The standoff

Isn't this what short-sales are for? "Beg, borrow or steal" from the bank to get the deal done.

Even though the seller can do a short sale (which can take months), it will have an impact on their credit score, thus jeopardizing their chances of buying a new place on the West Coast.

On the other hand, the seller can do a lease option (not necessarily with the current buyer) and lease the property out to them with an option to buy. That way, the seller can rent the place out to a tenant buyer for a 2-3 year period, put equity into the property, and then sell the property to the tenant buyer when they exercise their lease option.

Please note that lease options work better for A) first time homeowners that do not have enough to put down 20% on a property or B) tenant buyers that do not have stellar credit in place to qualify for conventional financing but are individuals with good jobs (in many cases, these tend to include doctors and lawyers). The tenant buyer is taking over the payments of the property from the seller but never assuming the mortgage or owning the property. The seller still owns the property until the tenant buyers exercise their option to buy. When you see an ad that says "Rent To Own" and/or "Owner Financing Available", the seller is giving you the flexibility of using a lease option.

In the end, it becomes a win-win situation:
1) The seller gets to move out
2) The seller gets their mortgage paid and equity in the property
3) The seller gets to sell the home in the next 2-3 years
3) The tenant buyer gets a new home
4) The tenant buyer takes over the payments so no new mortgage
5) The tenant buyer gets the home they want to buy after 2-3 years

** Disclaimer **
Always consult an attorney regarding the legal aspects of real estate transactions. The laws in every state and city will determine whether this is a viable option to pursue or not.

Yeah, this sort of thing will be more and more common, and more and more of a mess. Its not good for the american economy.

No practical idea other than short sale.

This is why buying into dropping markets requires so much thoughtfulness, which thankfully your clients are getting the benefit of.

I'd ask the employer to cover this as a "relocation expense". Often easier said than done, but worth a try. Best of luck.

So sellers who made poor decisions want buyers to bail them out? Too bad.

My wife and I were in a similar spot last month. We found a beautiful condo that we just loved and was perfect for us. However the listing price was way too high, even after a series of price reductions over a three month period it was sitting on the market. We made an initial offer that was defintiely fair based on CMA's but still about 10% below what they wanted. The sellers had bought the condo five years ago and clearly could not face the idea of selling it at a loss but needed to move to California for a new job. We made an initial fair offer based on the CMA's but they countered with only a token reduction in their price leaving us very far apart and we moved on.

A month later, their agent called us back to rekindle discussions. As we hadn't yet found anything remotely as good (for us) we were willing to up our initial offer a little but told them, like in your entry, that this was the best and final offer and any other offer in the future would be less this one. Needless to say, we were able to iron out a deal fairly quickly (our agents were able to bridge the difference by agreeing to a commission cut) so it worked out in the end.

melonrightcoast: Short-sales work better in non-recourse states (like california, not MA). In MA, if a bank forecloses on you and sells the house for less than your remaining principal, you still owe the bank the remaining balance. If you're in truly dire financial straits, it may make sense for the bank to work out a short sale, but if you have the money (or it looks like you'll have the money in the future, e.g. you have a good job) then the bank can say, "pay us what you owe, or we'll send it to a collections agent."

It seems like one critical question is just how much cash the seller has available to bring to closing. If your offer + their cash is less than the outstanding principal, you'll need to get awfully creative with the financing in order to make this work. You need either a short sale (problematic) or a loan to the seller (which seems like it should be much easier to get the bank to agree to, but I don't think I've ever heard of one).

Maybe the job offer would kick in a better relocation package.

They could take personal loans from friends and family, liquidate any other assets, pull out the principal only of a Roth IRA, hose their 401(k)s for a penalty (do not do this, duh), negotiate a payment plan for the deficiency with the lender, or go through with a short sale. The short sale might be an option if the buyers are prepared to hang around while the bank thinks about it. Chances are the sellers will then get a 1099 for the difference, and they may have an OK hardship case because of impending relocation and no cash on hand. If their bank does not require them to be behind on payments to qualify, the impact to credit seems to be mitigated.

Or sell a kidney or dabble in any number of illegal but lucrative industries. Whichever.

It seems that the Listing Realtor has little to no influence with the Seller, which means he/she is a weak Realtor and/or the Seller's don't trust him/her. This happens all the time. The Seller may also be a Left Brain person who needs facts and figures to make a decision.

Nearly all Salespeople (in this case, a Realtor on straight commission) are Right Brained. They are very verbal but usually don't possess a deep understanding of finance, economics or history, other than what they're spoon fed from NAR press reports.

Until Realtors, the media and lastly the Seller's realize that we are in a different world than what existed only several years ago (and that world was a fantasy to begin with) and face the new economic reality of homes not always increasing in price and that "it is always a good time to buy" song and dance, many Seller's are going to go down with the ship.

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Hmm. Hmm. I would assume the seller's agent and the seller knows that you, Rona, write for the Boston Globe's real estate blog.

That raises some interesting questions. 1) I assume your buyers are aware that their story is being told in public during negotiations; and, 2) your buyers think there might be something to be gained by posturing this story in a way that makes it look as if they aren't going to budge and that the seller should do the right thing and balk.

I don't mean that as a criticism, more as questions / comments. Seriously. You know I am not questioning your integriy.

2005 - What these people were telling their friends "renting is throwing your money away"

2009 - What these people are learning "highly leveraged 'investments' in an illiquid asset is throwing your money away"

"In MA, if a bank forecloses on you and sells the house for less than your remaining principal, you still owe the bank the remaining balance."

James: thanks, I did not know that MA was a non-recourse state. Now it is starting to make sense why these sellers absolutely refuse to lower their price to market value: they would have to write too big a check at closing. I wonder if changing this law would help get the Boston area market to the bottom quicker.

melonrightcoast: MA is a recourse state. The terminology has flip-flopped a couple of times, but now "non-recourse" means you can just walk away. Only a dozen or so states are non-recourse, but they include some of the hardest-hit (CA, AZ, FL) and biggest (TX) states, so it gets a lot of press.

@JohnAKeith your comment raises an excellent point re the larger question - does an agent with an influential forum like the Boston Globe have a built-in and substantial conflict of interest? Whose interest is being advanced here? It's exceptionally hard to tell. I would be deeply resistant as a participant in a private transaction to the possibility of having my story splayed across the Globe by a third party.

I see no mention of the sellers being behind on their payments, so why would the bank do a short sale?

ah, I had the terms backwards. the non-recourse states that you just listed are also the states where prices have fallen far and fast (with the exception of TX, but they didn't have as much of an increase). so my point still stands: I wonder if MA were to change the law to be a non-recourse state, then if we will get to a bottom faster.

this makes me even more hesitant to buy right now. now it makes sense to me why so many sellers are renting their homes out for a monthly loss, and now i have a bit more sympathy for all those sellers that are either stuck in their homes or have to pay to move.

melonrightcoast, James: Even though MA is a recourse state, you can negotiate with the bank to purchase the property on the condition that they waive the deficiency judgment. The deficiency judgment is what the bank would require the seller to pay if the house is sold for less than the mortgage.

If the house has been on the market long enough and the bank is eager enough to get the property off their hands, they will do this.

You should never do a short sale unless the bank is willing to waive the deficiency judgment. You may get the property at an absolutely great price but morally/ethically, it isn't right to do it at someone's expense.

@18, I don't think there is an obligation for the buyer to ensure the seller makes back his costs. Whether or not the bank covers the gap, the seller isn't obliged to feel dishonest when the seller takes a loss. In this stance, we would hold the bank responsible for assuming all risk, which is NOT the bank's responsibility. A mortgage shouldn't be insurance against home devaluation. Perhaps there will be a new insurance product for that down the road...

Anyway, for the cases when a lowball offer comes, the seller can say "no."

Hilarious. I love the innuendos about Rona's conflict of interest due to her widely-read real estate blog, coming from a competitor who writes a widely-read real estate blog. At least Rona's blog isn't littered with breathless updates about which condo developments are getting "scooped up" and multiple posts about how the real estate market is just going up, up, up. No conflicts there, no siree.

Anyway, I really wanted to reply to this:

You should never do a short sale unless the bank is willing to waive the deficiency judgment. You may get the property at an absolutely great price but morally/ethically, it isn't right to do it at someone's expense.

Right. You should let the seller go into the foreclosure, out of Christian charity, so at least their personal liability isn't on your conscience. That's helpful.

Marcus, fortunately I have a good-enough relationship with Rona that she can see past what you accuse me of. I was clear that I wasn't making criticisms. It's a valid question to ask - what is the responsibility of someone who not only writes about but works in real estate.

Although I find your comments insulting, I feel the need to defend myself. I infrequently wrote about clients I've worked with. And, I work with so few clients that anything I write can't be seen as a way to promote the market - my clients hire me for my background and experience, not for any salesman tactics. I've worked with one client this year (a friend) and, I think at most, six, last year. I'm certainly not espousing opinions in the hopes of pulling in more business.

I don't remember ever mentioning the real estate market goes "up, up, up"; in fact, I report on that real estate blog, weekly, about the state of the Boston real estate market. It clearly showed a degradation in median and average sales prices during the past eighteen months.

I also don't remember ever writing about how any developments are being "scooped up", although I used the word just this week to talk about two affordable housing units being bought.

You've hurt my feelings and I don't appreciate it. I think you should be kinder to people, even those who you disagree with.

JP: If you get a great deal, it's coming at someone's expense, either the seller's or the bank's. I'd argue that morally/ethically, it's the seller's obligation to make good on his promises if he has the means. If he doesn't have the means, society allows him to start over (declare bankruptcy). Bankruptcy isn't a punishment, it's a second chance.

melonrightcoast: Non-recourse laws are essentially wealth transfers from reckless lenders to reckless borrowers. They help the market fall faster (or rather, they help the market continue to function while it's falling), but they penalize responsible borrowers, and incentivize people who are underwater but able to afford their mortgage, and would not otherwise sell, to walk away from their homes.

But there are a lot of people who are "trapped" in homes they can afford, but would rather not own. With all the talk about loan modification, debt forgiveness, etc, it would be nice if there was some help for homeowners that didn't involve skipping out on their obligations. Like banks allowing, and the government encouraging, sales where the underwater portion of the loan converted to simple unsecured debt. Since the underwater portion is essentially uncollateralized debt already, this should have no net effect on banks' balance sheets. (I suppose there's an option cost, but that's negligible.) It would make the market more efficient, and it would allow "trapped" homeowners a way out of their house without going bankrupt.

To address John's question about my use of clout:
1. I use poetic license about the time that things happen. This standoff is a done, done, dead, dead deal. When it happened is none of your business. That is happened is fodder for discussion.
2. I also change or omit details about properties so that it is hard to find the places I am talking about.
3. I don’t write about on my peers by name and I omit identifying information on any story that includes other agents.
4. Lastly, I am not that famous! If I were, do you think my peers would behave so badly in front of me? Wouldn’t they all know that they would end up here on the blog? There’s no ticking clock like 60 Minutes every time I walk into a showing. Really!

P.S. Update on this story will come when these clients are through the process.
The lender was not involved in this sale. The sellers were bringing cash for the amount they were short.

Rona, your comments raise a fresh set of questions - poetic license in a real estate blog makes me question your judgment (and your editor's) and the quality of your reporting or recounting. Chronological accounting is important even if you dismiss it as irrelevant - for example, a deal done in 2005 or 2007 would be freighted differently when compared with one done in this market so when it happened is absolutely the reader's business - why dismiss that concern so cavalierly?
I am not a competitor nor am I an agent - simply a reader getting ready to buy a house and who thought this blog space might be a good resource.

Jen,
The particular people, or particular house, or particular price in a real estate story regarding one of my clients is not relevant to the lessons it may reveal about how to buy or negotiate. I have gotten more specific about details when they affect the discussion. (Let’s face it, $30,000 off a $Million home is not the same as $30,000 of a $300,000 home.)
This story of the standoff took place in a market where owners owe more than they can sell for. Do you doubt that this is still relevant? Does it matter if it happened last summer or this summer, or last spring or last week?
When a real estate situation is no longer relevant to the current market, I do not publish about it. Several entries waited in the can for reasons of privacy, then the market changed and they never saw light of day.

Rona,
I agree with Jen here. If you want to tell a story from the past, use the past tense. The specific buyer, seller, and price don't matter, but the timing does. What are price/rent ratios like, what does the job market look like, are there any tax credits coming in or phasing out, does it look like the market is still falling sharply? If it's January, there's a decent chance another buyer will come along, but if it's August, that's pretty unlikely.

Rona: It seems that the best your seller could do was a lease option, see comment #2 above.

James: I'm not sure how you go about working on real estate but even if a bank takes a hit on a property, they make money elsewhere or find other ways to make a profit. If a seller is taking the hit, or too big a hit, it could be catastrophic for them. If the seller lost their job, it would be harder to find a new job if they have a few dents on their credit report. Employer's check a candidates credit report and tend to look unfavorably at candidates with issues on it. Just because a seller is distressed does not mean they are bad people that made bad decisions. There are lots of sellers out there that are in trouble due to loss of jobs, medical issues, family related situations, pay cuts, and so on. Bankruptcy is not the answer to everyone's bad financial situation. Irresponsible and selfish thinking like that only helps to reinforce the economic situation we are all in right now.

JP: Having a bad credit report doesn't mean you're a bad person or that you make bad decisions. It just says to future potential creditors, "Hey, just so you know, the last person this guy borrowed money from didn't get paid back." There are lots of ways to settle debts without bankruptcy, but the implicit threat of bankruptcy is often what brings banks to the negotiating table.

Also, mortgages aren't like credit cards, where interest rates and fees are so exorbitantly high that banks can still make money even when they forgive a big chunk of the principal. If a bank takes a hit on a property, where else do they make money or find ways to make a profit? Charging low-balance and overdraft fees to their customers? Jacking up late fees on people who are trying to pay their mortgage on time? Laying off employees? Or raising rates and tightening lending standards on new mortgages?

The only winners are the people who sold at the top of the market. Those people are long gone now, so now there are sellers who don't have enough money to be able to sell, banks who can't get repaid on their loans, and buyers who can't find any available houses. Nobody who's still around in the market is winning today.

One big reason it's so hard for people to get a mortgage right now is that banks are afraid of people defaulting on their debts. And the more people default (through foreclosure, bankruptcy, loan modification, or waiver of deficiency judgment) the harder it is for lending to resume.