I got a great question from a long time reader, John Gall, today.  He asked:

When I look at the [other company's] site which I’m sure pulls from MLS I’m seeing the following status on the listings.  It would be interesting to have an explanation of why one is chosen vs another.  Some are obvious but some are murky.

Lender Owned – Obvious

Potential Short Sale – Does this mean the owner “might” be underwater?

Another says “In Foreclosure” Potential Short Sale – Does this  mean the Sheriff sale was done and we’re in redemption?

I thought there were a couple more variations on the “short sale” that I’ve seen and was curious if there was a way to tell if someone has maybe just stopped paying their payment vs they have a sheriff sale scheduled etc.

These are great questions.  As agents, we just assume everyone speaks our language.  I answered John’s question at my MLS site.

According to some estimates, about 5 million to 7 million properties are potentially eligible for foreclosure but have not yet been repossessed and put up for sale. Some experts argue it could take up to three years for all these homes to go through the foreclosure process, hit the market and be purchased by new owners.  This new bubble of foreclosed properties will increase the inventory of properties on the market (which is already too high), pushing down prices and lengthening time on market for homes to sell.  This will reverse the trend we have seen in the last 90 days, of falling REO inventory and increasing prices (at least in REO properties).

One example is that JP Morgan Chase hit its top month of foreclosures in the middle of 2008 and their numbers have been steadily falling.  Unfortunately, the bank is estimating that it could again beat that previous record by the fourth quarter of 2010.  Data released by RealtyTrac shows that banks are now slower to take properties back through foreclosure despite the fact that more and more homeowner are falling behind in their payments.  This new wave of foreclosures are less the result of ARM mortgages adjusting and over leveraged properties. They are the result of job losses or changes in income.

Maybe a wave 3?  I hope not, but there is an estimated 11 million US homeowners that now owe more on their mortgage than their home is worth.  Many of them will decide that keeping that home is not worth it and will become delinquent.  Hopefully some of these will opt to sell their home via a short sale instead of letting it go into foreclosure.  By the end of 2012, 39 percent to 50 percent of home purchases in Phoenix will still be foreclosed properties, J.P. Morgan Chase has estimated. Wow!

According to the National Association of Realtors, the inventory of bank owned or bank mediated (short sales) properties declined from 49 percent of the inventory of homes sold in March 2009 to 38 percent of the inventory in January 2010.  Additionally, the inventory is down to just a 7.8 month supply from a high of 11 months in July 2008.  A stable market is around 4 months; we still have some time to go.

On the radio yesterday I heard that “the officials” were saying that cybercrime and identity theft are up dramatically. They blame it on the weak economy. I guess criminals are getting laid off and taking pay cuts like the rest of us and are therefore putting in some extra hours to make ends meet!

The following is my explanation of sale that I was involved in. I was only made aware of the design of this sale at the closing table and really pieced it together after reading about similar scams in following weeks. This scam did not affect me or my buyer, but as you will read, probably affected the seller and bank. While I am not implying these next people are criminals, their techniques sure don’t smell on the straight and narrow. I have heard the Department of Commerce is looking into it. You can decide for yourself.

Situation:
Buyer/Investor watches the pre-foreclosure lists.  He contacts a homeowner on the list (who may or may not be selling his house) to buy their property.  Buyer/Investor writes the offer contingent upon the bank approval for a short sale on the house.  The homeowner signs docs and/or gives the buyer/investor personal information linked to the loan to negotiate with the bank on the homeowner’s behalf.  Sometimes this will be in the form of a power of attorney.  Occasionally, the document will not allow the homeowner to even know the details of the short sale.

The buyer/investor will begin negotiating with the bank on the short sale.  Typically he does not disclose to the bank that he is also the buyer of the property!  In my sale/example, it turns out he was telling the bank that he could get them no more than $75,000 for the property even though the seller had paid $180,000 only 2 years previously.  At the same time, other properties in the neighborhood (of the exact same layout, age, and condition were selling for $115,000).

Concurrently, the buyer/investor puts the home on the market looking for a “replacement buyer”.  This could be you; it could be one of my customers.  In this scenario, they were selling the property through a real estate agent on the MLS for $113,000.  They were set at the correct price for that property.  The buyer/investor is betting on being able to sell the property to the replacement buyer prior to the short sale falling apart on him.  The investor/buyer often has no liability or responsibility to execute on his purchase.  He will have lots of contingent fine print that gets him out of the deal if he can’t get the bank to take the short sale or more importantly if he can find the replacement buyer.

Problems:
On the surface, you may be thinking, why is this bad? This buyer/investor is just good at pulling all the pieces together and making money being the middleman. Let’s examine who can/will get hurt:

• Homeowner gets hurt if they waste time with this buyer/investor while the clock is ticking during the redemption period.  If the buyer/investor walks, they get nothing but closer to losing their house.
• Homeowner gets hurt as often these buyer/investors are not negotiating in favor of the homeowner with the bank.  They can possibly leave the homeowner with a large unsatisfied debt (of the difference between the mortgage and the sale price)-most legit short sale real estate agents will insist that the bank waives any deficiency judgment.
• The selling bank gets hurt as it only receives $75,000 for the property in the short sale when the retail buyer (you or my customer) actually would have paid $113,000 for the property.
• Although the buyer of the property is usually oblivious to this scheme, they can be hurt if the buyer/investor does a double close and leaves chain of title issues These can happen as these buyer/investors will often use a land trust or other legal instrument to hide their identity/liability.

These type of schemes are hard to spot on the buyer’s side of the transaction. All we ever see is paperwork back and forth with names we don’t recognize and situations we are not aware of. As a seller, though, you need to keep your eyes open in this market as new schemes or “creative programs” are popping up all the time.

It seems like the banks that are selling the foreclosed properties (REO banks) are trying to rewrite Minnesota law!  I am constantly bombarded by their version of purchase agreement and 100% of them require the buyer to sign a “bank addendum” after they accept the offer.

Many of these REO banks also believe that they are not required to sign a seller’s disclosure or the seller’s disclosure waiver.   Minnesota Statute 513.52 -513.60 (Seller Disclosure law) requires a property owner of an existing residential property (including banks selling bank-owned foreclosed properties) to make a written disclosure to a prospective buyer, prior to entering into a purchase agreement, including all material facts of which the seller is aware that could significantly or adversely affect an ordinary buyer’s use or enjoyment of the property or any intended use of the property of which the seller is aware.

The Seller Disclosure law does allows a buyer to agree to a waiver of the seller disclosure requirements under Minnesota Stat. 513.52- 513.60.  Such a waiver must be in writing signed by the buyer and the seller.  Often the bank will argue that they are exempt from signing anything because they have never occupied the property or because the property was acquired through foreclosure.

Other times the bank (and some short sale sellers) will claim the buyer is agreeing to buy the property “as-is”. Selling a property “AS-IS” DOES NOT eliminate the seller’s obligation to make required disclosures regarding the property. A seller is still required to give, and a prospective buyer still has the right to receive, the required written disclosures from the seller even if the seller is demanding that the property be sold “AS-IS.”  The “AS-IS” is not a “waiver” of any disclosures that are required by federal state and local government regulations to be provided by the seller.

So if you are buying properties in Minnesota, make sure you demand to receive the seller’s disclosure.  Even though the waiver may not tell you anything, it is still your right to receive it.

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