Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
I recently saw a spectacular beach house that was listed for sale at $3.9 million dollars which made me very disheartened. Here is the story…
About three years ago, I was working with a client who had a beach home that he bought with a partner as an investment property. They purchased the property and they used a “private mortgage” (ie: Hard Money) to buy the home. It was an expensive proposition, but the multi-family home was very lucrative with its income-producing tenants, so the added expense was not much of a concern for them. In addition to the extortionate loan terms, however, the loan had a 5-year “balloon clause” which meant that the loan must be paid off in full after 60 months.
One of the owners came to me as a recommendation but was quick to admit that his partner was really the “money man” who was working with his connections to try to get this done. It wasn’t really working out as they would like, and they were running out of options. I spent a lot of time with David (not his real name) to try to get the full picture and then offering some suggestions. The most viable solution in my opinion was to refinance his current home, to help him pay off some of his high-interest rate credit cards, and roll it into a new cheaper mortgage. We spent quite a lot of time detailing the strategy and going through each and every piece of debt, to try to maximize the lowest payment possible. Once completed, he would be eligible to refinance his beach home thereafter.
I am not sure why they waited this long, but by the time we met, there were less than sixty days left before their loan was due, which didn’t give them much time – and certainly didn’t give me as much time as I would like to get everything done. We agreed that there was not a moment to spare. He said he would discuss with his partner, and get back to me. I was shocked when I did not hear back from him and did not get any of the paperwork that we requested. Eventually, I did get a call, and David told me that he would be working with another mortgage broker that his partner started the process with originally.
I was more disappointed with what he told me next than I was about him not using my services after all the time we spent together…
The broker recommended a completely different approach. His suggestion was that David applies for a “loan modification” on his current mortgage, which would save him much more money on a monthly basis than the recommendation that I presented. He said that he could have that done within 30 to 40 days, and then he would be able to work on refinancing the beach house afterward. When I heard that, I was shocked. I begged David not to do this. The broker said that with a modification, if eligible, they would not have to pay new closing costs, and given that his home was in Brooklyn – closing costs, specifically state mortgage tax is extremely expensive, which they would avoid. Conceptually it was a great idea. Practically it did not seem logical, reasonable, or achievable. I told David that I’ve heard too many horror stories of loan modifications that had taken much longer than anticipated, that have never gone to fruition, and that have caused credit issues to the homeowners. A day later I again called David to say I didn’t think it was a good idea, and I strongly suggested that he speak to an attorney to see what they felt about it.
That was the last I heard from David until a week before the deadline to refinance his beach home.
The modification was a bust. He claimed that the loan modification specialist recommended that he not make his next mortgage payment in order to “trigger” the hardship, which would make him eligible for the modification. Naturally, he obliged and was more than happy not to make his February payment.
Needless to say, the modification did not come through. Unfortunately, the beach house loan was “due”, and they were served with a default notice. They were able to delay the creditors for a bit as they scrambled to see what could be done. I of course was unable to refinance David because his credit was now derogatory, and it would take too long to repair. Eventually, the creditors pressed hard enough that David and his partner were forced to turn over the property to them in lieu of foreclosure at below market value. That was a little less than two years ago. They gave the property away at a price tag of $1.9 million dollars. Last week, I saw that this property was listed for sale on Zillow for $3.9M.
Sometimes deals are made and money is earned by making wise decisions and planning ahead. Other times, money is lost because of poor planning and bad advice. It was heartbreaking to see that because of inexcusable guidance, a person was forced to sell his investment at discounted prices. Will these sellers get their $2M profit in less than two years, I don’t know – but it should not have come to it in the first place.
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