Dean Graziosi

Government backed loan modification programs appear to be taking hold.  In efforts to turn back the wave of foreclosures, Treasury Secretary Timothy Geithner unveiled new incentives for borrowers and lenders who successfully negotiated modifications of Freddie Mac and Ginnie Mae mortgages. 

At a recent loan modification informational event sponsored by Neighborhood Assistance of America in Los Angeles, more than 50,000 attendees met to learn about mortgage-reduction opportunities.  California has been especially hard hit by unemployment and tumbling real estate values.

Before the recession, Riverside, California, was a thriving business community and served as home to many growing businesses.  Now the area has the look of a ghost town with “For Sale” and “For Lease” signs on almost every commercial building. 

Riverside had been one of California’s foremost entry points for construction materials arriving from Asia.  The housing boom was so strong that warehouses were stockpiled with inventory and jobs were plentiful.  The local economy could only be described as robust.  Now, all that has changed.

Real unemployment in California is estimated to exceed 18% and many employed workers have endured cutbacks in pay and hours.  Nabil Boctor, a 65-year old business and property owner in Riverside, has seen his coffee shop steadily lose customers and has lost his home to foreclosure.  Once contemplating retirement, Boctor has put those plans on hold.

At one time the coffee shop had three delivery persons, three waitresses and a chef.  Now Boctor and his wife are struggling to keep the odors open.  They are in default of their $440,000 mortgage.  Unlike many homeowners, the Boctors put $100,000 down on their dream home.  Despite the down payment, the home is not expected to sell for the amount of the existing loan.

Sadly, almost 43% of U.S. homeowners who negotiated loan modifications earlier in the year are already in default of their new loans.  This statistic is prompting the Obama Administration to consider extending unemployment benefits.

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When a lender agrees to accept an offer in an amount lesser than the amount of the mortgage, the opportunity for a short sale has been created.  Short sales occur when the seller is in delinquent status or about to enter delinquent status. 

Short sales have come to dominate the marketplace.  Like foreclosures, short sales greatly impact the overall value of housing as they tend to drive prices down. 

The investor stands to benefit the most in a short sale.  The seller has no equity, is faced with the loss of the residence and a damaged credit rating and the mortgage holder usually takes a loss.

The typical short sale includes five basic components.

·                     The seller signs a listing agreement with a real estate agent.  The agreement to sell is contingent upon approval by a third party, the mortgage holder. 

·                     The agent finds a buyer and secures a contract for the purchase and sale of real estate.

·                     The seller accepts the offer contingent upon third party approval.

·                     The offer is submitted to the seller’s lender who accepts the buyer’s offer.

·                     The transaction closes when the buyer delivers the funds and the existing lender releases the lien and the seller delivers the deed.

Short sales take time to close.  Many buyers become frustrated.  The buyer must understand that the mortgage holder is taking an unwanted loss.  These lenders do not bear many of the standard expenses a conventional seller might carry.  As such, the buyer is expected to buy the property in “as is” condition.

It is the buyer’s responsibility to perform all inspections prior to validating the purchase and sale agreement.  This includes pest, roof, sewer and water, plumbing, electrical, chimney, septic and fireplace inspections.  The old adage “let the buyer beware” definitely applies to short sales.  Buyers need to protect themselves with strong contingency language regarding these inspections.

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Times have changed.  Since December 2007, the recession has changed the way real estate agents transact business.  Those warm and fuzzy days of easy credit and rising prices have been replaced by excessive supply and not enough demand.  That is the reality of today’s real estate market.

Once upon a time, the short sale and the foreclosure action were rarities.  Now, these distressed sales are an important part of the real estate industry and recovery.  With one in every 355 residences currently in the foreclosure process, and with million of American homeowners under water, real estate agents have changed their focus.

As Charles McMillan of Coldwell Banker in Dallas said, “Foreclosures and short sales can offer opportunities for home buyers, but it is extremely important to have the help of a real estate professional for these kinds of purchases.” 

To assist real estate agents gain knowledge about foreclosure and short sales, a new certification has been created by the National Association of Realtors.  The Short Sales and Foreclosure Certification program (SFR) has been created to train real estate agents in this new phenomena.  The program includes training about how to manage short sale, foreclosure and real-estate owned transactions.

The association is actively distributing the latest updates about private and government programs aimed at helping these transactions take place.  Bringing resolution to this aspect of the real estate market is key to stabilizing housing prices and clearing out excessive inventory. 

McMillan explained the Realtors feeling about the dilemma.  “Unfortunately, there are situations in which people just cannot afford to keep their homes.  A short sale can help families protect their credit by avoiding a foreclosure.  When a foreclosed or REO property is sold, it helps the surrounding community by reducing the impact of those properties on home values in the immediate area.”

Real estate investors who are purchasing large blocks of short sale properties have the comfort of knowing that there are now certified short sale and foreclosure experts.  These agents can help put the package together and clear the inventory at the same time.    

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