Here’s the scenario. A consumer calls you based upon a blog post that you have recently made. He is in dire NEED of the services of a competent and professional real estate agent.
He must sell his house quickly. He is in foreclosure and he does not want his credit damaged. He already has had a short sale denied by his bank because he has too many other assets. His only alternative is to sell the home.
Here are the vital signs:
1. The home is worth approximately $300,000.00 as determined by comparable analysis
2. He owes $208,000.00 on his first and second mortgage combined
3. He has a Federal Tax Lien in the amount of $22,500.00
4. He has a municipal lien for not maintaining his pool (it’s a green slimy mess) and it has been running since October 2007 at the rate of $1,000.00 per day
5. He has not paid the County Property taxes in 2 years and he owes the County $12,500.00
6. He has not listed the property because he thinks he can not afford to pay commission and he’s not willing to sign a listing agreement that he can not terminate at will
7. His wife is on title with him but she’s now in Chicago living with her parents and wants $5,000 from the sale of the house
8. He needs at least $5,000.00 himself to be able to move on with his life
9. He will also need to stay in the house for 30 days AFTER the closing because it will take him that long to move because he can’t move until he gets the money from the closing
10. The house has pretty good bones but will need:
a. basic cosmetic work
b. new landscaping
c. the pool drained, cleaned and refilled as well as a new pump
d. the roof needs to be replaced (estimate from local roofer is $8,500.00)
e. the garage door needs to be replaced
Other than what has been stated above, the home is located in an upper middle class neighborhood with good schools and is in close proximity to great amenities like a major mall, fine restaurants and exciting nightlife activities. It is also located within an area of stable employment.
This house goes to auction on May 31, 2008. What would you do? Seriously, often times we are accused of “realtor bashing”…not true it’s the sub-par ones that irk us. However we know there are some consummate professionals, many of whom have taken offense to some of my posts.
Well, I have decided to make a concerted effort to engage much more civilly with real estate agents and to network with fellow real estate professionals so that we may all further our endeavors through the camaraderie of being brothers and sisters at arms…if you will.
So in that regard, I want to be more of a resource facilitator so that we can all benefit from our mutual experiences. That being said, I wanted to poll members of Active Rain and the readers of Bloodhound Blog to get their valued input as to how they would handle this transaction.
I am sure with the tens of thousands of readers of these collective sites, as well as our own, that we can come up with a plan to successfully help Mr. “Smith” sell this home and move on with his life.
So please, let’s work together not only to help Mr. Smith but to help each other should any agent anywhere be faced with this kind of challenge in the future.
What would you do?
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Louis Cammarosano says:
I am not a realtor, but here is what I would do if I was.
If I had the time I would help him, I would charge him as little as possible, or nothing at all, but I would make sure I got the exclusive listing agreement.
If I did not have the time and was otherwised engaged in profitable activity, I would refer the client to an underutilized and perhaps inexperienced junior realtor in my office who might take the assignment on for little or no commission. Failing that I might call broker B across town and ask if they had someone available to help.
This way the junior realtor who take on the job gets great experience as the case has more than the normal number of issues, and the customer realizes the value of a Realtor’s services and once he gets on his feet, a lifelong cusomer has probably been created.
This example is similar to the “pro bono” type work that lawyers engage in where they provide quality legal services for free to those that can not afford to pay.
Realtors are part of the fabric of the community in which they live, so helping out a member of the community is the right thing to do. The good will created by helping a distressed neighbor AND helping maintain property values in the community will speak well for the Realtor and his/her brokerage when the time comes for other homeowners to sell their homes when the market stabilizes.
I know that may not be the answer you want Barry.
I suspect you were thinking that one might or should respond:
“my commission is 6% take it or leave it” Or
“Selling a house is a snap. I can’t do it because I need to get 6% and you can’t pay, but I’ll be a sport and let you in on a little secret. All you have to do is get one of those little FOR SALE signs and post it on your lawn.That should do the trick. If that doesn’t work call me back and I can tell you another secret about selling houses called the “Internets” where for free you can post your listing.”
Especially in time of distress, the homeowner needs the services of a Realtor. Probono work in these tyypes of situations would speak well of the Realtor who takes it on and for the profession in general.
April 12, 2008 — 8:05 am
Andrew says:
Well,
If we would list the house at 280,000, that would build in $20,000 instant equity. Subtract the 6% listing fee, leaves you with 263,200. With outstanding mortgage, tax lien, fed tax lien, what spouse wants, and what he needs all totaling 253,000. That leaves us with about $10,000. At this point the biggest issue is the municipal lien. A trip to the municipalities may give you a settlement. I seriously doubt they would expect to get 1K a day since October. However, if the client could pay $2500 or $5,000 on the spot, they may forgive the rest and lift the lien. If that would happen, the client would have 5K left to partially fix the roof/or clean the pool.
Ultimately, he does not want his credit damaged, and if he does NOTHING, that is going to happen. So, if he needs to get the roof fixed, clean the pool, and other minor work, that could be put on a credit card.
The municipalities would probably take a payout, or at least go down if he would try to talk to them.
I don’t agree that the Realtor should work pro-bono. This is not a close friend/family member. It is someone who is contacting us from our blog. The Realtor still has a responsibility to provide an income for his/her family. We are trained professionals and to automatically assume that we should cut our income, degrades our value and the value of our services. We CAN help this client, and we should give our best to him, but not be expected to do so without compensation.
This client may have to take some responsibility for his situation. Taxes should not have gone 2 years without being paid…He should have taken care of his property and cleaned the pool. Not to be un-compassionate or harsh, but he may end up having some debt when this is done. The goal is to get him out of this house with his credit minimally damaged, so he can move on with his life.
If we can help him get most of this out of the way, with out having foreclosure, his credit will not suffer too bad. Even if there is some kind of debt, it will not be so large, and can be handled over the next year or so. As the post said, he has a number of other assets, so maybe he will need to sell some of those things (at least to pay his wife off and for the 5K he needs).
Just my $.02
April 12, 2008 — 9:36 am
Barry Cunningham says:
No Louis…no trap doors..seriously was looking and will continue to see how realtors would get this deal done.
April 12, 2008 — 10:11 am
Louis Cammarosano says:
Let’s wait and see what the responses are, then I’d like to hear yours.
April 12, 2008 — 10:23 am
Louis Cammarosano says:
>We are trained professionals and to automatically assume that we should cut our income, degrades our value and the value of our services.<
To the contrary, providing free services actually enhances your status.
I also would not automatically assume that income should be cut, one could take a pass and in the example I gave, I would recommend that an underutilized realtor take the case, or perhaps a realtor who is doing very well to take it on.
Some of the top law firms in the country provide pro bono services that enhance their reputation.
When I was an associate at Cravath, Swaine and Moore in NY I did pro bono work on behalf of Congressional Medal of Honor winners who were being taken advantage by trading card companies that were using their likenesses and not paying the medal winners anything.
Many of the Congressial Medal of Honor winners are destitute and this type of free legal support built good will.
As a corporate mergers and acquisition/securities attorney, I also got to learn about new areas of law.
I am not suggesting, however, that every homeowner that took out a loan he should not have and ends up in default, should be entitled to free realtor services.
In Barry’s example he put the emphasis on what would we do, implying that we had an obligation to do something.
April 12, 2008 — 10:49 am
Barry Cunningham says:
Louis, you have me wrong. No implications. A simple outline of a deal. If it were yours what would you do. Imagine this as a public brainstorming session. Not implying ANYTHING.
If the answer is walk away..then that’s the answer. I am merely trying to ascertain how others would handle this transaction.
April 12, 2008 — 11:21 am
Barry Cunningham says:
Good Answer Andrew. Not I who mentioned anything about any body working pro-bono. Just wanted the input of others
April 12, 2008 — 11:23 am
Louis Cammarosano says:
Barry
I probably shouldn’t even have responded because you directed the questions to realtors. I answered the question as if I were a realtor.
Would I walk away?
It would depend on my personal financial circumstances, available time, whether I liked the guy, whether I knew any one who could help him etc.
BUT I probably wouldn’t tell him to try and sell the house on his own as an initial response.
April 12, 2008 — 11:26 am
Jeanne Breault says:
I am really loving the conversations here!
Putting aside for the moment the debate about whether 6% commission is or isn’t the best compensation model for real estate brokerage, I agree with Andrew that the REALTOR shouldn’t work for free, and for the reasons he mentioned. Heck, for something like this a 10% commission is probably more in order…I mean, we’re only talking about a $200,000 or so sale, possibly split with another broker!
Barry, I’m taking you at your word that you have initiated this discussion as part of your effort to “engage more civilly” with the REALTORS. Given that, and honestly not meaning to be snarky or sarcastic, a question I have is, “Is justifying a REALTOR’S compensation of higher importance than justifying your wholesale offer?”
The reality of Mr. Smith’s situation seems to be that:
1. He’s not sure what to do.
2. Even if he were sure what to do, he may not have the emotional fortitude or technical skills to “do” all of it.
3. He doesn’t know who to trust.
4. There’s a heckuva lot of info gathering and negotiating that needs to be done. (i.e. Convincing the lender(s) handle this a “short sale” vs. convincing municipal powers-that-be to lighten up.)
4. Clear title will not be available until the myriad of liens are resolved.
5. The extensive property repairs needed may prohibit financing for any buyer, other than an investor using hard money, prior to the repairs being completed.
There’s more, but I think that’s enough!
My plan would be to spend some time with Mr. Smith, acknowledging his fears and suspicions, and honestly outlining his options and their potential outcomes. This would hopefully demonstrate my skills and gain his trust and understanding.
In a transaction like this, for a (good) REALTOR to spend the amount of time it will take to consummate a sale, the REALTOR also has to be able to trust that Mr. Smith is going to uphold his end of the bargain by being open, honest and responsive.
2 cents…I haz dem!
April 12, 2008 — 11:46 am
Barry Cunningham says:
Ok…I’m not getting the response type I was hoping for. I guess some people are a bit leery of what awaits.
For the record, in my post, the question of commission or the need to justify it was never raised.
I have a certain way of doing things. What I am trying to ascertain is how would a realtor get this deal done. Specifically.
I don’t care what you charge, what you make, or your methodology.
Lay down the guns here and please offer some insight as to how you would structure this transaction.
I know this deal is viable and potentially quite profitable. I would like to engage in open discussion (not debate) as to how you would get this deal done.
This is not a right or wrong issue…you may have some varying ideas as to how to strike this deal and this post is designed to elicit a response..a problem solving response.
No critique, no traps or as Jeanne said..nothing sarcastic, just open and free discussion as to what you would do.
April 12, 2008 — 12:16 pm
Allen Butler says:
Frankly, I don’t necesarily think this is a job that a realtor should do at all. There are many aspects of this scenario that a realtor knows very little about, and is not an expert in. Handling municipalities, taxes, and all that other crap is not what a realtor does. I would think this would be a job for several professionals: an attorney, a tax professional, and a realtor combined might do it. The realor’s job would simply be to market and sell the property, as that is what they do.
Now, a person who is skilled at negotiating, and is an expert at short sales, might be able to convince the lender(s) that a short sale is in their best interests. I am fairly confident that this could be done is in this case, by the fact that you indicated that the bank had previously rejected a short sale, but that the property had not been on the market before. This indicates to me that the homeowner had probably tried to negotiate the short sale with the bank himself, which is a sure-fire way to fail at a short sale.
So, if the proper realtor had a team of professionals together, and they worked in concert to comsummate the deal, it could be done.
April 12, 2008 — 12:55 pm
Broker Bryant says:
OK I LOVE problems.
First this guy needs to speak with an Attorney. His 45 day window before he is foreclosed on is real tight so the lender needs to be contacted so we can attempt to negotiate an extension based on our plan to get it sold.
Since he has other assets it may be possible to get the IRS lien moved to another asset. Though time is probably prohibitive and if this is done they more than likely will not want the seller getting any pocket change at closing.
The municipal lien could certainly be negotiated. Or may even be removed if they were made aware of the entire situation and the pool was taken care of.
It sounds like he may be a candidate for an “accelerated marketing” via an auction. If we did that the commission and other closing costs would come out of the buyer’s premium which means we could price the property in the $260’s range. Unfortunately this might not be low enough to achieve a quick sell.
If it’s only “worth” $300,000 I doubt an investor would be interested for anything more than about $210,000. Which of course just happens to be the amount of the existing financing.
So if we could get rid of the other liens there would be room for an Investor to give this guy the $10,000 he needs and bring the mortgage current and take over the payments.
The biggest issues then are the property taxes and the IRS lein.
Based on all of this…selling in time may not work.
So let’s see….an Investor could pay off the IRS and the back property taxes for $35,000. The municipal lien could go away. Which would mean an investor would still have $45,000 in it and a mortgage of $208,000. Too much in my opinion.
Which all brings me back to the auction. OK..let’s auction it off.
Or maybe I can just tell him this is not my area 🙂
April 12, 2008 — 1:00 pm
Brian Brady says:
I think you’re dealing with an unrealistic seller, Barry. The house heads to the steps in 6 weeks. Valuation, then, declines every day as the drop dead date approaches.
An investor’s going to buy that home for $230,000- cash deal-10 day settlement.
Why not do an incentive-based fee? Say 50% for every dollar above $260,000- 14 day guaranteed listing.
April 12, 2008 — 1:26 pm
Bob Wilson says:
There are important unknown factors here.
1. Is the first a recourse or non-recourse loan? The 2nd?
2. Is the 1st purchase money? The 2nd?
April 12, 2008 — 2:33 pm
Jeanne Breault says:
Barry, I’m taking you at your word…arms wide open!
I’m still not sure if you’re asking how we would structure the “listing,” which the two BBs answered, or structure the deal.
Since the BBs did a good job answering how to structure the listing, I’m going to answer how I would suggest the deal to both seller and investor client.
I disagree with Allen that this is not the REALTORS job…I think in this market it is, and while I would couch everything I told the seller and buyer with the caveat “I can’t give legal or tax advice,” I think sharing our expertise and technical skills with clients is what creates “desire” for us. 🙂
It would be good to know how sales are going in that neighborhood, and whether the $300,000 value is before- or after-repair value. I assumed after-repair value, so obviously if $300,000 is before-repair value numbers get pretty sweet!
Assumptions: 1) Buyer/investor using own source of funds (LOC/cash); 2)Negotiated removal of IRS and municipality fine liens from title; and 3)No cash to seller. My numbers don’t show much profit. (Maybe your definition of “good profitabilty is different than mine – that would be nice!)
Numbers would also be better if:
1. Lender accepts short sale. Good possibility.
2. <6% real estate brokerage. Good possibility.
$208,000 purchase price pays off lender
$18,000 closing costs
$12,500 back taxes
$25,000 repairs
Total costs to investor = $263,500
Resell for $300,000 = $36,500 gross profit
Investor resale closing costs $23,000
Cost of funds = $2000 – $4000
Net profit $9,500 – $11,500 to investor.
April 12, 2008 — 2:43 pm
Bob Wilson says:
what state is this?
April 12, 2008 — 2:46 pm
Christopher Cioffi says:
As a Real Estate Investor who has conducted many short sales I have worked with homeowners and local realtor to help get the monkey off of the home owners back.
1. The situation has gone beyond the point of salvation the only recourse for the owner is a short sale. This means negotiating with the bank before it goes into foreclosure. This will save the home owner from having a foreclosure on their credit report.
2. The fact that the bank refused once is not important. The bank is going to loose $80K right off the bat if they go to foreclosure and they will inherit a property that obviously needs repairs. The pool condition, everything wrong with property is used in negotiating with the bank. I have negotiated $.50 on the dollar on homes.
3. While an experienced Short Sale REI is negotiating with the bank a realtor can be doing what they do best finding a buyer and selling the home. In this way when the bank agrees to a short sale a double closing is conducted and the home is sold. I have had situations where some homeowners can get some money out of the deal depending on the sale price.
The benefits:
1. Bank doesn’t have another home in its REO and gets it off their books.
2. The owner walks away without a foreclosure on their credit report and a better chance to start over.
3. The realtor can sell the house within a price range that is reasonable for all parties. The Investor, realtor and maybe the homeowner walks away with money.
4. The buyer gets a house at a wholesale price.
As an investor I do all I can to help the homeowner understand their options and help them through a tough time. In the end a short sale is the best option for them.
April 12, 2008 — 2:56 pm
Barry Cunningham says:
Now..this is discussion..I am going to take some notes on all of this and get back to you…Love what the BB’s and the AB’s said and Jeanne great breakout.
Chris..you and I think a lot alike as investors and this is most assuredly a cat that can be skinned!
April 12, 2008 — 3:29 pm
Bob Wilson says:
Which lien holder is foreclosing?
April 12, 2008 — 3:42 pm
Barry Cunningham says:
1st and it’s in Florida
April 12, 2008 — 4:13 pm
Broker Bryant says:
OK.. I thought some more.The missing ingredients are the amount to bring the mtg current and the amount of the payments. Assuming these are reasonable, an investor could bring the mtg current, to stop the foreclosure, have the seller quit claim the property over, for an additional 5k(his move money), then let him stay for 30 days.
The investor could then attempt to find an end user on a lease/option or contract for deed deal with say no credit check but $30k down. Once this deal is secured the investor could close on the house at say $258,000 to pay off the existing leins and pay the wife. Then simultaneous resale to the end user on a contract for deed at say $315,000 or more with no qualifying but $30k down. The investor would now get 30k to offset the money he has dished out plus he would have built in 58k in equity. Total out of pocket would be the amount to bring the mtg current + the 5k + what ever the loan for $158,000 cost- the 30k from the end user.
Of course this would assume the payment for the end user would be enough to cover everything.
April 12, 2008 — 4:29 pm
Jeanne Breault says:
It’s great to see the different ways we approach the same situation! I, for one, am learning a lot!
I guess that’s your purpose, huh Barry?
April 12, 2008 — 5:49 pm
Brian Brady says:
I didn’t see Bryant in here, just ahead of me. FWIW, I’m not surprised that we are thinking along the same lines (price, foreclosure bailout and pay to walk).
I posed a similar problem, on Active Rain, about a hard money loan amount for a unique income property. Bryant picked the loan amount within 5K.
(Bryant- the borrower has been on time, every month- ya done good on that one)
April 12, 2008 — 6:16 pm
Brian Brady says:
Bryant-
I love your “wrapped sale”. How’s the broker get paid?
Now before everyone starts getting worked up, that’s important. In the words of the late, great and mythical Hyman Roth:
“After all, we’re not communists”
April 12, 2008 — 6:21 pm
Bob Wilson says:
IMO the focus so far on this has been off, with Allen the only one hitting it.
An investor’s perspective in this case is self serving and nothing more. Any agent that lets an investor negotiate directly with the seller’s lien holders should be drawn and quartered. It is a complete abdication of fiduciary duty. What may be in the buyer or lender’s best interest is rarely in the seller’s best interest.
Now to the problem at hand. In addition to the existing problems, the consequences of the options at hand need to be evaluated as well. That absolutely requires at least a tax expert, as a foreclosure could trigger an additional tax liability (which is why I asked if these are purchase money loans).
Frequently, home owners are counseled to stop paying the mortgage in order to do a short sale. Not only is that not an absolute, but agents should never advise a seller to stop paying bills.
If Mr. Smith had seen an attorney as Allen advised, the attorney may have counseled Mr. Smith to try to keep the first current and force the 2nd to foreclose. Doing this would probably go a long way to getting the 2nd to agree to a short sale. An attorney could also slow the process by requiring the lender to prove that they have a)complied with all applicable RESPA laws and b)have the legal right to foreclose. Many lenders are merely loan servicers and will back off if pressed.
Saving credit is probably the least of his worries at this point as he has already been hit with a 30 day late, likely 60 and 90 day lates, an NOD and a tax lien. A short sale will be seen as a charge off. If he isn’t in the 500s, he will be soon with or without the foreclosure.
He needs someone who knows all the possible scenarios and options so he can mitigate the damage as much as possible. Just selling the property without an overall gameplan isn’t helping him.
If Mr Smith really exists, he needs an attorney versed in this stuff and I know the guy he should talk to.
April 12, 2008 — 6:35 pm
Barry Cunningham says:
Hey BB #1 are we mending fences here my Central Florida friend? Love that approach.
Now here’s one of my strategies on this deal. Some I realize a realtor may not feel comfortable doing or may have an ethical diliemma..but we can adress this as we move forward and Jeanne yes..it’s about learning.
Ok here goes:(kind of long)
1. The home is worth approximately $300,000.00 as determined by comparable analysis
We confirm this and make sure we know what our hard money lender will give us on the deal. We know we can get $210,000. Now we begin working backwards
2. He owes $208,000.00 on his first and second mortgage combined
We find out the first is $163,000 and it will take $9,000 to reintatse the mortgage the second is $45,000 with all past due interest and acceleration fees.
3. He has a Federal Tax Lien in the amount of $22,500.00
We contact the IRS and have the property excepted by the FTL. As it will be foreclosed on in a crappy market, their option for redemption is unlikely going to be exercised (FYI…read on IRS Tax Lien Redemptions and I can send you info if need be)
4. He has a municipal lien for not maintaining his pool (it’s a green slimy mess) and it has been running since October 2007 at the rate of $1,000.00 per day
You guys are right..the municipal lien can be negotiated..but the work has to be done before they will lift the lien. this will be an expense we need to bear.
5. He has not paid the County Property taxes in 2 years and he owes the County $12,500.00
this needs to be settled at closing..no negotiating here
6. He has not listed the property because he thinks he can not afford to pay commission and he’s not willing to sign a listing agreement that he can not terminate at will
Let’s see what the numbers look like before we address that
7. His wife is on title with him but she’s now in Chicago living with her parents and wants $5,000 from the sale of the house
We’ll have to negotiate with her based upon the analysis of the numbers
8. He needs at least $5,000.00 himself to be able to move on with his life
We’ll have to negotiate with him based upon the analysis of the numbers.
9. He will also need to stay in the house for 30 days AFTER the closing because it will take him that long to move because he can’t move until he gets the money from the closing
No big deal, we do post occupancy agreements all the time and this will be a aprt of our negotiation
10. The house has pretty good bones but will need:
a. basic cosmetic work
new paint, door knobs, wall patching..no big deal here but from a realtors perspective who is going to do this…I know that’s what you are thinking..hold on
b. new landscaping
Some cheap sod some Home Depot plants and we’re good to go….no big deal here but from a realtors perspective who is going to do this…I know that’s what you are thinking..hold on
c. the pool drained, cleaned and refilled as well as a new pump
no sweat but has to be done to code enforcement officers approval
d. the roof needs to be replaced (estimate from local roofer is $8,500.00)
has to be done..no way out here
e. the garage door needs to be replaced
….no big deal here but from a realtors perspective who is going to do this…I know that’s what you are thinking..hold on
So what do the numbers look like or rather how would we put this together.
Well the most we are going to have to work with is:
$210,000.00
less $163,000 to give to the 1st Mortgage holder
less $2,500 to give to the 2nd Mortgage holder (they are toast in regards to their position in this deal
less $12,500 to give to pay the back taxes
less $500.00 to settle municpal lien because of the pool (yes we get these kinds of discounts on liens as the Cities want these properties cleaned up but they will charge municipal fees
less the $8,500 for the roof repair
less $3,500 for the landscaping, cosmetics, and garage door
sub-total of Expenses: $190, 500.00
Balance of the Hard money loan: $19,500.00
We give the wife $5,000
We give the husband $5,000 less $1,000 for his 30 day post occupancy agreement. In order to make this deal work and make the profit we desire, we need to get control of this property. This may be the step some agents have a problem with (let’s discuss if you do) We have the husband and wife deed us the property. The deed goes into escrow with our attorneys and if we are successful we are fine and if not, it does not really matter as the guy is going down hard anyway.
We still have $10,500 left over for holding and marketing costs and this thus far has been a no money out of pocket deal.
We now list the property all cleaned up and looking nice (after Mr. Smith moves out) for the full $300,000 marketing to and end user.
We put it on the market with and begin the sales process with a $90,000.00 equity spread that allows us to be paid our commission AND our spread on the deal.
It also allows us to provide the Buyer with all kinds of Seller concessions and incentives. We can lower the price as we need to to make sure the deal closes quickly..we can even list it well below market and still make a pretty penny. We can even refi the property and as BB says above do a lease option on the deal.
Bottom line it’s an absolute home run..if the strategy works. Only one way to know, and that’s try.
Like I said Jeanne..no trap door just out of the box thinking. My posts have been villified because I come across as beating up agents but in reality I want to lift the game.
This market is where millions are made and it’s the whining by SOME and the unwillingness to roll up sleeves that cause many, NOT ALL, to be passive in looking at real estate rather than seeing the plethora of deals out there right now.
I think we need to look at CREATING opportunities not hoping for them. Maybe this exercise has helped and hopefully we can continue discussing different ideas about how to handle this.
I am sure BB will have some additional ideas, and who knows amybe russell will deem it okay to join us.
Let’s have a good old fashion barbecue out by the lake in Bloodhoundville and talk about EXTREME Real estate.
I swear, if a lot of realtors decided to dive in this pond they would be making an absolute bundle…that’s all I want to broaden the landscape so we ALL can make more money.
this oil and vinegar approach that has been between investor and agent needs to come down. Perhaps agents themselves can cross the aisle and move back and forth changing hats as they go. No listing need go expired. that’s my intent.
Let’s get these deals done!
April 12, 2008 — 7:33 pm
Broker Bryant says:
Bob, If it helps I more than likely wouldn’t touch this deal with a 10 foot pool. This guy is certainly way to gone and needs an attorney not a Realtor. Now as an investor I don’t think based on the info we have that there is enough money in this deal to interest me or any of the investors I work with. Too much risk.
Brian if this deal were doable(and I doubt it) the broker could be paid by the investor or could be paid out of the 2nd deal. Especially if the broker was the one providing the end user.
IF…this scenario was thrown at me in real life and it was a seller that I knew, I would stick with my first scenario. Seek legal advice and then proceed towards an auction fully disclosing that this is a last ditch effort and may not work in time.
Of course everything would be contingent on this guys true situation. If a short sale was already declined because he has too many other assets, then my first question would be …Why don’t you sell some of those assets and pay your bills? I mean he hasn’t paid his mtg, his property taxes or his Fed taxes. He may very well just be a dead beat. If that’s the case then I wouldn’t help him at all.
April 12, 2008 — 7:40 pm
Barry Cunningham says:
Bob..thanks for the comment. I appreciate your response however in the shorts that we have done we ensure that the payoff is recorded correctly so that the homeowner’s credit does not reflect that which you say. It’s all in the presentation to the lender.
I agree he should have legal advice. Often they can not afford it or are unwilling to pay for it so we sometimes will provide an attorney on their behalf to do just as you say and it gives us time to get the deal done.
What many do not realize is that some of these people, actually most of these people simply do not want these properties and want to move on with their lives.
As for the additional tax liabilities, I am not sure if you are aware of the recently passed Mortgage Debt Relief Act. It ensures in shorts on primary residences that there will be no tax ramifications.
As for you viewing the transaction as being self-serving, it is quite to the contrary. The Homeowner gets what he desires, has competent legal representation, has his debt paid off and emerges from the transaction with cash in hand to move on. As the client emerges from the transaction in an IMPROVED state it can hardly be seen as self-serving.
Bob while your concern is somewhat warranted, what would be the alternative if one followed your course of action and was unable to effect a meaningful resolve?
April 12, 2008 — 7:43 pm
Bob says:
I have written extensively about that law. It isn’t as cut and dry as you say. While it applies to a primary residence, it only applies to qualified acquisition debt, which would be purchase money loans or the amount of a refi’d loan up to the amount of the original purchase money loans. Any cash out refi funds that went to “substantial improvements” would also be covered. That’s why I asked about the loans. With your scenario, if the 2nd was not purchase money, then both husband and wife (assuming she is on the note) get a 1099 C. You also did not address the deficiency the 2nd can seek against the seller.
Again, your approach is solely that as the investor looking for profit. My approach is that of the fiduciary of the seller. Any negotiating you spelled out with these various entities, I can do as well, but with more of the benefit going to the seller.
I assumed this was a follow up to the debate about the value of the agent in a given situation, not a lesson in investing. While it was a good lesson in problem solving as an investor, a licensed agent acting as a principle doing what you suggested would be setting themselves up for a lawsuit.
FWIW, my course of action has the same chance of success as yours. The only difference is who keeps the profit.
April 12, 2008 — 8:50 pm
Jeanne Breault says:
Interesting, Barry…I’ll have to spend a little time getting my arms around the numbers. I’m still not really seeing great profit. Sometimes I’m slow, so maybe once I do the calculations myself I’ll see it!
At first glance, I don’t see the hard money cost factored in. If you’re talking about incentives for buyer and reducing price if necessary, I’m having an even harder time seeing the commission/spread in this.
I’m also wondering about the cost of the pool repair? Contractor needs ground water pumps to keep pool from popping, and I’d want a contractor who has “pop-out” rider on insurance – I’ve been down this road! From my experience that alone puts you with the higher caliber (therefore higher priced) contractors.
You didn’t ultimately address the labor for landscaping and the garage door…admittedly peanuts in the great big scheme of things here, but needs to be addressed.
After analysis, what would you pay Mr. and Mrs., if anything?
I agree with a lot of what you say, including payoff of second, but signing over the deed would be a deal-killer for me – I’d advise against that to a client and I wouldn’t be part of the transaction. Signing over the deed would end any other options that may (however unlikely) present. Why not just close and own/control the property during post-occ? Is it because that would involve two closings and the associated expenses?
As Bob points correctly points out, I would also insist on doing the negotiating with lien holders myself. Once an offer, any offer, is in hand and negotiations can begin, anything could happen, including that farfetched better offer. The investor/buyer should not be a part of that. I will do my level best to get the offer in hand accepted! I’m also going to be negotiating the wording of the payoff letter so it will be in the seller’s best interest, including a statement that there will be no deficiency judgement. (Though yes, in the end, his credit score will be only slightly better than if there were a foreclosure, given the payment history!) I will also be going to court to request postponement of setting auction date, which in our local jurisdiction has been summarily agreeable to by the judges. I’m not sure an investor has that ability.
I don’t have the overall ethical notion that this is unfair to the seller, or that the investor is self-serving and greedy. The seller is going to end up with nothing anyway, and the investor is taking a risk.
The only other option would be foreclosure, where everybody loses!
April 12, 2008 — 9:21 pm
Barry Cunningham says:
Bob with all due respect..and I truly mean that…you may need to look a little further.
You wrote that I: “did not address the deficiency the 2nd can seek against the seller”
The reason that this was not addressed is because it is not possible. A deficiency judgment can only be applicable if the property goes to foreclosure and then the bank does not receive enough at auction to cover what is owed. When a bank agrees to accept a settlement, or short pay, they are agreeing to “payoff” the loan thereby it not going to foreclosure and obviously there not being any deficiency to recover. As for the 1099 that is indeed covered in the MDRA.
No this was not a follow-up to any previous debate. It was designed for me to understand the mindset of realtors better and to see what seems to be an apparent disconnect betwen the two species.
We are on the same page but often reading different words. Trying to bridge that gap.
In what you wrote you intimated you could have a similar result as what I wrote…how? In my scenario I controlled the situation. How do you envision getting the deal done.
Also, you mention a great deal of liability, where is the liability as long as you disclose? We do these types of deals all the time and one of the reasons I asked this question is it will help me in working with agents who may not be as well versed in the complexities of the transaction and it gives me a view into the mindset.
You wrote that my “approach is solely that as the investor looking for profit” Well…mostly. The Seller is greatly enhanced.
By the way, I have no doubt that your skillset could do this. Could you do it given the timeframe? And if you could not would the Seller be better of in my scenario or with yours?
If you represented this client and could not effect the resolution as you would want to see it..would you advise him against doing the deal with us and then just tell him to take pack up and move out?
How do you uphold your fiduciary obligation when the sheriff comes a calling and tells your client that he has 24 hours to move out..all which could have been avoided if you advised and counseled the Seller into working with my scenario?
No this was not a lesson on investing..it was a discussion on getting a deal completed in the best way possible given the time constraints and vital signs.
In essence if we discuss this we can help realtors understand the options and myriad of ways of getting transactions such as these completed and help investors understand the mindset of the agent.
April 12, 2008 — 10:24 pm
Barry Cunningham says:
Jeanne..you’d be surprised at our ability to get things done. That is one of my points of contention with some of my past posts…we have been extremely successful in going before judges and magistrates in getting motions heard and negotiating time extensions. With all due respect what made you think that was an agent’s only skillset? Many of us know how to structure deals and work all facets of the transaction. I outlined the costs in my comment. Might have been missed.
“signing over the deed would be a deal-killer for me”..why? what would be the problem in this regard. We had 20 of those deals last month. It’s completely legal and absolutely above board.
Maybe Brian Brady can address the difference in the credit score issue and the ramifications of the big “F”. At this point he is late (extremely late) but if the loans are satisfied and the SOM is filed correctly and the entry on the credit report simply stating Paid in ful , which needs to be part of your negotiations, it’s MUCH better than a foreclosure on the record. We have been told by more than a few people that the F is a 150-200 point deduction and could be a scarlet letter for quite a long time.
While resolving the matter in the manner as I outlined, the Seller could re-establish credit in a matter of 18-24 months and be able to buy again as no foreclosure showed up.
This alone would be more beneficial to the Seller.
Lastly, the numbers don’t lie…large profit in this deal.
April 12, 2008 — 10:34 pm
Jeanne Breault says:
Barry,
I didn’t mean that “going before judges…” was a skillset – I just wondered if judges would be as open to an investor who is not “representing” the seller as tney are to a REALTOR.
I’m still curious about the costs I questioned in my last post.
April 12, 2008 — 10:47 pm
Russell Shaw says:
Nice Post, sir.
April 12, 2008 — 11:54 pm
Bob Wilson says:
That is not an absolute, particularly in Florida where the sold out junior would be able to seek a deficiency. Many lenders condition approval of “short sales” on release of the lien but not the underlying note. It is one of the most common mistakes agents make when working with short sales and one reason why sellers should have legal counsel. Your providing for their legal counsel is questionable as you may very well have a conflict of interest.
Let’s revisit the seller’s original claim that the short sale was initially refused because of assets. If true, what has changed? The 2nd would have been the lender that quashed the deal. They knew earlier that they could seek the deficiency if the first foreclosed and that the seller has assets which make it even more likely. Lenders are becoming far less likely to report as nothing other than “paid in full” when it wasn’t, without leverage – and in your scenario you have none. Your offer to them is little more than “go pound sand”.
The truth is that unless the seller gets in writing that the 2nd won’t seek a deficiency or report the charge off to the credit agencies, they can tell you what they like and hit the seller after the fact. Is the lawyer you’re paying going to tell the seller that a deal that still kills his credit and leaves him saddled with a deficiency judgment is not in his best interests?
You never said whether or not the 2nd is purchase money or cash out. The law only applies to purchase money and it has nothing to do with the 1099. The 1099 is issued regardless. The tax code requires the lender to do so. You can’t legally negotiate away a statutory requirement. It’s up to the seller to then file IRS form 982 and seek the exclusion.
You asked “where is the liability as long as you disclose?”. Disclosure does not eliminate liabilty. At best it reduces it. The liability for an agent in this scenario is triggered the moment you negotiate with a bill collector on someone else’s behalf. Add in to the mix the fact that you stand to get the most profit out of the deal and done the road the wife’s attorney is cross examining you in court. By definition you are dealing with a seller under duress. Liability for a licensed agent acting as an investor, but at the same time negotiating with the sellers’ creditors creates an inferred or implied agency in many states.
“signing over the deed”
“legal and above board”
I have spoken with two people this month that signed over the deeds expecting results similar to what you suggested here. That isn’t what happened though. Legal or not, it was a bad idea.
It isn’t that only agents have the skillset, it’s that when you employ that skillset on behalf of the seller, you cross the line by acting as an agent for the seller.
April 13, 2008 — 12:36 am
Brian Brady says:
“Maybe Brian Brady can address the difference in the credit score issue and the ramifications of the big “F”.”
Seller’s FICO score is trashed for 2-3 years. Regardless of the foreclosure. Avoiding legal foreclosure allows you to answer negatively on the “big” questions on page 4 of the 1003 (the declarations section).
If the seller has the “f” stigma, it stays on the credit report for 10 years. Most mortgagors will make a loan after 4 years; some may not for 10.
To give you an analogy (and it’s a stretch): Your seller already broke his leg. Let’s see how many places he broke it.
April 13, 2008 — 1:24 am
Greg Cremia says:
I would turn this listing down.
I do a lot for charity but I do not see someone who has not paid their property taxes in 2 years as a charity case. An IRS lien takes even longer. This guy has been traveling down this road for a long time and now at the last minute I am supposed to pull a rabbit out of my a– to save his credit? And he has other assets?
If this person was a victim I would help. He is not a victim. I have worked for free and will again but only when the situation warrants it. This one does not.
April 13, 2008 — 6:19 am
Barry Cunningham says:
Russell: Thank you
Jeanne: Yes…judges have allowed us often to work with the extensions in the Court..as long as the Homeowner is present. Only time we have been turned down is when one time when the Homeowner did not show up. The costs are outlined above. If I missed something please let me know.
Brian Thank you for the clarification
Bob:The junior lien holder would NOT and NEVER be able to seek a deficiency IF the agree to the short pay AND the wording on the payoff letter is correct. I understant theoretcial application, we have completed many of these and have actual letters from the bank acknowledging that fact.
The original short was refused because it was not prepared properly upon my review. Once we packaged it correctly it was obvious the 2nd was toast. The prior person tried to short the 1st and did not realize there was no reason to. We are simply paying off the first.
Bob..you are missing the main point here.THERE IS NO DEFICIENCY JUDGMENT POSSIBILITY..it is in the presentation and the drafting of the payoff letter both of which ensure this to be the case.
I thought it was implied based upon the fact that no 1099 was being issued that it was a purchase money 2nd. Sorry if that got lost in translation.
Bob you keep mentioning liability. We all get in our cars everyday. I am very prudent but there comes a time when as a professional you weigh liability against potential reward.
This may not be for you and that is understood. Does not make it wrong and certainly does not make it unethical. As for the agency part our Letter of Authorization is comprehensive and affords us the right to speak on the Seller’s behalf.
One question beyond perceived liability and fear of agency that has not been answered by you and asked several times, If you represented this client and could not effect the resolution as you would want to see it..would you advise him against doing the deal with us and then just tell him to take pack up and move out?
Which incidentally is the nature of this post. What sir, would you do? Your input thus far has been valued but the bottom line is what would you do with this client?
April 13, 2008 — 6:51 am
Barry Cunningham says:
Broker Bryant if you are around or to anybody else…Bob above keeps referring to “fiduciary” obligations.
I recall a conversation with BB and as well with a few attorneys recently that a Transaction Broker does not have any fiduciary responsibilities. Can someone please expound on this?
April 13, 2008 — 7:27 am
Jeanne Breault says:
Barry,
Homeowner doesn’t have to be present when REALTOR appears before judge…a benefit that gives emotional relief and eliminates missed time from work.
There are still a few loose ends…please address/answer from my earlier questions/comments:
1. I don’t see the hard money cost factored in. If you’re talking about incentives for buyer and reducing price if necessary, I’m having an even harder time seeing the commission/spread in this.
I’m also wondering about the cost of the pool repair? Contractor needs ground water pumps to keep pool from popping, and I’d want a contractor who has “pop-out” rider on insurance – I’ve been down this road! From my experience that alone puts you with the higher caliber (therefore higher priced) contractors.
You didn’t ultimately address the labor for landscaping and the garage door…admittedly peanuts in the great big scheme of things here, but needs to be addressed.
After analysis, what would you pay Mr. and Mrs., if anything?…
2. Signing over the deed would end any other options that may (however unlikely) present. Why not just close and own/control the property during post-occ? Is it because that would involve two closings and the associated expenses?
3. Once an offer, any offer, is in hand and negotiations can begin, anything could happen, including that farfetched better offer. The investor/buyer should not be a part of that.
Thanks!
April 13, 2008 — 8:57 am
Jeanne Breault says:
Barry,
Just saw your question on fiduciary responsibilities of transaction broker…here they are (Florida):
1. Dealing honestly and fairly;
2. Accounting for all funds;
3. Using skill, care, and diligence in the transaction;
4. Disclosing all known facts that materially affect the value of residential real property and are not readily observable to the buyer;
5. Presenting all offers and counteroffers in a timely manner, unless a party has previously directed the licensee otherwise in writing;
6. Limited confidentiality, unless waived in writing by a party. This limited confidentiality will prevent disclosure that the seller will accept a price less than the asking or listed price, that the buyer will pay a price greater than the price submitted in a written offer, of the motivation of any party for selling or buying property, that a seller or buyer will agree to financing terms other than those offered, or of any other information requested by party to remain confidential; and,
7. Any additional duties that are entered into by this or by separate written agreement.
April 13, 2008 — 9:06 am
Bob Wilson says:
It wasn’t implied because if debt is forgiven or cancelled, then a 1099 has to be issued. It is the law. You can’t negotiate away a statutory requirement. Any agreement you negotiated with the lender about not issuing the 1099 is invalid. Odds on the 1099 will get issued in 2009. It will be up to the seller later to prove to the IRS that the 1099 should be excluded.
That is an important “IF”. One that should require the seller to have his own legal advise.
My role as an agent is different than your role as an investor. Im not saying that he shouldn’t do the deal as structured. If he was my client and you approached as an investor, structuring the deal in such a way that works for all is what I do. What I’m saying is he should have his own legal and tax representation and not trust you to do the right thing. You have made inaccurate assumptions about the 1099 and credit impact here, so assuming that you would make sure that the legalese fully protects the seller when you have profit at stake is not a smart bet. Based on that, I would not rely solely on you to do what is in the best interests of the seller as you have an inherent conflict of interest.
Greg speaks at length about divorcing commissions so representation isn’t compromised. I’m fully behind that concept, so perhaps you understand why your scenario suggesting that buyer represent seller is something I think is a mistake.
BTW, transaction brokers with limited liability don’t exist in every state.
April 13, 2008 — 9:28 am
Bob Wilson says:
One other question.
Why wouldn’t the 2nd simply buy out the first and the IRS lien themselves? Why would they settle for $2500? There is plenty of equity here.
April 13, 2008 — 9:39 am
Barry Cunningham says:
Bob…the MDRA is clear…there is no 1099 issue on a primary residence. Not going to debate that any further.
Bob, we clearly disagree and I respect your opinion. Dead horse, we’ll move on and tackle another issue on another day.
As for the 2nd not buying out the first? I am surely not going to suggest that to the lender. If they accept (they have) the settlement I am not going to ask them why they accepted it. Despite as it appears in my posts and comments, I certainly know when to shut up in a transaction.
One last question…if the Seller who has no money is directed by you to seek legal counsel and can not afford to do so, are you going to retain the attorney?
Aren’t you pretty much telling the Seller you can’t help him? I know..that was 2 questions.
Bob it seems kind of clear that you do not like deals as this and would not want to be involved. Which possibly indicates that you would not take this on as a listing anyway. Am I correct in that assumption?
April 13, 2008 — 9:54 am
Bob says:
You are still wrong on that issue. Send me an email, I’ll show you exactly how it is spelled out.
I have had attorneys submit legal fees for sellers to escrow, then paid them from my fee out of escrow. Did it 3 weeks ago. I have also reimbursed sellers for legal fees out of escrow. One client borrowed from a friend and I paid off the loan out of escrow. I reserve the right to pick and choose my clients though. Very few are unable to find a way to get legal counsel.
In your scenario, the seller had too many assets to do a short sale so it wouldn’t have been an issue.
What I don’t like to see is the seller trust the buyer to act on their behalf. If the seller had his own representation, preferably legal, then the basic structure of this deal is a potential home run. I take deals like this all the time. Right now I’m dealing with 15 distressed sellers and I get contacted by 1-2 a day. I’ll see well over a hundred by year end. All speak to an attorney before I take any listing though.
I can see why you are opposed to the seller having their own legal counsel though:
Are you saying that the legal counsel you provide advises the seller that this is a good idea? I have a hard time believing that. If you were the investor and I represented the seller, the deal would close without having to deed you the property prior to close.
April 13, 2008 — 11:14 am
Barry Cunningham says:
Bob..saw your comment on my site..thanks… no I am not suprised you commented. You are a great debater and very knowledgable! We’ve beat this one down..on to future commentary.
I value your continued input on future topics.
April 13, 2008 — 1:13 pm