Surprise Real Estate By Mike Horton

Dropping the home owners insurance when you have left your home and you are short selling the home could be a disaster! In a distressed home sale, homeowners that are no longer making their mortgage payments often forget about the home insurance. If you are not making the payments then your lender is not preparing to pay the home insurance when it is due. Even if you feel you are "tapped" out, this move could cost you thousands. In a short sale you still own the home and you are still responsible for the home and have a liability for the home. What is if there is an accident in the home from a door that was left open or glass that was broken by a baseball and someone get hurt. Who will the injured party sue for damages, it could be you! If the home has damage due to a toilet water fill that breaks and floods the house, what about the damage? All of these things do happen and can happen to you. If there is damage to the house the lien holder(s) may sue you for damages, called "waste" to the house. In a law suit the lien holders could elect to sue for the damages and you could loose the protection you may have received when you sold your home for the difference between the sales price and the mortgage value.

Your insurance company can provide the information to you about when the insurance policy is due. Insurance companies may have to adjust your policy if you no longer live there. All in all it is important to remember that until the house is sold or a foreclosure event happens and the deed tis transfered from your name, you are responsible, it is still your home. But don't believe me, call your insurance agent and find out exactly what you have to do to protect yourself from additional financial risk. Ignore this and things could get worse.

In Arizona our state association (Arizona Association of Realtors; AAR) has strived to generate standard contract forms that provide consistency to business of buying and selling real estate. When the short sale of property became a significant factor in real estate sales the Short Sale Addendum to the real estate purchase contract became a part of the tools agents needed in a transaction. What was once a significant help in protecting buyers in a short sale transaction, has become liability in the process promoting buyers and buyer’s agents to write many contracts that were never destined to be executed. In fact this form has:

• increased the number of foreclosures we are experiencing in Arizona
• provide an unfair advantage to the buyer
• increased poorly written contracts that don't provide adequate protection to the buyer or seller in a short sale transaction
• significantly increase the liability of agents in a transaction

 It is time we change the short sale addendum to address the changes in the market. It is time the short sale addendum provide fairness to both buyer and seller. It is time that the short sale addendum be modified to decrease the liability that faces an agent.

Owners with homes that are in the short sale process are often forced to stop payments in order to have the servicing agent (i.e. the bank) begin the short sale process. Both Fannie Mae and Freddie Mac backed loans require the owner of the home to be in default or in eminent threat of default before they allow the bank to begin evaluating the owner for the short sale process. This creates a time line that for the owner to successfully have a short sale transaction negotiated before the trustee sale. Most banks (ie. at the direction of the investor who holds the mortgage lien) will initiate foreclosure proceedings at the time the lien is 90 day late and set a trustee sale date about 30 days later. While agents can occasionally get a short sale transaction to process in less time than the foreclosure process, that is not typical. Even though I hear about sellers and agents who got approval in 10 days or 30 days, the realty is many short sales never close due to foreclosure. Why is that? When a buyer puts an offer on a home that will be in the short sale process, line 41 of the Short Sale Addendum allows the buyer to cancel ANYTIME prior to receiving the Agreement Notice from the Seller. This is a non-binding offer. Buyers will write offers on multiple homes and take the first one that comes through. More frequently than not, the offers that the buyer is no longer interested in are no longer addressed by the buyer’s agent. The seller mean while has been diligently working to get the short sale agreement notice from the lender. If offer is no longer viable and the seller’s agent finds this out, then that agent should inform the bank that the offer is no longer good and that they are seeking a new offer. This creates a situation where is they are in the foreclosure process and the trustee sale is coming up, the only way the bank will stop the trustee sale in most all cases is with a new offer ( and sometimes the bank will only allow a certain number of extensions or no extensions). If the offer is not canceled by the buyer’s agent (which does happen but not all the time) then the seller may not have enough time to get a new offer and the home can slide into foreclosure. Anyone who is involved with short sales on a regular basis has had this experience. There are more scenarios we could discuss that create conditions for trustee sale (the result of the foreclosure process) but my example above illustrates probably the experience most sellers have when the home is lost.

In today’s market the Short Sale Addendum is unfair to the buyer. Buyers can cancel at any time without any sort of commitment. Sellers have to put their property into the foreclosure process to get the short sale process started in the vast majority of short sales. The only defense the seller has when faced with a non-binding offer is to consider replacing the offer with a new buyer that is willing to commit at least staying through the negotiation phase. And by commitment, I mean opening escrow with a modest earnest deposit of say $1000 on a property that is not available for refund until the agreement letter or a mutually agreed time is written into the offer. I won't go into the specifics, except to say that the real estate transaction has always been based on a commitment by two parties to complete a transaction. In the short sale process as we know it today that commitment is not existent. Before I get to far afield of this specific point, I have often had pointed out that lines 13 - 15 provide the protection needed by the seller. This is a red herring.

First and foremost, banks are looking for the net that meets the requirements the investors have set for them. They don't evaluate contracts as to their quality or enforceability, just their bottom line. When a 2nd offer comes in, an assuming the first is non-binding, the seller’s agent has to help the seller decide what is best to do in the situation. If the bank is in document collection, accepting and presenting a new offer to the bank may be the best to do for the seller. But even if the 2nd offer is better, the seller’s agent must consider where they are in the process. When the financial evaluation is going on, a new offer may create confusion with the bank. Resets of the process are not unusual causing weeks of delay even under the best of circumstances. We all know that the quantity of homes under consideration by each negotiator is usually enormous. These weeks of delay can cause the buyer to lose heart (it’s a lot easier when there is nothing to lose) and drift away from the offer to another. If the offer has been presented by the bank to the investor, this could cause a significant glitch in the process with many weeks delay as the banks offer to the investor must be reworked. During this time unintended consequences can go rampant; BPOs that are no longer usable because they are older than 90 days; the investor may not allow any more extensions to the trustee sale date and the home goes into foreclosure; paperwork is lost; the file is passed to another negotiator based on the phase of the negotiation and then must go back in the process. More delays and more delays. Murphy's Law works overtime in this process.

What about contracts and how they are frequently modified to protect the seller or provide more protection to the buyer. Article 26 provides agents in Arizona with the right to write and modify real estate contracts. These are legal contracts and all of the ramifications of writing a legal contract apply. Typically we are concerned about saying to much outside our discipline of real estate, like advising someone on bankruptcy. But what happens when you do not adequately explain a paragraph and the implications when written by another agent in your discussions with your client? What happens when you accept a clause in the contact such as eliminating lines 13-15 of the short sale addendum when written in a non-binding offer and the buyer fails to perform and the seller goes into foreclosure?   What happens when you write something in the short sale terms and conditions that the deal to fail or maybe your buyer's earnest money is tied up for a long period of time after you have canceled your offer? You might say, well just give to the seller and let them make the decision and recommend they go to legal counsel specializing in real estate. What I am hearing is that is insufficient to protect the agent. The error of omission can be as bad as the error of giving advice outside of your expertise.  Agent’s liability is increase and sellers and buyers have protection that is maybe inadequate for the process.

In the short sale process, buyers have all the advantages with the standard short sale addendum focusing on providing them with the ability to cancel at anytime. Sellers can only be protected by performing significant surgery on the short sale addendum. An even then, when the agreement letter is presented and technically the offer become an executable contract, buyers often demure. They have bought another home or maybe they have buyer’s remorse and just don't like the home. Many will never even open escrow. When that happens the seller no recourse except to obtain another offer at the last minute if possible or try and force the buyer to open escrow and go through the motions which is really a waste of time.

My goal of this blog is not to discuss if distressed sellers are deserving of protection. It is not to say we should have or not a short sale transaction. it is to say that the process has to be changed such that we real estate transactions that are as close as possible to what I will call a straight sale where we have committed buyers and sellers, where buyers and sellers are on equal contract terms and where the real estate contract has meaning and the protection it provides to both parties is what we intended it to be.

In a future blog I will recommend changes to the short sale addendum.

OK, you have been looking at homes that are in pre-foreclosure for sale (short sale) and you found one you like. It is in good condition and not a major fix up. Your next step is to write an offer and for arguments sake lets say it is listed for $150,000. Before you write that offer you check out what has sold in the immediate area over the last 3 months and determine the list price is at current market. Now you have to decide what price do you want to offer. Thinking back over what you heard or read in news reports or heard on TV or Radio commercial about making offers on distressed properties you decide lets really discount the price and write your offer for $100,000. The lender (who has final approval) will negotiate right?

In essence, you have put yourself in the worst position you could have. In the current market, lenders know that there are a lot of buyers trying to find homes and they are willing to pay market or close to market because prices are at the bottom. Wait you just heard that the market was still decreasing. Check the market facts not the hype. In Surprise in all zip codes, the market bottomed out in April, May , or June of this year. It came up a few dollars per square foot since then but has remained steady, The number of buyers are keeping homes from further decreasing in price, its a competitive buyers market. As luck would have it, there are enough foreclosures and pre-foreclosures keeping the market prices from raising appreciably. So in effect the market for homes is between two forces holding prices steady. So why should a lender approve a short sale with a deeply discounted offer? They won't, they know they will get a better offer.

What will they do? From my experience there are a couple of reactions. First they come back with a price that is about 10% less than market. That seems to be bottom spot for them. Then they will often ask for a substantial seller contribution in the range of $5,000 to $10,000 cash from the seller at closing. Note that they also will often provide a promissory note option payable over 10 years at 0% interest for twice the amount (looks like a hidden interest to me but that is another topic). So now you have set the tone that says you must meet their new price (this is extent of their negotiation) and the seller has to  come up with substantial cash at closing. What are the odds this will happen?

When you go to a seller and ask for a cash contribution, the most common comment I get back is "If I had that kind of money I would not be short selling my home". So where are you now. As the buyer, you can walk away from the deal or your can make the cash contribution. This is where you have to make the decision, could you have made the offer at a price where the lender would have been willing to take it without a cash contribution from the seller? If you did then the money you would have spent would be in the mortgage and not cash out of your pocket. This is a value of money decision. Buying home at super low prices have passed this market unless their is something very wrong the home.

The second response is that tell you it is not enough. Sometimes that continue with additional price guidance and sometimes you have to guess. Believe me that's when your offer drops to the bottom of their pile.

The second issue is that you are competing against other buyers. The listing agent has the responsibility to provide their client with the best opportunity to short sale their home. if a better contract comes in, a listing agent has the right to swap yours out. The listing agent wants the home to sell as quickly as possible. Unless you modify the short sale addendum, an offer can be replaced at the lender anytime prior to receiving a letter of acceptance from the lender. If you are serious buyer, you contract maybe replaced and you may or may not know about it until it to late. The listing agent should let you know when you are no longer in the primary position, but it doesn't always happen.

Your best bet as a serious buyer is to write your offer such that the sellers lender, who must approve the offer price and provide their additional conditions,  will see the offer as just meeting its requirements for not asking for seller contributions. Lender negotiators are more likely to review the offer quicker and not find reasons to put it aside for future review and allow you as the buyer to decide the amount of leverage you want in your transaction at the beginning and not under the pressure of losing the home purchase from having to make larger cash contributions then you are comfortable with at closing.

Remember the critical issues. Know your market, know your comps, find out who the lenders are and what are their requirements for an OK, know what additional costs you may have to pick up for the seller, and know what mortgage and cash levels you are comfortable considering. Short sales are very little resemblance to a non-distressed home sale. You are going to need someone who has the experience to provide knowledgeable advice on what is a complicated process.

Anti deficiency ARS 33-814 provides protection to the borrowers in some cases against a deficiency judgement when their property has gone through a foreclosure. In many cases, it appears the lenders are recognizing the limitations this statute puts on them to obtain a judgement after the deed transfer takes place and they are willing to allow a short sale. In a Short Sale there is nothing that prohibits them from asking for seller contributions as a part of the demand letter stating the conditions that they are willing to accept to release the lien on the property. Conditions could include additional monies at closing or a repayment of all or part of the loan over a period of time. This applies to any deed of trust lien on the property.

Any lien in anything other than the primary position is wiped out during a foreclosure. In some states which don't have an anti-deficiency statute, the lender can pursue a judgement against the home owner. The Arizona Anti Deficiency statute prevents the lender (primary or otherwise) from seeking a deficiency judgement against the foreclosed property owner if the property is 2.5 acres or less, is used as a single family or single two family dwelling and the lien(s) were used to purchase the home.

In a short sale, the Anti-Deficiency law does not apply. When an offer has been evaluated by the lien holders in a short sale they will provide a letter which states which conditions the lien holder is willing to release the lien. The primary lien holder will have the final say on how much money of the total purchase price will be assigned to each lien holder. The amount of money the suborinate lien holders want may match what the primary lien holder wants or it may be more than what is provided. The seller (owner or designate) will have to negotiate between the primary and subornate lien holders to get the best possible resolution to be able to sell the house. This usually entails restating seller financial conditions that caused the loss in the first place, describe the current market conditions and provide additional information to sway the subornate lien holdes to reduce their demand to match or come close to what the primary lien holder wants to provide. If the primary lien holder will not provide enough money to satisfy the subnornate lien holders, you may be able to get terms.  The amount of wiggle room you have is dependent on the assest owners guidlines and your ability to provide supporting information. You are working with a system that has little regard for the individual problem and is more focused on the overall financial picture over many liens. The servicing groups, lenders and investors have their guidlines and those are not very flexible.

When the negotiations have been complete, the seller (owner) has to decide what they can afford financially to meet the lien holder demands. If they can not or will not meet the lien holder demands there are two options. First is to try and split a part of the lien holder demands with the buyer. My suggestion for sellers and their Realtor is to work with the buyers and buyers agents to see if there is a way for each party to contribute to the lenders demands. The buyers are typically getting a very good value, so while there is often a lot of grumbling, buyers are often getting a great deal anyway.  This is very dependent on how well the buyers agent can represent the value of the property, understands the short sale process and sets buyer expecations early in the game that this type of problem may stick its ugly head up. It is a team effort to get these negotiations done successfully and being up front with everyone when this problem comes up is critical to success. In some cases the issue becomes highly emotional, so its important that everyone look at this from a value perspective to the buyer and the seller realize that over the long run closing the short sale will have more long term financial advantages over the short term costs.

Most certainly I recommend for buyers and sellers to talk to a real estate attorney who deals in residential issues for more clarification on the Arizona Statutes concerning anti-deficiency.