What is a Short Sale?

March 10, 2009 by  
Filed under Short Sale How To

dictionary-2-70x70The short answer is it is a sale where you do not generate enough money from the sale of the property to fully pay all the loans and liens, and the creditors accept less than full payment for these debts. In other words, the payment is “short”.

In your grandparent’s day, if you sold a property and did not have enough money to pay off all the loans, you took the rest of the money out of your pocket and brought it to the closing of the sale.

I have heard that the first short sale was done by Fannie Mae in 1988. I did my first one in 1992. In the early ’90s, it was unbelieveable for a banker to have someone call and offer to pay them less than what was owed. You could hear some real ugly words out of a banker’s mouth back then. Failing to fulfill the promise that you will pay back what you borrowed was obscene to them. When you think about it, the banker has a point, because the borrower is not living up to the promise to pay back the loan.

This is a process that may not be perfect, but it is frequently the most practical solution to the current financial crisis. If the property has gone down in value so you cannot get enough money out of the sale, a short sale may be the best choice. If the borrower has had a recent financial disaster, the short sale may get more money from the bank than any other choice, because you cannot get money out of a broke borrower.

A short sale works where the property qualifies and the borrower qualifies. If there is enough money from the sale, the bank gets fully paid. If the borrower has the money to bring to the closing, the bank probably will not approve a short sale. If the property has insufficient value and the borrower has insufficient funds, consider a short sale.

There is a wide range of training that the Realtor must have to give the right advice. There are at least three sides to the negotiations, instead of two, because you have to get the sale agreed by the buyer and seller then approved by the lender. There are title issues, so you have to understand what the liens are and how the priority of the liens affects how much each lender gets paid. There are income tax issues. There are issues concerning the foreclosure process. You need to explain the effects on credit reports. You need an understanding of the law concerning debt collection to try to get a full release from the debt. You have to be aware of interpretations restricting your ability to negotiate with a bank if the foreclosure process has started, as it may be considered the unauthorized practice of law. You have to be able to close an “as is” sale, so the second round of negotiating after the inspection is different. A short sale even takes special talent for the closing attorney or escrow officer.

Where are you going to learn all this? Right here at www.ShortSalesR.us

Don’t Take Away the Owner’s Lifeline

March 9, 2009 by  
Filed under Short Sale Do's & Don'ts

lifeline-70x70There are times when you should not do a short sale, or you need to do it carefully. If the seller has a home equity line of credit, it may be the only lifeline available to the family. If the seller can still withdraw any substantial amount of money from that line of credit, it may be the only thing keeping the family afloat while they look for another source of income. In the current economy, people who have lost their jobs or had major setbacks need to keep their one means of support in hopes that something will be found in time. If you are not careful, you could ruin their chances for recovery.

Some Realtors submit the financial information to the lender early in the process, to see if the seller qualifies for a short sale. The seller’s financial information can be fed into a computerized review system to see if the seller qualifies for a short sale. Most of us are familiar with Desktop Underwriter where a loan application is fed into a computer to see if a borrower qualifies for a loan. Some loss mitigation departments have software for the reverse situation, to see if the borrower is in enough financial distress to qualify for a short sale. In some situations, the loss mitigation department will review the financial situation before you have an offer and determine that the seller qualifies for a short sale. This can shorten the review process once an offer is presented.

The last thing you want to do is to give the home equity lender a financial statement showing that the borrower no longer is able to qualify for the home equity line of credit. Nearly all of these lines of credit have a provision that if your financial situation changes, the lender can take away the line of credit. By submitting this information while there are still funds available on the line of credit, you will be eliminating the one lifeline that the family has.

So, if you are going to do the short sale, you have to time it right. Be sure that selling the home is the best thing for the owner by determining if the payments on the house are substantially higher than the cost of other shelter available to the family. If the house payment is one of the things that is pushing the family “underwater”, the short sale may be appropriate. But, you only want to present the financial information at the last minute and keep the line of credit available as long as possible.

The BPO is Critical to a Short Sale

March 9, 2009 by  
Filed under Short Sale How To

bpo-house-70x70A short sale is a way for a bank to minimize its loss and get as much as possible for their loan. To judge whether the proposed sale is reasonable, the bank wants to know what the market value of the property is. Most banks will accept an offer that is around 90% of the market value of the property, some will go as low as 80% under exceptional circumstances. To get a market value, some banks hire appraisers for a full appraisal. Most ask for a Broker Price Opinion, commonly called a BPO.

BPOs are done by Realtors, typically ones who sell the properties that banks foreclose on, commonly called REOs (for Real Estate Owned, a category on the bank’s books to show the foreclosed properties they own). The bank contacts the REO broker with an order for a BPO. Typically, the Realtor has a series of instructions from the bank that have to be carefully followed. The BPO form is just a few pages long, asking for a comparison of the short sale property to three properties that are for sale and three recent sales.

The standards for the properties to be compared are set down by the bank, and the reviewers for the BPO company are meticulous in enforcing these standards. Most of the forms are extremely inflexible, with little room for comments or description of any issue that does not fit into a box on the form. In other words, you need to be aware that the form does not normally allow for any unusual information, and most of them only allow a limited number of pictures. Imagine trying to get the information for the house in the picture on this post into a BPO form. So, you could have a serious ideosyncracy for the property with no place to put it in the BPO form. However, the banks process thousands of these forms, and standardization makes them much easier to review.

There are interior BPOs and exterior BPOs, commonly called drive bys. Both involve taking pictures of the property and the neighborhood. The interior provides much more information, the exterior just looks at the outside. The pay for an exterior BPO is around $40 to $60. The pay for an interior BPO is higher, typically around $100. Some companies get the BPOs done for free with the promise that Realtors who do enough BPOs will get the REO listings. You have to get used to the alphabet soup, if you are talking to a bank, you need to know the acronyms.

You can tell from the pay, or lack of pay, the BPOs cannot take too much of the Realtor’s time. Many of the Realtors who do BPOs have a staff to do the administrative tasks, so the agent gets involved only on evaluating the information to give the price range. In short, they are mass produced.

Most of the people who teach about short sales want the Realtors to try to influence the BPO. You want to provide accurate information about the market, the repair issues in the house, the features that will make it hard to sell and other factors that affect the value. Some seminars say to take the lock box off the door to the house, so the BPO agent has to meet the listing agent to get into the property. That is difficult to do if the house is still on the market and being shown by Realtors. The idea is to give the listing agent an opportunity to provide information about how the sales price is close to the market value, such as handing the BPO agent three listings that are for sale and three that have recently sold. Some instructors say to fill out a sample BPO form and give it to the BPO agent. There are a great deal of new regulations prohibiting Realtors from trying to influence appraisers, so if you are dealing with an appraiser, be sure you know the rules for your area.

A good idea is to furnish the bank with pictures of any repair issues or damage, along with bids for the cost of repairing those items. These pictures and bids should be sent to the loss mitigation negotiator, as the BPO agent may not be able to put them into the form. Ask the negotiator whether the BPO discusses these issues and adjusts the price accordingly.

It is prefectly appropriate to try to get accurate information of the value of the property into the BPO. The whole process depends on comparing the offer to the market value. A high BPO does no one any good, except for the people who make money off of foreclosures. There is a new state law in California that prohibits an unfairly high BPO price by an agent who may get the listing on the property if there is a foreclosure. The California legislature found there were agents who gave a high BPO value to prevent a short sale from being accepted so they could list and sell the property after a foreclosure. I am skeptical that agents would do that, because it is extremely hard to predict who will get the foreclosure listing. It is the law in California none the less.

If you get a BPO that is out of line, it is difficult to correct. Many loss mitigation negotiators will not tell the agent what the BPO value is, which makes little sense because the listing agent could provide great insight into any mistake in the BPO.

I had one short sale where the propety was appraised at a value of $520,000 while the sales price in the contract was $420,000. The property had been for sale for over a year, with the highest asking price being $475,000. I had to drop the price several times to get other agents to show the property, which indicates the $475,000 asking price was too high. When the bank started foreclosure proceedings, the price was dropped to $400,000 to get a quick sale. The low price resulted in three offers, and buyers who bid the price up to $420,000. If the property was worth anywhere near $520,000, there would have been dozens of buyers much earlier.

The bank would not disput the appraisal, and ignored the comparable values I sent. Radian Guaranty, the mortgage insurance guarantor, would listen to me, and reviewed an extensive market analysis that I sent. As a result, they overturned the decision to reject the short sale and the sale closed gracefully. The lender, the guarantor and the investor will be skeptical of your figures, feeling that the Realtor is just trying to get the sale approved to make the commission.

In short, the secret to success in short sales is to get a good BPO that allows the sale to be approved by the lender.

Powered by WishList Member - Membership Software