Banks Have All The Money – Money Is The Root Of All Evil – Therefore Banks Are Evil

Another “Don’t Ya Just Love Working For Free” Story

In the minefield of residential real estate lies the ubiquitous short sale. Fundamentally, all  short sales have a commonality – the market value of the property does not exceed the disposition costs plus mortgage liens and other encumbrances. A short sale requires a successful negotiation with the lien holders – and the operative word here, boys and girls, is successful.

It was the summer of 2007, I found a nice big lake lot for my clients. After many years struggling to advance in their careers, they finally reached the point where they could build their dream home. Their kids were now adults, and it was time for them to begin to enjoy the fruits of their labor.

With a builder in mind, they set out to acquire this lot and begin construction on a 3500 sf 5 bedroom 4.5 bath home. The bank had many requirements, including a set of plans and specifications, as well as a variety of documents from the builder.

The bank – that shall remain unnamed – would only finance 70% of the appraised estimated value of the completed property. Not an uncommon practice – as it gave the bank a level of protection in the event that the future wouldn’t turn out as planned… and we all now know what happened to the residential real estate market since the summer of 2007.

The house was slated to be completed in April of 2008 – a goal that seemed more than attainable. Eight months to build a  home like this would be considered child’s play for any builder. Unfortunately for all the parties involved – that wasn’t the case.

The builder was having problems with his other projects – so much so that he was having great difficulty even getting started on this project. The owners threatened to pull  him off of the project if he didn’t get started – so after several months with nothing taking place on site, the construction began.

Although the house was making progress – and the builder assured the owners that the house would  be complete by the one-year construction loan deadline – he did not deliver as promised. The house was still in need of almost all of the interior completion – as well as the exterior brick work, paving, deck construction, final fill and grading, and landscaping.

The owners talked to the bank about their displeasure with their builder, and asked for an extension on their construction loan. Keep in mind that the owners had been making monthly payments on the balance that had been spent thus far – so it’s not like the bank was losing ANY money on the slow construction.

The bank would only give the owners a 30-day extension – at an additional cost of $2000. That’s $2000 in addition to the interest payment on the construction loan balance. The following month, the owners had to repeat this procedure.

At this point, the construction had nearly stopped. The builder had plenty of excuses and apologies – but apparently no funds to continue the project. The owners had no choice but to seek out a new general contractor.

All the contractors that were interviewed brought the owners bids that were higher than the remaining funds that were left in the construction budget to finish the job. Meanwhile, the original builder kept saying that if given the chance, he could finish the job.

And the bank would not budge on modifying the loan. No way – no how.

Just about the time that the owners had to pay another $2000 penalty to the bank for another 30-day extension – the builder takes a dirt nap. At only 40 years old – skinny as a rail – married with two young children – never smoked or drank – the most unlikely person in this story fails to wake up one morning in October.

Of course, everyone is shocked. No one imagined that a man of his age and physical condition would die of a heart attack. And although the owners are disturbed at his performance in the construction of their home, they attend his funeral along with his friends and family.

At this point, the owners approached the bank – yet again – to explain that the builder had passed, in the hope that they will finally modify their loan.

Request denied.

So they raided their savings to continue the construction while giving the builder’s widow a few weeks to recover from the shock of her husband’s untimely demise. During the following few weeks, the cabinets; brick front; and driveway were installed.

The builder’s widow was unable to find any paperwork regarding the construction. Nada. Zip.  Perhaps the builder had a hiding place no one knew about. At that point, the owners approached the bank for a copy of the performance bond. After all, that’s what a performance bond is for – to ensure the completion of a project.

But the bank reported that they could find no record of a performance bond.

Oh, they required them on their construction loans before this one… and they’ve required them on their construction loans since this one – but on this particular loan, it was apparently not required.

So there were the owners – with no performance bond, and an incomplete house with not enough money left to finish it. Their savings were drained, and their bank wouldn’t have any part of providing a solution – in fact, the bank still wanted their monthly interest payments AND $2000 monthly deadline extension penalty.

Did I mention that the owners were also putting their daughter through college?

So the owners began discussions with some builders and hard-money lenders in a final attempt to finish this project… all while the real estate market had been in a free fall. The builders discover many items that must be repaired or replaced, as they don’t meet code. For example, the electrical panel – which is full – did not have the circuits run for the stove, heating or air conditioning.

It became painfully obvious that without a loan modification, this house would not be completed – well, not by these owners, at least. And the bank still wouldn’t have anything to do with a loan mod.

Can anybody say “Short Sale”?

So I listed the property for sale as a potential short sale. I showed it several times – as did other agents, and encouraged several offers – but the best one that crossed my desk was for $125K. So I called the bank… only to discover that the owners had filed for bankruptcy protection.

Needless to say, bankruptcy tends to put a damper on things.

So for the next couple of months, I had to disclose the situation to potential buyers and their agents… and along with the economy, the market continued to sink as did the interest in this property.

Finally, we were made aware that the property had been discharged from the bankruptcy – and we could attempt a short sale. I communicated with the bank of my intention to lower the list price to $175K – along with my doubt that we’d ever see a offer that high.

And as hoped, the interest and activity kicked up.

Unbeknowsnt to me, the bank had started foreclosure proceedings… but I felt I could get an acceptable offer in the few weeks before the foreclosure date.

In the beginning, the offers came in ranging from $83K to $125K… so I began working a multiple offer scenario.  In the end, I was able to get an offer for $177K – all cash – to close in two weeks.

And once again, the bank never failed to disappoint.

The day was Tuesday –  and the  bank wanted us to close it that Friday – two business days ahead of the scheduled foreclosure date. Now I know you’ve heard stories about all these banks that drag their proverbial feet when it comes to short sales… well this wasn’t one of those banks.

Their rationale was that since Georgia is a “restart” state – meaning that each time they begin the foreclosure process it costs them money – they didn’t trust the buyer to perform, and did not want to risk the $2500 it would cost them to “restart” the process.

I had never heard of anyone taking a short sale from contract to closing in three days before – but as a good pioneer who has taken many an arrow in the back in this business we know as real estate – I proceeded to give it my all.

I worked late into the wee hours of the next morning putting the short sale package together… complete with everything sans an executed agreement with the new proposed closing date. To the bank’s credit, they wanted to get the package quickly – even without an executed agreement – so that they could begin their analysis and order the BPO.

The buyers, who were from Canada, were spooked by the banks insistence on a quick close. Way to go, currency breath. I warned the bank that this offer was extremely good, and that they should risk a restart to make this deal work… but they didn’t see it that way – and the buyer withdrew their offer.

One day down – two more to go.

The next highest offers contained contingencies – and they could not possibly close by the bank’s unreasonable date, so I had to move on to the cash offers.

The best cash offer was for $130K, and they could close in the two remaining days we had left. We drafted up the contract and emailed them to all parties for their signatures. The BPO had been ordered with a rush (for the previous offer that the bank spooked) and the closing attorney assured us a time for the closing.

A rush title exam was ordered and assured, and power-of-attorney docs were drafted for me to stand in as Attorney-In-Fact for my absentee clients. Funds were verified, and cashier’s checks were being drawn to avoid any trouble with wire transfers.

I prepared a new preliminary HUD-1 for the bank, along with the proposal letter and supporting documents for this new contract. All we were waiting on was the BPO.

Before the BPO had come back, the bank had made up its mind that they would accept no less than $150K for the property.

“What if the BPO comes in at $100K,” I asked.

“The last BPO in May came in at $196K” was their reply.

“I would stake my life on the fact you’ll never see $196K for that property,” I quipped.

“Well, we’ll see what the new BPO comes in at,” was the bank’s response.

Meanwhile, I drafted up a two-page letter outlining all the additional costs that I believed would not be considered in a BPO, as property evaluations are seldom for incomplete construction. I even submitted one construction estimate that was in excess of $200K for the completion of this house.

Well the BPO came in – on time – and on the money. $129K.

Now you would think that a bank that was insisting that we close in such a hurry would accept an offer that equaled the BPO value, right? Think again. They were sticking to their figure of $150K.

All I could do is convey this message back to the buyer’s agent – If your client comes up with another $20K, we have a deal. If not, thanks for playing. There will be no parting gifts this evening.

So yesterday was D-day. The buyer was ready, able, but not willing to bring the extra $20K to the table. The bank was not willing to release the property, and chose to take their chances on it as an REO. The agents witnessed yet another deal gone dead – and more wasted time working for free.

One thing is certain – the road to a successful short sale is not necessarily the quickest one.