Negotiating Short Sales

negotiate-short-saleMost 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.

Do Disclose Short Sales in the MLS and Advertising

mls-70The fact that a property will be a short sale has to be disclosed in the MLS. You must disclose material facts, and the fact that a buyer will have to go through a short sale process is a material fact.

By the way, MLS is a registered trademark of Major League Soccer. We are not talking about that MLS, we are talking about the Multiple Listing Service.

The simplest way to disclose a short sale is to say something like “the sale is contingent on lender approval of a short payoff of the existing loan.” There are all sorts of other phrases to disclose this. “The sale is contingent on the lender’s acceptance of less than a full payoff for the existing loans.” I put this phrase in the Agent Only section of the listing in the MLS.

What about commissions? Since lenders frequently try to cut the commission, how does the listing agent deal with that possibility? If you specify a certain commission to be paid to the agent for the buyer, you will have to pay that amount at closing, unless the buyer’s agent volontarily lowers their commission. If you want to be able to adjust the commission, specify in the listing that the commission is subject to the lender’s approval and may be renegotiated. The listing agent can also specify that the commission to the buyers agent will be 50% of the total commission approved by the lender.

This commissionectomy by lenders discourages short sales. Agents for buyers need every dollar they can get in todays market. If they are going to have to make an offer on a short sale property and speculate on whether it will close based on the lender’s approval, there should be a bonus to the commission to compensate for that risk. Instead there may be a commission penalty, a risk that the sale won’t close, and a longer time for the buyer’s agent to work with the buyer holding the deal together. On the other hand, the listing agent is taking the same risk, doing much more work in submitting the short sale package and negotiating the decreased payoff and full release of the loans, not to mention explaining lien priority, tax consequences and other issues. So, it is not fair that the listing agent eat the entire commissionectomy. The new guidelines by Fannie Mae are a step in the right direction to prohibit renegotiation of the commission if the total commission is 6% or less.

Some Realtors feel that the fact that a property will be a short sale should be put in advertising. There is not enough room in most ads to put in every material fact about the property, so I do not see how that should be required. You do not have to put all the required disclosure statemtents in your advertising, so you should not be olbigated to say it is a short sale. Before a buyer makes any kind of offer on the property, the fact that this will be a short sale should be disclosed. Bringing this fact up in a counter offer is too late, as it would result in the buyers feeling they have been mislead.

Most short sales are sold “as is” because the bank wants to get the amount shown on the closing statement (HUD) that is presented at the time the lender approves the sale. Since the seller usually has no money, any repair costs would come out of the proceeds of the sale, reducing the payment to the lender. Do you have to put “as is” in the MLS and the advertising. I do not believe it is required, so it should be left to the negotiating abilities of the listing agent. If you want to frame the negotiations to start with the idea that the property is sold “as is”, put it in the MLS. If you want to deal with it as the negotiations proceed, that may be your preference, as you may be able to get some basic repairs done as a part of the transaction. For example, if the property does not meet the FHA standards, certain repairs are going to need to be made for the buyer to get FHA financing. The existing lender should realize that this is an expense that is necessary to get the sale to close and allow that charge on the closing statement. I have had an easier time convincing the existing lender to pay more in closing costs, then have the buyer pay that same amount for the repairs directly to the contractor. For some reason, adjusting closing costs is easier for the short sale lender to swallow than to pay for repairs. Since the amount of money for the buyer is the same by paying the repair cost instead of the closing costs, most buyers are happy work in this manner.

To set the proper expectation, you need to disclose that the house is a short sale. It does not make a pleasant surprise.

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