“I’m Not Doing Another One of These Short Sales!!!!” I hear as one of my negotiators at The Short Sale Service slams the phone down yelling.
I walk down the hall and ask what’s up. He continues: “I’m not doing another one of these short sales unless there is an investor in the middle to make sure it actually closes!”
Huh? Go on . . .
“We’re $1,950 apart on this deal because of some HOA dues lien. The bank won’t pay it – they say they’re at the maximum that their guidelines allow. The buyer won’t pay it – they say it’s the seller’s job to deliver clear and marketable title and not their responsibility to clear liens. The Seller is broke and can’t pay it. The agents won’t pay it – they say the bank already cut their commission and they’re not forking out cash just to make a deal happen. If my buyer was an investor, he’d just pay it and we’d be at a closing! BUT THERE IS NO DEAL MAKER HERE TO MAKE A DEAL! It’s going to die, four months of work down the drain and a seller is going to lose their house to foreclosure because there is no deal maker here to make this deal happen!”
Interesting…
Let me give you some background. At The Short Sale Service we negotiate a lot of short sales as a third party negotiation service. Many of our customers are real estate investors who purchase short sales, but we also do a fair amount of work on behalf of real estate agents who hate doing short sales themselves (either because its such a time consuming and frustrating process or because their legal counsel has advised them that the S.A.F.E. act prevents them from doing it themselves.)
The negotiator was dealing with his frustration on a deal where there was no real estate investor “in the middle” and through his outburst, he was actually illustrating why the Administration’s efforts to encourage short sales has largely been a complete disaster and why less than 10% of all short sales attempted across the country actually close (Housing Predictor). Quite simply – without a deal maker, the deal does not get made.
Purchasing distressed property from distressed sellers in advance of foreclosure is not your normal ‘ready for retail’ transaction. If it needs a short sale, then the property does NOT have clear and marketable title, which is what is required to have an insurable closing. Without clear and marketable title an owner occupant retail purchaser will be unable to obtain financing to purchase the house.
More often than not, the short sale is merely one of several reasons a property does not have clear and marketable title. When a distress seller does not pay the mortgage, they often are not paying the property taxes, the homeowner’s association dues, the garbage bill, the water bill, and the sewer bill, any and all of which can result in liens that cloud title and prevent a sale to an end user-owner occupant.
In addition, when someone is experiencing a financial hardship (a prerequisite to a short sale) they are often not paying credit card and medical bills and may also be facing battles with the IRS or other creditors – all of which can result in liens or judgments that attach to their real estate, cloud title and prevent a property from being sold to an end user-owner occupant.
There are two ways to fix the mess of unmarketable title and create a property that can be sold to an owner occupant retail end-user:
(1) Foreclose, or
(2) Untangle the knots – one knot at a time.
It’s actually one of the benefits of foreclosure – it wipes out all the liens and judgments (at least with respect to the property) and gives title a clean sweep. From a title cleaning perspective – foreclosure is great.
However, foreclosure comes at a great cost. To the lender, the homeowner, the neighbors, the local tax base, and the community the costs and damages of foreclosure are well documented and the Administration has advanced the universally accepted goal of reducing foreclosures.
The alternative to foreclosing on a property to fix unmarketable title is to untie the knots one at a time and fix each lien individually. The short sale is usually just one of these knots – there are usually others. Clearing title one knot at a time is time consuming and often complex work. Who is going to do this work?
Let’s explore the options:
The Homeowner – probably not. They are at the worse point of their life and they have neither the ability, frame of mind, or motivation to fix the mess.
The retail end-user owner occupant – not likely. Owner occupant home buyers are retail consumers. They generally want a pleasant retail consumer experience. They want a house that is move-in ready and that looks nice. Sure they may want a bargain and express an interest in a foreclosure or short sale; however, the average owner occupant home buyer does not have the knowledge, ability, time or interest in fixing seller’s title defects – too much hassle, too many other houses. (Because an owner occupant retail buyer is not a viable purchaser of a property without clear and marketable title, the value of that property is depressed until such time as the title defects are cleared and the property can be marketed ‘ready for retail’.)
The real estate agents? There are few agents who have the skill and experience to address clearing title. Generally the work transcends the skill, knowledge, and expectations of the vast majority of licensed real estate agents. It’s not what they are trained to do – and most will say, they’ve been trained to NOT do that.
The job of a real estate agent is to help buyers find properties and help sellers find buyers. Their job is not to track down liens and judgments and negotiate title cleaning.
What about the title company? Title companies insure title and close transactions. They’ll tell you what’s wrong and what has to be fixed. They may even make a phone call or two – but they’ll tell you quickly that they do not have the time to go chasing down lien holders or negotiating releases. They’ll tell you it’s broke – but it’s not their job to fix it.
What about closing or real estate attorneys? Yep – here is finally someone who has the training and ability to clear up defected title. However, attorneys just don’t run around cleaning up title unless they have a client who asks them to do so and is willing to pay for them to do it.
So in our short sale ‘deal without a deal maker’, who is going to pay the lawyer to clean up title? The seller? Nope, they’re broke. The agents – nope, they’re just in it for the commission. The short selling lender? Nope – they’ll allow the short sale and taxes, but they won’t mess with all that other stuff because they can just wipe it out at foreclosure. The buyer? Rarely – why would a potential home buyer spend money on an attorney to fix something before they’ve closed on the house? An owner occupant retail buyer is not likely to risk money before closing and speculate that title will be fixed.
So who is left to take this risk and make such speculations? Someone who is willing to take risk and speculate on a return on an investment – yes, the much needed (but often maligned – vulture, maggot, bottom feeding, etc.) real estate investor.
Absent the real estate investor – there is usually no other party willing to undertake the work, time, and expense to transform a property that does NOT have clean and marketable title into the home that can be sold to the end user owner occupant into a retail ready home that can be sold to an end user owner occupant.
In the rush to fix the housing mess, find a scapegoat for its cause, and an excuse for what they’re not doing, some lenders and services would like to see real estate investors removed from the short sale arena. Some have gone so far as to suggest their involvement as somehow fraudulent.
Not only is such suggestion baseless in law, it is misguided public policy that – if followed – would greatly exacerbate the country’s foreclosure crisis. Vultures and maggots are not the cutest and most adored critter in the zoo, but take them out of the ecological mix and the entire ecosystem collapses – they’re ones who do the work to transform waste into the green grass and flowers that everyone loves.
I fully understand that in hindsight it may seem unfair that a deal maker, the middleman, the transaction engineer, the investor buys a house on Monday and sells it on Tuesday and walks away with a large profit spread. The profit from one deal may even be more than the entire year’s salary of a hard working bank or government official. I understand how this might just sting a little when you watch it from the sidelines. I understand how that may just feel like an injustice – that one person should make so much money. I get it – it looks like that money should go the bank, or the Treasury – anywhere but not some investor!
But that’s the luxury of hindsight, the Monday morning quarterbacking of the finished product brought to the market by the efforts of someone willing to do what nobody else would or could – take the risk, bear the expense, and undertake the effort of transforming something that cannot be sold on the retail market into something that can be sold on the retail market. And in a market based economy – the reward associated with taking that risk is called – profit. It’s not fraud, it’s not unfair, and it’s not unjust. In fact, just the opposite – the work of the investor is essential to fixing this housing mess and the foreclosure crisis.
Fixing the housing mess will be done one house, one family, and one deal at a time. Take the deal maker and the incentive for profit out of the ecology and the whole ecosystem collapses – because without a deal maker, the deal does not get made.
