By Elizabeth Razzi
Sunday, November 4, 2007
Everyone talks about finding alternatives to foreclosure. What people don't talk about is how difficult they can be to pull off.
Take, for example, the "short sale," which can happen when a home's value has fallen below what the seller owes on the mortgage. In theory, everyone wins, at least compared with a foreclosure. A financially strapped seller suffers less credit-history carnage, the lender loses less money than if it were to take possession and have to resell the house in a weak market, and the buyer gets a really good deal.
However, buyers thinking about acquiring a home this way should understand that it can be a long road to a short sale. Negotiations are far more complicated than with a typical purchase. You may have to attempt several deals before one goes through. There will be weeks, if not months, of delay. The home you get could need lots of work. And you could lose several hundred dollars in upfront fees on each failed attempt.
Why volunteer for such a hassle when the local market is glutted with similar homes that you could purchase more easily? It's about money, of course. "I wouldn't bother unless the price is way lower than the market," said Bobby Samson, an agent with Samson Realty who focuses on the Route 28 corridor around Dulles Airport. He said the price would have to be 10 to 15 percent below market value just to catch buyers' interest.
The local multiple listing service doesn't compile statistics on how frequently short sales are happening, but real estate agents and lenders say they're seeing them more often -- and plenty of thwarted attempts. "It's been pretty prevalent in our market, that's for sure," said Laura Triplett, branch manager for SunTrust Mortgage in Woodbridge. We can expect to see more as long as home prices fall and as more adjustable-rate mortgages reset to higher rates that borrowers can't afford.
Typically, if a seller can't get enough for a house to pay off the mortgage, that seller is expected to take cash out of savings or investments to cover the shortfall. For a short sale, the seller must convince the lender that he's too broke to cover that shortfall, and that the lender would be cutting its losses by agreeing to accept less than the amount owed.
Lenders don't like to accept less than they are owed, to put it mildly. And they're not too keen on buyers getting below-market deals at their expense. And with all the calls coming from Congress, the administration and elsewhere saying lenders have to figure out a way to stem foreclosures, some of those lenders are wondering whether they'll be snowed by borrowers who could pay but don't want to.
Not only will the lender need to be convinced it's the best deal it can get, but a title insurance company may have to sign off on the deal as well. Title insurers decide case by case, according to Wesley Justice, assistant vice president for loss management at United Guaranty Residential Insurance, which sells private mortgage insurance (PMI) to borrowers with low down payments.
They're more inclined to do it when borrowers can demonstrate a financial hardship, such as a job loss or illness. Even then, they're skeptical. "Quite frankly," he said, "sometimes some of the hardships they're going to be [deceiving] us about."
For the buyer, a short sale is more likely than a regular transaction to fall apart before closing. The sellers are already on the path toward foreclosure. "If they're not already behind on the mortgage, [lenders] will not entertain the request," Triplett said. If the buyer is lucky, the sellers have already approached the lender about the prospect of a short sale and have gone through the necessary financial disclosure. (It's similar to a loan application, but in this case the pay stubs and bank account information are supposed to prove that they can't afford that loan or to pay off any shortfall after a sale.)
However, Triplett said, lenders won't take the request too seriously until there is a live offer on the table.
That's when the negotiating begins. Lenders want the home to sell for as close to market value as possible. But a buyer wants to be compensated for the extra hassle and uncertainty.
As a buyer, you will be negotiating with at least two parties, the seller and the seller's lender. It can take three or four weeks, even longer sometimes, just to get the lender to say yes or no to your purchase offer. Sometimes they will present a counteroffer, but not always. The lender will get its own professional estimate of the home's market value, in addition to the appraisal you need for your own mortgage application.
You buy a short-sale home as-is. The seller has no money to cover your closing costs, and the lender certainly doesn't want to hear about your needs. The buyer can pay for a home inspection, but that's strictly an exercise in information-
gathering. Nobody's going to pay for repairs.
It's also wise to pay for a title search early on so you can learn whether any other liens have been placed against the property. The second--lien holder needs to okay a short sale, and there can be some negotiating between the lenders over who gets a share of the proceeds as their price for letting the deal go through.
Unpaid property taxes pose another threat to your deal. Some subprime lenders did not require that borrowers prepay their property taxes through an escrow account. If there are unpaid taxes, a buyer may have to write a big check to cover them before the deal can go through. No one gets anything until the tax collector gets his due.
If you have the patience and the cash to cover upfront expenses, a short-sale deal can be one of the cheapest ways to get into a home now. Some lenders aren't too willing to consider short sales yet, but given the price declines in some parts of the metro area, they're probably going to get much more used to the idea.
Md. Firm's Assets Frozen
Maryland authorities have frozen the assets of Metropolitan Grapevine and its related companies, along with the personal assets of its chief executive, Andrew H. Williams. On Monday, the Prince George's County Circuit Court appointed Invotex of Baltimore as receiver for the companies. Invotex has been directed to track down the group's assets and, if any are found, will attempt to create a pool of money to refund to investors and other creditors.
The local company had promised to pay off the mortgages of participants in its Dream Homes program with money it said it earned from the sale of automated teller machines and video advertising.
According to a statement from Attorney General Douglas F. Gansler's office, more than 1,000 people invested approximately $50 million in Grapevine and its related companies. The court found that Grapevine's businesses generated "no significant income," and that they are insolvent, with liabilities of $200 million to $300 million and assets of approximately $2 million, the statement said.
The receiver is still trying to locate assets, including bank accounts and more than 50 vehicles.
Invotex, the receiver, has established a Web site that Grapevine investors can use for updates on the case, http://www.pos-receiver.com. Participants, including those outside Maryland, can call Invotex at 410-824-7139.
Gansler also asked anyone who knows the location of Grapevine vehicles, bank accounts or other assets to contact Invotex or call the attorney general's office at 410-576-6360.
Considering the relatively small amount of assets found so far, compared with the huge sums collected from Dream Homes participants, it looks as if many people stand to lose much, if not all, of the money they gave Williams and his partners. Participants had better be making their own mortgage payments now or they will face delinquency or foreclosure. They also need to be on guard that they don't open themselves to further losses by trusting someone who claims to know a way out of this mess.
The only way to recover money invested with the Dream Homes program now would be through the receiver's office, and the people there are still trying to find out where the cash went.
E-mail Elizabeth Razzi atrazzie@washpost.com.
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