Short Sale training seems to be lacking for the Hemet, California real estate market, and I am sure it is the same throughout Riverside County, the Inland Empire and Southern California as well as the rest of the nation.  Hemet homeowners don't know where to turn when they find themselves upside down in their mortgages or their loans are resetting causing higher monthly payments for the Hemet homeowners.

I attended my first training on the topic in the spring of 2006, recognizing that the inevitable was on the horizon.  I know at first, I personally did not want to get very involved in this niche of helping homeowners who are in eminent foreclosure to help them save their homes.  Unfortunately, by early 2007 I heard too many Hemet homeowners cry out to me, "Help Save my Home from Foreclosure".  At this time I studied everything I possibly could, attending every seminar on the topic and just grasped the concept, positioning myself for the coming tsunami of short sales that are flooding the Hemet real estate market.

For any REALTOR® who want to work this market, they need to be prepared ahead of time knowing that there is a lot of labor that goes into successfully closing a short sale in Hemet, or anywhere else.  The time line is exhausting, typically stretching out over a month just to receive confirmation of an offer to buy the real estate in preforeclosure.  The odds of successfully closing a short sale listing is roughly 30 to 40% - depending on how will you work the short sale.  The most devastating aspect of a short sale is that no matter how much hard work you put into the short sale package and once you are close to successfully negotiating your offer, you will undoubtedly be beat up once again by the lender when it comes time to paying your commission.

My notes from this initial training were very complete and can be found in this initial blog article:  Notes from a Day of Short Sale Training.  Well, in the recent comments, it has been brought to my attention that some of this initial information is outdated...which prompted me to update this information with my own experiences.  So, lets pass the meat an potatoes and take a closer look...

                                           My current comments will be in italics, proceeded by the date 9/07.

SHORT SALES:

THE LEAST YOU NEED TO KNOW

•   "RISKY" ALTERNATIVES TO THE SHORT SALE:

Become an "Equity Purchaser," aka "Shark." One who is a Non-Owner occupied "equity investor," buying a sellers equity at a DEEP DISCOUNT, to bring loan current. The EP is often deeded onto title. Seller's often remain in the property as co-owners, or rent back from the EP. The plus for the seller is no damage to credit, with a place to live, without moving.

9/07 - Homeowners will receive many solicitations from many different investors.  Your advantage to working with a REALTOR® is that we are held to a higher level with our Code of Conduct and much easier to pursue if we were to take unjust advantage of a Hemet Homeowner.

Beware of the "Foreclosure Consultant," who charges a separate fee (not a commission) for a "Rescue Plan" Consultation, and does not have any agency with bank, buyer, or seller. This means no fiduciary responsibility. "Consultants" often do not hold real estate licenses. Both Equity Purchasers and Foreclosure Consultants invite Civil Code Violations CC 2945 and 2945.11, which protect distressed sellers from fraud by the above.

9/07 - There are some great companies who can help.  In California, it is illegal for a "Consultant" to collect a fee prior to assistance and must offer a money back guarantee.  I happen to represent one such firm that does an excellent job of helping those who can afford to stay in their home.

Be aware of the: "Soldiers and Sailors Act" by Congress, which provides protection with an Automatic Stay of Foreclosure, for military.

9/07 - I have since found out through personal experience that the help is only available for debt (mortgages incurred prior to active duty - so if there are Reserve military being activated they may be eligible.  If they bought their home while on Active Duty it does not appear tome that it will apply...but check it out for yourself.

•   A "SHORT SALE" IS DEFINED BY: "ALL liens of record PLUS costs of sale, EXCEEDING CURRENT MARKET VALUE." Said to be "Upside- Down" in payment.

Simply put: Seller owes more than what they can sell for.

This includes, but not limited to: Tax Liens, Mechanics Liens, 1^st TD, 2 TD, 3 TD et al., Unpaid Judgments and Small Claims, and Unpaid HOA Dues. (Many people who do not pay their mortgage are also not paying many other bills, which may be secured by real property. For example: Home Equity Lines of Credit (HELOC's), Mechanics Liens, and Boat Notes).

•   BANKS DO NOT INITIATE SHORT SALES. SELLERS & AGENTS DO:

The above Beneficiaries (aka "Bennies") are always negotiated with by the seller, or assisted by the agent. Lien holders rarely agree to 6% listings. Commissions can range from 1-5%, depending a number of factors.

9/07 - No hard rule here, but it seems as if lenders will knock the commission by 1% - regardless of where it starts.  I just submitted my first at 8% to see where they take this.  An interesting test I am in the process of performing.  Most commissions are 5% for a 6% contract and 4% for a 5% contract.  They will also beat you up extra hard if you are performing both sides of the transaction - so be aware.

•   "VALUE OF A SHORT SALE VS. THE COST OF FORECLOSURE" ANALYSIS:

This is performed by the bank. Banks take up to 45 days to perform this analysis, only after a Short Sale Package is submitted. All lien holders must weigh options before committing to a Short Sale, IN LIEU OF A FORECLOSURE. By foreclosing, lien holders assume all the risks by taking back the property:

9/07 - This is one reason why you must perform your own BPO - give the bank as much data as possible to support your position.  Recently, I have been providing 6 month data, which is typically what they look at and now I have been adding some real hard data that only extends back to August 1, 2007 - the day "Alt A" financing collapsed.

•   RISKS TO THE BANK INCLUDE:

Exposure to vandalism by the seller, deferred maintenance costs, cost of actual foreclosure process, the months of unpaid mortgage, (at least 4 months!). Also, the cost spent marketing the REO (Real Estate Owned), and commissions paid to future agents. 

A four-month process is typical from Notice of Default (90 Days/ 3 Moths), to a Notice of Trustee's Sale (21 Days/3 weeks), and is sold at auction by Trustee's Sale on day 22 if no resolution is reached, AND NO BK IS FILED.

9/07 - There is also the time to rehab the home once it is taken back, the cost of the rehab, the cost of insurance, utilities and taxes - just like any other homeowner.  Then of course there is the expense of commissions to REALTORS® and al of the normal closing costs.  In the current market where there is very little financing available, the home could easily sit on the market for a year or more with nothing but more competition being added every day.

Many sellers will file chapter 7 Bankruptcy, forcing a "Stay of Foreclosure." Some sellers do this simply to buy time sufficient to close a current escrow, and then just cancel the BK application. This is known as "Stopping the Clock" of the four month process. Once a bankruptcy is accepted, a bank IS NOT ALLOWED to offer a Short Sale to the seller, and will be sold at a BANKRUPTCY SALE.

The bank then hires attorneys to file for a "Relief of Stay" which allows them to continue foreclosing even though you are in BK.

However, courts are reluctant to approve this, and prefer a BANKRUPTCY SALE in order to pay off more creditors than a NON-JUDICIAL FORECLOSURE would, provided there is more equity over and above paying off the lien holders. Other "Non-Secured" creditors may be able to be paid off.

Example: If 350k is owed on the Hemet home in foreclosure, and the home can sell for 300K, the courts know the bank will "under price it" to recapture just the loan and costs- but not a penny more, especially in a declining or even a flat market. Banks want to "cut their losses." Courts want to realize the MAXIMUM RETURN, where Banks want only the note value and costs.

(In a rising market, banks are willing to price REO's along side the competition, going with the upward trend).

9/07 - I have heard of services that for a fee will allow the homeowner to deed a portion of the title to a trust, which happens to be in BK - thereby stalling the auction.  Once the home is in bankruptcy, the lenders bankruptcy department is much more likely to be willing to negotiate.  I do not condone this method, but I have now heard of it twice in the last month - so it is going on.

•   WHAT TO ASK A SELLER:

It is very much like a traditional listing except for the "sense of urgency," caused by deadlines and a sense of doom by the seller. Ask the seller:

Did the seller disclose All Liens and encumbrances?
Are there Late Payments, Notice of Default, or Notice of Trustee's Sale?
Determine with a net sheet if there is enough equity to pay all liens AND costs at a "marketable" price?
If NO: You have a potential Short Sale.

9/07 - The real key is commitment.  Will the seller stick with you to the end, or are they going to mentally bail on you?

Many sellers are out of touch with who their current lender actually is. The loan is sold many times in the secondary mortgage market.

9/07 This is why is is critical that you walk away with a current mortgage statement - for each lender!

On counter offers and the MLS, be sure to write in: "subject to lenders approval," or if you are the buyers agent, GET COMMISSION AUTHORIZATION IN WRITING from bank.

9/07 Our MLS now has a field in the FINANCIAL section that can automatically populate this information straight into the MLS and make it easier to search by.  I try not to make a big deal out of it in the MLS, as it seems that many REALTORS® who do not know what is going on, do not have confidence in short sales and will try to avoid those listings.

Banks prefer NON-DELINQUENT sellers (Not easy to get SS accepted), with payments current, and good credit, because they leverage and threat with "derogatory credit reporting." They want to "milk" the seller as long as possible, staving off the NOD process. It's very difficult to have banks agree / negotiate on a SS with Non-Delinquent sellers.

9/07 - Believe it or not, I have heard of banks starting to negotiate in advance of delinquency if a loan is about to reset and there is a verifiable hardship that will prevent the Hemet homeowner from paying on their mortgage in the future.

They have to miss payments first; Or otherwise seller will request forbearance or restructuring.

DELINQUENT Sellers have much less to lose, as their credit is already damaged by "Mortgage Lates," and are in "arrears." They are typically IN DENIAL as well.

•   LENDERS HAVE TO BE "SOLD" ON THE IDEA OF A SHORT SALE:

FHA Does not do Short Sales. FreddieMAC does not accept SS, but is known to renegotiate loan terms, or created a window of forbearance. Conventional Lender's may do the same, but typically foreclose. Much depends on "The Market." This is best negotiated before delinquency.

Many Lenders will not respond at all.

"Private Money," such as a Second Trust Deed, will be the most resistant to agree to a SS, and almost always prefer to foreclose. They feel their investment is secured by the deed.
In our current cycle, persuading 2^nd's will be key, as many loans are 90-110% financed.

EXAMPLE:

(500K 1^st/ 100K 2^nd = Owe 600k) Property can sell for 520, leaving 2nd with "0" after commissions. 2^nd does not agree to SS. Seller or Agent approaches 1^st with 450k (50k less to 1^{st @500k}) and 50k to the second... Both agree to Short Sell in a declining market. The 2^nd can easily stall a short sale by refusing to cooperate.

9/07 - In todays market, the second lien holder is typically accepting $1,000 to $5,000.  You must realize that this amount is dictated by the first lien holder.  Although those in 2nd position do not have to accept the short sale, most seem to not be holding them up and accepting what they get - in a short sale they end up with nothing.

*ALL LIEN HOLDERS MUST AGREE TO A SHORT SALE. THIS MEANS A LOSS OF CAPITAL TO ALL THE LIEN HOLDERS. It is used for lien holders to "cut their losses," usually only in a "flat or declining market." Otherwise FORECLOSURE IS PREFERRED.

9/07 - This includes Judgements, Tax Liens and Child Support issues.  If these are undisclosed going into the deal, you can waste a lot of hours before finding out the deal cannot close.

•   IMPORTANT:

"Anti-Deficiency Law" states that a lender CANNOT go after personal assets if foreclosing on a "PURCHASE MONEY" loan.

•   A BIG "HOWEVER"...

Foreclosures on "REFINANCED MONEY," 2^ND TRUST DEEDS, AND MECHANICS LIENS ARE NOT SUBJECT TO THIS LAW, AND CAN GO AFTER PERSONAL ASSETS! So, lien holders like to know this and use it to threaten and motivate the seller to make payments. (Phone calls and letters).

*Even if it is an original "Purchase Money Loan," 2^nd Trust Deeds MAY STILL GO AFTER
PERSONAL ASSETS! However, JUDICIAL FORECLOSURE to obtain a DEFICIENCY JUDGMENT is a costly option, and takes a long time.

The MOST difficult option to get Short Sale Approval is when the seller voluntarily stops paying. Seller walks away, or disappears.

•   OBTAIN CLARITY ON HOW THE BANK WILL REPORT THE SALE
TO THE CREDIT BUREAU'S:

Anything less than "Paid In Full" IS DEROGATORY, and will damage credit scores greatly.
This is within the control of the seller and/or agent, assuming the bank will cooperate.

Lenders will "1099" (report to the IRS) the seller in the amount of ANY deficiency (unpaid principal), and the seller WILL BE taxed. A deficiency judgment is treated as "income" by the IRS, and is taxed accordingly.

Example: Shortfall of $50,000? IRS expects $12,500 as income tax, based on a 25% Income Tax bracket. Often the seller will sue the assisting agent for not disclosing this, of course.

•   BANKS TAKE UP TO 45 DAYS TO CONSIDER SHORT SALE:

And ONLY after receipt of a Short Sale Package. For this reason, prepare all parties involved for a longer escrow. Banks vary on their "consideration time." Contact lien holders for negotiation ASAP, at the time of the listing, and before you have a buyer. The banks need the time to weigh options: Lenders analysis of marketability in a SS, vs. the expected return or expense of foreclosure.

•   OBTAIN WRITTEN AUTHORIZATION FROM SELLER

This is needed for the access and release of information from lender about the seller and loan information. They will deny you information without written approval from seller. You will also need the loan number, zip code of Payment Notice is sent, and seller's SS #, to communicate with the Lender. Ask for a "Delinquency Dept," and for any known short sale procedures, current loan status, and ask the bank if they have filed for foreclosure, as the seller may claim to be unaware, or "with-held."

•   NEED TO JUSTIFY SS TO BANK AND/ OR SELLER:

Show comps that demonstrate the inability of the subject property to sell and still cover debts. Show declining market trend. If trend is increasing, there is little motivation by the bank.

To the seller, justification may be made on NOT having a short sale on the estimate of FUTURE INCOME. If they are expecting a return of income, it may actually be in their best interest to request forbearance or restructure. Have seller demonstrate future income to bank.

•   RE/ DEFICIENCY JUDGMENTS:

Occurs when "NON-Purchase Money" lien holders (ex. a Refi, a Mechanics Lien by a sub-contractor) files for a "JUDICIAL FORECLOSURE." Lien holders who have remained unpaid (IN PART OR IN FULL) after a traditional bank NON-JUDICIAL FORECLOSURE (AND NO BK WAS FILED) will file this.

DEFICIENCY JUDGMENTS are equal to the shortfall amount of the unpaid lien, PLUS the Lien Holder's costs, fees, and penalties. Remember: Only if there is a recorded lien, can you file for a deficiency judgment.

This amount WILL BE SENT TO COLLECTIONS.

•   SHORT SALE PACKAGE TO INCLUDE;

MARKET ANALYSIS (& APPRAISAL IF POSSIBLE)
LISTING AGREEMENT
HARDSHIP LETTER
SELLER'S FINANCIAL STATEMENT & 2 YEARS TAX RETURNS
PROOF OF CURRENT INCOME & MOST RECENT PAY STUBS
PAST 4 MONTHS BANK STATEMENTS
ESTIMATED NET SHEET

9/07 - Other items to include are anything negative about the local market - gangs, drugs, crime, school test scores, graffiti, Megan's law  - anything and everything to bring the value down.

•   BE SURE TO CONTACT ALL OTHER LIEN HOLDERS TO NEGOTIATE SHORT SALE. THIS MUST BE DONE SEPARATELY WITH EACH LIEN HOLDER.

9/07 - Wait for the first and then hit the second up - tell them time is of the essence and this is what the first has approved - allow yourself about 50% fluff to negotiate.


•   SOME TYPICAL SHORT SALES "CONDITIONS":

CLOSING DATE MUST BE FIRM
SALES PRICE MUST BE FIRM
BUYER MUST BE FIRM- NO ASSIGNMENT
AMOUNT OF PROCEEDS TO LENDER MUST BE FIRM
SALE "AS IS" MUST BE FIRM- NO REPAIRS PAID BY LENDER
THERE MAY BE CONTRIBUTION REQUIRED FROM SELLER
ZERO PROCEEDS MAY BE PAID TO SELLER
ZERO PROCEEDS TO BE PAID TO ANY ENTITY NOT DISCLOSED ON ESTIMATE
SELLER CANNOT ASSUME DEBTS OR COSTS OUTSIDE OF ESCROW
ONLY WIRE TRANSFER OF FUNDS ACCEPTED AT CLOSING
ANY REFUNDS AFTER CLOSING WILL GO TO THE LENDER
LENDER TO APPROVE FINAL HUD (NOT ESTIMATE!) PRIOR TO RECORDING

9/07 - I have found that lenders typically will not allow proceeds back to the buyer to help with closing costs - otherwise this list is fairly complete.

I hope you find this information useful.  If you are a homeowner, you can see what your REALTOR® has ahead of them and you can use this article as a checklist to gauge if your REALTOR® is up to the challenge.  If you live outside of the Hemet San Jacinto California market, if you want to call me and discuss your situation, I would be more than happy to hear from you and possibly refer a qualified REALTOR® that can service you in your area.

If you are a homeowner in Hemet San Jacinto or elsewhere in Southwest Riverside County or the Inland Empire and find yourself either facing foreclosure or feel that one is imminent please consider allowing me to help you with your current situation.

Wishing you all of the Best,

Now Have a Blessed Day,

John Occhi, Hemet CA REALTOR®
Mission Grove Realty

If you would like to make sure you never miss one of my articles, you can subscribe here

This blog and the contents written here is the intellectual property of John Occhi, Hemet California REALTOR®.  The views and opinions expressed are just that - views and opinions of John Occhi and those who comment.  Please note that I am not an attorney or a tax professional and any time I discuss either topic, I suggest you consult with the proper professional for relevant assistance. 

This blog is part of the ActiveRain Real Estate Network, which is a social network highlighting the best of Web 2.0.  Information is provided with the intent of educating and assisting home owners, home sellers, home buyers and real estate investors with information the can be used to make better real estate decisions. 

I am proud to be a full time REALTOR® with Mission Grove Realty who is proud to be a contributing member of the ActiveRain community.

If you would like to be added as one of my Associates, please click here

Finally, If you would like to receive a FREE ActiveRain Blog and receive free coaching by John Occhi, please join here