At some point, you might find yourself up against a rock and a hard place. Been there, done that, I can tell you all about it. The most important thing to remember is that creativity always trumps conventional thinking in times of need. Especially when a deadline is looming. The bank, debt collectors, almost anyone you have ever done business with, is now filling your mailbox mailing with letters, phone calls fill up your voice mail, text messages blow up your phone – it never stops! If you find yourself in this situation these are IMMEDIATE SOLUTIONS that can put you in a better situation, (depending on your exact situation):
- CASH OFFER – This is your FASTEST path to cash. Selling your house to a buyer that offers cash will allow you to sell your home in a no-nonsense way. The buyer just wants to know, after paying off the loan on the home, that they will get free and clear title. As fast as the title company can clear title, the deal will close. If you are upside down with your loan, meaning your house is worth less than what you owe it is strongly recommended that you request a cash-for-keys condition in counter-offer to the buyers offer. In this situation, the bank is agreeing to accept less money than what is owed on the home, but it is reasonable for a seller to be allowed “walking money” when the deal closes. That “walking money” is what the seller will use as a security deposit and moving money towards their next residence.
- STAY IN YOUR HOUSE – A sale/leaseback is the most common way for a seller to sell their property today, lease the property back from a new buyer, and then purchase the same property back in the future. The seller can either sell the property at a discount to the buyer so that the seller can purchase the property back at today’s value, or sell the property at today’s value and purchase the property back at a higher price in the future that is agreed to by the seller and buyer. The advantage a sale/leaseback offers is that it allows a seller to geographically stay put and enjoy the benefit of their present location. Examples would be a seller that needs to stay in a specific school district, a seller that receives medical services from a specific medical professional and military personnel that have pending orders to ship out, but have not yet been assigned a new base location. The buyer must be an investor who has no intention of ever moving into the property whose primary goal is to rent the house for income. Additionally, the seller should consult their agent how to draft the paperwork to ensure the future purchase date is specific and agreed to by both parties. Contracts that state the “…seller can buy back the property in the future…” is too generic and must state a specific price, date, any extensions of time agreed to and how those extensions will be communicated by both parties. For a seller that is resistant to moving or leaving, this method can be their best selling solution!
- LIST WITH A REALTOR – This method, while not as fast as accepting a cash offer, wastes minimal time because the realtor will market the property on the MLS system, giving the property maximum exposure to the market. Additionally, an agent will work with the seller to sell the property for the highest and best offer based on the terms, conditions and price offered by the buyer that the agent feels has the highest probability of closing the deal. Nothing can be worse than entering in to an escrow that doesn’t result in a sale. Agents work very diligently with buyers and buyers agents to only do business with buyers that offer the highest probability to close. A fee is paid to the agents to negotiate through all the offers and potential buyers, a process that allows the cream to rise to the top, to ensure a sale happens to the satisfaction of the seller. Any seller who does not want to waste time with their property sitting on the market will list with a realtor to give the property the maximum exposure to draw qualified offers in the shortest period of time.
- FOR SALE BY OWNER – A solution where the seller representing themselves and the property that is being sold in order to work directly with buyers. Although this process will eliminate the fee’s associated with listing with a realtor this method from my experience wastes more time on the market, unless the price, terms and conditions are highly favorable to buyers. Rarely do I see sellers price or give favorable terms to buyers in their self-made-home-marketing. A for sale by owner sale can generate an immediate buyer but the owner who is the seller now must open the escrow and ensure all of the deadlines are met according to the terms and conditions outlined in the purchase and sale agreement. They must also be familiar with how to read the terms and conditions or hire a lawyer to explain the contract to them to ensure contingencies are removed according to the contract terms. The advantage owners see in this solution is in not paying agent fees. The disadvantage is that the property will not be marketed on the MLS for agents to show buyers eager home buyers. This could make the buyer pool for the property significantly smaller for the property.
- HOUSE TRADE – This is the SLOWEST path to cash and potentially a non-cash transaction where the seller is trading one property for another property. Although a trade can take longer to match sellers of different cities and states together, this is a method of disposing a property where Seller A can assume the debt payments of Seller B and vice-versa in order to keep all financing in place and require neither seller to apply for a new loan. A trade can also get creative in the event one property is valued much higher than the other property. An example of this might be where a California seller with a property valued at $500,000 wants to trade a property with a North Carolina resident who is selling a property for $200,000, and wants to buy a property in California. Since the California seller’s property is much greater in value, the California seller can offer to trade her property for $450,000 where the North Caroline seller sells at $200,000 and then owes the California seller another $250,000. That difference can be turned into a promise to pay by the North Carolina seller. In this scenario the California Seller moves into the North Carolina property for no money down, collects $250,000 of payments over ten years, and traded the property at near asking price. The North Carolina seller moves into the California property with no money down, traded their property for $200,000 (full asking price) and makes the additional $250,000 payments over ten years. In this scenario there is no upfront money exchanged by either party. This can be a very clean transaction but it is strongly encouraged that legal counsel for both parties before entering in to the agreement.
- REFINANCE YOUR LOAN – This is a non-cash option. This can be the most obvious solution, but, is not relies on the borrower’s creditworthiness. With this solution a borrower that is still creditworthy might be able to get the property refinanced with little difficulty. But . . . in the case of defaulted borrowers, my experience has shown me this solution has the least success. Again the creditworthiness of the borrower is critical with this solution!
These are just a few of the options available to owners that are facing the possibility of foreclosure. Like all solutions it depends on a borrowers situation at that time. There are no guarantees with any of these solutions. It is also strongly recommended that none of these solutions be executed until a borrower seeks the advice of legal counsel and a realtor in the event a realtor will be hired to represent a seller.
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In 1992 an up and coming real estate investor/agent found himself over his head in the commercial real estate market — $5 Million in debt! He couldn’t pay back the loans for his commercial real estate projects. At the same time many developers were getting out of commercial real estate because the market was collapsing. Not a single banker would negotiate or restructure his debt. His loans were causing him such a headache he couldn’t pay his bills including his mortgage. He had to downsize immediately! So he put his house on the market before serious trouble ensued. But he didn’t try to sell his house. Instead he recognized that his home had value and if he could find a suitable renter, it would allow him to return to his house after getting his financial situation in order. He consulted several colleagues and determined the best idea was to find a tenant that would pay a full year of rent in advance. This strategy would allow him to keep his house, even though he would have to move out temporarily. He called every realtor he could think of and asked if they could knew of a renter who could make a full years worth of payments — up front. Weeks passed when one morning an associate learned about an athlete who had just retired from sports and was between home purchases. The athlete wanted to take a couple years to make her next buying decision. After walking the property the athlete said “I’ll take it. Would you be ok if I signed a 2 year lease?” The investor/agent couldn’t have been more excited. In actuality the athlete liked the home so much she actually stayed much longer. This gave the investor/realtor the time he needed to rebuild his residential real estate business, which at that time was his only source of income. It took 8 years — but he did it! Eight years after he had left his home he was able to move back into his residence which had never gone into foreclosure. Foreclosures are on the rise again. If you come across someone facing financial strife please refer them to this blog. There are more and more solutions available to ease the burden and solve the problem at hand!
So now your behind on your house payment. That job with the big commission is now further delayed till next year. You open the mail to find that you owe tens of thousands of dollars on credit cards and your bank account balance just dropped below a thousand dollars. Your getting the picture. This was the scenario that my customer Jerry and his family were facing (I changed the names and dollar amounts to protect the innocent). As an artist, Jerry earned commissions when he sold his works of art. His wife Diane had a steady office support job that she had been working for over twenty years. With the downturn in the economy (for Jerry) Diane soon found herself the breadwinner of the family. Behind on their house payments, the threat of foreclosure seemed inevitable. Through a mutual colleague I met Jerry at the brink of financial disaster. Only it wasn’t. You see Jerry had several patrons that, through the years, had kept his business thriving. Jerry had done a great job keeping in close touch with his business patrons. Our discussion also revealed that Jerry was waiting on five (5) years worth of work that could be commissioned any day now. Even if only one project was funded it would bring enough income to last for more than a year! Based on our conversations I believed his best opportunity was two fold. First, Jerry had to get out of the original loan. It was in default and the bank was not receiving timely payments. Second, I requested Jerry reach out to his patrons and ask for a private equity loan. Based on his earnings projections he we was to ask for a five (5) year loan with a modest 6% interest rate and a payment schedule that would start out low but increase each year till the end of the 5 years. At the end of the five years Jerry would refinance the loan into his and Diane’s name and the patron would be paid back all of the interest and principal accrued to date. Although the patron liked the idea, at the last minute they changed their mind. The patron was concerned that if Jerry got behind in payments again, the patron would be forced to foreclose on Jerry and Diane. A scenario the patron could not stomach. So the patron contacted me and made the suggestion that instead they would buy the house outright, put the house in the name of a trust and then would rent the house back to Jerry and Diane with the right to buy back the property at an agreed upon sum at the end of five (5) years. That way if Jerry got behind the patron could adjust the rent and would not be forced to foreclose on the couple. After discussing with Jerry and Diane it was agreed. I soon drafted a purchase and sale contract for Jerry and Diane to sell the house to the patron’s trust, then executed a lease-with-option-to-buy in the amount that Jerry had just sold the house. The lease payments were small enough for Diane to cover and, five years and one month later, Jerry and Diane were able to purchase the property back by obtaining a new bank loan. Will this method always work? No. But it did because it was a STANDARD SALE. You see the banks do not allow a SHORT SALE transaction to occur where the buyer then leases the property back to the debtor (the debtor was Jerry and Diane in this case). But there is no such restriction with a standard sale. In my next segment Foreclosures are Avoidable Part 3, I will share a scenario that involved a short sale scenario.
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.
Recently I have read how affordable home ownership has become, including how foreclosure filings are at a 7 year low. On the flip side, mortgage delinquencies are up! Mortgage delinquencies mean that the borrower is behind on their payments, but no sale is pending on the home. I believe if it weren’t for several states enacting new laws that delay foreclosure sales, the filing against delinquent borrowers would be much higher …http://dsnews.com/news/12-30-2014/foreclosures-falling-delinquency-rate-climbing