My mama was the consummate southern lady, and therefore, without the need to say, also a superbly able cook! Now, I know that the cholesterol content was out of sight, and that a cardiologist would tolerate us eating a good Southern meal only about once a year. Then, we were unconcerned about that, and one of her favorites, and mine, was “beef” stew.
I’ve learned that the contents of those stew pots was never quite planned. Instead, they contained whatever she had left over from meals gone by, plus. Her recipe was a bit imagination and a whole lot necessity. That’s exactly the recipe for a real estate short sale.
Actually, there is no such thing as a “real estate short sale”. No law school has ever heard the term, and the course has never been taught. You won’t find the term in the glossary of any law book or dictionary. The truth is that we’ve made up the term over the last year or so to meet a reality previously unknown to any of us in real estate, banking, or law.
The term “real estate short sale” has only one reference. It is the sale of real estate for less than the amount necessary to pay off all the debt owed on the property. Since, under normal circumstances, an owner would not want to do that, such a sale is usually made under duress, which is generally economic distress. That distress today, is propelled by unintended over-mortgaging.
The reasoning behind such over-mortgaging provides a fascinating snapshot of American politics and lifestyle. I include “politics”, because variable rate mortgages are common with no regulatory oversight of their marketing. “Deregulation” is an attractive political buzzword in trucking, airlines, automobile gas mileage, and also in lending. Non-existent regulation of the packaging and sale of residential loans on the secondary market, the attendant lack of appraisal standards, and the whole culture of make-believe values driven by the real estate flip are also partly to blame for over-mortgaging. Our indulgent lifestyle that converts living expenses to highly-marketed, teaser-rated credit card debt directly into no-closing-cost, exploding-rate home equity loans is another force driving toward this perfect storm of over-mortgaged real estate.
All of this is made more painful by the delusion we all shared that real estate had more value than it really had. Now that we know better, what do we do?
The first answer is to wait, at least for those that can afford to do so. But not for the “market” to come roaring back. Instead, pay down the principle and take your losses where you must, over time.
This is not like a walk in the woods where, if we get lost, we try to get back the way we came. Nevertheless, even with over-mortgaging, the way out may be different, depending on how you got there. Therefore, the professional advising a client in mortgage trouble might do well to find out what got the client in that trouble.
For instance, if the client got there through credit card debt and living expenses, the answer is obvious, but difficult to accept. They must do what we all must do with an aging waistline – change their lifestyle. This solution won’t be easy, and it may require credit counseling. If they are a couple or a family, it will require teamwork. But it will be worth it in the long run, and the rewards will come.
On the other hand, if the client is over-mortgaged because of property bought to flip or because the client was surprised by exploding-rate mortgages, your client may need professional help.
Remember that the bank or mortgage company is not a partner in property they finance. When your client bought the property, they didn’t expect to share a percentage of profits with the lender when the property was sold, so borrowers shouldn’t be led to expect the lender to want part of the loss when there are losses. Please don’t start with the assumption that your lender will be a willing partner in losses.
There are few professionals who help with this brand new concept which we now call a short sale. But a lawyer or accountant whom you pay a fee for their service is probably a beginning. A Realtor can help, but remember that they normally work for a commission when property sells. If they also get into the detail of your finances, and they must if they facilitate a short sale, I encourage them to do so on a fee-for-services basis.
The question of what fee is to be paid, and how, and when, is important. There are sharks in these waters. Late-night television is busy hawking courses to big-money wannabees about gaining entry to distressed owners solely to turn the owner’s property for profit. Without exception, those people do not have in mind the best interests of the distressed owner. Their success requires that they get title to distressed property for almost nothing. They will promise a percentage of what they “save” for the distressed owner. Their “savings” can only be at a lender’s expense—or the owner’s—and most often, your lender will not play along. That’s especially true if the lender gets the message that the only one benefiting is a mortgage scavenger.
The professional assistance you need will not be free, and it will not direct the conveyance of a distressed deed to the professional or to a third-party for “safe-keeping”.
Space does not allow more discussion of a short sale, but owners should know that the mortgage industry has begun to appreciate the mess that exists, and the industry is trying to react. The secondary market today strongly encourages lenders to work with borrowers to avoid foreclosures. Lenders are responding differently, depending on their own perceived best interests.
Borrowers don’t expect responsible assistance in these matters at no cost, and don’t wait for the 2005 market prices to come roaring back. Do identify what got you there, and do work the problem. I give very few guarantees, but I guarantee you’ll be glad if you make a plan and work it. The only bad plan is none at all.
Finally, like southern beef stew; no recipe fits every short sale. The common denominator of such sales must be a sincere desire to benefit our clients by delivering a result that’s fair to everyone involved, including the Realtor.