It’s hard to imagine in this day and age with the amount of information available on the internet about how homeowners can avoid foreclosure that they still happen. But they do. Although the foreclosure process ends with the possession of the home (the collateral for the mortgage loan) returned back to the bank that is servicing the mortgage, what some people still don’t realize is this: foreclosures with equity can be just as common a foreclosures without. What is a foreclosure with equity? It’s a foreclosure of a home that is worth more than what is owed on the outstanding mortgage. Banks that service the mortgage loan for homeowners will use a Trustee to handle the business of sending notices and ultimately the sale of the property at auction if a mortgage is in default (has not been paid in full and on time). In some cases, a property that is sold above what is owed on the original mortgage+interest+legal fees is classified as an Equity Foreclosure, meaning, the amount over what is owed to the bank is equity, the borrower’s equity. BUT the borrower must makes a demand to the Trustee for the equity portion to be returned! Although the bank does not get to keep this “overage” the borrower must make a demand to receive it. The foreclosing Trustee will almost never make an effort to find the borrower if the borrower is still owed money from the sale of the property. It is very important to understand that a borrower who has equity in their home can still experience a death, divorce, disability, loss of employment or income source or a variety of other “life events” that can cause a borrower to get behind on their payments. If the payments continue to remain unpaid the bank who is servicing the loan can still move to foreclose the home, even if the home has equity. One strategy to avoid foreclosure of a home with equity is the sale lease-back. As a true win-win strategy it allows the borrower to lease back their home from a new buyer with a promise that they will be able to purchase the property back after a certain period of time has passed. After the borrower repairs the financial damage that caused them to get behind on their payments, the borrower (who will temporarily become a tenant) will have the option to purchase the house back in the future at an agreed upon price. The new buyer and the borrower will negotiate how the equity in the property is split before either party enters into the sale of the house and after reviewing the contract with qualified legal counsel. The equity in this scenario is used by the borrower as a bargaining chip with the buyer and in turn offers the opportunity for a buyer to earn a return on dormant cash that might be earning a meager 1% or less in a savings account. In my next article I will discuss ways to avoid foreclosure of homes that have no equity. To your prosperity!
The loan modification failed. You’ve shelled out tens-of-thousands of dollars in attorney’s fees. The impossible-to-pay mortgage payment is WAY behind. All the agents of foreclosure (Realtors, Lawyers, Media, Guru’s, etc.) are telling you the same thing: A short sale is your only option. It’s your only way out. So it would seem practical that your next step would be to contact a realtor to list the house for sale. Well — you would be surprised how many realtors I have met that simply focus on “getting the sale” to “get their commission” that they forget the obvious: the homeowner is the client, not the bank. Realtors who focus on the sale typically only focus on “what the lender wants.” If your a homeowner in this predicament remember — TERMS are all that matters to a homeowner in a short sale transaction, NOT price. A homeowner needs TERMS to ease the burden of dislocation. Let’s be real. The homeowner is about to lose their house. It will be potentially one of the most traumatic experiences of their LIFE. What should a homeowner do? This is what I would do — First — I would interview a potential listing realtor. I would ask this simple question: “What terms were you able to get your last short sale client at closing?” If the agent begins to deflect the question with a canned response that is similar to this… “Well with short sales, its up to the lender…” I would RUN. Not walk, RUN! This is a realtor who has NO IDEA what they are doing! So don’t be surprised if they get you NOTHING at closing. NEXT, I would keep calling till I found a realtor that could give me a verifiable deal story. An instance of how that realtor was able to negotiate time or money. Or both. Keeping in mind verifiable means, the agent will give you the contact information of the homeowner they helped. Like anything else, never assume a story is true no matter what you have heard about a particular realtors reputation. Verify everything. Why does this matter for homeowners? It’s like this: This is your LAST chance to get help — you have NOTHING TO LOSE BY SIMPLY ASKING. In addition, you might be surprised to hear what the lender is willing to do to move on in the process. Most recently I met a homeowner who was offered more than 120 days — 4 months — to find a new residence. That’s 4 FREE MONTHS OF RENT! Another homeowner I met was offered over $10,000 by the lender to ease the burden of moving within 30 days! THAT IS WHY TERMS MATTER! You never know until you ASK. If you find yourself in a Short Sale scenario contact me through my blog. I can help!
In all my years of experience I have worked with some incredibly sharp-minded partners to learn how to help homeowners find solutions to financial challenges. Each partner was solution-driven. Sometimes homeowners are faced with financial problems that look like a tangled plate of spaghetti. But insert one experienced chef into the kitchen and viola! A meticulously crafted entree appears! My first real estate deal taught me many lessons, lessons that can prevent any homeowner from being foreclosed on. For the sake of protecting the innocent, I am going to change the names and dollar amounts of the transaction. So the homeowners were Kathy and Joe. Kathy had called me one day telling me she and Joe were deeply underwater financially, behind in payments and the bank wanted to foreclose on their home. ADD to the situation that Joe had lost his job due to poor health, being diagnosed with cancer. Kathy had no regular earnings as she had just started up a new business which had not been profitable yet. We decided to to meet immediately. With foreclosures the clock is always ticking. After arriving at their home I was greeted by Kathy and Joe. I will never forget the look on Joe’s face. Fear. The saving grace was that Kathy was optimistic. As I walked the property with her I found it to be in very good shape. With the walkthrough complete the three of us sat down to discuss options. The couple had a minute amount of savings. Next income, of which there was none since Joe was not able to collect unemployment yet. His first check would take 6 months to arrive. And only a paltry $400 every week. Next the debts. A first mortgage for $500,000. A 2nd mortgage (really a HELOC) for another $200,000. And then back taxes, totaling $10,000 which was being paid by the bank holding the first mortgage. Insurance, none. Next, a quick look at home price comparables. I figured the house was worth about $450,000 on its best day and $435,000 comfortably. In order to attract qualified buyers it was decided to charge the seller (the bank in this case) a 6% commission, that way the realtor-sales agent community would be incentivized to bring a buyer to the table. Additionally the Notice of Default had already been sent to Kathy and Joe a week ago with us going into the winter holiday season, the most challenging time of year to sell a house. Based on my numbers both banks were going to take a hit. The next morning I contacted the bank and explained that I would be representing the seller so I wanted the short sale package asap. After completing and sending the short sale package back to the bank they ordered a BPO (Broker’s Price Opinion) within a week. Bad news hit almost immediately. The BPO came in OVER market. $550,000! Had the BPO agent done this purposefully to give the bank justification to reject our short sale and continue with the foreclosure? I was without words. I immediately forwarded my comps to the bank. Arguing ad nauseam that the BPO was WAY over market. A day or two went by and they adjusted the BPO per my comps – to $525,000. I knew what this meant. Go collect offers ASAP and SHOW the bank why they were going to end up taking less. So Kathy and Joe helped me get the house ready for a series of open houses. One weekend after another we came up empty handed regardless of the high volume of potential buyers that walked through the house. There was plenty of foot traffic to get one written offer. I couldn’t understand it so I called each agent, one after another and asked “what’s wrong here? Why didn’t your client write an offer? The house is great. The yard is great. The amenities are current. The school district is great. What is it?” They all said the same thing. “My buyer thinks its overpriced and wants to wait till spring.” Since I knew I needed offers now I put it to each agent this way. “Write ANY offer you want. I’ll present any and all offers. But I need it in 2 days!” And write they did. I got some ridiculously low offers. But that’s what I needed to show the bank where the market was this time of year. The highest offer was $430,000. Not even close to the banks $525,000 BPO. Now the BPO isn’t a rule but it IS a number and like all things, only good numbers matter! As we continued to hold open houses my negotiations with the bank representative began to progress. After a few weeks the bank finally agreed to update the BPO. So they sent another agent. This time the agent nailed it – $446,500! PERFECT! I contacted my transaction coordinator who immediately updated the MLS with the price reduced banner on the MLS listing. Immediately I generated a non-represented buyer. A young family who lived in the neighborhood and saw the Price Reduced rider that I attached to our house sign. They wrote an offer and presented it to me that night. $440,000 was the offer. With proof of funds, income documentation and a letter from the loan officer the offer was forwarded to the bank for approval. The 2nd mortgage was paid $500. The bank holding the 1st mortgage accepted the offer and discounted the loan balance to the $440,000 offer, and still paying the 6% commission. Unfortunately right before we closed escrow Joe had passed away, succumbing to his cancer. On the day we did close escrow I asked Kathy what she might do. She didn’t have a penny to her name. You see Kathy and Joe were in their young twenties. They had not yet started saving for a future together. The house purchase WAS their new beginning together. They were living off of Joe’s earnings, slowly starting their new lives together. Because Kathy was a friend I gave her half of my commission. I told her to take the money and start her life over by using the money for education – education that would help her start a new career. And she did just that, enrolling in nursing school almost immediately. A few years later she has a reliable and dependable career in nursing and is able to support herself, save a little and start a new family with her new fiance. At the end of the day, the foreclosure was halted because I incorporated a plan to take ALL-OUT-MASSIVE-ACTION IMMEDIATELY. There are so many alternatives to a foreclosures. This is just one deal. I could share many more. And over the next several weeks I will. If you know someone who is getting behind in payments please have them contact me. The devastation from a foreclosure for some people is irreversible. The good news, its completely avoidable.