The Real Estate and Business Blog

It's not yet time to relax.

Real Estate Agents must always remain in control of their real estate closings, beginning with the listing agreement and right on through to the closing.  Unfortunately, some Agents still believe that upon the signing of the Purchase and Sale Agreement, the only thing they need to do is sit back and wait for the commission check to arrive.  They couldn’t be more wrong.

Real Estate Agents who have been in the business for a while know that their work begins when the purchase and sale contract is signed.  If the following ten steps are taken, an Agent will find that the work that leads up to closing is much smoother and the chances of having issues preventing a successful sale are diminished considerably.

1.  Establishing the Effective Date.
If there is a fully executed contract and everyone has initialed every page and every handwritten change, an “effective date” of the contract can be determined.  When things are required to be done by the Buyer or Seller under the contract is first determined by the effective date.  Make sure both sides agree on the effective date and get out your date planner. It would be good practice to write a note to your clients outlining the dates.  It will help you remember all the important dates.  Be aware that every contract contains the phrase “Time is of the essence”, which means that ‘Almost’ only counts in horseshoes, hand grenades and nuclear war.  If you miss the date you’ve breached the contract.  Stick to the dates!

2.  The Mortgage Application.
The first deadline is usually the mortgage application.  Make sure the Buyer does it within the timeframe specified, usually five (5) days.  Ensure that the Buyer has documentation verifying the date of the application.

3.  Additional Deposits.
Sometimes, contracts call for additional deposits to be made.  I hate to play lawyer (that’s not true) but failure to meet this date, or any other date, is a breach of contract!  Make sure you send or receive confirmation in writing.  Escrow letters should be made part of your file – ask for them.

4.  Title Documentation.
Get the title information (prior title policy) to the closing agent (me, I hope) or confirm that the Seller has none to give.  This should have been done upon listing the property.

5.  Existing Mortgage Payoff Information.
Get the mortgage payoff information (company, loan number and telephone number) to the closing agent so that the payoff can be requested early on.  It also doesn’t hurt to get a written authorization from the Seller (lenders sometimes require one before providing this information).

6. Condominium or Homeowner Associations.
If it is a condominium or homeowner association, obtain the necessary payoff information.  The association documents hopefully have been delivered to the Buyer, triggering the rescission period time clock.  If it is a condo, start the approval process immediately.

7.  Home Inspections, Municipal Code Violations and Buyer’s Right to Cancel.
Make sure inspections are done and the written reports delivered to the Buyer.  If the Buyer disapproves of the report, make sure a report is delivered to the Seller if the contract calls for it, and send notice of intent to cancel within the contract deadline.  Recommend to the Buyer that a municipal lien search (also referred to as “lien letters”) be obtained through the closing agent early on.  Some contracts require that municipal issues, such as code enforcement violations or citations and open permits, be raised and objected to during the inspection period, otherwise they are waived.

8.  Homeowner’s Insurance.
Make sure the Buyer has selected an insurance agent to obtain Hazard Insurance.  Insurance agents must take pictures of the property, which takes some time.  Even if it is a condo (where a homeowner’s policy is not necessary), suggest that the buyer obtain contents/liability insurance anyway.

9.  Boundary Survey.
Although the title agent orders the survey, don’t assume that it will automatically happen.  When the  Buyer is purchasing the property without financing (i.e., an all-cash deal), title agents often assume that the buyer does not want to obtain a survey or simply neglect to obtain one.  This is can turn out to be a terrible mistake for the Buyer.  There’s a reason why lenders demand that a survey be obtained: an encroachment can affect the use of the property, the value of the property and can affect the owner’s ability to later obtain financing.  It can also lead to litigation.  Worse yet, it can lead to a very upset client.  Make certain that the Buyer is aware of the importance of obtaining a survey.  If a survey will be performed, make the Sellers aware that a surveyor will come by to inspect the property boundary lines so that there are no confusion or delays.  Sometimes it may take some arranging to get the surveyor on the property, so make sure that the title agent doesn’t delay in ordering one.

10.  Following Up With Lender.
Follow up with the Lender to ensure that the Buyer has done everything required.  You want to make sure that the file gets submitted to underwriting!  If has not been submitted, something is incomplete and the Buyer may need some help.

Real Estate Agents should get to know an experienced Real Estate Attorney that is hands-on and should begin by asking other agents of known law firms that handle real estate closings.  By doing so, they may find that the deals close a bit easier and with less involvement on their part.  Getting an attorney title agent involved in the deal from the beginning, as opposed to just a title agent, will also allow title defects and other legal matters to be resolved quickly without resorting to a last minute search for an attorney to rescue the deal on an emergency basis!  After all, real estate attorneys do not charge any more for their closing services than title agents do.  And yet you get all the added benefits should the need arise.

Once the deal is closed, then you can start relaxing on your hammock.

It happens more often than not: a homeowner wanting to modify his home mortgage loan despite the many reasons not to.  The fact that  most find themselves owing more to the lender than the home is worth is lost among the few reasons they find to save it.  Due to the decline in market value, the single most crucial element of a mortgage loan modification is a principal reduction – yet it is rarely offered.  Despite this, the homeowner usually jumps at the chance to temporarily reduce his mortgage payment.  And temporary it is.

The initial interest rate provided under the HAMP program, as well as in-house modification programs, gradually rises after the modification is finalized until they reach a predetermined ceiling.  Every case is different, but for the most part, that initial interest rate of, say, 2½% simply won’t stay there for long.  Inevitably, the interest rate will continue to rise and that initial monthly payment will rise right along with it.  Albeit, the overall terms may end up being better than the original, but homeowners can not ignore the fact that they remain underwater (the loan amount far exceeding the current value of the home).  A short-term reduction in the monthly payment, without a substantial reduction in principal, will not provide enough of an economic benefit to offset the negative equity in the home.

A recent article in CNNMoney.com found that lenders have come to the realization that, just like with short sales, modifying a mortgage loan is a less costly option for them than going through the foreclosure process and taking title to the property.  The government’s HAMP guidelines, however, are not flexible – leaving many homeowners out in the cold.  Lenders, though, are now more amenable to approving in-house modifications where guidelines are less rigid and even allow for principal reductions (though don’t bank on a sizable reduction) which are not permitted under HAMP.  In fact, as CNNMoney.com reported, far more in-house modifications have been approved by lenders than those under the HAMP program.

“Banks are doing nearly twice as many modifications under their own foreclosure prevention initiatives than under the Obama administration’s signature Home Affordable Modification Program, known as HAMP.”  Surprise! Banks help more homeowners than Obama, CNNMoney.com, By Tami Luhby, August 30, 2010.

Data released months ago shows that lenders lose 20-30% less money when they approve a short sale as opposed to foreclosing on the property owner.  And 10-20% less money is lost when they modify a loan.  A short sale, though, is not always appealing to a homeowner that wants to stay in his or her home.  Owners are far more likely to choose the short sale option when it concerns second homes and investment properties (which, by the way, do not qualify for modifications under HAMP, no matter what cousin Ed tells you).  Unfortunately, everything learned in Economics 101 goes out the window when it comes to a principal residence.  This leaves a large number of homeowners wanting a loan modification even though they shouldn’t.

Because homeowners are not as rational when evaluating the investment aspect of primary residences, they seem to be less concerned about owing more to the bank than what the home is worth.  While most will acknowledge that they are underwater (indeed, sometimes more than twice the value is owed), they dread the loss of the home even more.

Ignoring the hard facts masks the most sensible option: a short sale.  With far smaller rental payments for homes equal in size – if not larger – and in the same neighborhood, homeowners are nonetheless compelled to save their current homes despite the cost.  The old mindset that everyone should  own their home is difficult to shake.  Since the homeowner does not have to face the music for a few years, they cling on to the hope that their financial situation will improve and quite possibly find that that their home’s value has increased enough to have made the saving of the home worthwhile.

The future is unpredictable, but the numbers do not lie.  Saving a home worth far less than what is owed, is not always the answer.  Unless there is equity in the home or some other compelling reason, the homeowner should seriously consider a short sale and forget about a temporary modification.

So you’re underwater on your home, are you?  Well, you’re not alone.

If you’re like everyone else owing more than it’s worth, you’re probably considering a short sale.  But is a short sale right for you?

Short sale expert, Michael B. Citron, describes a short sale candidate in his book, The Art of the Short Sale, as having “the one key ingredient …  a financial hardship.”  While you can come up with many reasons why you don’t want to pay the mortgage on the house, you must have a good reason why you can’t pay.  Don’t fool yourself into believing the lender won’t care that you have a nice nest-egg sitting in your bank account.   And don’t believe for one moment that simply being underwater on the home is a financial hardship.

So, assuming that you are a candidate for a short sale, here are seven ways you can make sure that your short sale is successful:

1.  No Straw Buyers or Accepting Money From the Buyer Outside the Closing.

There’s no more sure-fire way to end up in prison than to try to purchase the home from yourself by selling to a friend or relative.  And secretly asking for money back from the buyer after closing is no different. If you would like to find yourself back in homeownership, there are ways you can go about it legally.  For instance, credit restoration expert, Michelle Deeb, explains that the damage to your credit score isn’t permanent and will improve over time.  She explained that “a short sale does not negatively affect your score like a foreclosure or collection does.”

2.  Make Sure the Real Estate Broker Commission is Due Only Upon a Successful Closing.

Some commission agreements state that the agent has earned a commission when an agent finds a buyer.  In a short sale (in fact, in any transaction), however, finding a buyer is only the beginning.  I can appreciate the hard work a real estate agent puts into getting your home under contract, but you wouldn’t want to find yourself owing a commission even though the deal doesn’t close.  This, of course, is not the only listing term that should be negotiated.  An experienced real estate attorney can help advise you on what else you should be looking out for.

3.  Find a Real Estate Agent that is Experienced in Short Sales.

While short sales have been used as a method of pre-foreclosure workouts for years, never have they been so common.  Many agents declare themselves to be experts after only a few successful deals.  Ask for referrals and find out who will actually be doing the negotiating with the lender.  Sometimes the agent hires a loss-mitigator experienced in dealing with lender.  This may not necessarily be disadvantageous to you, but you should then inquire as to the loss-mitigator’s credentials.  Also, be concerned when the loss-mitigator wants to buy the house from you – you may very well end up being the victim of a fraud.

4.  Contract Contingencies.

As a seller, you want to make sure that the Purchase and Sale Agreement is contingent on all your lenders (there may be more than one) approving the short sale and agreeing to release you of all liability.  From a legal perspective, you may be on the hook with the buyer absent this contingency even though the lender did not agree to the short sale, or agreed to it, but still wants to hold you responsible for the deficiency.  Assuming that you you are experiencing a financial hardship – which is the reason your attempting a short sale in the first place – the buyer may have little incentive to follow through on any legal claim against you.  But why take the chance?  This is another good reason to seek the advice of a real estate attorney and have your contract reviewed.

5.  Take Control of the Closing.

Every jurisdiction is different.  In Florida, depending on the county, the buyer usually controls the closing and chooses the closing agent.  Regardless of what is customary in your county, you should control the closing since the closing agent will be taking an active role in negotiating with the lender.  The extent of the closing agent’s participation will differ from deal to deal, but will, at a minimum, include acquiring the short sale payoff approval and making the actual payment to the lender.  Another good reason to choose your own closing agent is that you can pick one that is a real estate attorney and have him help you through the short sale process in exchange for the closing and title work fee (which the lender pays anyway).  Essentially, you get an attorney to review your contracts for free.

6.  Consult with an Accountant.

Do not accept tax advice from your real estate agent or lawyer.  Just like you wouldn’t want your pharmacist to give you medical advice, why depend on someone other than a CPA to determine your tax liability.  Sure, you might be able to do some research on your own, but why take a chance?  There are exceptions to every rule.   Contrary to what you might have heard, there are certain circumstances that you might not have tax consequences on second homes and investment property.  Again, consult an accountant.

7.  Review Your Lender’s Short Sale Payoff Statement.

This is another great reason to hire an real estate attorney.  There are many different ways that lenders word their short sale approvals.  And it’s all in the wording.  Sometimes they reserve the right to pursue you for the deficiency.  There are other times when the lender is silent about it.  Either way, it is important that the short sale approval be examined and reviewed carefully before you proceed to the closing.

Bonus Tip:  Make sure the agent’s listing agreement allows for a reduction in the commission if the lender refuses to pay the entire amount – it is almost a certainty that they will.

There are many things that can go wrong with a short sale.  Have you experienced a short sale nightmare?  Be sure to comment below and share them with us!