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How the Short Sale Arm’s Length Can Backfire on a Seller
Some Sacramento short sale sellers could be headed for a big surprise down the road after signing an arm’s length. I know this because I’ve talked with a Sacramento short sale agent here and there who see nothing wrong with letting the parties to a short sale make agreements outside of the closing. They can agree to all sorts of things that are against the law and without the bank’s knowledge, but a common happenstance is over possession. Sellers sometimes have a hard time moving so they want to rent back, but most of the short sale arm’s length agreements prevent a rent back. Therein lies the problem.
Now, you can ask the bank for an extension but a short sale extension is not always possible. Especially if the bank has already issued an extension. A bank is not always eager nor willing to issue a second extension. I’ve had banks say they would close the file and start the short sale over. In some instances, that solution would be OK with a seller because not every seller is in a rush to move — especially if the seller isn’t making a mortgage payment. Free rent doesn’t come along every day.
I can tell my sellers we are closing on a certain day but that doesn’t necessarily mean they understand that they have to move out. Doing a short sale is an overwhelming process for many people. Each is different and can be convoluted, so it’s sometimes difficult to predict what a seller may or may not understand. But one thing is for certain. If a seller violates an arm’s length agreement and works out some kind of rent-back with the buyer, it might seem innocent but it can cost the seller big-time. If the parties agree to a lease back, for example, and the arm’s length prohibits such a lease back, it’s possible the bank could rescind the deficiency waiver.
There is a little clause in CA Civil Code 580e that says the deficiency waiver does not apply in the event of mortgage fraud. If a seller intentionally defrauds the bank, the bank might demand that all of that forgiven debt be repaid. Apart from the ethical implications, there could be legal ramifications and consequences to violating the arm’s length. My advice is just don’t do it. Don’t go through the headache and heartache of a short sale just to end up with the deficiency back in your lap.
It’s in a seller’s best interest to plan to move out on or before closing in a short sale. The agents don’t set the closing date, the banks do. And right now, because of the expiration of the mortgage debt relief act, many approval letters are coming in with fewer than 30 days to close. Everybody and their uncles are trying to hit that December 31 closing date.
School Teachers Can Do a Short Sale
One thing that this Sacramento short sale agent is blessed with is super nice clients. All of my clients are really nice. But some of them are exceptionally nice, over-the-top nice, the kind that if you turned to talk to them while waiting in line at the grocery store you might feel embarrassed because you’d end up hugging a total stranger out of the blue — THAT kind of nice. And I am not a huggy-feely type of person. I am more of a firm handshake type of person.
This particular seller and her husband are high school teachers. They are super sweet, sensitive and caring. They started their life together as a young family in this home in Rancho Cordova. As the years passed, they, like many new families in Sacramento, outgrew the tiny 2-bedroom, 1-bath home.
They bought a larger home in a nearby community and rented out their former residence. Unfortunately, the rent did not cover the mortgage payment and unexpected rental expenses. But they could still get by because they both worked over the summer months at a summer school. When the economy crashed, they lost their summer employment. Expenses mounted. Like so many homeowners in Sacramento, they did not count on the value of the property falling as well. They had hoped if they ran into difficulty that they could sell the home. But selling this home was not an option because they were underwater.
We began this Rancho Cordova short sale in May. The market was very hot in Sacramento in May. Not as sizzling hot as it is now, but it was a strong beginning of our seller’s market. We received a ton of offers and had to sort through them all. One offer stood out from the rest. The offer was from a real estate agent who was trying to buy a home for her son and his fiancé who were beginning their own family. The lender in this situation was Sun Trust (notoriously slow), and there was a second lender that was demanding more than the first loan would allow. The buyer agreed to hang in for the duration and not cancel. Bingo, that’s our buyer.
It took us 7 months to negotiate and close this Rancho Cordova short sale. We were rejected once because the lender could not understand that teachers live on 10 months’ of income in a 12-month calendar year. An important thing I have learned over the years as a Sacramento short sale agent is not to give up. Not to throw in the towel. Especially NOT when sellers are counting on you and the buyers are counting on you. If there is a shred of hope, you find a way to get the message through, and you close.
Wishful Thinking Won’t Close a Short Sale
I’m not from Missouri, so you don’t have to show me the money. But I do have built-in radar that makes me question certain things. If something seems off, I tend to explore it. That’s my nature. I grew up with the expression: Question authority, because I lived through the 1960s. You will notice I did not say I completely recall the 1960s, but I did survive those years.
Today the expression is: Question everything. When one is a Sacramento short sale agent, one tends to question everybody and everything anyway because a real estate agent has a legal fiduciary to her client. I look at what people do and not so much what people say. Sometimes, agents can be bamboozled. Some of them so badly want to hold a deal together that they’ll let things slide and they’ll believe their own wishful thinking. For example, I am working on a short sale in which the buyers were unwilling to meet the bank’s demands. They sent a signed cancellation. Then, after talking with a third-party vendor for Bank of America, I was able to get the bank to agree to look at a different solution.
I presented this solution to the buyers in the form of an addendum. That was a couple days ago. The buyer’s agent says the buyers will sign the addendum. Every time I ask him for it, he says it is coming and he is working on it. But the addendum has not arrived. There comes a point in which somebody needs to be the grown up in this situation. Today is that day. We need to examine the facts. The facts are we have a signed cancellation. We do not have a signed addendum. We have a verbal that the buyers will sign the addendum but the addendum is not in my hands.
It’s nothing personal, but that short sale is going back on the market today. My advice to my sellers is to sign the cancellation and find another buyer who is willing to perform. As a professional courtesy, we gave the buyer’s agent until 9 AM today to produce the document. If it shows up, the home won’t be released to inventory, but I am not holding my breath. I wish people would do what they say they will do. But that’s what they call wishful thinking. If you’re looking for a short sale in the Sacramento area, call me.
Two Loans on a Short Sale for Luxury Homes
Having to deal with two loans on a short sale is always a bit tricky. I’ve yet to encounter a dual loan short sale slam dunk, and I’ve closed hundreds of short sales over the years. Over the last 12 months alone, not counting my regular equity sales, this Sacramento short sale agent has closed 138 short sales. Not one involved an easy second loan to negotiate. They are all a pain in the butt. But I do them because they come with the territory. I’m not about to decline a listing just because it involves a little bit of extra work. After all, I sell short sales. By the very nature of the transaction, a short sale is a lot of extra work over a regular sale.
I can share with you one such solution to the two loans on a short sale problem involving a luxury home sale. Upper-end short sale homes are handled differently than entry-level short sales. I just closed a short sale home in Roseville with a $1,000,000 first mortgage and a $300,000 second mortgage. Both were held by the same lender. This is important only to the extent that two loans on a short sale, held by the same lender, does not necessarily mean the investors for each loan are the same. The investors can be different. Plus, the junior loan can be managed through another department in a different state.
The second loan was hard money. Lenders aren’t always flexible with a demand for a hard-money second. That’s because these loans carry recourse in California. A lender could just wait for foreclosure, get wiped out and then pursue the seller for the deficiency. This is why it’s important to consider a short sale for hard-money loans because the rules governing short sales are different. When a short sale is approved, under California state law, the lender must forgive the deficiency and waive the right to pursue the seller.
In this particular instance, since both lenders were the same, the second lender might not have had a legal right to pursue the seller in the event of foreclosure because there’s a little known law that excepts those instances. You can’t have your cake and eat it, too. But that’s neither here nor there, and I am not here to give legal advice. If you want legal advice, you must ask a lawyer.
In this luxury home short sale in Roseville, the second lender wanted a lot more money than the amount the first lender would approve. Most first lenders will authorize payment from proceeds somewhere from 6% of the unpaid principal balance up to $8,500 maximum. There are a few exceptions, and I’ve seen banks authorize a payment of 10%, but in this instance, the second lender demanded a big chunk of change. Peanuts as compared to the deficiency balance, but it amounted to a lot of money. The seller can’t pay it. California Civil Code 580e prevents a seller contribution. But the buyer can pay it providing, and this is the tricky part that you can’t overlook, the first lender approves. We negotiated the payment and reduced it but it was still almost $20,000. Since the first lender was the same lender as the second, the first lender approved the payment.
This was a good deal for the buyer because the buyer really wanted the house and was picking up the home for about 50 cents on each dollar of debt. We suspected a buyer contribution was a distinct possibility when we chose the buyer for this short sale. We asked the buyer: If push came to shove would the buyer step forward? Because you never know exactly what a short sale bank will do. When you think you know, that’s when you get into trouble. But this buyer agreed to discuss if the issue came up. It did, they paid it and we closed.
Sacramento Short Sales are Like Snowflakes
You can do all of the research in the world online and still come up with the wrong answer about a Sacramento short sale. That’s because no two short sales are identical. Short sales are like snowflakes. Each is different from each other. Sure, you can try to categorize them and say, oh, a Bank of America FHA short sale is so bad it makes you beg for a bullet between the eyes to put you out of your misery, but that wouldn’t necessarily be true. Sometimes, you might trade having your guts stomped on by King Kong.
Yet, this Sacramento short sale agent continues to list B of A FHA short sales because I am an optimist. I’m one of those glass-half-full people, and I especially am happy if it’s half-full of champagne. I toast you Bank of America, for your FHA short sales and the opportunity it presents for you to overcome this monster of an obstacle.
So, while you can partially classify a short sale by the bank and the investor, the condition of the property, location and appeal of the home in Sacramento, and the seller’s particular hardship all play an important role in the short sale. You can tweak any one of those factors and conditions, and it will change the outcome of your short sale. Throw into the mix a second loan, a Fannie Mae investor and any kind of financing that was not purchase money, and flip that switch on the blender — turn it up high, so high that the contents blow off the lid and that icky, gooey mess hits the ceiling and drips back in your face. How does it taste? Yuck is right.
Here is what some Sacramento short sale sellers will hear this month: It’s OK that the buyer walked because we’ll find another. Yes, it looks like some little thugs and thugettes ripped out the AC unit in the yard. Fannie Mae wants a higher price than an appraisal will support. But a good Sacramento short sale agent will persevere, soldier on, and drag that short sale kicking and screaming to the closing table.
The moral of this story is if you have a question about your short sale, you should ask your Sacramento short sale agent. Don’t go looking for answers online because what you will find is somebody else’s nightmare, and you probably won’t stumble upon your own situation. Each short sale is different. Unique. It is a snowflake.
