The Orange County Realtor

COMMON SELLER MISTAKES

2008-06-19T15:06:00.000-07:00

by Mikey and Steven Hall

Over the years we’ve seen a lot of seller mistakes.. Some of these mistakes are more costly than others, and some are repeated more often than most. Virtually all of them are unnecessary.

1. Setting The Price Too High
Setting the price too high is a classic seller mistake. This very common mistake happens for a number of reasons. Sometimes the cause is pride of ownership, but more often the seller is setting a price based on what he or she needs out of the sale, as opposed to the market value of the home. If the price is set too high it will discourage offers. Moreover, in a down market, an inflated price on day one of the listing is even more inflated after a week or two have gone by. Not only is the asking price not tracking the market it’s becoming more out of line as each day goes by. Most sellers though refuse to set their initial asking price at a level which will invite offers and is representative of the market. This leads us into mistake number two.

2. Refusing To Lower The Asking Price On A Reasonable And Timely Basis
Sellers who have set their asking price above the market value, will also invariably fail to adjust their price appropriately as the market declines. Instead of pricing to sell, these sellers will only grudgingly reduce their asking price and never by an amount large enough to make their home a worthwhile buy. As a result they find themselves chasing the market down - always priced too high and never getting a serious offer. In the end, this seller will loose more money than if they had simply priced their home correctly in the beginning. It may sound trite, but the market really does set the price.

3. Rejecting The First Offer
Too many times a seller will be suspicious of the first offer they receive. We’ve all heard statements like "I must have priced my home too cheaply" or "If I hold out I’ll get more money." or "I just listed my property and I don’t want to take the first offer." These reactions and others similar in nature, generally cause the first offer to be rejected. In down markets this is a clear mistake. Each day that passes the buyer’s alternative choices are increasing and the seller’s bargaining position becomes weaker. In times of rising interest rates the buyer’s purchasing power is decreasing as times passes.

Assuming the home was priced correctly in the first place. The plain fact is the first offer is more often than not the best offer. Think about it this way. A home which has just been listed can more easily be perceived as a desirable "discovery" by a serious buyer than a home that’s been on the market for weeks. The longer a property sits, the less desirable it appears. In fact, a buyer’s first question usually is, "How much?" and the second question is "How long has it been on the market?" If you get a first offer, at or near your asking price, it’s probably because you’ve priced your home correctly. If you feel the need, recheck the comparable sales, but don’t reject the offer out of hand. Which brings us to the next common seller mistake.

4. Becoming Offended By Low Offers - Refusing To Counter
It’s surprising how many people will become so offended by a low offer they refuse to counter. There are a couple of good reasons why this is a mistake. If a seller has "an offer on the property" they are by definition in a stronger position with other potential buyers. The property is seeing action and there is the potential of getting a "buzz" started. Used properly, even "low ball" offers can instill a sense of urgency.
Moreover, a low starting offer may be the buyer’s way of testing the market and may not say anything about what the buyer is actually willing to pay. A seller is rarely hurt by responding to an offer.

5. Carelessly Selecting A Buyer
It’s important to pay attention to the buyer’s ability to make the purchase. The buyer should be pre-qualified by his lender, and should have a reasonable down payment. Between two otherwise equally qualified buyers, the buyer whose offer is contingent upon selling their own property represents more risk than the buyer without contingencies. This is especially true in a down market where the buyer may not be able to sell his home for the price he wants.

6. Not Presenting The Home Effectively
A cluttered home or a home which needs repairs or paint fails to communicate desirability and in some instances can even signal to the buyer to reduce their offer. Fresh paint (neutral colors), clean windows and clean floors and carpets can work wonders. Cut the grass, and pull the weeds. A few flowers inside and out always seem to help.

When it comes to furniture, a little less may be better. Less furniture will cause a room to look and feel larger. That’s a good thing. Some agents dislike using a home stager, but the results can be really good, so long as the stager has some talent and the cost isn’t too great.

Contact us if you are interested in listing your home. mailto:AskMikeyHall@gmail.com

SHORT SALES - BARGAIN OR TRAP FOR THE UNWARY?

2008-06-11T20:31:00.000-07:00

By Mikey and Steven Hall

An Environment Ripe For Failure
Throughout most of the recent real estate boom buyers would regularly choose to use what we call, "stated income" borrowing. Instead of having to fully document their income these buyers would simply state how much they earn in their loan application. Sometimes those buyers who were less than sophisticated would simply let their loan broker state their income. The potential for both intentional and inadvertent abuse was great.

The widespread use of Adjustable Rate Mortgages (ARMs) further complicated matters because of their provision which called for a low introductory rate (usually for the first one to three years) to be later replaced by a higher interest rate set by some indicator or index. Many times the buyers were qualified to pay the lower teaser rate, but not a higher rate to be established later.

To make matters even more dangerous a large percentage of buyers were making "no money down" purchases. A 5% down was considered good while 10% or 15% down was considered great!

Why were people setting themselves up for disaster like this? Simple. Real estate prices were skyrocketing at a truly astounding rate. The real estate inventory in some areas was barely enough to cover 10 days worth of sales. It was quite common for a home to be listed and sold with multiple offers in the same day. In such a market it didn't matter if a buyer couldn't afford his home payments so long as the price continued to rise. The buyers felt secure in the knowledge they could always sell for a quick profit.

As prices continued to rise owners found themselves with large amounts of equity in their homes which they pulled out (refinanced) and spent. Best case, the funds were used for improvements; worse case the funds were used for vacations and SUVs.

The Perfect Storm
Then in 2006 the market began to cool and, like a roller coaster approaching the summit from which it would begin its terrible fall, prices stopped going up and the summit was reached.
In 2007 the roller coaster began to pick up speed as it plunged downward. All of the elements were now present for the perfect storm. The ARM rates began to tick upward at the same time prices were falling. The falling prices began to eat the equity windfalls and owners found they could no longer refinance to cover their lifestyles. Houses began to flood the market. Rapidly dropping prices were a self fulfilling prophecy.

The Short Sale And Its Issues
Suddenly, sellers found themselves trying to sell homes whose market value was below the amount owed to the lenders. Enter the "short sale" or "short payoff", as it is sometimes called. Sound like a great opportunity? Maybe not.

Because Realtors® with short sale listings are facing stiff competition they will many times list the properties at an extraordinarily low price. Not good. Why? Because the lender is being asked to absorb a loss and as such has a right to approve the purchase. In a large percentage of cases the listing price of the property is far below the amount the lender is willing to approve. As a result the majority of offers made are not approved by the lender(s) involved.

Most lenders will not consider a short sale unless the homeowner has a true "hardship" and is at least 30 days late on their mortgage payments. Moreover, most lenders won't even consider a short sale unless there is an offer on the table. In today's market, offers are few and far between. This means that before the lender even begins to think about possibly approving a short sale the property is dangerously close to the 90 day point when lenders record their Notice of Default (NOD).

All of this can create problems, but for the experienced realtor they aren't necessarily fatal:

1. While the seller is usually excited to take the offer, the lender's approval is generally very slow in coming. Sometimes months can go by without a word from the lender(s). This potential problem can be addressed in the purchase offer and addendums.

2. Typically the lender(s) will not approve the buyer's offer which tends to be below the asking price which was already far below what the lender would consider anyway. A good realtor should have already begun working on this problem before the offer is even made.

3. There is also real possibility the lender will not grant a stay of the foreclosure, and unless the buyer can close the escrow before the trustee sale the deal may fall through. This is always a possibility, but simple communication can work wonders.

4. Unless the buyer writes in the appropriate conditions and sets an approval deadline he runs the risk of being tied up in an escrow with no way out. Again this is a matter of experience and expertise.

Are there reasons why someone (a non-investor) would want to buy a short sale?
Absolutely! By definition a short sale is being sold for less than the total debt on the property. Moreover, the lender knows that its loss will very likely be even larger if it goes through the entire foreclosure process. As large as its loss may be, a short sale will probably be the least expensive strategy for the lender. At the end of the day, the discount passed on to the buyer can be substantial.

Why investors need to be careful.
If the buyer is an investor (the property is not going to be their residence) then there can be a serious danger to both the buyer and the buyer's Realtor®. This occurs if the lender records an NOD while the owner is living in the property as his primary residence.

When this happens an "Equity Purchase Contract" is created which is closely controlled by the laws set forth in the California Civil Code. This set of complex laws was intentionally created by the California legislature to protect people who are losing the family dwelling in a foreclosure.
As originally conceived, the first effect of the law was to make it impossible for any Realtor® to represent the buyer by requiring that the agent acquire a bond which wasn't available in California. This requirement was held to be unconstitutional and unenforceable in the case of Schweitzer v. Westminster Investments (2007) 157 Cal.App.4th 1195, when the California Supreme Court denied review on March 26, 2008.

Unfortunately, the other requirements of the home equity sales contracts law remain in effect. For example, special notice requirements are triggered, as well as, a myriad of other requirements. In essence, all mistakes are construed against the investor and it is actually possible for a seller to come back a year later and attempt to set aside the sale. Long story short. Investors are at risk when it comes to Short Sales. Investors should consult legal counsel before becoming involved in an Equity Purchase Contract.

Find an experienced Realtor and you're good to go
It has taken some time for the Real Estate profession to adjust to the changing market place, but the California Association of Realtors (CAR) is now providing Realtors® with the contractual tools necessary to deal with the complex issues involved in Short Sales. Buyers (we haven't addressed the issues facing sellers) are well advised to be sure their Realtor® has experience with Short Sales and is familiar with the issues and the current approved CAR forms.

mailto:AskMikeyHall@gmail.com

DISCLAIMER
This article is intended to be a general discussion only and should not be considered legal advice. Your use of it does not create an attorney-client relationship. Any liability that might arise from your use or reliance on this article or any of its links is expressly disclaimed. This blog is not legal, accounting or tax advice, is not to be acted on as such, it may not be current, and is subject to change without notice.

A Short Sale From The Seller's Point Of View

2008-05-15T11:47:00.000-07:00

Short sales, when considered through the eyes of the seller are, by far, more complex than the issues faced by the buyer. Each situation is different and will turn on its own facts. The purpose of this discussion is to highlight a few of the areas of concern where the seller should obtain professional legal, tax, and/or credit advice. The law is constantly changing and the reader is warned not to rely on this discussion as anything other than a description of issues to be researched.

The notation C.C.P. refers to the California Code of Civil Procedure and the notation C.C. refers to the California Civil Code.

Foreclosure:
In the event a borrower defaults on a loan, the lender may foreclose on the borrower's real property which secures the loan. A foreclosure may take the form of a Trustee Sale Foreclosure, or a Judicial Foreclosure resulting in a deficiency judgment. A foreclosure poses a number of threats to a borrower: (a) loss of the borrower's home; (b) a foreclosure on the borrower's credit report; and, (c) a potential deficiency judgment.

Deficiency Judgment:
A deficiency judgement is a court judgment obtained by the lender, in a judicial forclosure, against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the property, whichever is greater (C.C.P. § 726(b).) A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment.

When Deficiency Judgments Are Not Available:
Under certain circumstances, in California, a deficiency judgement may not be available to a lender:

a. Purchase Money. If the loan was obtained to purchase an owner occupied residence (1-4 units) and the loan is secured by that property, the lender may not obtain a deficiency judgment against the defaulting borrower. The loan is entitled to "purchase money" protection (C.C.P. § 580b.). However, if the loan is the result of a refinance the new loan is no longer "purchase money" and is not entitled to protection.

b. Seller Carryback. If the purchase money loan for any type of real estate is financed by the seller and secured by that same property, the lender/seller may not obtain a deficiency judgment against the defaulting borrower. (C.C.P. § 580b)

c. Trustee's Sale. A lender may not pursue a deficiency judgment against the borrower if the lender opts to foreclose by a trustee's sale foreclosure (a non-judicial action). (C.C.P. § 580d.)

d. 3 Month Time Limit. An action for a deficiency judgment must be brought within 3 months from the time of a judicially-ordered sale. (C.C.P. § 580a.)

e. Fair Value Limitations. A deficiency judgement is limited to the difference between the unpaid balance of the secured debt and either the amount produced by judicial sale or the fair market value of the property, whichever is greater, in a judicial foreclosure (C.C.P. § 726(b).)

Junior Deeds of Trust:
If a junior deed of trust is not purchase money or seller carryback, then the junior lien holder may sue on the note and the borrower on the junior loan may be presonally liable.

Exception To The One Action Rule:
Typically a lender may not sue on a debt secured by a mortgage, except by judicial foreclosure (C.C.P. §726). An exception to this is if the property has become valueless after the lender's security interest was recorded. In this case, the lender may sue directly on the debt, unless the borrower's loan is either a purchase money or a seller carryback loan.

Risk of Deficiency Judgment and/or Direct Suit:
Seller is warned to consider carefully the risks of a deficiency judgment and/or a direct suit on the debt.

Other Lender Options:
Borrowers should understand that lenders will sometimes consider solutions other than a foreclosure. These solutions might include:

a. Loan Workout: A loan workout is a resolution of the problem between the borrower and the lender which modifies the original loan agreement. Some of these options include forbearance (e.g. forgiving a portion of the debt or late charges); deferment; renegotiating interest rate, monthly payment amount, principal amount, maturity date; or the enforcement of an acceleration clause in the loan.

b. Deed in Lieu of Foreclosure: After the borrower is in default, the borrower voluntarily delivers title to the lender for consideration and the lender accepts the conveyance of the property in full satisfaction of the mortgage debt.

c. Short Sale: A short sale is a transaction in which a lender allows the real property securing the loan to be sold for less than the remaining mortgage amount due and accepts the proceeds as full payment of the loan. This is generally the result of the borrower's inability to make the mortgage payments and a property value which is less than the total amount owed on the mortgage(s). Typically, a lender will not consider a short sale unless the borrower has stopped making payments on their loan and has in hand an actual offer to purchase the subject property.

New Loan:
Sometimes it is possible to refinance Borrower/Seller's existing loans and thereby obtain an affordable monthly payment. Borrower/Seller is encouraged to explore the possibility of refinancing the existing mortgage debt.

Debt Counseling:
If borrower/seller's inability to make the existing loan payments is due to other unsecured debt (e.g. charge cards etc) the seller may benefit from the advice of a professional debt counselor.

Advice Of Counsel: The Borrower/Seller is encouraged to seek the advice of an attorney as to the most appropriate course of action to be taken.

Effect Of A Short Sale On Credit Rating:
A lender will likely report a short sale to credit bureaus as being "settled" for less than the full balance. This type of report will show up on the borrower's credit report as a negative mark for seven to ten years (C.C. §1785.13). Even so, the effect of this negative mark is generally perceived to be less damaging than a reported foreclosure. Typically lenders will not negotiate how they report a short sale.

Tax Effects Of A Short Sale:
The tax implications for the borrower can be significant and are relatively complex. In very general terms mortgage relief (i.e. a discount on the amount owed) will be reported to the IRS by the lender, and must be included in the borrower's gross income.

On December 20, 2007 President Bush signed into law a measure giving tax breaks to homeowners who have mortgage debt forgiven. With the passage of the "Mortgage Forgiveness Debt Relief Act of 2007", a taxpayer does not have to pay federal income tax on debt forgiven for a loan secured by a qualified principal residence. This tax break applies to debts discharged from January 1, 2007 to December 31, 2009. Qualified principal residence indebtedness is debt incurred in acquiring, constructing, or substantially improving the residence (up to $2 million for refinances).

Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor. To determine if there will be taxable income credited to the seller. "Insolvency" under the Internal Revenue Code is an issue not discussed here, but certainly one which the seller should explore with a tax advisor.

Lender Not Required To Approve Short Sale:
Sellers need to understand that lenders are not required to agree to a short sale and may refuse to proceed with a short sale even though a conditional approval has been issued. A lender may resort to a foreclosure all the way up until the actual close of escrow.

Lender Not Required To Respond To Approval Request:
There is no requirement that a lender respond to a request for approval of a short sale/payoff.

Effects Of Late Payments:
If borrower stops making payments and the lender begins the foreclosure process by filing a notice of default and then the borrower pays what is owed under the note, these activities may appear on the borrower's credit report. The lender can report to a credit bureau receipts of any payments made 30 or more days after their due date. This may appear as a "foreclosure in process," etc. and will harm the borrower's credit rating. Before stopping payments on a mortgage, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

It bears repeating that lenders are not obligated to accept a short-payoff and that Sellers and Real Estate Brokers have no control over whether Short-Pay Lenders will consent to a short-payoff.

A short sale may create credit or legal problems or may result in taxable income. Seller should always seek advice from an attorney, certified public accountant or other expert regarding such potential consequences of a short-payoff.