Testimonials

Hi Tim,

I just wanted to send you an email and really reiterate what a pleasure it was working with you and your team on our recent transaction! I’ve NEVER had a short sale close so smoothly and efficently! It was truly a pleasurable experience….I only wish ALL REALTORS who ATTEMPTED to list short sales were as dilligent and effective with communiting with the bank and getting all documents submitted correctly and in a timely matter. I’m positive that YOU are what made the difference! My client and I thank you!

I look forward to working with you again in the future! (even for another short sale)!

Warm Regards,

Erika Hudson
REALTOR (R)
ZipRealty, Inc.
Licensed in NC
My Profile: http://www.ziprealty.com/agent/ehudson

Short Sales and the Military

Special Military Benefits Make Short Sales Easier

One of the causes of financial distress is relocation.  Being in the military is a frequent cause of relocation, so it makes sense that there are special programs for short sales and other assistance for the military.  Members of the Armed Forces do so much for our country that it is important for real estate agents to provide special service to them. 

Military personnel and federal employees who are “under water” with their mortgage can benefit from a program by the Department of Defense that is administered by the US Army Corps of Engineers under the Base Closure Act known as HAP (Homeowner’s Assistance Program).   This program was extended under the American Recovery and Reinvestment Act of 2009.    For full information, go to http://hap.usace.army.mil/

This program was originally designed to apply to members of the military or federal employees who owned a principal residence in an area where a base closure or realignment caused the values of the homes to decline. However, it has been extended to military personnel who were reassigned and had to move more than 50 miles during the mortgage crisis.  These military homeowners qualify if they were reassigned between February 1, 2006 and September 30,  2012, they purchased the principal residence that they are selling before July 1,  2006 and they sold it between July 1,  2006 and September 30,  2012.

It also applies to members of the military and federal employees who were wounded in the performance of their military related duties after September 11, 2001, as well as the surviving spouse of someone who was killed in action after that date.  The website encourages people who may not fit all of the requirements to apply anyway to see if they can get benefits.

The website says that “HAP provides assistance in four ways. For eligible applicants, the Government may:

1. Reimburse you for part of your loss from selling your home.
2. Assist you, if you don’t have funds from the sale of your home to pay-off your mortgage.
3. Purchase your home by paying off the mortgage.
4. Help, if you default on your mortgage. “

For short sales,  the private sale reimbursement program is the most applicable.  Under that program,  the military member or qualified government employee sells their home and gets reimbursed for some of the losses on the sale of the home.  This reimbursement is used to pay off the lender so that if there are enough proceeds the lender gets fully paid.  If not, it is a short sale that is partially reimbursed.  The website indicates that the amount of reimbursement can be 95% of the difference between the value of the house before the base closure and the current value (or sales price), but it also indicates there can be a payment of 90% of the original value of the home, with the added value of any improvements to the home.  The seller can also be reimbursed for closing costs, including the real estate commission.  

So, the home is sold with a short payment to the lender, but with an agreement to reimburse the lender later when these benefits come in.   This is an excellent use of the short sale process, as it gets the seller moved gracefully and may get the lender fully paid.  At a minimum, the lender will get more than just the sales proceeds of the short sale, as the reimbursement is in addition to what the buyer will pay for the purchase price.

So, if your seller is in the military or a qualified federal employee, look into these special benefits.  The members of the Armed Forces deserve to get every benefit allowed, as they have definitely earned it.

Short Sale Abuse

Unfortunately, there are people who will try to take advantage of other people’s misery in a real estate short sale.  I get emails daily by “coaches” who want to sell me a program of how to short sale a home in order to make money off shorts sales in a manner that I find distasteful.  This is not the kind of Realtor training that I want to be involved in.

The schemes have two basic approaches for the property for sale, one by using an option to purchase and another using a trust.  Basically, they start by teaching their students to find people in trouble with houses for sale, then put those people in even more trouble.   I do not think it is right to do that to one of my neighbors in Raleigh, or anywhere in North Carolina.

The student is supposed to approach someone selling a home who needs to short sale their home and tie up the property using an option or a trust agreement.  In other words, the student looks for a MLS listing that should sell for $200,000 and makes an offer of $160,000 to a family that is desperate to sell.   Using the option, the student pays as little as one dollar to have the option to purchase the home, and gets the owner to sign the contract.   Remember, this is an option to purchase, not a promise to purchase for a traditional sale.

The student submits a short sale package to the lender, saying that they are paying a reasonable price.  At the same time, the student puts the home back on the market, tries selling the home for $200,000 or more.   If the student can get the mortgage loss mitigation department to take a short payment based on the price of $160,000 and if the student can find another buyer to pay $200,000, then the student exercises the option, buys the property and immediately resells it for a profit.    In short, the holder of the mortgage does not get the payoff it deserves, the property owner does not get to the equity they deserve, and the student takes the money that should be paid on the home mortgage.   In stead of loss mitigation, this is loss maximization for the lenders who make mortgage loans.

So, what is wrong with that?  If all the other parties are willing to let the student take advantage of them, why shouldn’t the student profit? 

Lets analyze a completed sale first.  The student is telling the holder of the home loan that they are paying off as much as possible of the loan on the home.  Also, the student may be leaving the people with homes for sale with the obligation to pay the balance of the money that is not paid on the home mortgage.  The owner of the home may also have an obligation to pay income tax on the amount that the payment to the bank is “short”.

After the sale closes, there will be some mortgage lender that will take a simple look at the tax records and see that the home sold for much more than the lender saw on the HUD-1 or closing statement.  Then, the mortgage lender will get its lawyers to work to recover the ill gotten gains, as well as any other damages they can claim.  The government prosecutors may get involved to teach the student what happens when you mislead institutions that make home loans.

Next, let’s analyze sales that do not close.  In today’s market, a well priced home sells, an overpriced home does not sell.  When the student raises the price to try to make a profit, the chance that the home will sell decreases dramatically.  The family that owns the home is expecting a normal home buying experience, possibly hoping to stop foreclosure when the student buys the home.  That family gets an education on the difference between an option and a sales promise when the property does not sell.  When the student does not get another buyer to pay an inflated price, the student leaves the option money behind and does not buy the home.  In many of these schemes, the option money is one dollar.  So, the family does not get to stop foreclosure, they get to endure a foreclosure sale,  and have one dollar for all the heartache they went through.  Also, America gets more foreclosure homes.

I have a hard time with teachers who tell students to find people who are begging for a life preserver to keep them afloat.  Then, they teach the student to throw them an anchor that is disguised as a life preserver that will drag them under.  These teachers have stories about a few of  their students who have made large amounts of money taking advantage of uneducated sellers and mortgage lenders that are so desperate for cash that they will approve a low short sale.   This is not how you do a real estate short sale, this is how your increase your chance of a foreclosure.  We should provide Realtor training to prevent foreclosures.

When someone approaches you with a scheme like this, just remember “thou shalt not steal.”

Don’t Have Short Sale Moving Problems

In a real estate short sale, you have a seller with no money who needs to move out of the property. As a part of Realtor training that I have done for agents in Raleigh and Cary, North Carolina, we have to discuss how moving costs money,  and have a plan for the proper thing to do.

The best answer occurs when the home mortgage lender allows some payment to the seller at the closing of the home sale that can be used for moving expenses. Some payment is permitted under the HUD Preforeclosure Sales Program to the seller, a sales program used to stop foreclosure and allow the mortgage loss mitigation of a short sale to replace a foreclosure sale.  In general, the seller gets $750 at closing. If the property sells quickly, the seller gets $1,000. This money can be received in cash at closing and used for anything the seller wants, such as moving expenses. The seller will also be reimbursed for the cost of the appraisal and title search required by this program and a portion of the legal fees incurred. So, the seller can get some additional money back at closing, even though the seller does not fully pay off the mortgage loan.

Some short sale agents tell the buyer to pay money to the seller outside of the closing, or outside of escrow, so it does not show up on the closing statement.  One of the requirements for short sales is that all parties have to certify to the lender getting the short payment that the seller is not getting anything out of the sale.  I disagree strongly with having the buyer hide the payment to the seller as you are deceiving the home mortgage lender, and I do not think you want trouble with the home loan authorities as a part of the home buying experience  Yet, I have been on a Realtor training webinar where the participants discussed this approach.  Be careful who you listen to,  they may get you in trouble.

There is another seminar leader whose Realtor training is to pay the seller $2,500 for work the seller is doing as a part of selling a home.  The examples given are that the seller does the open houses and other work that the agent would otherwise have to do to market the short sale home.  So, the agent is merely paying the seller for work that the seller is doing on the agent’s behalf on the property for sale.  I have paid other agents to do open houses for me on houses for sale, but the compensation has been around $100.  It could be argued that this  may have some merit, because it is a payment for services rendered and the mortgage lender may see that there is some way that the payment can be justified, so they may choose not to challenge it.  However, this a risky way of selling a home, as the amount of the compensation is out of proportion to the work done.  Also, there may be regulations in your state that prevent a Realtor from paying someone for doing work that requires a real estate license.  You could take this idea and modify it to pay the seller a reasonable amount for some useful service, particularly a service that does not require a real estate license, then you can justify the payment as a reasonable business arrangement that is not related to the property for sale.   

So what do you do to avoid lying to the home mortgage lender?  There should be no problem if you want to take the idea above and pay the seller for work done, and pay a reasonable amount for whatever service the seller provides in a field that does not require a real estate license.  I have paid agents to hold open houses at my listings in Wake Forest and Rolesville, North Carolina.  It would  not be that much different if I paid the seller, so long as the payment was properly disclosed.

My favorite approach is to look at the problem in a different light.  The problem is the furniture, the cost of moving it and the cost of storing it.  So, eliminate the problem and raise cash at the same time.  Sell the furniture as a different approach to loss mitigation.  There is nothing that prevents the seller of real estate from selling any asset they may have to raise money, including the furniture.  Separate from selling a home, just sell the furniture to anyone, and there are auction companies that specialize in selling a home full of furniture.  You can also put in your MLS listing that the furniture is for sale. Even if the buyer wants to buy the furniture for a reasonable price, there is nothing I can see that is objectionable.  The buyer gets fair value, the seller gets some money, and the seller does not have to pay for the moving and storing of the furniture that was sold.  

There is another solution that is relies on the goodness of the community.  Particularly where I live in the South, there is a principal of helping people who are down on their luck, particularly a family facing foreclosure.  The church members will help the seller move.  The relatives will take them in.  Other community members will pitch in to help get the family resettled, or take care of the yard after the seller moves.   See if you can find other resources to help out the seller so that you are not tempted to mislead those who make mortgage loans.

This is a recurring problem and there are solutions that will not get you in trouble.

HUD’s Preforeclosure Sales Program Avoids Foreclosure

Housing and Urban Development (HUD) has a Preforeclosure Sales Program that will allow a homeowner in default on a HUD mortgage to prevent a foreclosure and sell a home, even if it results in a short sale.  To read all the details of this program to avoid foreclosure, click here

The short summary of the program is that owners who are 31 days or more late on mortgage loan payments on certain loans related to HUD can contact HUD to start the process. They will fill out applications and get a Information/Disclosure form 90035 mailed from HUD.  If the owner is approved for the program, they receive an Approval to Participate notice from HUD.  The owner must then list the property with a Realtor, who is not a relative for an arms length real estate sales effort, including an MLS listing.  This sales program gives the owner four months to get a contract to sell the short sale home, and the sale must close within 6 months of when the owner is accepted into the program (or 8 months with special qualification) .  During that time, the home mortgage lender will stop foreclosure. 

As a part of selling a home using this program, the owner will need to get an FHA approved appraisal to establish an “as-is” value.  Then, the owner can place the property for sale, sell  for less than the appraised value. and use the proceeds to pay as much as possible on the home loans.  The amount of the allowed sales price goes down as time goes on.  During the first 30 days on the market, the sales price has to be at least 88% of the appraised value.  In the next 30 days, the sales price can be at least 86%, and for the rest of the program it has to be at least 84% of the appraised “as is” value.  This approved sales price creates a quick form of mortgage loss mitigation, as the loss mitigation department should give a quick approval to any offer that meets these guidelines.

As a part of the sales program, the owner may receive some portion of the sales proceeds, which is extremely unusual for short sales because the seller is typically required to walk away with nothing.  If the home sale is closed within 3 months, the incentive is $1,000 and it decreases to $750 after that.  The program has an additional $1,500 that can be used to pay off any junior mortgage loans after the incentive payment is applied, i.e. to pay off a second trust deed loan or a home equity loan. 

The program allows the seller to pay up to 1% of the sales price as a payment toward the buyer’s closing costs which is also unusual for short sales.  In order to encourage good marketing, this program to prevent a foreclosure sale allows a real estate commission of up to 6% of the sales price, which is consistent with the new Fannie Mae policy on reasonable commissions in real estate short sales.

This program applies only to owner occupied homes for sale.  If it is an investment property, or a property abandoned by the owner, those houses for sale do not qualify.

For homes that qualify under the Preforeclosure Sales Program with home loans associated with HUD , you can do a sale that is up to 16% below the appraised value and those proceeds will be approved to satisfy the HUD related mortgage loans.  There is no restriction on how short the payment is in comparison to the mortgage balance, just a limit on how low the price can be in relation to the appraised value.  So, if the mortgage balance is above the appraised value, the sale could be well over 16% “short”.   In other words, you can get this short sale approved easily by the loss mitigation department if you comply with the procedural requirements established by HUD.

This program is a little know part of the Realtor training of how to short sale a home, but it decreases the number of foreclosed homes and gives the buyer a smooth home buying experience.

Mindy Finds Out It is a Short Sale After Making an Offer

I worked with Mindy Oberhardt on a short sale home purchase.  She had a surprise after she made an offer, because the sellers had used a limited service agent who only entered the home as a MLS listing and that was the extent of the listing agent’s service in selling a home.  The fact that it was a short sale was not in the MLS, which resulted in a surprise that Mindy did not deserve as a part of the home buying process. Homes for sale with limited service agents that have high balances on their mortgage loans may put you in an unintended short sale.  Here is what she has to say:

 

During August of 2008, I represented a buyer in his pursuit of a home in Raleigh, North Carolina, that was involved in a real estate short sale. The fact that it was a short sale had not been disclosed in the MLS listing. The listing agent, a limited service agent, had posted the property in the MLS but took no further responsibility in making the property for sale. I was notified by the Sellers directly that the property was a Short Sale Home. I immediately disclosed this material fact to the Buyer and discussed the uncertainties involved in securing a home which was involved in a short sale. My client indicated that he wanted to go forward with the offer. Having not dealt with short sales in the past and putting my client’s best interests as my highest priority I approached Tim Burrell, a colleague in my office who had done many short sales.  He partner with me to represent the Buyer and provided a bit of Realtor training at the same time. I explained to the Buyer that Tim had experience which in combination with mine, would increase the likelihood of the offer getting approved by the mortgage lender and would increase the potential of the real estate sale being approved in a more timely manner.

 

Tim and I worked together to not only explain the process to the Buyer but to guide the Sellers through the process as well. Tim took the lead in securing the detailed paperwork that was necessary to provide a complete package to the loss mitigation department. He interfaced with the mortgage lender on a regular basis to keep the process moving forward. Both Tim and I interfaced with the Buyer on a regular basis to explain where we were in the sequence of events, to answer questions and to keep him realistic regarding his expectations. Both Tim and I were in contact with the Sellers on a regular basis to keep them informed as well.

 

Tim was able to get short payoff on the home loan approved in less than two months, an amazingly short time frame for this type of transaction.  Tim was out of town at a CyberStars Summit, but keeping in touch with the home mortgage lender.  While he was checking out of the hotel, he took the mortgage loss mitigation negotiators call.  She said the short sale was approved, and we had to close the sale on Monday.  Calling on Thursday to get a closing on Monday got Tim’s attention, as it woudl be impossible to get the home buying process completed in that time.  After exploring the reason, the negotiator said the Monday closing was necessary to get the exact amount shown on the closing statement paid to the investor.  Tim explained that there was no way to get the insepction accomplished, the appraisal done and the loan approved by then.  However, he was able to convince the negotiator that the exact amount would be paid to the investor when the closing occurred in a couple of weeks.  The negotiator was worried that the payment required for the taxes would decrease the payment to the investor.  The buyer paid the little bit of extra money to cover the few days of taxes.  The home closed within a reasonable time after approval, once the inspections and the appraisal were completed.

 

Both parties involved in this transaction were extremely fortunate to have the attention of Tim and myself in this transaction. If they had been left to the limited service agent who did not know how to short sale, I shudder to think what would have happened.  I don’t know of many agents that would have had the knowledge that Tim brought to the table to take it from a shocking surprise to a seamless transaction.  In addition, both Tim and I took great care to respectfully keep both parties up to date at all times and to calmly guide them through what  was undoubtedly a very stressful process.

Don’t Represent Jerks in a Short Sale

Even more than usual, you need to be able to rely on your seller in a short sale. 

 When you are short selling a home, there is great deal of material that has to be gathered by the sellers for the short sale package.  It all has to be accurate, with no misrepresentations, in order for the mortgage lender to accept the short payment.

You have to stare down the bank and stop the foreclosure, with the assistance of the sellers contacting the bank.  You get to go through the foreclosure version of waterboarding as the lender takes the property right up to the sale date, then postpones it.

The sellers have to understand, and accept,  the tax consequences of the short sale and not change their minds. 

The sellers have to get nothing out of the short sale, then move out gracefully.  If they try to get money out of anyone at the time of closing, it can be a misrepresentation as they have told the lender that they are walking away from the short sale with nothing.  Although, some lenders are allowing the equivalent of moving assistance to the seller, so this may be getting better.   If this comes up, you might consider having someone buy some furniture from the seller to give the seller the funds to move in separate transaction from the short sale.

In essence, you need to pick good people to work with.  Short sales are difficult enough.  If you represent a jerk, you get all the features of hell without the inconvenience. 

I act as a short sale consultant for Realtors all over America.  In the Triangle of North Carolina (Raleigh, Durham, Chapel Hill and lots of smaller towns like Cary), I get to select my own clients, and I try to choose wisely.  But, when I am a consultant, I do not get as much input in chosing the clients as I would if I interviewed them myself.  A delightful agent that I have known for many years asked for my help in an extremely complicated short sale and did not want to go through the Realtor training or Realtor education to learn how to short sale on such a complicated transaction.  It took months.   We got to avoid foreclosure three times, getting it postponed at the last minute each time, because the seller cannot pay the mortgage.  The seller was able to sell a home for $1,500,000 when it had four liens and unpaid taxes that added up to about $2,100,000.  Much of the unpaid debt was completely cancelled.   Yet, he yelled at me when the judgment debt that was the fourth lien was only released as a lien on the property and  not completely cancelled.  We were only able to get the three preceeding lenders who were not getting fully paid to let us pay $5,000 on a $15,000 judgment.  At first the creditor who had this judgment was so angry at the seller that he would not settle at all, but his attorney persuaded him it was better to get some money out of the seller’s only asset.  When you figure that second loans of $250,000 are frequently settled for $2,500, you will understand what an accomplishment getting $5,000 to a fourth lien was.   But, it was not good enough.

He insisted on documents being hand carried to him for his review, with deliveries made by the Realtors.  When it came time to close, the seller would not even go to the escrow office to sign the papers at the proper time.  The escrow was delayed due to his delay.  Then, he would not agree to move out when the escrow closed.  He wanted money to pay for moving and storage, and he wanted to stay in the house he was  sellling  for two weeks, rent free.  Possession was supposed to be delivered at the close of escrow, not two weeks later.   We worked out the money by selling some furniture at a public auction.  The buyer was amazingly gracious on the move out date, but the seller made it difficult for the buyer to bring contractors to the house to measure for future work.  I had everyone prepared to have to evict the former owner, but he moved out on his own. 

Learn from my experiences.  If the sellers are not truly fine people who deserve to be rescued, do not rescue them.   So, if you have a hard working family in Garner or Knightdale, North Carolina,  take good care of them and they will treat you well,  But,  I learned in lifeguard training that you can swim up to help someone who is going down and they can take you down with them.  It is a tough time for the seller, so you do have to put up with a great deal to provide a needed service.  But, do not sign up to be abused.

One of the reasons to do short sales is to get undying loyalty from clients and referrals of all their friends.  If the client is the “south end of a north bound horse”, most of their friends are probably jerks.  Do you want to spend your life working for people like that?  

Pick your clients wisely, rescue the good people and help save America from the financial crisis.  But, there are some people you should walk, no run, away from.

Negotiating Short Sales

Most of this website talks about negotiating in one form or another, but here are some key points.

If you are trying to avoid foreclosure, you need an offer fast. Negotiate with the Realtors through the MLS by putting something like “submit all offers, we do not care about the selling price” in the MLS listing. You will probably get “less than wonderful” prices, but you will have an offer to submit. This is particularly important with those lenders who will not let you talk to the loss mitigation department until you have an offer. With the offer, you can negotiate to keep the file in the loss mitigation department and avoid foreclosure.  One of the great ironies of this process is that when the lender puts the pressure of foreclosure on you to get you motivated to sell the home, the lender almost always gets less for the home.

Negotiate the price with the agent doing the Broker’s Price Opinion (BPO) for the lender that is considering the short pay. Use the independent authority of comparable sales and the preparation of pictures of defects and bids for repairs to keep the price in line with reality. Most of the time you will have no contact whatsoever with the BPO agent, so do this negotiating with the loss mitigation negotiator, by furnishing the same pictures and bids.

Negotiate the time for review and the postponement of the foreclosure by using every form of persuasion possible. I have even called the Western Regional Director of the Office of Thrift Supervision to put pressure on Washington Mutual when they were under supervision by OTS so that I could avoid a foreclosure. If you are not getting what you need, go to an authority who can get it for you, like the investor who owns the loan, the guarantor (mortgage insurer) or a supervisor in the department. Just remember, when you do that, your pleasant relationship with the loss mitigation negotiator just ended, so only do that when you can afford to make her mad.

Most of negotiating success in short sales comes from preparation. That is why it is so important to have a complete Short Sale Package, with persuasive materials about the problems with the real estate market and the problems with the house. If you can convince the lender that they never want to own this house, the negotiations on the short sale go better. Mold, toxic waste, dangerous conditions and illegal structures are your best friends in negotiating to avoid foreclosure.

After you get a response from the loss mitigation negotiator assigned to your short sale, realize it is not that person’s decision. Don’t yell at them, they are the messenger. Also, you will need their recommendation as the negotiations continue. If the lender wants more money, present it positively to the buyer, with the benefit that the buyer has the power to eliminate the biggest problem with the short sale i.e. if the buyer accepts this offer, the approval process for the lender is over and the buyer wins by getting the home they want.

If the buyer wants to give a counter offer to the lender’s counter offer, present it with some comparable values that support that price. The BPO price may be getting out of date, so if you have more current sales and homes that just went on the market, that will give the negotiator ammunition to persuade the investor or decision maker.

Part of a Realtor’s education in negotiation is that once you get an acceptance from the lender, do a “nibble”, a negotiating technique that gets you the one last part of the deal that you need. Say, with confidence, “Of course that includes a full release of the obligation for the seller.” One of the biggest benefits of a short sale is to get the entire debt off the seller’s back, so get a full release. Some people who provide Realtor training call this without recourse, which is adequate, but the real term you want is to be fully released from the balance of the debt.

If you do not get an approval from the lender that the buyer will accept, you still have accomplished getting a short sale file open and established a method of communication with the negotiator. See if you can persuade the negotiator to keep the file open so that you can directly submit another offer to her. This will dramatically shorten the time for a second review of the short sale.

Even if you did not get a deal accepted by the buyer, hopefully you have a price from the lender that they will accept in another short sale. Some lenders just give you a denial with no price, which is a ridiculous way to negotiate. If the price was so low that it did not merit a response, the whole short sale review process should not have started. After all the review work, get a price and try to put the short sale together. Getting an acceptable price greatly helps your negotiating with future buyers. Tell them they can get the benefit of a short review time and decrease the chance that another buyer will come along if they will just equal the price the lender wants. In other words, they win on the big issue of getting the lenders approval. Also, you can adjust the listing price accordingly, so you can get more showings and hopefully more offers.

Negotiating an “as is” sale is difficult in a short sale. Most buyer’s agents cannot handle that term. They get the buyer excited about all the horrible problems that the house could have, and wonder why you brought it up if there is not some horrendous problem. Some agents even ask if “as is” means they cannot do an inspection. Assure them you want them to do an inspection so the buyer knows the condition of the house. But, the seller has no money to fix anything in a short sale. The lender is already getting a short payment, so the lender does not want to pay to “upgrade” the house.

In most short sales, you can accomplish “as is” using gradual persuasion. A tug boat cannot move a supertanker in one huge push. It does it with slow, gradual nudges. Tell the buyers agent that the lender will probably insist on an “as is” sale, but you will see what you can do. This gets the buyer startiing to accept this term, but without the image that the seller has no confidence in the quality of the house. When the lender comes back with the requirement that it gets exactly the amount shown on the closing statement (HUD-1), you indicate that there are three choices. The buyer can take the house “as is” after doing an inspection. The buyer can pay more for the house to get the repairs paid for on the closing statement, because the seller has no money. Or, the buyer’s agent can kick in the money for the repairs. When the buyer’s agent and the buyer have three choices, no one is forcing them to take the property “as is.” They just select that choice as the best one for them in the short sale.

If you get multiple offers on a short sale, a smart buyer’s agent will put the “as is” term in their offer to make it more acceptable to the lender. The buyer’s agent will know that the mortgage lender wants to deal with an agent who knows how to close the sale, and who will not “nickle and dime” them after the contract is approved for a short pay. I have seen offers that are less money get accepted by banks because they have better terms, although it is usually because the buyer is paying all cash for the short sale home. So, if you represent a buyer, make the terms of the contract as easy as possible for the lender to approve.

If you want to pick up all the tools of real estate negotiating, look for my book Create A Great Deal, the Art of Real Estate Negotiating. It will help you in ever part of real estate, but especially in short sales.

Don’t Let the Buyer Misunderstand a Short Sale

Many Realtors have never done a short sale.  If they represent  buyers, they do not know what to tell them to explain the short sale home buying experience.  If you are listing a short sale, be an information resource for the buyer’s agent.  Or, send them here as this site provides complete Realtor education on short sales.

The first point to explain about a short sale is that you do not know how long it will take the lender to review the sale.  You may have some experience with the same lender, but that does not mean they will be as efficient this time as they were last time.  Estimate 45 to 60 days for the review if you do not have any experience with that lender.  If the buyers are relocating for a new job that starts in two weeks,  they will need to have other living arrangements.  So, you need to have a longer than normal time in the contract for the closing date for a short sale home.  Take your estimate of how long it will take the lender to review the sale, then add 30 days for the buyer to close the sale.

The agent for the seller needs to stay in touch with the agent for the buyer during the short sale process.  You need to have some reports of progress, and tell the agent for the buyer what is being done to move the transaction along.  Remember, the buyers do not know whether they bought a house or not, so they are on edge as this is not the typical home buying experience.  Let them watch the progress so they can feel that something is being done.  

The second point is that negotiating on a short sale is different.  The sellers might sign anything at any price, because they want to get rid of the house, out of trouble and possibly avoid foreclosure.  This is particularly true if he seller pays no income tax on the amount the payment to the lender is short.  You do not have a deal that can close until the lender approves it.   Just because the seller agreed does not mean that you can count on that price for as the final sale price of the short sale home.  Most of the negotiating is with the lender.

The third point is a short sale is not a sure thing.  The lender may not approve the short sale, or if the seller cannot pay the mortgage, the lender may foreclose.  The buyer can make it a sure thing by paying enough to fully pay off all the liens, but I have never had a buyer who wanted to do that. 

The fourth point is that the house stays on the market in a short sale.  Paragraph 6 of the Nort Carolina Short Sale Addendum says that other “offers may be received by the Seller’s agent, which must be presented to the Seller pursuant to North Carolina law.  Such offers may be accepted by the Seller as backup contracts and forwarded to Lienholders for review and approval.”  The buyer needs to know that the house is still for sale until the contingency for lender approval is eliminated, and the buyer may have to outbid the other offers.  Using the term “backup” is not as clear as it should be.  If you were a lender who is losing money and the first offer makes you $20,000 less than a second offer, which one would you approve and which one would  you disapprove?  Since the short sale does not close without the lender’s approval, having the lender disapprove the first offer makes the second one more than a backup offer. 

I am working on a short sale in a townhouse in North Raleigh where there is a first mortgage and a line of credit as a second loan.   We have had five offers.  I started the lender review process with the first offer that was extremely low, but it gave me an opportunity to get on the waiting list.  The seller signed it, with the short sale addendum, and we submitted it to both lenders, as both of them would be short in the payment.  By the time the file was assigned to a loss mitigation negotiator, we had gone through four more offers.  The last one was good enough that only the second loan is a short pay.  By the time the last offer came in, the second loan had agreed to accept $2,000 on a prior offer, but I had no approval on the first loan, so the contract still had a contingency.  The best offer fully paid the first loan and gave the second loan more than $3,000.  Maybe the key to financial recovery is good marketing and better negotiating skills in short selling a home, so that more money is returned to the banks and the homes sell for higher values to support the neighborhood values.   

By the way, every time we received a better offer on this townhouse, we went back to the previous offer and gave them a chance to submit their “last, best and final” offer.    You need to give all buyers, and all buyer’s agents, every opportunity to be the successful purchaser in a short sale.   The Realtors work hard trying to get a house for their clients and you need to give them every chance to get a commission.  For more on negotiating when there are multiple offers, see my book Create A Great Deal, the Art of Real Estate Negotiating.

The fifth point is to tell the buyer not to spend any significant amount of money on the short sale until the lender has approved the short payment.   The California Short Sale Addendum is one of the best.   It is right in specifying that the time limits in the contract run from the time that the lender approves the short sale.  Normally, the time limits run from when the contract is signed by the buyer and seller.  In a short sale, you should start the time for inspections, loan applications and other contingencies from when the lender approves the sale.

I had a short sale in North Raleigh where the agent for the buyer was an old friend of mine.  She did not pay attention when I told her the house was still on the market and that other offers could outbid her clients.  The buyer paid for an inspection of the property about a week after the seller signed the contract.  I should have been more emphatic in stopping the inspection, but I thought no one else would make an offer on the short sale home as it backed up to a noisy road.  When another offer outbid her client, and her client would not raise his price, I did manage to get the buyer reimbursed for the cost of the inspection.  But, she is still mad at me.  So, learn from my experience and emphatically make sure the buyer does not do anything until the lender has accepted the short sale.

A sixth expectation for a short sale is that the lender is going to try to negotiate to get more money.  One potential aggrivation in a short sale is a lender who takes a long time reviewing a short sale, while the values in the area are going down.  Then, the lender wants more money to approve the short pay.   If the lender comes back quickly with a higher counter offer, it is easier to present to the buyer, as the comparable values may support it.  If the lender comes back after an extended period of decline in the values, it is harder to get the buyer to accept the counter offer, because it is harder to have the comparable values support it.  Also, it is harder for the appraisal for the buyer’s loan to come in at the purchase price.  Luckily, the values in Raleigh are not declining, or just barely declining, so I do not have this problem.  But, you need to set the expectation for the agent for the buyer that there may be a counter offer from the bank.  

A short sale is a different type of transaction altogether, so you need to explain the differences to the buyer’s agent and the buyer so that they have a home buying experience that is as pleasant as possible.

Short Sales With Multiple Loans and Liens

Some short sale sellers will make your life extremely “interesting” with their talent for putting on multiple mortgages and collecting liens.  You get to negotiate them all,  because if any one will not sign off, the short sale does not close.  As the picture shows, you have to get every lender to jump into the deal.

This is why some Realtors will not take short sales with too many mortgages and liens.  Some short sales do not close, and ones with multiple liens are the hardest to close.  Once you have done some short sales, you will understand why.  Refer the short sales you do not want to another Realtor who is willing to deal with the mess.   A separate post discusses the priority of liens and their effect on how much to offer each lien holder in  Lien Priority Determines Who Gets Paid & How Much

The first issue is how do you negotiate with all the liens.  Some of the people providing Realtor training say to negotiate with the last one first .  In other words, if you have a first loan and a second loan, find out what the second loan will settle for first, then negotiate with the first loan.  There may be some merit to that, because you know what you have left to offer the first loan as a short pay.

I do short sales differently because I negotiate all of the debts at once.  The reason is that there is not a linear relationship between them.  In other words, the results of each negotiation is interdependent on the results of all the other negotiations, so you need all the answers all the time.   If the property is in foreclosure, you do not have enough time to submit the package to the second lender, wait for their review and approval, then submit it to the first lender.   I had a property in foreclosure in Palos Verdes, California with a first and second loan with Washington Mutual and a third with CitiBank.  Citibank gave us an approval on the third loan one day before the deadline set for the foreclosure on the first loan.  If I had waited to get that short pay approval first, then submitted to the other lenders, the sale would not have gone through.

To understand the interdependence, some lenders on a short sale home have guidelines for how much they will let a junior lienholder be paid.  I am working on a short sale in Rancho Palos Verdes, Calfironia where the first loan is with Countrywide and the second loan, a line of credit, is with Bank of America.  The seller cannot pay the mortgage.  Countrywide will not allow the second lender to be paid more than $3,000 on the closing statement (HUD-1).  Bank of America will not settle for less than $5,200, because they have a rule that they will not take a short sale that does not pay them at least 10% of the outstanding balance of the loan.  The entertaining part of this standoff is that Bank of America is merging with Countrywide, so it is like a one member of a couple saying you have to put all the money in my right pocket, then the other member of the couple saying no don’t do that, put money in my left pocket. 

How do you break this standoff? You have to know what is allowed under your local rules, the disclosure rules for lenders and the National Association of Realtors code of ethics.  In California, the commission is paid by separate commission instructions to the escrow officer that are not part of the escrow instructions signed by the parties.  You can consider having one of the Realtors send the amount of the difference to the junior lender.  You can also have the buyer buy something from the junior lender that happens to equal the amount of the difference.  You cannot do anything that is beyond the rules for proper presentation of information to a lender i.e. do not lie to a lender.  See the post Don’t Put Your Client In Jail for more discussion, and substitute Yourself for Your Client.

If you watch a good chef, you will be amazed at how many things can be prepared at once with all of them finishing at the same moment.  When you get good at short sales, you can handle many liens at once and get them to a closing at the same time, and be able to avoid foreclosure at the same time.

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