Shop, Swap, and Drop
This is a new term I heard in class from my real estate agent students. It describes a home buyer shopping for a move-up home; a nicer home in a nicer neighborhood. The buyer has an existing home and the home’s value has dropped so far that in order to sell, they would have to go through a short sale approval process.
In order to qualify for any kind of short sale, the home seller must provide proof to the bank being shorted, that they do not have the funds to pay back the shortfall. If they DO have the money, then instead of a short sale, we have a “seller brings cash to closing” transaction. In a Shop, Swap, and Drop transaction, the home seller actually DOES have the money and/or assets to makeup the difference between what is owed to the bank, and the home’s current, much lower value.
But…the home seller doesn’t really want to hand that money over to the bank. So instead, the home seller doesn’t sell. Instead, he/she becomes a home buyer. These folks shop for a new home and when asked about their existing home, they tell the bank “we’re going to rent it out.” Since most banks and lenders have new strict guidelines about counting rental income from a new landlord, they will often make the homebuyer qualify for their new loan by including BOTH mortgage payments into the buyer’s debt-to-income calculations.
No problem for the Shop, Swap, and Drop buyers. They CAN qualify to repay both mortgage loans. So they select a nicer home in a nicer neighborhood but with prices far below what they were at the peak of the bubble.
After the new loan closes, they move out of their underwater home, move into their move-up home, and then default on the first home. The dropped house goes into foreclosure and your Shop, Swap, and Drop neighbors throw their credit score under the bus for a while. But they figure the gamble is worth it if they can get rid of a house with serious negative equity that they can’t rent for enough to cover the payment.
It will be interesting to see if this becomes more widespread. At this point in time, I’m not so sure the masses would be able to qualify with both mortgage payments. Instead, I’m hearing more stories about people who are just unable to pay their mortgage and are waiting it out, sometimes for many, many months before the foreclosure auction happens and they must move out into a rental. I’m hearing that people are living mortgage-payment free for up to a year before the bank gets around to their auction.
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Comment by Bruce Burns on 7 February 2010:
So, I’m reading about sellers living in their houses for “up to a year” before the foreclosure auction. I’ve seen several over a year! Yep! It’s very true. So, far my “record” client has been in his place Totally Free (no taxes, no rent, no payments of any kind, etc.) since August of ‘08! He is still there today as I type and really enjoying it! He has sold the auxilliary nautral gas powered generator with automatic transfer capabilities. Can you say “attached?” And of course, the washer, dryer, refer, etc., plus green house, storage shed, and other “extras.” There has been so much time expire, he is elidgeable (sp?) to claim bankrupcy again. This started with a guy wanting to sell his home because he had become disabled by an on the job industrial accident for which the insurance company choose not to settle the claim for years. He couldn’t work, finally accepted a token from the insurance co. and has given up! So where does all the blame lay? I’m not even going to try and sort it all out here.
What would you think of a situation where the “free rent occupant” waiting for foreclosure plus at least 20 days is collecting almost enough rents to make the monthly payments? Wouldn’t it be smarter for “everyone” to forgive the penalities and reduce the interest rate to say 5.0%, so the guy could make the payments?
So now, on top of that, let’s look at the other side. The “Service” company handling the mortgage for the 1st lien holder is paid on a monthly basis. So, let’s figure this out. Does the service company, that feeds all info to the primary lender (when he wants to), really want to see this come to a resolution? Of course not! So far, I’ve had two qualified buyers “walk” when we couldn’t get any response regarding their offers (even though we learned one was “accepted”) and we had less than a week to the supposed foreclosure auction day!
It can get frustrating but plenty of them can get done just because of the shear #’s!
Comment by jillayne on 7 February 2010:
Hi Bruce,
Thanks for stopping by and sharing this story. I’m assuming this is happening somewhere in the greater Seattle/Puget Sound area? I’ve heard similar stories of homeowners wanting to avoid a foreclosure by trying a short sale and, after default, staying in the house months and even over a year afterwards with no auction date/eviction date in site. So they just stay, living mtg payment free, and save their money.
The banks and lender/servicers have way too many foreclosures to process and will never have enough people to do the work in an efficient manner. Further, the banks want to slow the rate of REOs coming back on their books as well as slow the rate of REOs going back on the market. The next 3 years will be very interesting.