The Story

I had a client call me the other day… his story was similar to many we have all heard over the last year and a half. He had been trying to sell his investment property for over two years but was very resistant to dropping the price, which he recognized was necessary to get any offer of purchase. His life savings had been depleted trying to keep current on this property and he had reached the end of the line. He was depressed, frustrated and resigned to losing the property and taking a credit “hit”. The bottom line for him was whether he should he “go to the trouble of trying for a short sale” or just “let it go to foreclosure”. He definitely wanted the easier road, which he thought would be a foreclosure. The consequences would be similar between the two . . . . right?

What do Lenders Say?

I flashed back to about two weeks prior when I was teaching a Short Sale and REO Transaction class for a local lender. The Senior Loan Officer had some material to share with us. First, she showed us actual credit reports of clients who had gone through a Short Sale. There was a “Before” and “After’ credit report for the same borrower. The Short Sale basically dropped this borrower’s credit score by one hundred (100) points. The mortgage also showed as “Paid in full but settled for less than was owed.”…. Okay, this was kind of what we would have anticipated and is certainly consistent with the information we have received from the lending institutions over the last year. Then we see the real show stopper. The Loan Officer hands out the new Fannie Mae underwriting guidelines that go into effect May 31, 2008. Guess what? The rules have changed.

REALITY BITES

The reality for my client on the phone becomes painfully clear. My advice: You better find a good agent who is competent and experienced in handling a Short Sale transaction. Under the new Fannie Mae guidelines the effect of a Foreclosure on a borrowers’ credit worthiness is substantial, devastating and decisive. A Short Sale may reduce your clients’ credit score and will stay with them for about a one year or twelve month period of time. For all our clients who have “let it go to foreclosure”, I have some very, very bad news. Effective May 31, 2008, according to the Fannie Mae guidelines, a client who has filed a foreclosure will be “ineligible” for a period of five years. That is FIVE YEARS (5 years) for a foreclosure compared with a one year “ineligible” for a Short Sale. That difference is significant and will have an immediate effect on our business.

Don’t be Surprised

It should be no surprise to us that the lending guidelines would adjust. We should have all seen this coming, right? Certainly the prior estimates of a 2 year credit hit for a Short Sale as compared to a 3 year hit for a Foreclosure were astonishing and somewhat unbelievable, leaving many of us to wonder if the effect of either outcome made no significant difference to our Seller, then why did it matter which outcome they pursued? The implementation of these new guidelines solidifies the rules and changes the desired outcome for many of our Sellers. As a result, I think we will all become experts on the Short Sale transaction.

After hours of home searching, your buyers have finally made a decision.  It’s the home of their dreams, the price is perfect and they see the value. They are excited about the prospect of buying their new home.  As a seasoned Agent you prepare your contract as air tight as you can possibly make it.  You assure every page is initialed, every clause examined carefully, each paragraph closely scrutinized.  You and your qualified, pre-approved buyer have done your homework and you are certain all is right with the offer.   You send it off to the Listing Agent with a hope and prayer and wait patiently, maybe for a couple of weeks, albeit but you wait patiently. 

But wait!  What’s this Bank Contract Addendum?  What does it do to your contract?  They are accepting your contract and all the conditions set out in it. Or are they?  At this point you and your buyer read the Contract Addendum.  As you negotiate each paragraph you and your buyer become more and more concerned about the terms to which the Bank wishes you to agree.

The REO addenda often have the following terms: 

 AS IS, WHERE IS – including:  Property condition, personal property in house, debris in yard, environmental hazards and tenant/prior owner holdovers

Inspections:  Buyer may have to pay $250 to de-winterize the house for inspection purposes.  Inspections are for INFORMATIONAL PURPOSES ONLY.  Repairs by seller, if the seller agrees, will have a cap.  The seller may choose to provide a credit to the buyer – please review that very carefully.  Inspections, including the pre-closing walk through must be completed by the number of days specified in the contract

Title Issues:  Normally, title is conveyed by a SPECIAL WARRANTY DEED which means there is no recourse against the seller if there are title issues pre-dating the seller’s ownership. If the seller is paying for the title insurance they are usually preparing a title policy based on a very limited title search.  Which means any unreleased judgments, liens, trusts or major title issues are not revealed and could pose a threat to the new owner if title insurance is not in place.

Commission:  The commission is often based on NET purchase price.   Any closing costs subsidies, credits and/or repairs are backed out of the sales price and the new amount is used as the basis for the commission. 

What is your responsibility when it comes to protecting your buyer from the terms in the Bank addendum?  First, you need to remember that you can make changes to the addendum.  While the banks frown upon a marked up addendum, feel free to use blank space in the addendum.  The listing agent must submit this to the bank. Also, you should read each paragraph through carefully.  These addenda are ever adapting creatures and you need to be sure you know what your buyer is signing.  It never hurts to be extra careful.  This is probably the largest purchase of your buyer’s life.  As such, they should feel comfortable with the documents, with the closing company and with the fact that closing may take longer than a traditional transaction.  Buckle Up!  Receiving the bank addendum is just the beginning of what may be a very exciting ride.

Last week went to a settlement on a property in Spotsylvania County; the home was a bank owned property that came about through foreclosure.

Seller selected the settlement agency for their side and we selected a local attorney to represent the buyer.  At the settlement table we were told that the bank had dictated the commission to be paid.  I was not listening as I should have been!

After the commission check was written to my broker, my astute broker/owner discovered that my commission was less than normal and asked if I had agreed to a different figure.  After I responded “No” the light went on.

We decided to hold off on depositing the commission check and my cashing my check which had already been written.  Upon my return to my office I called the broker/owner of the listing brokerage.  Initially, I was told that he was busy and could not come to the phone.  When asked why I was calling the response was “Possible arbitration.”  All of a sudden he became available and we spoke.  In all honesty he was very professional in the entire discussion and I gained a great deal of respect for him.  He was, he said, overwhelmed by the volume of work inherited with bank sales.

When I explained the situation to him (our brokerage had received less than the commission offered in the blanket unilateral offer of cooperation and compensation to brokers in the Metropolitan Regional Information Services (MRIS)) he was quick to comment “That is wrong.”

In a matter of seconds he suggested that the situation be remedied immediately.  He would call his bookkeeper and have a check issued to cover the difference.  That was agreeable to me and we talked a few minutes longer before the call ended.

This morning I received a call from the bookkeeper telling me that she had been contacted by the broker/owner.  She confirmed the amount owed us and asked me to validate the address of my brokerage.  She then stated that the check would be sent out today.

I post this because I want you to be careful when you go to settlement.  Examine the HUD-1 carefully.  Be sure that the commission paid your firm is in conformance with that shown in the MLS listing.