20 THINGS THE LISTING AGENTS DON´T TELL YOU
ABOUT THEIR SHORT SALES
Feb. 7th, 2012 the National REALTORS® Association predicts there will be an increase in legal disputes in property “short sales” because of lack of disclosure.
Some sellers are unaware that a REALTOR® can only list a property as regular sale, short sale, foreclosure, rental or auction. It is illegal for a REALTOR®, (unless they are also an attorney or mortgage broker), to help a homeowner to stay in their home via assisting in a loan modification, refinance or grant program.
January, 2010 the Federal Government passed the MARS Law. (See the link MARS Disclosure on my homepage for more information) The law requires Mortgage Assistance companies to give written disclosure to a “short” seller, because of the potential disastrous consequences of a failed short sale. The law requires disclosure to the potential short seller that the agent has no special relationship with the government or lender. The short seller is advised that; their credit will be damaged if they stop making their mortgage payments and the property could go into foreclosure; the short seller can cancel a pending short sale transaction at any time prior to closing; and the short seller has the right to continue to try to obtain help on their own to get a loan modification, refinance or grant to keep their property, even while the agent is involved in short sale on the property with a potential buyer. Agents were telling sellers who were not behind in their mortgage payments to stop making them and to stop calling their lender. There is a “stay” on this law as it applies to REALTORS®. So REALTORS® are not required to disclose any of these facts to the short seller in writing. An Ethical REALTOR® will discuss these issues with the seller. Sellers considering a “short sale” should consult an attorney and tax accountant first.
As of Feb. 2012, there is a small, newer Southwest Florida neighborhood which has no foreclosures. There are now 5 pending short sale contracts in the neighborhood. The short sale agents have under valued these properties to get offers quickly. These agents are not taking into consideration the lack of inventory, rising prices and rapid sales in the surrounding area. Those sellers could possibly sell their property via a regular sale and save their credit. This community will definitely loose its´ true market value, the association maybe in jeopardy if short sellers stop paying their dues once a foreclosure seems eminent. This is how Southwest Florida´s real estate market is backsliding at the same time all indicators show a very positive direction toward a strong recovering real estate market!
Unsuspecting short sale buyers maybe asked to pay additional money for past dues, high attorney or loss mitigation fees at the last minute in a short sale. The lender may counter the buyers´ offer on the property after 9 or 10 months; at a higher price than the listed price. The angry buyer often walks away. A short sale “offer” is not a binding legal contract unit the lender signs it, and often that does not happen until almost closing day. The term “approved short sale” is highly misused to mislead buyers into short sale transactions. Foreclosure filings on the short sale property begin once the seller has missed 3 payments. These are a few reasons why failed short sales lead to foreclosures. Some short sellers are lead to believe they can buy another property right away. It will be many years before most lenders will consider lending to them again.
Short sale fraud is rampant (See the Short Sale Fraud link on my homepage). From the beginning investors and REALTORS® have played the waiting game on short sales. Some with 100´s of offers on short sale listings; gambling some will be completed and others go to foreclosure. The ones that close are flipped to a second buyer who pays tens of thousands of dollars more than the first buyer agrees to pay the short seller and lender. Would a seller and lender really agree to be cheated out any equity in a property via a same day, next day or week later resale closing? It is difficult for a buyer, or a buyer´s broker to know what the short sale agent and title company are telling the seller and the lender. It is easy for a buyer to be inadvertently be implicated in a fraudulent short sale. My firm no longer participates in short sales because of the potential for fraud, non-disclosure, decreasing inventory and increasing values (the lender will usually counter back a market value).
Short sales are commonly listed “as is” which are now resulting in decline of seller disclosures leaving the buyer open to more “undisclosed defects.”
And lenders are beginning to go after the agents, seller’s and buyer’s involved in transactions which are cheating them out of money via “flipping” of short sales.
The definition of a “short sale” as defined by the National Association of REALTORS(R) is as follows: “short sales are defined as a transaction where the title transfers and the sale price is insufficient to pay the total of all liens and cost of the sale; and where the seller does not bring sufficient liquid assets to the closing to cure all deficiences.”
Lenders are now seeking to collect deficiencies from former homeowners who walked away from their properties or who sold them in short sales. The State of Florida gives mortgage holders as long as 5 years to seek a deficiency judgment. If granted the bank gets up to 20 years to collect and the option to renew for another 20 years if the debt isn’t paid. Even though asset managers are providing “approval letters” for short sales that say they will not send the seller a 1099. The IRS requires the 1099 reporting and they are being sent out by the lenders on the shortages. So, the investor or second homeowner maybe obligated to pay taxes on the difference of the shortage regardless of any statements made by the asset managers or real estate agents. Legislation was passed which gives the primary homeowner an IRS exemption regarding their mortgage shortages via the short sale process, this exemption expires at the end of 2012/beginning of 2013.
All short sales require approval from at least one lender, a seller “hardship” qualification and the sellers’ lender property price evaluation. Short Sales are complex transactions with many stringent requirements which often lead to disappointment for all parties involved. The following list is intended to educate both buyers and sellers prior to perusing a short sale transaction.
- REALTORS® often mislead the seller regarding the disastrous credit consequences of the short sale transaction and the odds are high that the seller will still end up in foreclosure. *In some instances listing agents are taking short sale listings from sellers who are their “friends” so they can stay in their property to draw out the foreclosure process. Now, most mortgage companies do the simultaneous foreclosure process. Agents are also underlisting a property to sell to an investor or fictious buyer to flip at a profit. (See Short Sale Fraud.)
- If the Seller is current on their mortgage payment, the REALTOR® may will tell seller to stop making their mortgage payments so the lender will believe their “hardship,” situation. The sellers’ credit is trashed after 6 or 9 months of late mortgage payments, late fees accrue and it becomes impossible for the seller to catch up. Whether the seller is attempting a short sale or not, the lender may start the foreclosure process after the seller is 90 days late on their mortgage payments.
3. Often the listing agent will not tell a seller at the time of listing that the seller will have to make full financial disclosure to their lender. Sellers are literally disappearing or stop cooperating with the listing agents if they have assets they do not want to disclose. They may choose to live in the property during the year or 2 year foreclosure process. They may consult an attorney and find out some form of bankruptcy is a better financial option for them to recover their credit, in which case, the property goes into foreclosure.
- Short sales typically take 6 to 9 months to get an “approval” from the lender. The odds of getting a short sale approved are very slim in most cases. The lenders “asset managers” have hundreds of files to tackle. The timing of the short sale process is not up to the listing agent, “special mitigation firm” or attorney. An agent may boast being a “short sale specialist,” however; the timing is completely in the sellers’ lenders “asset managers” control. Occasionally, the foreclosure process will take precedence terminating the short sale process.
- The isting agent may not disclose to a buyer, prior to entering into a transaction whether the seller has or is planning on hiring a professional mitigation firm or attorney, how much the cost is going to be and who is going to be responsible to pay the mitigation firm or attorney. It is not uncommon for the buyer to be asked to pay this fee, after the buyers offer is accepted, during the short sale process or at the time the lender approves the short sale. These fees run from 1% of the purchase price, to as high as $4,500 or more in flat fees.
- Often the seller´s agent will say they do not know or will not tell whether the seller has one or two mortgages to negotiate with the short sale. Buyers have waited for many months only to find out after the first lender gives their loan approval that the seller has to get approval from two lenders! The second lender may not want to participate in the short sale transaction and/or sometimes will ask the seller to contribute a percentage of the loan amount or several thousands of dollars to “payoff” the second loan. The seller may not have the funds or may not want to pay and unexpected about to complete the short sale transaction. Sometimes the first approval time runs out while the seller is trying to get the second lender approval and then the seller has to go back and get another approval letter from the first lender, which creates more time delays!
- Once a “short sale” offer is accepted by the seller, the seller may decided to vacate the property. Many sellers get scared when the lender files the foreclosure papers after the seller misses 3 mortgage payments and they move out or abandon the property. The sellers may disconnect the utilities and stop paying condominium or HOA fees or insurance. The buyer may end up with a mold ridden property, and/or more cost and repairs than they anticipated at the beginning of the short sale process.
- It is not always evident when a buyer is looking at properties on the internet that a property is a “short sale.” Sometimes, short sales are listed at very low unrealistic prices to encourage multiple bids for the seller to take offer(s) to the lender for approval. The lender will do a property price evaluation prior to accepting any short sale offer from a buyer and often counters back at a higher price. The buyer may not be able to pay more, may feel mislead by the unexpected price increase or may not want to pay the additional amount and walks way after many months of waiting for the lenders’ response to their offer.
- The word “Approved Short Sale,” is frequently abused by listing agents when describing a property as a short sale on the internet. In Southwest Florida MLS there are no rules to clarify the difference between short sale and “approved” short sale, so the listing agent can describe their short sale any way they want to the consumer public, and they do! An “approved” short sale is typically what happens when the buyer who first made an offer on the property either can not meet the time constraints to allow the buyer sufficient time to get financing once the short sale is approved or the buyer does not want to take a “counteroffer-approved price” made by the lender. The “approved short sale” is often specific to the first contract buyer. If the sellers’ lender allows a new contract, there could be long time constrains with the process starting again with the new buyer. Each asset management company has their own rules. When the seller is unable to obtain another buyer in a timely manner to complete the “approved short sale requirements”, the lender completes the foreclosure process.
- There are no requirements for the listing agent to list the price the lender has actually “approved” in the REALTOR® MLS. Sometimes the listing agent will list the property in the MLS with a lesser amount than the lender approved. They may list the amount in the public property comments or they wait to tell the buyer when they call about the property that the approved price was higher but they will submit a lower priced offer. The sellers’ lender does not have to renegotiate an approved price or timeline as foreclosure may be eminent. Listing a property for less than the “lender approved” price jeopardizes the sellers’ changes of completing the short sale in the required “approved” timeframe.
- Sometimes the listing agent says they have an “approved” short sale but they don´t have an approved price. When the lender will not disclose an acceptable price it is often a indication that the lender does not want or can not work out the short sale with the seller. Remember when some of the large mortgage investment firms bundled up loans and sold them to overseas investors? Many asset managers have no choice except to follow thru with the foreclosure process because there is no way to contact the mortgage investors to get approval to change the “terms of the mortgage” contract.
- The sellers’ agent may not have asked the seller to apply to the lender with their hardship letter or made application with their lender to start the short sale process at the time of listing. Some lenders will not take an application with the hardship letter from the seller until an offer is obtained from a short sale buyer on the property. This may also be a sign that the lender may not want to cooperate with the sellre to do a short sale.
- If the listing agent obtains enough information during the short sale process to realize that foreclosure is eminent, they may terminate the listing with the seller and in the MLS. The property may be relisted in MLS by a desperate seller with another agent who doesn´t realize that foreclosure is eminent.
- The MLS does not require the listing agent to withdraw the property from the MLS once the seller becomes uncooperative or vanishes. Some listing agents think that their listing agreement gives them the right to negotiate the short sale without the sellers’ approval or signature just because they have a signed listing agreement. These agents will encourage a buyer to make an offer often without the buyer even looking at the property, because the seller is no longer cooperating with the listing agent to let buyers in to view the property. Listing agents do not work for the lender and they do not have the authority to take an offer without the sellers’ agreement to the sellers’ lender.
- Frequently, the buyer will withdraw their offer when they find a regular sale or foreclosure to purchase. Sometimes when this happens the listing agent does not tell the sellers’ lender because they want to see if the lender will approve the short sale anyway. If the listing agent obtains an approval they hope to slip another buyer into the transaction at the list minute. (Beware this could be fraud.)
- Listing agents want to encourage multiple buyers to make offers on their short sale listings and often under price them. To get a “back up offer,” they may mislead a second buyer to think that a higher offer from them will take precedence over an existing buyer who has already been waiting a long time. They may tell the second buyer that the current buyer is getting impatient and getting ready to leave the transaction. Or, the listing agent and seller may “kick out” a buyer with a low offer and present a higher offer to the lender. Short sale offers are not legally binding on the seller until good faith money is provided by the buyer and until the lender approves the offer. All short sale offers are “contingent upon the lenders approval.”
- Agents may continue to take offers or may present 5 or 6 offers to the bank all at one time without the seller having signed any of them, in order to get the bank to approve the highest one. Some REALTOR® MLS systems allow a short sale listing to continue to show “active” in the MLS as long as the seller does not sign the offer. Others show the property on the internet as “Active/Contingent” after the seller signs an offer; the seller can still obtain offers, while waiting for the lender to respond to a current short sale offer.
- Some listing agents want to take “good faith” money at the time a buyer makes an offer on a short sale. Because of the long delays some title companies have over extended themselves with short sale transactions and consequently aren´t making enough money to stay in business, so the “good faith” money may have to be moved to another title company. I recommend that buyers never provide escrow money in a short sale transaction until they have a fully executed and agreed upon contract, which means a copy of the approval letter from the sellers’ bank signed by the seller agreeing to the terms set forth by their lender to complete the short sale. The lender may give the seller some unattractive terms or the seller may need the buyer to pay some unexpected fees or cost to complete the transaction.
- During the short sale process if the financially distressed seller begins to default on other financial commitments they may consult a bankruptcy attorney who could advise the seller to stop the short sale process and include the property in the bankruptcy procedure, in which case the property goes thru foreclosure via the bankruptcy. Sometimes, the homeowner has a better chance of getting a loan modification when in the “at risk” category of bankruptcy.
- All listing agents or short sale mitigation firms require getting approval from the seller to talk to their lender on the sellers’ behalf. Sometimes a distressed seller will continue to work aggressively with the lender behind the listing agents back to get the lender to do a loan modification so they can keep their home. Some buyers who have been waiting on a short sale for months have been told that the seller has negotiated a loan modification to keep their home.
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Beverly Howe, Owner/Broker, ABR, GRI, TRC, CIPS, MCNE, SRES, ACCRS
1031 Exchange Specialist – Graduate Institute of Luxury Home Marketing – ILHM
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