Short Sale 101 REOPro Certification Training

Short Sale 101 What is a Short Sale? A short sale occurs when the sale price of a home is insufficient to pay off all outstanding liens and associated required closing costs. If the buyer is unwilling to increase the purchase price and the seller is unwilling or unable to advance the additional funds to make up the difference, then the sale will not usually proceed to closing without special arrangements. In this instance, the seller may ask all or some of the lien holders to release their lien for less than the full amount owed. Note Lien holders may determine that it is in their best interest to cooperate to facilitate the pending sale and to accept a reduced payment rather than risk receiving a smaller payment, or nothing at all, should there be a foreclosure action or bankruptcy action. Ordinarily, the more junior the lien position, the weaker the lien holder’s negotiating position. Approval of a short sale release of lien need not include a release of liability for the associated debt, though the borrower/seller may seek to have a full release included as part of the deal Justifiable reasons a seller would participate in a Short Sale. 1. Verifiable long term (3 months or more) financial hardship. 2. The seller has no assets such as savings, 401k, stocks, bonds, retirements accounts, etc.. 3. Ineligibility to participate in a Loan Modification or Workout. Justifiable reasons a bank would participate in a Short Sale. 1. Less expensive than the legal process of foreclosure. 2. Asset protection, homeowner agress to be responsible for the property maintenance and repair until closing. 3. The bank can expect to get a price closer to market vs. what they can get at auction, if anything. Benefits of a Short Sale. 1. Retain some dignity in knowing that you sold your home. 2. You won't suffer the social stigma of the "F" word: foreclosure. 3. No mortgage payments to make, unless you choose to make them. 4. You can meet the new owners. 5. You will be eligible, under Fannie Mae guidelines, to buy another home in 2 years instead of 5 years. 6. If your credit report does not reflect a 60-day+ late pay, under Fannie Mae guidelines, you will be eligible to buy another home immediately. Drawbacks to a Short Sale 1. Waiting for the bank to respond to an offer is frustrating. 2. The bank will want to examine personal records such as tax returns, bank accounts, assets and liabilities, in addition to asking for a hardship letter from you. 3. Accommodating buyers will mean keeping your home in spotless condition for weeks or months until an offer is received and putting up with traffic through your home. 4. There is no assurance the bank will accept a short sale offer. 5. The derogatory credit will remain on your credit report for 7 years. Caution to Sellers CAUTION TO SELLERS, before entering into a Short Sale agreement, the Seller should seek professional legal, tax, and credit advice regarding the advisability, terms, and important tax and credit implications. All available alternatives to a Short Sale should be carefully considered. Real estate licensees cannot give legal or tax advice. A Short Sale may have a negative impact on the Seller’s credit rating. A Short Sale may result in taxable income to the Seller or taxable gains on the property. The Seller may be required to pay back some or all of the shortage after the Short Sale is complete. The Seller will typically receive no cash from a Short Sale. Any proceeds will usually be paid to Third Parties. Lack of Third Party Approval or other complications could delay or prevent the completion of the Short Sale. Qualify the Homeowner It is imperative that you, as a Listing Agent, qualify the homeowner before you agree to list the home short the balance due. Each bank has their own guidelines and standards before they will consider a Homeowner for a Short Sale however, most all banks will request the Homeowner to furnish a variety of documents to help them determine if a Short Sale is viable as a part of their qualification process. Be prepared to provide the bank the following documents.... 1. 3rd Party Authorization to Release. (This document needs to be signed by ALL parties involved in the mortgage) Include all lien holders and, associated account numbers 2. 3 Months of pay stubs from ALL working adults residing in the home. 3. 3 Months of bank statements from ALL working adults residing in the home. 4. 2 years most recent tax return from ALL working adults residing in the home. If self employed all addendums MUST be included. 5. Hardship letter from the homeowners. (Must incldue the homeowner asking for the Short Sale as well as debt forgiveness). 6. Estimated HUD-1 or Seller's Net Sheet 7. Listing Agreement. Include your price calculations and justifications 8. CMA (Comparative Market Analysis) must justify your listing price. 9. Financial Form. (A list of the homeowners itemized assets and liabilities) 10. Order pay off letters from all lien holders. (Be sure these letters include the promise to release the lien upon the successful closing as well as the exact dollar amount they will accept.) 11. Verify if these is a foreclosure sale date. You can do this by first contacting the servicer directly however, you may want to check county records or with your local courthouse to verify if any public sale has been posted. 12. Any missing documents MUST be accounted for. In other words, if your seller doesn't have 3 months of bank statements, he must write a separate letter to the fact and explain why those statements are missing. The same is true for any variety of missing documentation. Note Banks can and do Pre-Approve Short Sales. It's called a "Approval to Participate" and includes pre-foreclosure sale procedures including your negotiators name, number and sometimes their email, property sales information such as the net, list price, AS IS value, deadline to obtain a qualified buyer, deadline to close and all other program criteria, property occupancy & Maintenance, specifically what the bank will and will not pay for and the responsibilities of the homeowner. Additional Documents for the Agent's Protection It is a good idea to include some Short Sale specific disclosures in your Listing Agreements and those could include..... 1. A Short Sale Addendum that outlines the fact that all offers are subject to 3rd party approval. 2. A "AS IS" Addendum that outlines the fact this property will be sold "AS IS" with no gurantees or repairs made, stated, expressed or implied and, the buyer is acquiring the property with all faults. 3. All offers are subject to close on or before 90 days after binding agreement by all parties involved. Short Sale Pricing Strategies Pricing the property is critical to the success of your Short Sale. The property should be listed at Fair Market Value in the property's "AS IS" condition. The term "AS IS" notifies any potential buyer that they are taking the property at their own risk, without recourse against the seller for the condition or performance of the home. "AS IS" translates to "with all faults". When pricing the home, a common "AS IS" calculation is done by completeing your CMA (Comparative Market Analysis) and then subtracting the estimated repair cost. It's important that you show these calculations and document the condition of the property as justification for your listing price. This informaiton should be provided to the bank as a part of your Short Sale Listing package. The bank will take your pricing strategy and compare that with the Internal BPO (Broker Purchase Opinion) they order, as well as with any previous or future appraisals. It is important to understand that any unreasonable pricing strategy will put your request for a Short Sale at risk. A common misconception by Realtors is that the bank doesn't know how much the property is worth however, these same Realtors fail to consider that the home will have 2 other price opinions outside of their own and, they are the Internal BPO ordered by the current mortgage servicer as well as an appraisal by the buyer's bank (if the buyer is obtaining a loan). If the Internal BPO comes back with a large variance, it will delay the Short Sale and the homeowners bank will request a 2nd BPO or possibly an Appraisal. Each bank has their own policy as to how they will resolve pricing variance situations so to make a blanket statement as to how these issues are resolved isn't practical. Remember, it's the goal of the bank to salvage as much as they can from this sale. It can be speculated that most likely they are going to counter for the higher price based on the higher opinion they received. It is generally a good idea to avoid a price variance if at all possible. These situations create frustration by all parties and can cause a spirit of incooperation. The best way to prevent these situations is justify your pricing strategy in such a way that leaves no doubt in the eyes of the Negotiator that they are getting a deal Note The foreclosure process does not stop while the property is listed. YOU MUST ASK FOR A POSTPONEMENT OF THE FORECLOSURE SALE. Most banks will not grant a foreclosure postponement until they have a legitimate offer pending.