it actually describes a short sale as fair market value. Right? So it's good to know, because a lot of these homeowners, if they can't afford to pay their mortgage payments, sometimes they're not properly maintaining the home either. So I know that with your real estate contract for short sales, that is a completely as is sale. So the seller is not responsible for making any repairs, the buyer is going to take it in the condition they find it, correct?

Bill:
Yeah. I mean, the transactions are as is, the seller is not compelled to make any repairs whatsoever. Obviously the buyer is not compelled to accept the house either. If the buyer does a home inspection, and the foundation is cracked, you can't force the buyer to buy in those circumstances. So it's a fair option. It gives both parties, I believe, the best way to proceed.

Adam:
Yeah. Yeah. If it's fair to say, usually we advise our sellers that you don't have to make any repairs. But, I would put your best foot forward that if there is a buyer who is thinking about backing out because of a particular condition, and you have the means to repair it, it may keep the deal together and proceed to getting this debt forgiven.

Bill:
Yeah. I mean, look, in a perfect short sale, you list it, you sell it, I get it approved, we go to close, and the homeowner gets three grand, pays nothing. Right? I mean, that's the ideal situation. Most of them are that way. But not all of them. There are situations where the parties have to chip in to make the deal work. If everybody wants it bad enough, they'll get it done.

Adam:
Fantastic. All right. So before we jump into talking a little bit about the coronavirus and how that's affecting things now, is there anything that you have to add for homeowners, or sellers, or anything that we missed?

Bill:
The most important thing is call us first. Don't call the bank first. That's going to come into play when we talk about coronavirus. It's so hard to avoid talking about it. It's completely taken over our lives at the moment. But I really see parallels between this and the financial crisis from 12 years go. The crazy thing is I'm still doing short sales, I'm still feeling the effect of the financial crisis from 12 years ago. Still doing short sales from 12 years ago. I think the current situation is going to be even worse.

Adam:
Okay. Yeah. A lot of the stuff that we talked about already, at least in the near future, I don't see changing as far as the process of a short sale. But I did want to talk a little bit about the coronavirus and how that's affecting things. I've already seen an effect on it in some of the transactions that we're handling. I'm sure you could communicate this. What, right now, just in the process of a short sale, is it fair to say that things are just taking longer because the banks are backed up, and inundated with all of their phone calls?

Bill:
Well, I'm seeing three, at least, initially, three big differences. One, you're right. They're taking a lot longer to process. Where it took an hour to talk to select portfolio servicing, mortgage servicers before, it's now taking two hours. Right? Because you got the normal hour it would typically take, and then you have 100,000 people calling, asking for deferment or forbearance. So they're taking a little bit longer, but they're still closing, which is good. That's one side effect that I'm seeing.

Bill:
Side effect number two, now everybody has a hardship. Right? Everybody has a hardship now. Sometimes I talk to clients, and I'm pulling at strings, trying to find ... You got to give me something, man. Give me a reason why you can't pay your mortgage. Now everybody has got one. Nobody is working. Everybody's income is reduced, for the most part. So now everybody has got a hardship, which is making, I think, going to make them a little easier to get approved.

Bill:
Then the third thing I'm seeing is all my sheriff's sales are getting canceled. All of these files where I was against these extreme time constraints, the sheriff's sales are getting canceled, which is buying me an indefinite amount of time. So those are some of the immediate changes that I'm seeing. Although I anticipate over the next year, the number of short sales I see will probably increase at numbers that I can't even guess.

Adam:
Yeah. I'm sure that very well may become true. One of the things I was curious about is we know that recently, the governor in the state of New Jersey here, they came out with this 90 day grace period on mortgage payments. So does that mean if I was in the process of going through a short sale, does the bank come back and say, "Hey, you know what? You're good now. We don't need to proceed with this, because we're giving you 90 days?"

Bill:
I mean, hypothetically, they could. But I haven't seen that scenario. I haven't seen that scenario yet. Again, it's great that we have these programs. It's great that the 90 day grace period exists. It's great that mortgage companies are offering two terms homeowners are probably familiar with now, deferment and forbearance. But again, I think in the end, these programs are going to do a lot of harm as well. Drawing on parallels to the financial crisis, and again, reiterating why they should be contacting me or you first, rather than their bank.

Bill:
During the financial crisis, there was also programs like this. Maybe not the 90 day grace period, but there was forbearance, and there was deferment, and there was programs like HAMP, home affordable modification program. These ultimate, great programs that the government came out with. Just like the ones that are out now, homeowners call and apply for them without really knowing what they're getting themselves into. Five, six, seven months later, they realize they've either not gotten the help they needed, their help was completely denied, or they did get the help, and now they need it more. What that gives rise to is people, essentially, realizing now they have to sell their home, which is why the short sales will increase.

Adam:
Yeah. Makes sense. Obviously, it's the first place that people go to is their home to sell in a time like this, whether they have equity, and that's the only cash that they have, and they have to sell it to cash out. Or, now they have this debt, and they don't have any equity. That's the route of the short sale. Coronavirus aside, one of the things it makes me think of, too, is I hear you keep referencing the financial crisis. We've seen short sales happen even in the best of markets. For example, where we are in Atlantic and Cape May counties, the financial crisis, we'll call it '08, when we had the casinos close in 2014 in Atlantic City, that's when we saw the most of our short sales, because of all of the employment that was lost during that time.

Bill:
Yeah. I mean, you're right. Any crisis is going to give rise to situations like this. You're absolutely right. Just to harp on the 90 day grace period on last time, I can't speak for all mortgage companies, but Shell Point Mortgage Servicing, they're making the homeowner pay all three payments back at the end of the 90 day period. So if your payments are 2,000 a month, and you get the 90 day grace period, that means on the fourth month, you owe $6,000, plus the $2,000 for that month. So eight grand. You're not going to have the eight grand to make that payment. So what's going to happen is you're going to have to do a loan modification. That's another interview we can do about how they don't really work so well. But the homeowners, it takes so long for the homeowners to realize that's not the answer either, and then they'll be calling us for the short.

Adam:
Yeah. Yeah. Without going into a different topic, at the end of the day, the mortgage companies want to get paid, right? That's why when they introduced this 90 day grace period, the mortgage companies, some of them overnight, increased their minimum credit scores, and the minimal reserve account balance that they wanted buyers to have, because naturally they want to get paid.

Bill:
Yeah. None of us know the future here, but it doesn't ... From where I'm sitting, it doesn't look good for the market.

Adam:
Yeah. Thankfully, there is solutions out there, and short sales being one of them, and potentially one of the best solutions, if you find yourself in this unfortunate circumstance

Bill:
Absolutely.

Adam:
So Bill, I appreciate it so much. Thanks for giving us this rundown and filling us in on everything short sale. Before I let you go, is there anything that we missed? If not, what's the best way for folks to get ahold of you?

Bill:
Look, obviously just about 40 minutes we've been talking. I can't go through 15 years of experience in 42 minutes. Every short sale is different, every bank is different, loan types are different. But again, that's just why it's super important for homeowners to contact us first, so we can guide them in the right way. I'm never going to push a homeowner into a certain option. I'm never going to say you have to do a short sale. My job as your attorney is to explain the pros and cons of all their options, and help them select the one that's best for themselves. It just so happens that if they're calling me, nine times out of 10, the best option they have is a short sale anyway.

Bill:
Best way to contact me is 856-61-5816. That is my cell phone. I know a lot of attorneys don't give their cell phones out to the general public. I do.

Adam:
You put it on this video now. You're going to get- phone calls.

Bill:
Yeah, I've always done it my entire career. It's one of the reasons I'm successful. I answer the text messages, phone calls. A lot of times I'll schedule consultations over text. My office number, if you want something more formal, is 856-528-2012. If you Google the Sokol Firm New Jersey, look at my website, you'll get my email, it's all there.

Adam:
Perfect. What we'll do is wherever this video ends up living or hosting, we'll put your website link and your office phone number just below it. So if anybody needs to get ahold of you, they can. If not, if you choose to contact us first, we have a direct connection to introduce you to everybody at the Sokol Firm as well.

Bill:
Yeah. You can put ... You have my email for my email signature, I'm sure. You can throw that in there, too.

Adam:
Absolutely, will do. Bill, I appreciate it so much. This has been fantastic. Thanks again.

Bill:
Yeah, Adam, pleasure man. Thank you very much. Have a good day. Stay safe.

Adam:
Yeah, you too.


Attorney Bill Sokol, The Sokol Firm, TheSokolFirm.com, 856-528-2012



*The content discussed in this video should be treated as a general opinion.  Consult your Attorney or CPA for specific legal and tax advice.