WHAT IS A SHORT SALE?
A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed.
Example: If the unpaid balance of a loan is $500,000 and the property sells for $400,000 under a short sale the lender might accept $400,000 as payment in full.
WHERE MIGHT I RUN A CROSS A SHORT SALE?
•· Listing Appointment
•· Contract Presentation
•· Trustee Sales
•· FSBO
•· MLS
WHO IS A CANDIDATE?
Anyone who owns a home whose current market value is less than they owe and cannot afford to make the monthly payments. Typically they are currently late by at least a month, which puts them in default. But that does not always have to be the case.
The most common reasons for default:
•· Health issues
•· Loan payment increase/Interest rate adjustments
•· Job loss/Laid off
•· Divorce
Most people in this situation think that bankruptcy or foreclosure are their only options. These options destroy credit, cause embarrassment and strip the owner of their dignity.
Not all lenders will accept short sales. With the information you provide, they will determine if it makes more sense to foreclose. However, foreclosure is absolutely their last resort.
If you are involved in a short sale, recognize it will be an uphill battle and there are no guarantees. Knowledge and preparation will be vital to your success.
HOW DO I HANDLE A SHORT SALE AND WHERE DO I START?
Determine if the property is actually marketable
•· Are there any other loans on the property?
•· Are there any other liens on the property? (IRS, HOA, Mechanic liens etc.)
•· Are there any judgments on the sellers?
•· Are the sellers currently in bankruptcy?
PREPARE THE SELLER FOR LENDER'S DEMANDS
A lender is not going to agree to a Short Sale unless the seller has NO EQUITY and is unable to repay the difference between the sales price and the existing loan. The seller will need to provide lots of information to make it work.
AUTHORIZATION TO-RELEASE INFORMATON
Have your clients sign a release (example below) allowing the payoff lender to negotiate and release information to you, the title company, lawyer and to anyone else who will need information regarding your clients. Lenders will not disclose any of your clients' personal information without an Authorization from your clients.
This authorization should also include:
•· Clients Name
•· Property Address
•· Loan Number
•· Date
All authorized parties' names and contact information
DO NOT OVER PROMISE AND UNDER DELIVER
Let your client know how difficult this process is. If you pull it off you will be a hero. If you don't they will take it much better if you don't fill them with empty promises.
CALL THE LENDER
It may take a few tries but you will need to find a supervisor in the loss mitigation department. Try not to waste time with people who ultimately are not the ones making decisions. Be aware, every lender has a slightly different protocol.
It is best, after the initial contact, to communicate with Lender through e-mail or fax. Always ask when the best time to get back to them and by what means. Often, the best time to reach them is in the first hour of the day. Don't forget about the time zones.
IT'S RECOMMENDED THAT ALL BORROWERS SEEKING A SHORT SALE
•· Call an accountant to discuss tax ramifications
•· Obtain legal advice from a competent real estate lawyer
Be aware! The IRS currently considers debt forgiveness as income and lenders have and will send 1099's to the borrowers.
GENERALLY SPEAKING YOU WILL NEED THE FOLLOWING INFORMATION
•· Authorization to release information
•· Comparative Market Analysis
•· Hardship Letter
•· Preliminary HUD-1
•· Proof of Income & Assets
•· Ratified Sales Contract
•· Listing Agreement
COMPARATIVE MARKET ANALYSIS
Prepare a CMA that is professional, current and supports your cause. Remember, sometimes payoff lenders do their own research so don't get CRAZY!
Typically a Lender will order a Broker's Pricing Opinion or "BPO". Get used to this term. It is here where you can make or break a deal!
HARDSHIP LETTER
The more compelling the better. This statement of facts describes how your client got into this financial bind and makes a compelling plea to the lender to accept less than full payment. Lenders are not inhumane and can understand circumstances beyond your client's control.
Be advised, Lenders are not particularly empathetic to situations including dishonesty or criminal behavior.
PROOF OF INCOME ASSETS
•· Provide past 2 years tax returns, this will show Investment/Interest Income
•· Provide past few months bank statements
•· Give brief description of debts and deposits and explain anything out of the ordinary.
You need to advise your clients to be truthful. If your client made a large withdrawal or large payment, make sure to provide an explanation for this to the lender. The lender will review the original loan application and might pull a new credit report.
PRELIMINARY HUD-1
The payoff lender will want to see an accurate itemized list of the transaction which includes:
•· Sales Price
•· Earnest money deposit
•· All payoffs to clear title
•· Commissions
•· Real Estate Taxes
•· Recording Fees (etc.)
Don't forget the seller CANNOT receive proceeds
BEWARE
Lenders have been through this procedure many times and have seen many creative ways to try and get over them.
Money under the table, bogus home improvement charges, mechanic liens, beefed up settlement charges, etc. Do not get involved - this is extremely important! It is called fraud and, if caught, the results are not pretty. Do not be lured by individuals who suggest these practices.
PRIVATE MORTGAGE INSURANCE
Keep in mind PMI mitigates the lenders loss usually in the 20% range.
RATIFIED SALES CONTRACT
The lender will want a copy of the fully ratified sales contract with all addendums. Don't forget that in order for the lender to approve a short sale they might want changes to the contract. They generally will not pay for (or allow the seller to pay for) any inspections like termite inspections, home inspections, chimney inspections, etc. Do not waive your right to obtain these inspections and make sure your offer is contingent upon acceptable results. The lender may also want to increase earnest money deposit.
LISTING AGREEMENT
The lender wants the listing agreement mainly to see the total commission and also when the property was placed on the market.
EXPECT COMMISSION NEGOTIATIONS
Regardless of the commission the seller has agreed to pay, in a Short Sale, the lender is actually paying the commission. Since the lender is losing money, the lender will likely negotiate the commission directly with the listing broker, who will then share the commission with the selling agent.
• If you are the selling agent, protect your full commission by having an agreement with the listing agent, in writing, which states you will receive your full commission regardless of what the payoff lender does. Example: Total commission is 6% split between agents. The lender comes back with an approval, which will only allow for a 4% commission. With the proper agreement the Listing agent would only be due 1%.
• As agents you need to use the reduced commissions as a tool to get referrals. You are agreeing to accept less than the agreed upon fee, in return for this you should be demanding referrals.
GIVE THE LENDER A DEADLINE
Give the lender a timeframe in which to respond, after which you can terminate your quest. If the lender is under no pressure, other files will get priority. If the property is already in foreclosure make sure you have the loss mitigator. Notify the appropriate department. In many cases you will need to get a forbearance agreement or a stay of foreclosure.
Some lenders submit Short Sales to a committee and have a four to six week turnaround. If you are organized and prepared and submit a complete package, you can usually receive an answer in less than three weeks. Make sure you already have a contact person lined up, and send the package to them directly.
Sellers and buyers need agents with short sale experience. As you can see, there is a lot that goes into a short sale transaction.
If you follow these steps you should be well on your way to negotiating a successful short sale.
SHORT SALE CHECKLIST:
- Authorization to release information
- Comparative Market Analysis
- Hardship Letter
- Preliminary HUD-1
- Financial Statement (assets & liabilities)
- W-2's (2 years)
- Tax Return (2 years)
- Bank Statements (3 months)
- Paystubs (last 2)
- Ratified Sales Contract
- Listing Agreement
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AUTHORIZATION TO RELEASE INFORMATION
Loan #:
Name(s):
SSN:
SSN:
Property Address:
For the purpose of assisting in pursuing and negotiating and loss mitigation alternative, I do hereby authorize ________________________ (my lender/mortgage servicer) to release or otherwise provide public and non-public personal financial information contained in my loan account which may include, but not limited to; loan balances, final payoff statement, loan status, payment history, payment activity, and/or property information.
We, ________________________, will take reasonable steps to verify the identity of the 3rd party authorized below, but will have no responsibility or liability to verify the true identity of the requestor when he/she asks to discuss my account or seeks information about my account. Nor shall we, ________________________, have any responsibility or liability for what the requestor may do with the information he/she obtains concerning my account.
I do hereby indemnify and forever hold harmless ________________________, from the actions and causes of actions, suits, claims, attorney fees, or demands against the ________________________ which I and/or my heirs may have resulting from the ________________________ discussing my loan account and/or providing any information concerning my loan account to the below named requestor or person identifying themselves to be the requestor.
_________________________________ or the representative of ________________________________________
Name Company
Telephone: ( )
Fax: ( )
E-mail:
_________________________________ or the representative of ________________________________________
Name Company
Telephone: ( )
Fax: ( )
E-mail:
Signature(s):
____________________________________________________ ____________________
Date
____________________________________________________ ____________________
Date
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