by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
The world of distressed real estate (only about 90 of my past 100 transactions) is a funny one; all the rules are different.
The REO sellers are pretty simple. They have a take it or leave it policy when it comes to negotiations, escrow terms, etc.. Some short sellers however, can be like the “bait and switch” mortgage brokers of last decade. The “bait and switch mortgage brokers” would issue a fictional good-faith-estimate prior to pulling credit, getting a good valuation estimate, and checking income. One week prior to escrow, a “surprise” was discovered, changing loan terms and putting the potential escrow in jeopardy.
Not all “oops” moments were conceived in evil nor should they be attributed to professional incompetence; sometimes; s**t just happens.
A similar trend has developed in short sale real estate agent community. Like the bait-and switch mortgage broker, some short sale agents low-ball the price, collect offers, submit them to the bank, and pray for a reasonable settlement. Oftentimes, the counters are far apart from the originally accepted offer. Sometimes, the term changes are issued after the buyer has become emotionally vested to the property or invested funds to secure a loan approval for purchase.
I’ll repeat myself; sometimes, s**t just happens. Other times, the surprises DO come from professional incompetence, poor disclosure and communication, or just plain old deceit. The result is an unhappy buyer or seller. The collateral damage is consumer mistrust in every agent involved in the transaction.
Rather than vent about the reasons, let’s consider a private market solution to the problems: Performance Bonds.
Performance bonds, issued by independent insurance companies, could seriously contribute to the #rtb movement. They can be offered by mortgage originators and listing agents alike. The credibility of offers to purchase, and listings for sale, could rise with the attachment of a performance bond into the escrow terms. Buyers could confidently place non-refundable escrow deposits, knowing that the lender has indemnified them from loss. Likewise, listing agents could rely on timely execution of the escrow if a lender performance bond were attached.
Performance bonds could lend confidence to short sale transactions, too. Buyers could enter into agreements, proceed with the due diligence required (along with the commensurate expenses), knowing they could be reimbursed for those expenses if the sellers and or their agents couldn’t perform.
Bonding companies would assume a good amount of risk but they can be well compensated to assume that risk. They would have to analyze performance statistics about mortgage originators and/or real estate agents, consider transaction specific details (borrower qualifications or seller financial status) and, the reputation of bank loss mitigation departments (for sellers) and bank underwriting guidelines (for lenders). If a legitimate “bondable amount” is 2% of the purchase price, different premium fees could be assessed after analyzing agent/originator reputation.
What intended effects would bonding have? The #rtb movement could abandon the “restrictive licensing” laws it currently supports. Apprentice programs, we’ve discussed here for years, might take root because rookies might not have established the reputation to secure a bond. Finally, we may inspire consumer confidence in an industry where the public opinion is unfairly focused on the few transactions that go awry rather than the hundreds that go according to plan.
Licensing is not the answer. Agent and originator licenses and about as unique as a blond in a Newport Beach nightclub. A higher degree of transaction supervision, from designated real estate brokers and HUD licensees could be but the economics of the industries precludes it. Transaction supervision then, could be effectively “outsourced” to a third party with a profit motive (the bonding agent).
Laying cash on the line could solve this problem. Bonding agencies could very well provide the “Good Housekeeping Seal of Approval” we seek, for industry participants whom are deserving.
Ryan Hartman says:
Man, this is a crazy good idea. So the scheisters provide an element of moral hazard until they’re phased out of biz?
April 23, 2010 — 6:17 pm
Don Reedy says:
Brian,
I think performance bonds have seen their day. Promise to do something, and then be financially responsible for it? But your heart is in the right place, as is your sense of attempting to effect a change in a system that increasingly damages both the perception and ultimate structure of these type of real estate transactions.
Oh, I think I dated that blond from Newport Beach back in…….Are you saying there were more of them?
April 24, 2010 — 5:40 am
Elizabeth Evans says:
The only possible good to come out of the administration’s plan to streamline short sales is the up-front statement of the purchase price and net proceeds the lender(s) will accept. That way everyone in the game knows whether the sale will work or not. Listing agents can just refuse to take listings that are not at realistic prices. No one will be able to low-ball and conduct an auction.
Here’s an example of the BS that some servicers/investors practice. An experienced short sale agent lists a property last fall at $99,900 and sends in the short sale package for approval. No offers. After two months, he lowers the price to $94,900. Still no offers. We offered $85,000 in December. The listing agent holds the offer for two days and no one else comes to the table.
The offer is signed by the seller in mid-December and sent to Countrywide (excuse me, Bank of Ameriwide). There it sits for over three months with no response. The asset manager assures the lister that things look good. Finally, at the end of March the BPO is done.
About two weeks ago, Bank of Ameriwide comes back with a counter-offer of $118,000. Huh? There is zero market evidence this property would sell for $118,000. Could we see the comps or at least understand the basis for this counter? Nope. Take it or leave it.
Because Bank of Ameriwide sat on its hands for three months and the first timers are getting desperate, the value is now closer to the list price of $94,900. Since there is no room for discussion and the foreclosure date is looming, we politely released the seller and moved on.
If this experienced short sale agent had received a bottom line of $118,000 last fall, he could have tried to convince the servicer/investor why they were wrong. Failing that, he could have told the seller nicely that he could not in good conscience accept the listing because it would not sell at the price the bank wanted. Instead, everyone’s time and money were wasted on an inefficient market practice. Or maybe a non-market practice would be a better description.
April 28, 2010 — 7:25 am