Pitfalls of a
(c) Copyright 2014 ‒ David Todeschini ‒ all rights reserved.
No doubt there
are deals to be found out there, and some of the best deals on homes can
be found in the Short Sale market. However, there are a few pitfalls
that you want to be aware of before jumping in.
First of all,
let's go to Wikipedia to define what a Short Sale is:
Before we start, I have to tell
If you are looking to buy or sell a house in the NJ / PA area (close to
Philadelphia) then give Larry Sarlo a call
or email him
and tell him Dave Todeschini sent ya!
Visit his Web site at
www.SellItFast123.com if you are interested in buying or selling a
Foreclosed or Short-Sale property.
A short sale is a sale of real estate in which the proceeds from selling
the property will fall short of the balance of debts secured by
mortgages and liens against the property, and the property owner cannot
afford to repay the liens' full amounts and where the lien holders agree
to release their lien on the real estate and accept less than the amount
owed on the debt.
A Short Sale
can be a situation where a homeowner is "upside‒down" on their mortgage
(we'll get to this later), or simply cannot afford to pay their mortgage
anymore. In such a case, the homeowner is given notice by the bank of
pending foreclosure proceedings. A homeowner doing a Short Sale is most
often required to prove a financial hardship "beyond their control"
(such a job loss, major medical expenses, etc.)
If a bank
actually proceeds with a foreclosure, the homeowner will (eventually) be
evicted from the house, and the house put up for sale as a Foreclosure
(as opposed to a Short Sale). The Short Sale gives the homeowner (who
actually still owns the house), an opportunity to sell the property and
pay the outstanding balance on the mortgage. If anything is left over
once the bank mortgage is paid (such as if the homeowner had lots of
equity in the house that exceeded the amount required to pay the
creditors), it gets paid to the homeowner. The buyer of the Short Sale
property then takes possession of the house with his own mortgage
broker, and hopefully everybody is happy with the deal.
UPSIDE‒DOWN and UNDER WATER
Negative equity occurs when the value of an asset used to secure a loan
is less than the outstanding balance on the loan; in other words, you
owe more on the mortgage than the property is worth on the open market.
In the United States, assets (particularly real estate, whose loans are
mortgages) with negative equity are often referred to as being
"underwater", and loans and borrowers with negative equity are said to
be "upside down".
in the last decade or so was primarily caused by banks who wrote
mortgages for homes that were highly over‒valued (sometimes ludicrously
so), and failed to properly qualify buyers. Some will say that the
banks, knowing they would be bailed out by the Federal Government, did
this on purpose, knowing that they would eventually foreclose on a
majority of these homes. The foreclosure battle rages on, and while the
war in the courts is being waged between borrower and creditor, the
family looking for an affordable home is in luck; there is, and there
will be no better time to buy than now. Once you "close" on a property,
it becomes yours, and any "anti‒foreclosure" legislation will not affect
you; in other words, after you legally bought it, it's yours, and nobody
can negate the deal.
Now, what does
"upside‒down" mean? Simply this: The homeowner has been the victim of a
predatory mortgage lender, or has seen the value of the property he owns
drop significantly from the time he bought it. For example, ten years
ago, a buyer bought a house for $200,000, and since he bought it, the
market has dropped, and now the value of the property on the open market
is less than half that.
Most people buy
homes to live in, and paid the fair market value of the home when it was
on the market. The homeowner who has a $200,000 mortgage on a house that
is similar to those that are selling for $100,000 on the open market
isn't going to be very pleased, so they start looking in the market for
a home with similar features at the current market price. If they have
equity in their current house, perhaps they'll come out with something
if they sell it ‒ maybe not. However, and whatever the reason, the
homeowner simply walks away from the mortgage payments, and the lender
starts harassing the borrower, threatening foreclosure.
on a home takes a long time ‒ sometimes a year or more, during which the
homeowner can legally remain on the premises. However, the continuous
harassment by the lending bank scares most people into moving out,
turning off the utilities, and leaving the house to rot, and "to hell
with the bank". The homeowner is led to believe that the lending bank
will send the Marshall in to forcibly evict them and padlock the
property. While this DOES, in fact happen, it is rare, and it will NOT
happen without a notice being served to the homeowner IN PERSON.
The bank, on
the other hand, doesn't seem to care whether the property is occupied or
not. The most a bank will do is hire a contractor to mow the lawn and
winterize the plumbing (so that the junkies won't have to lug a pipe
full of ice to the scrap yard). In a Short Sale, the bank usually is
willing to accept less than what is actually owed, because the
alternative is the actual foreclosure process that will net them ‒ after
all is said and done ‒ less than what they would recover in a Short
since all mortgages are structured so that the initial payments are
applied to the INTEREST instead of the principal, unless the homeowner
is 25 years into a 30 year mortgage when he puts his house up on Short
Sale, he will have very little equity that he can recover from such a
deal. In the case where a borrower defaults 15 years into a 30 year
mortgage, you can use most amortization calculator apps to figure out
the equity in a home. In such a case, the bank has already made their
interest on the money; when the principal is paid back on a Short Sale,
the bank (lender) isn't really losing much, if anything.
fact that the bank never really lent the borrower anything of value; as
US Currency is no longer backed by precious metals, one could argue that
the currency is worthless, and the debt owed is meaningless because what
was lent literally isn't worth the paper its printed on. I've heard of a
homeowner winning a foreclosure case based on this premise, but have not
been able to find the actual case anywhere I looked.
house is a magnet for squatters, drug addicts, and vandals who will
strip the house of copper plumbing, cut electrical wires, and literally
dismantle the place and sell it for scrap to have money for their next
"fix". Still, the bank doesn't care if the house falls to the ground;
the majority of the value of a property is the lot it sits on, and some
abandoned properties are better off with an empty lot than a dilapidated
house in disrepair that nobody will buy.
You would think
that the bank would seek mediation with the homeowner, because a
property that is occupied and lived in is less likely to fall into
disrepair or be vandalized. Again, the bank wants whatever they can
squeeze out of the homeowner, and whatever loss they suffer will somehow
(you can bet) be mitigated by your tax dollars.
Also there is a
"catch‒22"; by far the biggest pitfall to consider. A buyer who likes a
house that is on Short Sale, has to assume the responsibility up‒front,
BEFORE he buys the house, and BEFORE he actually takes title and
possession of the property, to make any repairs that need to be done in
order to pass multiple inspections, and an appraisal from his mortgage
lender. Inspections include: Termite inspection, electrical inspection,
and appraisal from the bank that the prospective buyer is using to
finance the mortgage. If the potential buyer is a US Service Veteran,
the Veteran's Administration offers no money down mortgages; however,
the buyer must still pay closing costs.
there is always something MORE than meets the eye when you buy ANY
property that has been previously lived in.
If the house
was occupied by the same owners for many years, chances are there are no
GFI outlets in the bathroom, kitchen, or in outdoor areas. These will
have to be installed to meet current codes. If you
do it yourself, each outlet
costs around $35 at Lowes or Home Depot. These are even cheaper at
Harbor Freight Tools. If you
hire an electrician to replace the outlets, the bill can be several
times that much. Contrary to what most people believe, replacing an
outlet isn't brain surgery, and does not require an electrician's
homeowner may have neglected to maintain the property because they
figured "I'm going to lose the house anyway; why make it nice for the
new occupants?" Some people forced into this situation have been known
to intentionally sabotage the house so that it creates a problem for the
buyer (and the bank). This is known widely as "cutting your nose off
to spite your face". This is because if the house cannot be sold in
the Short Sale process, the bank will have no other option but to
foreclose, which creates a myriad of problems for the homeowner, not the
least of which is a horrendous dent in their credit rating that will
follow them around for a decade.
A Short Sale or
foreclosure is a potential hornet's nest between seller and buyer. The
seller is pissed off that he lost his house, and may make things
difficult for the buyer. This situation doesn't make sense, but we are
dealing with emotions here; not logic. It behooves a homeowner to sell
the house as quickly as possible and satisfy their debt to the bank,
because this process sometimes, but not always absolves them of a
negative credit rating and other nasty effects like being unable to get
another mortgage because creditors are leery of taking the risk.
PRE‒QUALIFICATION & RE‒QUALIFICATION
Since these mortgages can take upwards of 4 months to
over a year obtain (the house featured on this Web site took 14 months), here is
another unspoken glitch that you most definitely will run into: When you
first apply for the mortgage, the lender will want copies of your bank
statements, 1099's, tax returns, and credit reports, among the plethora
of other documents you have to provide and sign. You will come to
believe that the lender has Leo Tolstoy on the payroll, a drone watching
you from above, and a proctologist checking your prostate. After going
through all of that, if you don't close on the property within 30 days,
the lender will want to RE-Qualify you, and you'll have to submit those
papers all over again.
AND.... Here is
something else you might want to know: if you lend a friend a few
thousand dollars and he pays it back to you right away in cash, the
mortgage lender may require that you PROVE where the cash deposit you
made into your account (when your friend paid you back) came from.
Personally, I don't think it is any of their damn business where the
money comes from; but that's "Big Brother" for ya!... And if you think
you're living in a free country, you might need a little of that "sumthin'‒sumthin'"
to clear the cobwebs out of the brain pan.
And this is probably the worst scenario of all: Although a
"pre-qualification" can get you "qualified" for a loan; whether it be
from the VA or other source, be aware that any unpaid traffic tickets,
unreported income, IRS audits or liens, or other paperwork snafus may
rear their ugly heads MONTHS down-the-road. This crap may surface even
though you may have been unaware of (you may never have been notified)
that there was a potential problem. As time passes, every swingin'
schwantz in God's creation will be tapping your bank account for fees,
fines, unpaid tickets, back taxes, unpaid child support or alimony,
requesting clarification of errors in your tax returns (or
lack thereof), proof of residence for the last 3 years, and identity
theft issues you thought long-ago "solved".... As far as paperwork goes,
they will come a hair's breadth short of requiring a DNA sample or your
first-born child, so be warned.
Sales or Foreclosed properties and "Flipping" a house is a way to make
some serious money. It is a good deal for someone who is looking for a
place to live, and it is also a good way to get driven to a nervous
breakdown if you don't have serious cash in the bank from a verified
sources) readily available.
2014 the housing market (at least here in New Jersey) seems to be
recovering, chances are if you buy a Short Sale or Foreclosed property
NOW, you are not likely to find yourself "upside‒down" on your mortgage
in the foreseeable future.
PROOF OF INCOME
Prior to lending
you any money, banks may require that you provide them with IRS tax
returns going back several years (they will ask you at the last possible
moment), and you should not assume that just because you filed, you're
good-to-go. It is best to get a transcript from the IRS (go to
www.IRS.gov) to make sure everything is
in order before you make any commitments. I ran into a situation where
someone was filing income tax returns with my SSN and former address ‒
filing jointly with my name and someone I never heard of. You wouldn't
believe the stress and aggravation I had to go through to straighten
that one out!
A GAME OF FIZZBIN
Anyone who is a
Star Trek fan knows what "Fizzbin" is. For those who are NOT Sci-Fi
enthusiasts, basically it's a case of "You can't win, you can't lose,
and you can't quit the game". The (partial) list of rules are:
The rules for Fizzbin are purposely intended to be
- The game can be played with a standard deck
of cards, despite the slightly differing deck on
Beta Antares IV.
- Each player gets six cards, except for the
player on the dealer's right, who gets seven.
- The second card is turned up, except on
- Two jacks are a "half-fizzbin".
- If you have a half-fizzbin:
- a third jack is a "shralk" and results
- one wants a king and a deuce, except at
night, when one wants a queen and a four;
- if a king had been dealt, the player
would get another card, except when it is
dark, in which case he'd have to give it
- The top hand is a "royal fizzbin", but the
odds against getting one are said to be
For over 8 months, I played Fizzbin on Steroids
between two foreclosing banks on the seller's side,
the Veteran's Administration, and the first agent (iFreedom
Direct) whose representative (Darcie Hampton)
was spectacular, but whose staff (whom I never dealt
with directly) screwed up the deal and dropped the
two days before we were supposed to close (November
2014), causing me to have to start the infernal
process all over again after I had sunk over 4
months of repair work and $8,000 in materials to get
the house to the point where a bank (and the VA)
would approve the mortgage.
Throughout this cluster-fuck of the 11th
magnitude, my broker
was right there by my side fighting the bureaucrats
and the thieving bastard bankers.... over what? God
only knows; it's not like the US Dollar is worth a
lit fart in a wool mitten anymore; and the banks,
being the dealers in the game of Financial Fizzbin
can't lose. The game of Fizzbin is enough to send
even the sanest person to the Spin-bin.
However, there IS a silver lining after you fly a
thousand nautical miles through the pea-soup fog of
regulations laced with balls of high-velocity
bullshit, and after providing so much paperwork that
rolled up, in a Franklin stove it would heat the
house for a month. The reward at the end is that the
house I bought for about $95,000 was recently
appraised for $172,000 - so as soon as the deed was
in my hand, I was "up" 77 Large in "equity".