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.