Tuesday, April 10, 2007

Short Sales and the FHA

I've been buying property this year using short sales on property that is in foreclosure. All of the banks I have been successful with have been happy to know that no Realtor fees were involved (saved them money). Today I ran into my first FHA loan. The FHA requires that the property be listed with a Realtor for at least 90 days. This presents a couple of problems for the seller.

First, by the time the seller decides to act, there is often less than 90 days left before the foreclosure auction on the home. People in foreclosure are in a great deal of denial about their ability to save their home. Until they get the lis pendens they often feel that somehow they can catch up on back payments (and the bank is encouraging them to do so). The reason they act at all is that I tell them I can stop the foreclosure process and they do not have to pay anything at closing. So they are not thinking at all about listing their homes for sale.

Second, the seller owes more than the house is worth. I'm not a Realtor and don't know the ethical obligations, but I assume that if you list your property for $X and someone brings you an offer for $X, the Realtor might get upset if you don't sell it. And why wouldn't you sell? Unless you (the seller) are familiar with a short sale process, you probably don't want to sell at a price at which you have to come up with a lot of out of pocket dollars to close. After all, if you had the money, you would just catch up on your mortgage payments and avoid foreclosure. And even if the seller were familiar with short sales and accepted an offer for less than they owed, there is no guarantee that the bank will accept it. Will a normal buyer even make an offer under these conditions?

This an other government rule that makes sense from the governments perspective (and probably to the Realtors association) but makes no sense to a seller. Sellers in foreclosure that owe 100% or more of what their house is worth are not going to list their homes. Closing costs plus the Realtor commission will add to their costs to sell. By the time a seller is in foreclosure interest plus fees that the bank has added to the amount due increase the financial obligation by 10% over the loan principal, so altogether the seller must get an offer about 20% over the homes value to break even.

Putting together a short sale package for the FHA is the most complicated of any that I have dealt with. Are Realtors familiar with short sales? If so, are they will to put in the effort to put together the short sale package and negotiate with the bank? I know the government is trying to protect the public from us dishonest business people, but in the end creates a situation in which the property will go to auction and the seller will have a foreclosure on their record.


Diane Cipa, The Closing Specialists® said...

I know. I've been working with FHA loans all of my professional life - over 30 years now.

Though their rules seem really tough considering individual cases, they make sense in the greater scheme of things. The lax FHA rules of the past left their program vulnerable to abuses by residential property investors and so they are sensitive to those risks.

If the current level of foreclosures causes significant enough levels of losses for them to re-evaluate their short sale policy, the changes, if any, to the rules will likely come after the crisis has passed.

Just wondering. Do VA mortgages have the same kind of restriction?

Paul said...

I don't know about VA loans yet. I will probably encounter them at some point. Interesting question.

Robert Zuzek said...

I am representing a buyer in a short-sale of a home that has a FHA loan on it. The purchase agreement that was singed and approved by the bank indicated that Sellers were to pay closing costs of 3%. 5 days from now we are set to close and the bank with the FHA home states that they can pay no closing cost. They tell us this is the guide lines for the FHA. Remember they agreed to it to start with. Does anyone know anything about this.


My email is robertzuzek@remax.net

Anonymous said...

Speaking only for myself after 12 years as a Buyer Broker, I can tell you the reason I'm not in a rush to work short sales. The complexity of that type of deal doesn't scare me.

I'd be happy to work short sales, if the financial institutions would end their practice of cutting commissions at the closing table.

The paperwork they insist upon using and phrases like "subject to lender approval" (when final approval comes at the closing table and the attorney has been instructed to not pay the agents) is what keeps me well away from those deals.

When they take steps to ensure we Realtors are paid for the work we do (no discounts, no arguments) then we'll step up. Until then...they're left dealing with agents who haven't caught wise (i.e. newer and newer folks, before they quit in penury).

But things will change, our ranks are thinning and these sales are only increasing. My prediction is they'll be tripping-over themselves to not only guarantee payment, but even bonuses to agents who can shepherd a deal to close.

Sorry if that's bitter, but a lot of my colleagues have been stabbed-in-the back by higher level salaried bank-folk with no clue but the bottom line.

Al Block said...

I have been a Realtor for over 20 years. First, I agree with the last "anonymous poster". Short sales are loads of work and the lenders try to dictate all kinds of crazy rules, even if in the end they can get a sale, they do things to prevent it and lose thousands more later. Like not allowing the payment of buyer's closing costs, even if the net is more than they want for the property. This is crazy because on normal real estate sales, HUD encourages 3% to 6% seller concessions to help a buyer get into a home. But when the short sale is on a home with an FHA mortgae on it already, then no payment of those very same concessions on a subsequent FHA sale. DUMB! I had one just like that ... the lender would not allow it ... we resold the property to a buyer that did not need any closing costs paid ... that netted the lender $12,000 less but they were okay with that because it followed the "guideline".

As for the Engineer who puts out Extreme Perspective ... you seem somewhat anti-Realtor. Stop looking at our fees or commissions as some sort of fine or penalty. You speak of it in the same context as bubonic plague or a tax. What ever you do for a living, I'm sure you expect to get paid. Our commissions may seem high to many ... but those people have never spent a year in our shoes receiving that compensation. WE DONT' GET ALL OF IT and how much would you want to get paid if you were told ... you will go to work, you will have no guarantee of getting paid this week, people will call you at all hours, want your immediate attention, customers will be very disloyal, you will get a lot of rejection, most work you do will be for free ... and when you get paid you will get to split the commissions you receive with a Broker or have to pay variable business overhead (rent/phone/advertising,malpractice insurance, etc.). Oh, and even if you do everything right, people will want to sue you because they think you are the one with all the money and you will settle to make it go away. WELCOME TO MY WORLD.

Al Block
RE/MAX First
Serving Metropolitan Detroit

Paul said...

Sorry to disappoint you - I am neither for nor against Realtors. Though I think that if you are going to pay such a high commission, you need excellence. Most Realtors that I have dealt with are not really competent. Probably true in that profession because so many are part timers.

Anonymous said...

I am not a Realtor, but I do short sales and am trying to get more Realtors on my team. I buy the house from the bank, and do all the work that goes along with it, and have the Realtor go ahead and list it during negotiations, and lower the price as we proceed. They find a buyer ready to close when we close with the bank. I pay them 3% on the A-B deal( when I buy the house) and 6% on the B-C deal(the end buyer) I like paying them. They bring me the deal, I work it, they sell the house, and we all make money. This lets me do what I do, and they do what they do, and we all win.