What’s all of the hullabaloo about short sales? One the one hand, they are a nightmare and on the other hand, they are a saving grace. Both statements are absolutely correct. Here, I’ll attempt to provide a Realtor’s perspective on the what’s, why’s and how’s of short sales.
By definition, a short sale is when a homeowner needs to sell a property that is worth less than the total amount of encumbrances plus costs to sell it. Basically, they are upside-down and need to sell for one reason or another. Just like homeowners once applied for a mortgage when they purchased their house and proved to the bank they could afford it (well, not necessarily – but theoretically!), that same homeowner in a short sale must essentially “un-apply” for their mortgage and prove to the bank that they can no longer afford it. The objective is to ask the bank to forgive the difference between what they owe and what the house sells for (plus fees, penalties, etc…). That is the process that becomes very hairy and rightfully gives short sales a bad name.
So a short sale listing begins just about like any other listing….a contract is signed, pictures are taken, a sign goes in the yard, the property goes into the MLS, open houses take place and we wait for an offer. The only difference in the beginning is that a listing agent will require additional documentation from the seller at the time the listing is taken. These documents comprise the “short sale packet” and typically consist of bank statements, pay stubs, tax returns, W-2’s, a letter of hardship, income and expense worksheet and authorization for the Realtor to receive and convey information with the bank. This “packet” is basically put in the Realtor’s file and sits there until we have an offer.
Once we receive an offer(s), we typically counter back and forth – not necessarily for price, but for terms and services. Eventually an agreement is reached and it is fully executed and includes a very important document called the Short Sale Addendum that acts as a contingency, protecting both buyer and seller should the bank not agree to approve a short sale, the process exceeds the contingency date, or the bank’s terms are not favorable. In that case, either buyer or seller could usually cancel without liability.
The listing agent then takes that offer and puts it together with the short sale packet that was collected in the beginning of the listing, then goes to their escrow officer to request a HUD. The HUD is the estimated cost sheet that itemizes all costs associated with the sale, and calculates the dollar amount the bank will net at the end of the sale.
Very important – in order for the HUD to be correct, all anticipated seller costs must be accounted for. This includes all mortgages, property tax arrearages and prorations, termite repair costs, judgments or liens (a title pre-lim should have been ordered and received before a HUD can properly be figured), homeowner’s association dues and penalties (a HOA demand must have been ordered at the time of listing), Realtor’s commissions, escrow and title charges, and any other costs that would be associated with the sale. All of these figures are added up in the HUD and their total is subtracted from the purchase agreement price. The figure derived is how much the bank will net. It may look something like this: taxes, termite, HOA liens, commissions, title and escrow charges, etc…, total $25,000. The purchase price is $300,000. The bank will net $275,000, even though their payoff balance may be $535,000. Thus, they will be asked to forgive $260,000.
The HUD, along with the short sale packet, offer and listing agreement are all sent off to the bank. This begins what I call the “purgatory” phase of the short sale. We wait, and wait, and wait. The listing agent, whom I refer to as the “quarterback” is in contact with the bank and nudges the file along by contacting the bank every week, then reports to the buyer’s agent any progress that has been made, but more importantly that they haven’t forgotten about them. More often than not, the bank will not receive all of the pages that we sent to them. They will ask for it again, and we’ll send it to them. And they won’t receive what was resent, and we’ll send it again, and again, and again. The bank will, at some point, order a BPO, or “Broker Price Opinion,” which is a property valuation done by a Realtor, rather than an appraiser.
The file will muddle around in the bank’s system for weeks and months, going from one person’s desk to another, until it eventually makes it to the final “negotiator.” This is the person who takes the BPO, the offer price, all of the financial documents that the seller provided, the HUD and the hardship letter, and acts as a liaison between the “investor” and the short sale listing agent. If there is anything missing or needs to be updated, the negotiator will call the listing agent and request whatever they need, and they will go over the HUD with their very sharp pencil and tell us if there is anything they refuse to pay for, such as HOA fees, termite repairs, etc…. They will require that we have the HUD revised per their requirements and we have to resubmit this to them. Most of the time they will give us a deadline, like 24 hours, to get this done. If we don’t comply within that time, they will close the file and we have to start all over.
On a side note, but of relative importance, these “banks” we are dealing with are usually not the investors. Meaning, we can be dealing with Wells Fargo, Chase, or Bank of America but they are acting as a “servicer.” The investor is Freddie Mac, Fannie Mae, or Bank of New York, etc…. (This is similar to the relationship between a “landlord” and a property management company.) The decision on whether or not to accept the short sale and the terms under which the short sale may be approved ultimately lie with the investor, not the bank (servicer) we are dealing with. There can also be multiple investors which make this process even more complicated. Further, there are government programs that some banks subscribe to which require them to exhaust the loan modification possibility before exercising the short sale option. There is much more that goes into this equation than I have time to explain here, but suffice it to say that the approval process resembles a jigsaw puzzle from Mars.
The negotiator that eventually gets the file “issue spots” the short sale packet on behalf of the investor. Once they have determined that there is a qualifying hardship (job loss, relocation, divorce, illness, etc…), a reasonable offer, have all of the required documents and whittle down the costs on the HUD, they submit the file to the investor. Some investors take 2-3 days to approve, some take 60-90 days or more. Investor approval timelines are in addition to the servicer’s timelines.
It gets a little tricky when there is more than one underwater mortgage on the property. That is very often the case and when it is, both note holders must agree to accept less than what is owed. Let’s say there is a first mortgage for $420,000 and a second for $115,000, with the value being $300,000. In cases like this, the first will typically give the second $3,000 as a “bone” for the second to release their interest in the property and allow the sale to go through. If the second requires more than that $3,000, such as $15,000, then the listing agent has some work to do, and is hopefully a skillful negotiator. How are we going to scrounge up an additional $12,000 for the second? Well, we can go to the buyer – perhaps they have some money they can contribute; we can ask the seller – who probably hasn’t been making a mortgage payment all this time, and we can go back to the first mortgage holder and ask them to cough up more than a mere $3,000. We can also see if the second will come down from $15k and take only, say, $9,000. Hopefully by tapping into all of these resources we can cover the amount. If not, then we have an unsellable house.
Bear in mind, if the house forecloses, the second gets wiped out and will receive nothing. However, some of these mortgages have mortgage insurance and they can get paid if it goes to foreclosure. This is not to be confused with PMI which is usually required if a bank holds a note of more than 80% of the home’s value. (PMI can be avoided if a home buyer puts at least 20% down payment or if they get a combination 80% loan plus a 20% loan – the latter is rarely, if ever, done anymore.)
All of this is going on while the foreclosure clock is ticking. It is the Realtor’s job to watch out for those timelines and be sure to request the bank to postpone the Trustee’s Sale if one is scheduled before we can close escrow. It is important to note that most banks do not let their foot off of the gas just because there is a short sale going on. They will continue to file Notices of Default and Notices of Trustee’s Sales, and often will only postpone a Trustee’s Sale within 48 hours of the sale date.
So if we have a sale on a Friday, we can’t even request a postponement before Wednesday. When we do request the postponement, we must follow up with the trustee to verify they “got the memo” from the bank, instructing them to stay the sale for 30 days. It is not uncommon to have the bank tell us they have postponed it, and yet the trustee is not aware. If this happens and the sale takes place, it is very difficult, and most of the time impossible, to turn back the clock. Once the house is foreclosed – even if it slipped through the cracks – the short sale is dead. Done.
If the all of the stars align and we make it through prickly patch, the day will finally come – we get the short sale approval! It may be 3 months, 5 months, 9 months, a year or more that it takes to get this coveted document. At this point, we must hope the buyer is still interested in the house. If not, depending on the bank, the whole process starts all over again should the buyer be replaced. Bank of America is notorious for closing files and starting anew with a different buyer – even if that buyer’s offer is the same or higher. Also, we need to have all approvals from all note holders, depending on how many loans are on the property. Sometimes the approval figures don’t match the HUD and we have to negotiate some things, like taxes, liens, etc….
We also examine the approval for “deficiency” language and refer them to a real estate attorney – particularly one that specializes and has specific knowledge of real estate deficiency judgments in short sales. This area of the law is very complicated, and while not new – it has been dormant for many years. The current real estate climate is unchartered territory, and how the law applies in these cases can be widely interpreted.
In addition, if the debt is forgiven, the tax ramifications can be compounding. Many folks confuse “capital gains” and “forgiven debt” when figuring out tax liabilities. The two are separate events. We refer our sellers out to a knowledgeable tax professional for appropriate advice.
If the buyer is still interested (we have a much better chance of them still being on board if the listing agent has had good communication with the buyer’s agent, keeping them motivated throughout the lengthy process), then we typically have 30 days to close escrow. The banks give us their deadline to close (usually 30 days) and if we exceed that timeframe, they will institute a penalty of anywhere between $65 - $150 (approximately) per day until escrow closes. The buyer must be vetted before ever accepting an offer, because they can easily lose interest or have glitches obtaining their loan if they are not highly qualified. The last thing we want to do is to go through all of this, only to have a buyer not qualify for their loan after all!
At this point, the buyer orders an appraisal, home inspection, gets full underwriter approval on their loan, the seller starts packing, and escrow finally closes. Whew!
So why go through all of this, rather than let the house foreclose? Several reasons come to mind, but mainly because after a seller completes a short sale, they can purchase again in as little as 2 years. If they allow the house to foreclose, they must wait 5-7 years – and even then, guidelines to purchase are much stricter. Also, a recourse second mortgage can usually pursue a deficiency judgment if a first mortgage forecloses; in a short sale, that second mortgage gets addressed and hopefully forgiven. Further, a short seller is not contributing to a national crisis because they are rolling up their sleeves and assisting the bank in unloading the asset, not just walking away and letting the bank, neighborhood and community deal with it.
There are some occasions when a foreclosure does benefit a homeowner; this is why it is crucial for a distressed homeowner to get sound advice from an expert in this field. In addition, it is vitally important to choose a Realtor who has vast experience in these situations. Short sales are like the brain surgery of our industry; they are not for the part time novice. Believe it or not, skilled short sale listing agents can have very high closing ratios, so one shouldn’t let the process intimidate them. These are “business as usual” situations that short sale Realtors are accustomed to.
So welcome to my world.....my office, knock on wood, has never lost a short sale to foreclosure and has never had a short sale denied. We are certainly not alone in our high success ratios and I don’t say that to toot my own horn, rather to illustrate there is achievement in this relentless arena.
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