Step By Step Short Sale
You need to know how to get through the entire process, step by step. Part of your education is to know when each step is to be taken, and how to do it gracefully.
1. The very first step is to decide if you can sell the home for enough money to pay off the mortgages. If so, list it at that price, even if it is debatable. Some lenders ask for a history of the marketing of the property. If you can show that you tried to sell it for enough to pay off the loans, that will help your presentation for a short sale. In other words, your first step is to try to avoid the short sale all together.
If it is clear that the market will not support a regular sale, explain the entire process to the seller to be sure they are willing to go through everything it takes to get it sold. There is nothing worst than doing all the work of a short sale, then failing to close. Even before you list the house have the sellers get everything they will have to submit to the bank. Many times it is the same information they gathered to get a loan.
2. The sellers have to qualify for the short sale. Before you list the home, be sure they have the financial hardship that will enable to lender to cooperate with the short sale. If the sellers have plenty of income, and plenty of assets, the bank will not be cooperative, asking the sellers to bring money to closing to pay off the rest of the debt, or to sign a note to make payments after the sale closes. If the sellers have no way to pay the balance of what is owed to the bank, you will have an easier time convincing the bank to accept the short payment.
Even before you put the house on the market, ask the seller to find all the financial information that you will need to supply to the bank. Every bank ask for different items, but typically they want a hardship letter, a financial form showing their assets and liabilities, two month of bank statements, their last two pay stubs as well as copies of the mortgage statements. If the sellers are self employed, you may need two years of tax returns.
3. Get a letter of authorization that allows the bank to talk to you in the same manner that they would talk to the seller. Send it to the bank when you list the house, as most lenders take days and sometimes weeks, to review these documents. Some banks have odd requirements for what those letters have to say, and the only way to find out about those requirements is to send in the letter and have them respond to it.
4. Find who you will be dealing with at the bank. Some are Loss Mitigation departments, others have different names. Most of them will not talk to you until you have an offer. If they will, find out what they want, how they want it done, and how you can make their job easier. Try every way you can to avoid dealing with the collections department, they get bonuses for getting the loan reinstated but get penalized if the property does not get back into performing status, so they usually are not helpful for short sales.
5. Research the title to the property to find out all the liens, judgments, unpaid taxes and assessments. Get the amount necessary to pay off each of the liens, e.g. order the payoff statements from the mortgages and contact the attorneys for the other lien holders. Many Realtors will not do short sales if there is more than one mortgage. My record is three mortgages, one judgment and unpaid property taxes, the second place finisher was one mortgage, four judgments and unpaid property taxes. If the situation is too complex, either walk away, or call me.
6. When you put the property in the MLS, you have to price it in accord with the time you have . If the seller is facing foreclosure, you do not have time to test the waters, just price it aggressively. Even if you are not pressured, you still want to be competitive. Look at the recent sales in the last three months, so you are aware of what it takes to be sold. Also look at the homes for sale to be sure you stand out from your competition. You need a reason for a buyer’s agent to put up with all the trouble that comes with a short sale, so you need at least an appealing price.
7. Get a buyer, and you hope for a fair market value. But, take the best you can get. The review time by the lender is long, so get it started with any reasonable offer. If you get a better offer during the review period, you can submit it. The contract provisions have to include a Short Sale Addendum that provides that the sale is contingent on the approval of the lender. If you do not have that provision in your contract, your sellers are signing a contract that obligates them to pay the “short” amount at closing.
One of the ironies of a short sale is that lenders take long to review them, but when they approve them, they want them to close quickly. So, try to get a contract that has a quick closing, but have the time for the closing start when the bank approves the sale.
8. Develop a HUD-1 closing statement. If you are in an area that does not use a HUD-1, get some software and develop one. You are dealing with a bank that is reviewing massive numbers of short sales, so you have to put the information in a format that is easy for them to review. Put the HUD-1 in with the rest of the short sale package.
9. Send the short sale package to the bank. How you send it is extremely important, and we will discuss it elsewhere in more detail. Watch out for a bank that requires you to fax it to a number that is constantly busy. If they do, fax it in the middle of the night, or send it to one of the supervisors in the loss mitigation department. Send a separate copy by registered mail, requiring a signature to prove that it was received. This prevents the loss mitigation department from claiming that they never received your short sale package.
10. Some of the traditional documents for a short sale package are the following:
a. Fax transmittal
b. Letter of Authorization (to talk with you)
c. Cover letter discussing the offer
d. The complete contract of sale
e. HUD 1 with an estimate of the payment to the bank
f. Listing agreement
g. History of the Listing: Dates of the listing and price reductions
h. Form showing the seller’s financial condition, such as a financial statement or worksheet
i. Hardship letter describing the reason for the financial problems
j. Last two pay stubs. if employee, profit and loss if self employed
k. Last two bank statements for every bank account, include all pages
l. Last two years tax returns, particularly if self employed, including all schedules
m. The pre-approval letter for the buyer’s loan or verification of funds on deposit for a cash buyer
n. recent mortgage statement to help identify the loan.
This is where you have to know what the bank wants. For example, Bank of America normally wants only the hardship letter, letter of authorization to talk to the Realtor, the HUD-1 and short financial statement. Give them what they want, and no more. Some lenders will ask for statements of all accounts, such as IRAs, stock brokerage and similar accounts. If they ask, provide them. If they do not ask, do not volonteer them.
11. If there are judgement liens, send the purchase contract as well as the HUD 1 to the lien holders along with a letter describing your offer to pay their debt for less than the amount owed.
12. Call to see if the package has been received and put into the system. You will need the loan number, name of the seller/borrower, the address of the property, and sometimes the last four digits of the seller/borrower’s social security number to get past the initial person that you talk to. You have to be sure your package gets into the system. My record is sending the package four times before it was finally registered properly.
13. Call regularly to see when the package is assigned to a loss mitigation negotiator. The lender will tell you it makes no difference if you call. In fact, your package will languish unless you see that it is moved along, and each time you call, someone will look over what you sent to tell you if they need something more.
14. Hopefully, the lender will order a Broker’s Price Opinion (BPO) before the case is assigned to a negotiator. Some will only order the BPO when the negotiator takes the case. The BPO is what the negotiator will use to determine if the price offered is close to the market value, so the lower the BPO price, the more likely your offer will be accepted. Be sure to point out the issues with the property and problems with the market to try to get the BPO price to be reasonable. The best practice is to have pictures of the problems and two bids for repairing them.
15. Occasionally, you get to talk to the negotiator. Other times, they only send emails. Other times, they will have no contact with you at all, so be sure that your letter explaining the transaction is clear and complete.
16. Sometimes you can learn the BPO price. Most of the time, you cannot. If you can communicate with the loss mitigation negotiator, show the merits of the offer and how it gets the bank a better result than all their other choices. The negotiator has a huge effect on your offer, so try to get their support, and definitely do not alienate them.
17. Find out who is taking the loss. If you are dealing with a bank, is it their loan, or are they representing an investor. Is there a guarantor or mortgage insurance, so the bank will get paid but the guarantor will take the loss. You need to know who is making the decision, so you can appeal to them.
18. Keep calling to see how it is progressing. Many banks will not notify you of their decision. The only way you will find out is when you call the loss mitigation department.
19. Get the response to your proposal. First mortgage holders will generally take 80 to 100% of the value established by the BPO. The second mortgage will generally take 5-20% of the outstanding balance of the loan. The third mortgage holders will generally accept 5 to 10% of the balance owed. Depending on the priority of a lien, they will typically take 5-10% of the debt.
20. If they do not accept your offer, see if they will give you a counter offer. Some lenders are extremely difficult when they just turn down your proposal and give you nothing to aim at. If you get a specific counter offer, see if your buyer will accept it. If so, send the revised contract to the loss mitigation negotiator. If not, see if the buyer will give you a counter offer to present. The revised offers will need a revised HUD-1.
21. During the negotiations, you may need to escalate to the supervisors and their supervisors. Remember, if you do that, you will alienate the loss mitigation negotiator, so figure you have lost their support by going over their heads. If you cannot get the bank approval and their is a guarantor (or mortgage insurance) move your negotiations to the guarantor. If you have problems with the bank, find the investor who actually owns the loan, and negotiate with the investor.
22. As a part of the negotiations, you will also negotiate how the lender will report the short sale to the credit reporting agencies. This is covered in more detail on this site. You will also be negotiating whether your short payment will be in full satisfaction of the debt, or if the lender will be able to pursue the seller after the sale closes. Occasionally, the lender will want the seller to execute an unsecured note promising to pay some of the balance due.
23. Watch out for commissionectomy! Many banks will try to take your money, even after you have done all this work to get them paid. Look at all these steps that you are doing to make the sale work, but many banks only look at their loss. To counteract this tactic, refer to the Servicing Guide of Fannie Mae saying it is against their policy to reduce the commission on a preforeclosure.
24. If the offer is approved, you must get the approval in writing with all its terms, then give it to the attorney or escrow that is closing the sale. The lender will require that they approve the final HUD-1 before the closing of the sale, and specify how the funds will be sent. If the settlement will not only release the lien but also eliminate the balance of the debt, be sure to get that inwriting.
25. If you do not get an approval, but learn what the lender(s) will accept, adjust your asking price to make it more likely that you will get offers that match the lender(s) requirements.
26. Once the bank has approved the sale, all the items that are normally done when a seller signs the contract are accomplished. Most of the time, the bank will insist that the buyer take the property “as is” because they do not want to have any more money taken out of their proceeds. You may have a problem closing if the buyer objects to the condition of the property and the seller has no money to do the repairs.
27. Have the attorney or the escrow officer close the sale and pay off the mortgages and liens. The seller will probably receive a 1099 from the transaction reporting to the Internal Revenue Service how much of the loan was not paid off. There may be tax consequences from having a portion of the debt forgiven, which is covered in detail in the post Income Tax and Short Sales. There may also be tax consequences from the sale itself, unless the gain is not taxed due to Section 121 of the Internal Revenue code (sindle tax return can make $250,000 and joint tax return can make $500,000 profit and pay no tax)
28. Celebrate your success.