My Notes:
Topic: Understanding credit reports & The Ins and Outs of Short Sales
Speaker: Gary Nicolini; 10 years experience as a loss mitigator and real estate investor.
A. Understanding a Credit Report: A Mortgage Lenders Perspective
1. First and foremost above score and history is the applicants ability, stability, and willingness to pay.
2. Even if history shows a few 30,60,90 days late or a series of skipped credit card payments the applicant might still be ok as long as they were consistently paying their mortgage payments
3. Subprime is not dead. Lenders still doing 80/20 with sub 660 scores.
4. lenders will strongly consider major illness, physical injury, and unemployment as legitimate reasons for past credit problems.
5. lenders fully understand that not everyone pays on time and not everyone pays all of their bills every month…and this is why the sub prime mortgage market began.
B. This Ins and Outs of Short Sales
1. A great line to use when talking to loss mitigators is, “ I want to work with you to figure out a way to minimize your loss.” Another buzz line is, “ I have already determined the homeowners R.F.D” (reason for delinquency).
This is important because if you can figure out the RFD you will save your loss mitigators time in processing your package because part of the mitigators job is to determine the RFD. Another words, what red flag did the lenders miss during underwriting that should have tipped them off before closing the loan.
2. A payoff figure must be determined early in the game. Will the banks be giving up all or sum of their fees, penalties, etc? Are they willing to talk about reducing the principal amount?
If you get an absolute no to these questions then it might not make sense to pursue the short sale. You have to be choosy about if you plan on dedicating the next couple months of your life to working the short out.
3. The banks DO NOT want to believe that the owner paid to much for the house. They have faith in their appraisal and they will fight tooth and nail to defend it. It is up to you to show proof as to why the appraisal was/is inaccurate. This is where your CMA skills will really come in handy. Do not only use MLS comps for retail sales, use tax records of all closed sales, even quitclaim deed sales, sheriff sales, etc…you will also have to make adjustments. For example the subject house has no kitchen due to vandals and no bathroom due to backed up sewer water damage…yet your 3 comps show homes with upgraded bathrooms and professional kitchens. Illustrate how your making your adjustments…60K estimate from a licensed GC for bathrooms 80K estimate for kitchen.
4. If you’re an agent there is power in aging your short sale listing. Explain in writing how many days on the market…when you reduced…when you reduced again…how many buyers showed interest (zero)…any offers (none)…if so document the offer and explain in writing why it could not be accepted. This shows the bank that you are interested in “minimizing their loss.”
5. “Yes, it takes a very long time to get through to us (meaning loss mitigators) because we have about 100 similar files on our desks.” Loss mitigators are hourly employees sometimes salaried but always a 9-5 type of position. They don’t really care about you, your client, your situation, or anything else except completing their 9-5 day and going home.
6. The loss Mitigator DOES NOT MAKE THE DECISION to accept or deny a package. Their main role is to organize and prepare information, identify red flags, and submit information to a higher up. Sometimes a VP or a branch executive. Regardless, the way you treat them will be the way they deliver your info to the higher up. If you are rude and demanding then you will be put to the bottom of the file…to fake and fuzzy same thing….and DO NOT go above their heads because this will come back to bite you.
7. Again, banks do not want to believe they made a mistake by approving your homeowner. However, they want to minimize losses. They also want to avoid a bankruptcy filed by the homeowner at the very last minute right before the forced sale. If you can document your homeowners desire to file bankruptcy (via attorney letterhead) then you may have a better chance at getting the short sale done according to your terms.
8. From an investors point of view the only way to make money when buying a property short is to get it for a steal. On top of everything else, you must factor in 25-30% “fudge factor.” If the numbers are to close then move on and don’t waste your time. THINK: where is the market today? 6 months from now? What is your exit strategy? Do I have a pre-approved buyer ready and waiting?
9. If the home has mold, water damage, asbestos, lead paint, backed up sewer line, structure issues, it is highly unlikely that a lender will lend on it. In severe cases like these you will need cash or an equity line. Then you must factor in money for repairs…unless you have cash or a running equity line you will need cash for repairs.
10. Homeowner of Short Sold property: What happens to the money difference between what was owed and what the short sale sold for?
a. A charge off will appear on the credit history
b. You might get a 1099 statement from the bank showing the difference as earned income. This amount is not as much as what would have been if the home went full foreclosure but its still a hard drink to swallow.
c. You can petition the IRS for debt forgiveness
d. However, you will still owe the bank. The only way around this is to enter a clause in the contract stating that all debt will be forgiven (same language in a deed in lieu of foreclosure).
11. You can find candidates for short sales for little or no cost.
a. Track your farm market. Know everything going on in your farm such as deaths, divorce, who is getting unemployment checks, who has recently become dependant, who received NOD notices, preforeclosure notices, etc. These are your distressed homeowners and these are the people who will likely be headed towards foreclosure.
b. Make friends with the postman, the nosy neighbors, visit all FSBO’s
c. You can use a variety of pay services providing relevant NOD and preforeclosure data
Q&A
12. If you own several properties as an investor and you deliberately fall back on one and get a short sale processed can the banks go after your other assets?
a. Yes. They can place judgments and/or liens.
13. What are the top red flags for credit reports?
a. Work history instability
b. If you’re a contractor what is your net worth; not gross income; not what you deposit into a bank account.
c. Bank statements over a 3-6 months.
14. What’s the average in NJ for foreclosure proceedings?
a. About 13 months
15. Give an example of a short sale package that immediately gets red flagged and denied.
a. A short sale package never gets immediately denied and no real red flags because all homes in preforeclosure are eligible for short sale.
16. What is in a standard package?
a. Each bank is different. Make sure to ask what components they need.
b. Almost always they want a copy of the contract, tax returns and pay stubs…if you want to get the job done you need a dramatized letter of hardship…well written, not to long, clear, documented, and to the point.
17. From first contact to closing how long do short sales usually take?
a. They vary anywhere from 2 months to 6 months (6 was the longest due to closing postponed 3 times). The first month you wont hear much from the bank because your information needs to be processed.
18. Are time frames getting shorter?
a. Yes. Banks are increasing their staff due to high rates of preforeclosures/NOD’s
19. What is the typical rate of purchase? On average how much of a percent reduction will occur?
a. Banks want to minimize losses but they wont give away property at this point like in the early and mid 80’s. Most Short Sales yield a 30% discount. Think about that on a 1,000,000 property.
20. What was the most amount of money that you personally made from 1 short sale deal?
a. The most I have ever made on a single short sale was $250,000.
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