Your CORE Advisor Blog

Chris Ormsbee and Your CORE Advisor say… “Yes, but only if your Bankruptcy Attorney or Lawyer says so…”

Does Bankruptcy Preclude A Short Sale -or- Does Our System Force Foreclosure?

I say not necessarily… The lawyers and attorneys seem to say yes… The IRS seems to say maybe…  The Banks don’t seem to care much….

Note this post is based around Colorado Foreclosure Laws and the economic area I am talking about is Montrose County and surrounding areas on the Western Slope of Colorado.  Still I think the issue is relatively the same throughout the United States of America at least, and probably beyond.

Does “The System” Make Banks, Lawyers, Accountants and Realtors Delay our Economic Recovery?

Maybe. 

I wonder about this, probably because I am whining about losing a deal… No big deal really, it happens all the time, but it is still frustrating and makes me contemplate why I do this for a living, and how the system works.  But essentially my “dead deal” was a short sale with a strong offer that died because of a Bankruptcy Attorney’s advice to “not waste the time on it, just let it go through the foreclosure and the Bankruptcy would wipe it all out.”

My thought is, that’s easy for him to say, but hard for me to swallow.  But hey I understand it may be the safest way to navigate the system and the least painful for our mutual client. 

So, next I will withdraw the listing & pull it off the market and the MLS because it can’t be sold, since the bankruptcy attorney and the client don’t want it sold.  So why advertise it?  Type up the amendment, email it out, then when I get it back, I will have to spend an hour inactivating it in the MLS and getting the office file together, scanning, making copies, etc. to update the file to close it out.   More free work…

So I was deleting spam comments here on my blog site and decided to post the topic and my opinions here.  As usual I am nothing but long winded, but hope you will find it educational or at least entertaining to hear my rants and opinions mixed with a few facts.

What happened to make me carry on like this?

Today (6-15-09) I lost a deal and a listing, that was slotted to be a short sale. 

I had received a reasonable offer, 13% below list price and the approximate payoff for the notes against the house.  It looked to be a very good short sale candidate where the first would be paid off entirely and the second would receive about $10,000. 

The offer was good.  It was a fair price and strong with a large down payment. 

For this deal, the commission was 6% and was split evenly.  The selling broker (with the buyer) would get 3% and my Office and I would get 3%.  I actually end up with about .75% on a 6% commission because I am currently part of the Montrose Gold Team and we split all our commissions 50-50 and this is after the Office and Century 21 Corporate take out about 50%.  Still on this deal it would have been about $1,000 and would have almost made my mortgage or my child support payment.  But, it’s definitely be better than nothing.   So really to me were talking $1,000.00 bucks vanished to $0.00

Plus it would of also helped: my partner, my broker, C21, the title company, the appraiser, the home inspector, the Selling Broker, his Company, his franchise (if any)… each with their little slice of the commission pie.

The frustrating thing to me is that this would of been money injected into the Local Economy NOW!  Not less money in future, which will likely be in about 6 months or 12 months from now with an REO.  In the Battle of REOs -vs- Short Sales, the REO moves more money out of town. 

Why you might ask? 

Because the Bank hires an Asset Management Company (not based here), a lawyer (not based here), a title company (often not based here), contractors (often not based here - usually through a national service chain like Service Magic).  These are often national companies and operate with high efficiency (heavy work load for the individuals employed there).  They offer low rates and standardization for the banks, kind of like bulk pricing, still, they erode the local economies sucking money out of them.   This isn’t necessarily bad, but in a small economy and community like ours, I think it makes a difference. 

Montrose Colorado depends heavily on the construction industry providing jobs through growth and new home or commercial development to allow many of those who live here to sustain their standard of living and keep their homes.  Many foreclosures in our area are from people who were working in the construction trades.  Many are Realtors, because homes aren’t being sold and their “net” pay after expenses and splits, etc. is eroding more and more each year, with increasing fees and expenses.  Yet amazingly the Lure of “the easy life of a Realtor” still brings plenty of competition and pressure for competitive commission rates. 

If you were planning on opening up a business this kind of trend would be bad.  Still many enter the life of a Real Estate Agent or Broker and think it will be easier than it is.  Many fail because their bank account of savings is not big enough to “front” their debut as a Realtor before they turn a profit.  Others come in well funded, well known in the community, etc. and immediately rocket to success.  Its the old adage “it takes money to make money.”

Ultimately, a local Realtor will still sell it and probably get paid a fair commission for selling the “Short Sale” turned “REO”. 

However, the Asset Management Company takes a cut as a referral or membership fee for assigning the listing anywhere from 25-50% of the listing commission.  This is steep, but when compared to the cost of advertising and branding its not that bad from the Realtor’s perspective.  

This money moves out of the local area though!  Your local area, my local area, doesn’t matter where you are unless you are in a place that is pulling more money in from this kind of thing than it’s sending out.

But the Montrose Gold Team (Diane Haynes and Chris Ormsbee at Century 21 Action Realty) believe - 

“A little bit of something is a lot better than a whole lot of nothing.”

We try not to be greedy and take what we can get.  Plus we do work with many of the Asset Management Companies and handle a lot of REOs, so its not all bad for us.

Yet it seems to me that this lost Short Sale is a lot of lost value or at best a delay of otherwise attainable local income, especially for Realtors, Mortgage Brokers, Appraisers, etc.  The REO in my opinion has a larger impact on the local economy by essentially requiring more money from the transaction to move out of the community.

I called the seller to tell them about the offer.  They informed me they had gone ahead and filed for bankruptcy.  I am not privy to the details and do not even know the attorneys name.  

I told the client that I wasn’t an attorney or an expert in the area of bankruptcy.  However,  based on what I had been told by other attorneys, the issue of a short sales and a bankruptcy is that if the bank clears the asset and then treats the short amount as a forgiven debt then the seller or person declaring bankruptcy could end up with a tax liability after the bankruptcy.  

So in this clients example, say $30,000 in loan principle is forgiven, if they were in a 30% tax bracket then they could end up owing about $10,000 in income tax on this amount.  

So I advised the seller to talk to their attorney about the matter. 

By the way, I do believe everyone should have an attorney to represent them and guide them through the process of Bankruptcy.  Bankruptcy is a serious deal with serious consequences.  It has recently been  tightened up from what I understand to discourage its over use.  

However, with all the current workout, bailout programs in the works and on the horizon (for better or for worse), who knows, they might come up with a streamlined “take your debt and shove it” plan to allow bailouts for people who qualify…

My clients did talk to their attorney and today the client informed me that he had advised them to not go forward with a short sale “it wasn’t worth their time or the hassle…, just let the property go through foreclosure”.

I honestly hadn’t thought about the extra hassle it might put the client through and I don’t think they should suffer any more than necessary.  My client expressed concern that I wouldn’t get paid and hoped the bank might list the property with me.  I told them that wasn’t likely, yet, they might list it with my partner or someone else in my office.  I assured them that their interests were what we were concerned with and not if or what I made.  That is the relationship that wasw defined in my listing contract with them, particularly when accompanied by the Short Sale Addendum in Colorado, that essentially gives them an anytime out if they want it.

It is frustrating as a Realtor to put all the time and energy into a listing and get an offer only to be told you cannot close the deal.  Still we always have to “bow” to the attorneys advice.    Plus I have a fiduciary duty to my client to look out for their best interest.  Typically this relates to money, but it makes sense it might also relate to time or in this case less pain and suffering (i.e. the time involved, extra paperwork, etc.).   I personally feel that this is part of my duty and from the courses I have attended it seems like the laws would require close examination of up front fees, etc. to defer this risk.  The risk of no pay is just part of the territory.

This particular client-attorney, didn’t relay back or express concern over the “phantom income”, just the hassle and time.  Yet I am still concerned about its possibility.

Regardless, I think if this phantom income showed up you would probably be able to negotiate it down at least with the IRS.  The State might be another story.  Colorado at least can  be a  bear to deal with.   A good accountant or CPA could also probably advise you how to avoid paying anything in this situation.  Still it sounds like a hassle and out of pocket money (CPA and legal bills) for the folks.

Plus, I just don’t think it is fair.  I think if you are forced to go through the “hell” of bankruptcy and going to live with that on your “record” for about 10 years, then it seems fair that you shouldn’t end up owing for things related to the liquidation of the assets for the bankruptcy.  

It is my understanding that it is entirely up to the banks discretion as to how they treat the “short” amount.

Is it a deficiency or is it a forgiveness of debt? 

Who knows, but I think you could contractually cover this with the bank and or get a letter or understanding or addendum to contract that dictates that it be handled in the desired manner for the situation.   

There is little true benefit to be gained by any party trying to make any of the other parties suffer unduly in this process, yet it happens.  This ultimately creates inefficiency, delays and in some cases damage to the properties. 

Some people strip their homes of everything (light fixtures, appliances, cabinets, boilers, furnaces, etc.), because they are upset the bank is taking it.  This is not smart.  DO NOT DO THIS.  If you piss the bank off they are very likely going to come after you with a judgment and attempt to collect the deficiency debt.  If you can evade them… and your vindictive, then fine, do what you want, but you will likely end up paying one way or another over time.

Otherwise, if you are in this situation, cooperate, stay in the home, take care of it and make plans to relocate shortly after the foreclosure sale date, they usually have to “evict” a lot of people and if you leave “nicely”, they might pay you to go… (Cash for Keys) to help you get moved into a new place, put down a deposit on an apartment or whatever.  Usually in our area the amount is about $500-$1,000.  But you have to move out by a scheduled date and leave the place clean and free of debris.  It sure sounds like a better option than dodging a judgment or at least avoiding the even higher judgment due to the damage caused by vacancy and the delayed time on the market and the further discounted price of an REO.  So I really think the Short Sale is a better way for the bank too.

An abandoned vacant home decreases in value over time because of a lack of personal TLC (Tender Loving Care).  If you stay in your home and take care of it, it preserves the value plus gives you a “free” place to live for a while (free -meaning - ”your not paying the mortgage during this time” .)  In some places when a home goes vacant, gangs move in or severe vandalism occurs.  So if the owner stays in the home until or even slightly after the sale, then it helps to protect the bank’s asset.

Obviously if a person isn’t going through or doesn’t plan to immediately file for Bankruptcy, then it makes more sense to do a Short Sale (only get about a two year credit ding) and then get a forgiveness of debt with the income as opposed to the deficiency judgment, where they can continue try to collect the deficiency from you.  Its worth it for your credit and for the local economy to deal with it this way.

It seems to me that if the deal were negotiated correctly, where the bank agreed to treat the amount as a deficiency rather than a forgiveness then there would be no issue with a short sale in a bankruptcy other than the time.  The deficiency and its related judgment would be wiped out by the bankruptcy.  Surely an Attorney could write his letter of authorization to stipulate the accounting procedures to be applied otherwise no deal.  Seems like it could be made into templates where it was easy enough to either request the deficiency or the forgiveness of debt, depending on the clients needs…

Unfortunately some attorneys, I think are more self serving than others and seek maximum billing hours.  Others are so narrowly focused on their area of expertise that they can’t see out of those boundaries anymore. 

I am sure my time is much cheaper than that of an attorney and eventually the asset has to be disposed of.  In this case, it will go through the sale at foreclosure and after about 4-8 weeks the bank will order a BPO (Brokers Price Opinion), then they will list the property with an REO Agent.  Usually, a different agent.  So I don’t get paid for my initial marketing efforts or my time.

Eventually the home will be sold, usually after about 6 months in our market as of 6-15-09.  That is, if they are aggressive on price, otherwise it will sit for even longer. 

Banks are usually pretty methodical about dropping the price monthly after reasonable time on market with no offers.  The Bank hires an Asset Management Company to dispose of the property.  They clean it out, get one or more BPOs and property inspections, handle the eviction of any tenants or owners.  Often they will offer cash for keys if the people will clean out the house and leave it in good condition.  The Asset Manager sets the price, usually based off of the Brokers Price Opinion, but not always.

Still the bottom line is this home will more than likely sit vacant for at least another 6 months, due to the Bankruptcy Attorney’s advice that its not worth the trouble to try the short sale.  I am not saying this advice was wrong… I am just frustrated by the ever increasing amount of “free work” that Realtors are doing.  If we don’t step up to the plate and try to help these people in a jam, then who will.   But we don’t always get paid well, or paid at all for the amount of time that goes into it.  I do it for Karma, plus I already have the knowledge, since I am interested in purchasing these types of properties so I got well versed in the specifics of the process.

Being occasionally prone to conspiracy theories, I wonder if the lawyer might just want to rack up more billable hours by handling the negotiations with the Banks Legal/Bankruptcy Department. 

Realtors, are always referring people to attorneys.  Clients often don’t go and when they do it seems the Attorney can sometimes complicate things or kill the deal. 

All I ask is that the Attorneys out there give us Realtors a little respect and think of us and the fact that we need to make a living as well.  I think they should also think a bit about the overall economy and the effect the vacant home will have on the surrounding homes and neighborhood for at least the next six months.  Plus the home as an REO property will usually sell for less.  When that home sells for less it has a harder impact on the neighbors and ultimately the bank and the original investor(s) who held the notes… 

I believe these are largely people issues.  Realtors are usually pretty good about dealing with people issues and thinking outside the box.  I think Lawyers are the same way.  They deal with people.  They think creatively.  But the key difference is in training, attitude, payment and billing… 

Lawyers require extensive schooling and training, plus difficult Exams.  They worked hard, they’re usually smart outgoing people and they usually think fairly highly of themselves.  So the Lawyers charge for it.  And in a convenient and collaborative fashion the legal industry has created the enviable concept of a retainer (pre-paid billing cushion account) and then they bill hourly and/or task based, plus can assign assistants or subcontractors mostly all on an hourly based billing.   The detail on these bills is often lacking based on the amount they usually concern.  And, the bill better be paid up or the Lawyer quits working….

Real Estate Licenses don’t typically require much training.  In Colorado, you can do a crash course in about a month, pass the test, and all the background checks and have your Colorado Real Estate License in about 3 months.  Realtors might think highly of themselves or not, but in general they don’t charge for it.  The Realtor usually works with ”no money down” on a leap of faith that the client will stick with them through the listing and sale or the purchase of their home.  And the Realtor has a fiduciary duty to the Client, but the Client often has little fiduciary duty to the Realtor.  So I think based on our code of ethics that it would be considered unethical to put the Realtor’s financial concerns in the way of the Clients.

I guess we as Realtors, must suck as negotiators compared to Attorneys, because our payment plan and business model suck compared to theirs.   Ha Ha.

I don’t know what I can do about it, other than go to law school, because if I start telling people I want a retainer and an hourly rate for Real Estate Services then they will go knocking on the next guy’s door.  So until we wake up in a new world, we will probably continue to work based on faith and trust and within the wonderful systems that define how the cogs turn.

As always if you need help with a foreclosure, a purchase, an investment property, the latest Real Estate Get Rich Quick Course you just bought…. whatever, give us a call, we don’t have a clock to start the billing and we will do our best to help you.  But remember WE ARE NOT ATTORNEYS OR ACCOUNTANTS - WE ARE JUST REALTORS.

Chris Ormsbee - I am a Colorado Licensed Real Estate Broker and a Realtor - Working for Century 21 Action Realty in Montrose Colorado.  My Office Phone is - (970) 249-7777.