Well, yup, kinda, but kinda not, too.

Yes, now that the housing stimulus is over, if you want to sell your home, you will have to drop your price. Supply and Demand says so and Supply and Demand don’t lie.

Yet if you are selling in order to buy another home, and like many, your next home is priced higher than the one you are listing, then now is the best time for you to drop your price and buy up.

The numbers have never looked so good.  Here are a few things to think about:

Ignore what you paid for your home. This is an irrelevant number – the market is the market.  You need to let go of your emotional attachment to the price you paid for your home.

How do I make cash flow work? This is the tricky part and usually requires the help of a qualified mortgage advisor.  There are ways to get out of a home for a little less than you owe and be able to get into your next home with little or no money down.  We just have to be a little creative.  The benefits often outweigh the costs – it’s worth a look.

I may sound like a broken record on this one, but talk to your lender and your Realtor about renting out your old home, making a move and purchasing without selling your existing home. This makes sense especially if you stand to take little or no cash from the sale in this market anyway. Homes in almost any neighborhood have a market for renters.  One of my clients has rented his 3500 square foot Okemos, MI home out for over $3000 per month for the past 12 months.  Another few years and we both expect he can sell the home (maybe to the current tenant) for as much or more than he owes.  Let the up market do the work.

Get out of debt. This may sound misplaced, but in most situations when I talk to clients who already own a home and want to know how to make the most of this opportunity market, I tell them the same thing: Make a plan to pay off all consumer debt and keep it paid off.  Your ability to make a wise transition in this market is almost zero if you have consumer debt.  Debt will kill you. Get rid of it this year while rates are still low. Make a decision to pay it off once and for all.

1. You can sell the home anyway and pay the difference at the closing.
2. You can request that the bank to whom you owe your mortgage take an amount short of the full balance.  This is a short sale.
3. Some combination of the above.

If you are a buyer and have written an offer on a home that is listed as a short sale, you know the following story all too well.

You write the offer at some amount that is a great deal for you.  The next step happens quickly and is almost irrelevant, but important none-the-less:  the seller accepts your offer!  You get excited, but wonder:  “why am I excited?”  Never has there been something less exciting.  Here’s why:

The seller is not in control of the sale.  In a short sale, the seller’s acceptance of your offer is almost always a given – and means nothing.  Since the seller is getting no money from the sale, they couldn’t care less what you offer.

After accepting the offer the seller must send the offer to their bank and get the bank’s approval to sell at the terms of the offer you’ve just made.  The seller, who has the right to sell the home, does not have the ability to sell it.  Why is that?

If the seller has done their homework, then it has also been determined that they do not have the ability to make up the full difference between your offer and the amount that is owed to the bank.  They need assistance and thus permission from the bank to sell at the terms they have accepted because the bank must take an amount short of what is owed to them.

To complicate matters, the bank that is owed on the mortgage does not have the right to sell the home because they don’t it.  They can’t sell what they don’t own.  They need the seller’s cooperation and signatures along the way to make this fly.

So, what’s the big problem?  The seller and the bank work together and you buy the home, right?

Well, banks are big, and short sale sellers are generally an unmotivated group of people.

Some time after the seller accepts your offer, they ask themselves why they care.  Somewhere they’ve just read that if they go through with a short sale, the hit they will take on their credit score will be similar to that of a full foreclosure.  A fact that may or may not be altered in the future, but is a reality today.

The bank on the other hand must jump through many hoops all the while taking this seller with them through each one.  If you’ve ever been to Sea World, you know that it takes a special kind of mammal to do the hoops and costs a lot of fish food.  It’s not for the faint of heart.  It takes some commitment and determination to stick with Flipper for an entire transaction–something that some sellers do very well, and others do not.

At first it’s fun.  The seller gets to sign paperwork and wait.  Sign and wait.  More signing, more waiting.  Then the first of the next month comes around.  They know they will not be getting a dime from the closing.  Why would they make their mortgage payment?  Why not keep that $1000 or $1500?  It’s a good question.  They call some friends who all agree and the mortgage goes (further) behind.

This complicates matters even more and potentially brings the loan closer to foreclosure land, which, by the way, if things go that far, then the deal is off completely and you, the buyer, must wait until the new owner, now the bank, has the deed and the right to sell the home.  This can take weeks and will likely involve a different realtor, and you may not be the only buyer once it hits the market again.  But that does not always happen, so let’s stay in short-saleville for the rest of this post.

Meanwhile, the bank is doing simple math.  They’ve analyzed the loan performance of the homeowner, reviewed their income and assets, and decided that they would be better off taking some amount lower than the full amount as a way of protecting their asset (the full loan amount) from greater loss through what might be that inevitable foreclosure.  Foreclosure law is cumbersome for banks, and they are often better off to take what they can get through short sale.

However, they have a long line of customers asking for this, and they don’t care about the details of any particular circumstance.  This deal simply goes on a pile.  When your offer is finally reviewed, it’s determined that the seller needs to initial something.  The bank calls the Realtor, the Realtor calls Flipper, and the signature is put on paper and returned.  The file finds its way onto the pile again.

I have provided preapproval letters for more than 30 active buyers who are looking for homes right now.  2 or 3 of them have written offers on homes that are in short sale.  One has been waiting more than 4 months to find out if his offer is accepted.

Ann O’Connor of Re/Max Home Professionals is a seasoned local Realtor. She says:

“Be prepared for a lengthy time leading to the closing table.  ‘Short’ sales are not called short sales because of how long it takes to close.  They test the patience of all parties. They do offer a good way for distressed sellers to be able to move forward and for buyers to purchase good value at reduced prices. Each one is unique depending on terms, bank and property, including condition.”

I’ll end with an important word about motivation.  If you are a buyer or a seller and are considering a short sale, you need to involve a full-time, professional Realtor.  If you think about it, buyers are motivated to buy this home.  Sellers, as we’ve discussed, start out motivated but will often lose steam right when they need to be on their game.  The employees at the banks that are dealing with these are not only behind in their work, they’re also likely to be new to the process in the last two years and not financially motivated to see this through.

A Realtor has done this before, is able to keep all parties on the same page, and most importantly, will get paid when and IF it closes.  A fact that will likely be the main reason your deal gets done.

A Realtor will earn his or her commission getting this done for you.  Don’t do short sales without one.

1. Choose a Lender that is a good teacher. There is no reason to be surprised at or after the closing of your real estate transaction.

2. Choose a Realtor that has this same trait. A professional, licensed, full-time Realtor gives you a lot of confidence, information and expertise to help you act like a “pro” in a real estate transaction even though you may only participate in one, four or five times in your entire life.

In the spirit of being a teacher and working with professionals, the video embedded here is a very good explanation of the new forms that lenders will be using as of the beginning of 2010. It was put together by the National Association of Realtors. The NAR (and the Realtors who are a part of it) has been a huge advocate for consumers.

I for one embrace these new forms and the attendant education and disclosure that is now required to be given to consumers at the time the loan application is signed. ‘After the closing of your loan’ is a terrible time to find out about your mortgage terms.

Take a few minutes to watch – its worth the time.

http://link.brightcove.com/services/player/bcpid31763633001?bclid=31792087001&bctid=61485517001

I thought about these things when I got an email this week describing a sales technique banks are using with potential mortgage clients. In a nutshell, they’re arguing that if you originate your loan with a broker, there’s a very good chance you’ll have your closing delayed due to the re-disclosure provisions of Reg Z; whereas a bank, unhindered by such nuisances, can get you to closing quicker. Therefore—by this logic—banks are the better bet.

hmmm…This is clearly folly. So do I answer it? Or do I let it go?

At the risk of “being like him myself” and just adding to the noise, I’m going to answer it because there’s more to this than an argument between banker and broker. There’s also the client whom these rules are meant to protect.

As I pondered how to respond, my first thought was—naturally—defensive. After all, I’m a broker, and them are fightin words. But then I thought, hang on. Rather than turn this into a mud fight, this might actually be an open door for re-emphasizing how a good broker is still your client’s best option.

Let’s start with Reg Z. The re-disclosure piece to TIL (truth in lending) was intended to prevent the bait and switch. You know how it works. A client is informed early in the process about the rate and certain fees (the bait), but when she sits down at the closing table, lo and behold, they’ve changed, gotten bigger, multiplied even (the switch). Most people don’t walk away from the table at this point, and that’s why the practice has been so lucrative.

A couple of observations…

1.  The law was meant to protect consumers from a dishonest practice. So why originate a loan with someone exempt from it? The incentive to be as truthful as possible as early as possible on disclosure of all the costs involved lies not with the bank LO who’s exempt from this part of Reg Z, but on the broker whose livelihood depends on compliance with it. Your client has a stronger basis for trust with the one who has the stronger incentive for full disclosure.

2.  Brokers who used such practices were also those likely to push b-grade paper, and those guys are gone. If your broker has survived the shake-out of the industry, then you’re most likely dealing with someone who’s been doing things right and above-board. Banks haven’t experienced the same “refining” effect of the housing crisis that mortgage brokers have. And if such brokers have survived, there’s a good chance that they’re doing it as bank LOs.

A couple of strong arguments aside from Reg Z considerations…

1.  Speaking of survival, you might not realize just what keeping the doors open has entailed for me—and brokers like me—over the past few years. Those still standing went through something like this:

• 3 hour state-administered test on everything from calculating APR to TIL to past laws pertaining to the mortgage-lending industry
• An audit of accounting books, procedures, financial position, and a random audit of ALL files (closed and withdrawn) from the past 36 months
• A net worth requirement at all times of $70,000 liquid cash in a bank

…and no bank LO can say any of that. Don’t hear me wrong. There are good, conscientious loan officers working out of banks, but they simply haven’t proven their professional commitment to the industry in the same concrete, measurable ways.

2.  And this may get to the heart of the matter better than anything else–By definition a broker provides flexibility that a bank LO just can’t. When my client is declined a loan from Lender A, I find out why, look for a remedy, help my client make adjustments, and then move on to Lender B. And I can do the same for Lenders C,D,E,F,G,H…you get the idea. But a NO from the bank is a NO to that client. No loan, no mortgage, no house, not from us anyway.

I hope that you can hear in this, and in all of my letters and blog posts and emails, that this is not just a “job” for me. It has been and continues to be a crucial part of my life’s purpose. Bringing excellent advice, service and rates to the mortgage industry—as low as it has stooped in the past—is what I do. And I’m not going anywhere.

I’m no Solomon, but I do know the mortgage lending business. And while banks are promoting their Reg Z exemption as an advantage and calling it wisdom, a closer look shows such thinking for the folly that it really is.