Don’t Have Short Sale Moving Problems

March 31, 2009 by  
Filed under Short Sale Do's & Don'ts

moving-van-for-short-sale-closingIn 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.

Don’t Let the Buyer Misunderstand a Short Sale

March 15, 2009 by  
Filed under Short Sale Do's & Don'ts

misunderstood-70Many 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

March 15, 2009 by  
Filed under Short Sale How To

multiple-70Some 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.

How to Communicate with the Lender/Servicer

telephone-operators-70You need to communicate with the loss mitigation department. Another post goes into detail about how to get in touch with them in “Find the Loss Mitigation Department.” Now that you have found them, how do you establish communication.

I have written a book on negotiating, Create A Great Deal, the Art of Real Estate Negotiating. It discusses collaborative negotiation as the best way to get the highest quality agreement. You want to establish a collaborative atmosphere so that you can exchange information that will make it more likely that the agreement will go together, and close gracefully. You and the loss mitigation negotiator have the same goal: to convince the investor or other decision maker to approve the short sale. Most negotiators get a bonus for an approved short sale. So, find out how you can work together to reach the goal.

The first thing you want to do is collaborate to keep the file in the loss mitigation department. If it goes to the foreclosure department, your time to get an offer and get it closed becomes much shorter. Also, the foreclosure department is much harder to negotiate with, as their guiding principles are to get to the foreclosure sale or get full reinstatement. Collaborate with the loss mitigation representative to find out what you can do to help them keep the file in loss mitigation. Furnish whatever they need to keep the file from proceeding to foreclosure.

My friend, Joan Curry at RE/MAX UNITED, represented a family interested in one of my Raleigh, North Carolina short sale listings in 2005. The sellers were getting divorced and I was talking with the loss mitigation department, sending them information to show that the sellers are qualified for a short sale and emphasizing the marketing effort. On December 30, I was just walking out the door of my house in California to catch an airplane to Raleigh when I got a call from the lender. My primary residence was in California where I had one team of Realtors, and I had another team in Raleigh, North Carolina. I traveled back and forth frequently. The loss mitigation representative told me that if she did not have an accepted offer by the end of business that day, the file was going to the foreclosure department. I called Joan Curry as I drove to the airport to tell her I had to have an offer right now, encouraging her with the possiblity of a good deal if she met the time deadline. Sitting in the L.A. airport, I got her call with a very low offer. I presented it to each one of my clients separately, in the manner that you must in a divorce, and recommended a quick counter offer.

My sellers had to battle each other to savor the divorce experience. They came back with a counter offer that was a bit worse than my recommendation just as I was boarding the airplane. I called Joan with the counter offer and explained that I would land in Dallas just before the close of business for the lender. I hoped her clients would accept it, and leave that message on my cell phone. When the airplane’s wheels touched down, I turned on my phone long before it was allowed, and there was no message. While we were still on the runway, I called Joan. Her clients had a counter offer. I called mine as we taxied. They wanted to fight again, but I was able to keep the focus on the time. They accepted the counter. I called the lender as we neared the gate, but there was no answer at her desk. I got the receptionist, had my contact paged and she heard it just as she was walking out the office door. I confirmed that we had a contract. She wanted it faxed to her immediately, and I stiffled a laugh. In 2005, that would be hard.

Since she was not going to be back in the office until tomorrow morning, I told her it would be there, but she could just leave for the evening and it would be on her desk in the morning. When I arrived in Raleigh, Joan had the contract signed by the buyer on my fax machine. I got the sellers to sign in the middle of the night, going to each residence. I sent it to the lender, so it would be on her desk when she arrived. If I did not fulfill that promise, I would lose credibility. We had several more fights between my divorced clients, but we close the sale on time.

To make a long story long, do whatever is necessary to stay in loss mitigation. Before that, do what is necessary to establish rapport so that you will get a head up and a way to cure any problem that is coming up.

While all this sounds good, you cannot rely the loss mitigation department. That sounds harsh, but you cannot trust that they have any continuity or that they are properly processing your proposal. There is so much turnover and so many people working on your file that you have to take detailed notes of every conversation. You will talk with dozens of people with little consistency in their approach to the short sale. You have to keep the process on track by having every conversation documented. They put notes in their file. You need notes in yours. Write down their name, the date, the time and even which department they work in (some lenders have branch offices that cover the phones all over the US, so know there that person works to properly identify them). If you are able to refer to everyone you talked to, and when you talked to them, and confirm what they said, you will have a much easier time persuading the next person you talk to that certain commitments have been made.

Another way you cannot rely on the loss mitigation department is that you cannot count on them to notify you when they have made a decision. I called Countrywide on my regular weekly call to discover that they had turned down my short sale five days before, and they were closing the file because I had not responded with a new offer. I got a new offer in the next day, but the file was closed, so it went through the entire review process again. They will not call you, you have to call them. When they ask why you are calling so often, tell them the Countrywide story.

Dealing with loss mitigation departments is the ultimate in frustration. You start out talking only to gatekeepers, low paid staff whose job it is to convey simple information and get you off the phone. Do not get angry with them, as they put down everything in the notes in the file.

Call at least once a week, and preferably more, after you package is submitted and before it is assigned to a negotiator. You need to keep after the process to be sure the package does not get stuck somewhere, or routed improperly. Always be polite, and ask for the help of the people you are talking to. They will review the file and tell you what is missing, what needs to be done or what will help. You can improve your chance of success by first asking for their suggestions, then listening carefully.

Once you get to a short sale negotiator, that person does not make the decision. They put together the presentation for the investor or other higher level reviewer who makes the decision. Some of them you will not be able to talk to, they are too busy. So, your trial brief summary of the proposal will have to speak for you. Others will only communicate by email. An email does not properly convey tone and emotion. To correct, write in detail and do not say anything that you do not want passed on to everyone in the world. If you get to talk, great negotiating is more about listening than talking. So, listen actively, repeat back bits of what they said with an encouraging remark, and listen more. The first way to establish trust is to listen, as you do not people who do not listen to you. Again, if you want a course on negotiating, go to Create A Great Deal, the Art of Real Estate Negotiating.

One of the most frustrating parts of the loss mitigation review is having your file reassigned to another loss mitigation negotiator. The gatekeeper will try to tell you that this will not slow down the process. If you believe that, I would like to sell you the Brooklyn Bridge. If you can get in touch with the new negotiator, do not wait for the package to be sent by the lender. Send the package again directly to the new negotiator, as there is a decent chance that it will not get routed correctly, or that it will take a long time for the internal routing to work. Then, listen to the new negotiator, whether you are listening to faxes, emails or an actual telephone call.

In short, be persistent, be polite, ask for help, listen carefull and give the negotiator what she needs to succeed.

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.

Time For Short Sale Approval

March 12, 2009 by  
Filed under Short Sale How To

time-70One of the biggest problems is the time it takes for the lender to review the short sale package. At the national conventions, the lenders on short sale panels talk about wanting to get close to the market value of a home in a short sale. To get close to a retail value, you have to sell to a retail buyer, not an investor. If the time to review a short sale proposal is measured in months, you will not get a retail buyer, as they are looking for a home that they need to move into in a reasonable time. The only buyers who will endure a long delay are the ones who are willing to trade the inconvenience for an amazing price i.e. an investor who does not care when you close. In other words, if you want to sell retail, you have to deliver the property in a retail time frame.

An example lets you see what the delay does to a family who wants a home. I submitted a short sale for $620,000 to Countrywide in May, 2008 on a property in Rancho Palos Verdes, California. They turned it down late in July, with no counter ofer, just a rejection. Two days later, the same buyer increased his offer to $630,ooo and I submitted it with a transmittal in huge bold letters identifying it as a response on an open short sale file. We did not get a response from Countrywide until November, 2008.

When the offer was submitted, the lady of the buying couple was seven months pregnant. They were hoping to get this home just down the street from where her parents lived. During the time for the initial review, their child was born. During the second review, the child was developing rapidly. When Countrywide responded by saying they wanted $635,000, the market had fallen so much that a bigger house with a better yard and a much better view came on the market for less money than Countrywide wanted for this house that needed repairs. So, the couple and their young child moved into that other house.

As you can see, the delay not only chases away family buyers, it makes it harder for the Realtors to convince the buyer to honor a contract price that was reasonable six months ago after the market has fallen.

So, what do you do? Some instructors say to submit the financial information for the seller early, so that part of the review can be completed before an offer comes in. That might help, but many lenders will not review anything until you have an offer. When the lender has too many files to review to begin with, they are going to review the ones with offers first and they may never get to one without an offer.

So, get an offer as fast as possible. If you have an investor who will buy the house at an amazingly low price, write it up, include the short sale addendum, have the seller sign it and submit it. If no other offers come along, see what the bank says in response to the offer. If they accept it, close the sale and your investor gets a good deal. If they give you a counter offer, you will know what the lender will accept even if your investor will not go that high. Once you have an approved amount for the short sale, you can adjust your list price accordingly to get a retail buyer who will accept it as you can tell them the process will be shorter than normal.

Another possibility is that a better offer may come along while you are waiting for the review of your investor’s offer. If it does, make sure that your file has been assigned to a short sale negotiator before you submit the other offer. If you submit a series of offers, the lender may start the process over with each submission, so you are moving to the back of the line each time you submit. You have to submit all offers to the seller promptly under the National Association of Realtor’s Code of Ethics. You do need to submit it to the lender at some time, but there is no requirement for urgency.

Some seminar leaders say to submit a fictitious offer, just to get the process going. If the bank accepts it, their advice is to say that the buyer walked away. I won’t do this as my credibility is extremely important.

One of the ways to speed up the process is to have a complete short sale package organized so that it is easy to reveiw. The short sale package has been discussed in a separate post, but the most important point on expediting the review is to find out what the lender wants and give them everything they want the first time.

Another part of expediting the process is to call regularly. I call at least once a week, and sometimes three times a week. You need to check the notes in the file to see where your package is. Occasionally, it is submitted to the wrong department, like the time ASC submitted my clearly labeled short sale package to the loan modification department. That department threw it away. Other times, you need to be sure that your package is moving toward assignment to a short sale negotiator. Most of the time in the review is waiting to be assigned, so if you can shorten that, it will help. The worst thing is if you are assigned to one negotiator, who does not get to your package, then they reassign it to another, who does not get to it, then it is assigned to another. You get the pattern. My record is being assigned to six different negotiators before one actually looked at it.

As a part of calling regularly, you may get acquainted with some of the supervisors in the department. See if you can submit the package directly to them for an expedited review. Usually the answer is no, but sometimes it works.

Another delay in the process is getting the appraisal or broker price opinion (BPO) done. Some lenders have a triage arrangement to review short sales. The ones that have no merit are rejected with little review. Others that may be considered go on to be assigned to negotiators. See if you can convince the triage people in the loss mitigation department to order the appraisal or BPO while the file is waiting to be assigned to a negotiator. If the person you are talking to does not have authority to order the BPO, ask to talk to a supervisor, or someone with the power to do that.

If the process is taking too long, find out if the loan has mortgage insurance or any other guarantor. One of the conditions of the loan guarantee is that the servicing lender will have a loss mitigation procedure that will promptly review short sales. Google the name of the mortgage insurance company and explain to them your issue with the delay. When the guarantor gets in touch with the lender who is reviewing the short sale to discuss how the delay may result in the cancellatioin of the guarantee, the process will speed up dramatically. You can also do this with the actual investor who owns the loan. If they hear that the delay is jeopardizing the ability to get the short sale approved, their contact with the company reviewing the loan will speed up the process.

One thing to remember during all this time, be nice. I have a strong temper and it is hard for me to deal with an incompetent system. But, getting angry with the people in the loss mitigation department is extremely damaging. They are the ones who will be making the recommendation to accept or reject your proposal. Bite you lip and be pleasant.

When you take a short sale listing, contact the loss mitigation department and find out what their normal time for review is. They will quote you something that you can pass along to the buyers to set their expectations at a reasonable level. If the buyer expects a long time for review, and it comes in anywhere near that time, you will have met their expectations. One dilemma is that sometimes the review times quoted are way longer than what it will really take. If the quote is incredibly long, it may make the buyer run away screaming. So, you have the dilemma of whether to pass on the outrageous quote or not.

Doing short sales will teach you patience, and perserverance.

What’s in a Short Sale Package?

March 10, 2009 by  
Filed under Short Sale How To

package-70x70You want to make the entire short sale package extremely easy to review, because you are presenting it to a loss mitigation negotiator who is overworked and underpaid. Look at the entire package from the negotiator’s point of view, and make it easy to recommend it for approval. If you put in everything necessary, in a format that is easy to review, you are much more likely to get an approval. For example, put the loan number on every page of the package. It is an administrative pain for you, but it is a sign of courtesy for the negotiator who will know that you are experienced and considerate. This will also prevent some of your papers from being lost. Similarly, include a recent mortgate statement from the lender so that the loan is easy for the negotiator to identify.

Find out what this lender wants in the package and give them everything they want, and no more. Some of the lenders put their requirements online, like the package for EMC. Compare this to what Aurora requires by clicking here . Bank of America does not want all this stuff, as they get too many short sale applications for the size of their staff. They ask for a HUD-1, financial information on the seller, a hardship letter and a letter authorizing them to talk to you. Other lenders will send you their requirements by fax or email. Still others will play “guess again” by telling you to send in a package, then telling you that you did not send in what they wanted. Let’s look at the items normally required in a short sale package.

I start my package with a trial brief that begins with a summary of what is in the package and points out why every element submitted supports a short sale. At the end of this trial brief, I include any problems with the property that make it evident that the lender would not want to foreclose on the property. The most dramatic are mold, toxic material, a former meth lab and dangerous illegally built structures are all hazards that the bank will not want to have to sell, because even though they sell a foreclosed property “as is” the bank will still get sued. My favorite was a series of illegal retaining walls nearly three times the height allowed by the zoning regulations that were so poorly built they were leaning from the weight of the illegal grading heaped on them. If you have these items, include some compelling presenation, such as pictures or bids for the cost to remedy the problems. In other words, this trial brief frames the review and leads the negotiator to the conclusion that approval of the short sale is in the lender’s best interest.

The most important part of the short sale package is the hardship letter, so I put it before all the other materials to set the tone of the review. It is so important that it is covered in a separate post “Do a Compelling Hardship Letter.”

The next part of the package concerns the offer. I put in a one page summary of its essential terms. The negotiator deals with contracts from all over America, so do not make them dig out the essential terms from a long contract. Include the entire contract, and make sure it is completely executed by all parties. You are dealing with administrators who check every signature and set of initials. I have even had ASC, the lender, say they would not accept electronic signatures on the contract in the short sale package even though the closing attorney said electronic signatures were legally valid.

The loss mitigation negotiator gets the best understanding of the offer from the HUD-1 settlement statement. It must show the estimated payment to the lender i.e what you want the bank to settle for. I put a large arrow by that number to make it easy for the reviewer to find it. The tips for preparing the HUD-1 are covered in a separate post “Do an Accurate Closing Statement.” An essential part of the presentation of the offer is a pre-approval letter showing that the buyer is sure to get the financing. The loss mitigation negotiators are sensitive to the recent trend of short sales being approved for deals that do not close. So, prove that this one will close. For cash buyers, include a letter from the bank manager saying the cash is in the bank, or a bank statement showing a balance large enough to close.

The next part of the package deals with the marketing of the property. The negotiator needs to know that the property was fully exposed to the market. Enclose a copy of the listing agreement. Since the new Fannie Mae policy says that the banks should not cut a commission so long as it is not above 6%, I would suggest a commission not to exceed 6%. A summary of the history of the listing helps by showing the date listed and the original listing price, then the date of any price reductions. If you started marketing the property at a price that would pay the bank in full, point that out to indicate that you tried to get the lender fully paid, but the market would not support that price.

The next group of items concern the financial qualifications of your seller. The bank will normally want their own financial statement filled out. Since the negotiator is used to reviewing that form, it is much easier to review the bank’s form instead of your form. You want the financial statement to show that the seller is not able to cover the monthly expenses, so that the negotiator will conclude that the seller cannot afford to keep on paying the mortgage. If the seller is self employed, you may need to send two years of tax returns. Some banks will want tax returns even if the seller is not self employed. Be susre to include all the schedules that are part of the tax return. Normally, the last two pay stubs are required for a seller who works for a firm, while a recent profit and loss may be required for a self employed seller. Be sure to check to see how many pay stubs covering what period of time the lender wants, and avoid delays by getting it right the first time. This part of the package finishes with the last two month’s bank statements, or however many statements the lender requests. Be sure to discuss any large deposits on those statements, particularly if the seller took those funds out of a retirement account. You do not want the negotiator to get the wrong impression that there is a large income when there is not.

You should have sent in the letter of authorization for the bank to talk to you before you send in the package, so that it can be reviewed and approved. Include another copy with the package to make it easier for the negotiator.

Remember the rule about not submitting anything the lender does not request? You break that rule if you have good market statistics in a graph or other visually compelling medium that show the market is declining rapidly.

Most loss mitigation departments will require you to fax this entire package to a particular number. Set your fax on Fine, so the quality of the documents is better. Also, you may have to fax in the middle of the night to avoid a constant busy signal. If you have a problem getting the fax to the loss mitigation department, ask to talk to a supervisor then see if you can fax it to her fax machine.

Whatever you do, send the entire package by mail, with a signature required. They may tell you they only accept the package by fax, but mail it anyway. You want the signature to prove that it was received. My record is faxing a package four times to ASC, having confirmation from my fax machine that it was received each time , only to have them claim it was not received. If they know there is proof of receipt, you will avoid this problem.

Providing a complete short sale package makes it much more likely that your offer will be reviewed more quickly and greatly increases you chance for lender approval.

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

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.

Do a Compelling Hardship Letter

March 7, 2009 by  
Filed under Short Sale Do's & Don'ts

poverty-70x70Short sales is all about helping people who have had hardship. I get lots of calls from well heeled investors who want the bank to take the loss that they should be taking. A short sale is for people who have had a financial hardship, not the wealthy who want to reallocate their loss. Short sales can be done on investor owned property as well as owner occupied property. But, there has to be a financial reason why the owner cannot pay the rest of what is owed to the bank.

The way you express that is in the hardship letter. Some seminars give you a list of hardships, but do not limit your thinking to a simple list. Anything that causes a change in the financial condition from when the loan was taken out which results in the inability to pay the monthly payments and the impossibility of bringing the rest of the money owed to the closing of the sale is a financial hardship. The obvious are having a business fail, losing a job, medical bills, death in the family, divorce or separation. Less obvious is forced need to move such as having to relocate to get a job or military service when your reserve unit is called up. If your payments adjust on the loan to an impossible level, describe that, but also look for dramatic tax, insurance or other monthly payment increases. One of my easiest discussions to persuade the loss mitigation negotiator that the seller had a financial hardship was when the seller was in jail. Don’t just look at a checklist, look at the curve balls that life throws that cause financial disaster.

The owner should write it personally, with enough detail that the loss mitigation negotiator can feel the pain. The letter needs to describe what has happened to create the financial setback. I have clients where the wife has breast cancer and their insurance does not cover nearly enough of the expenses. Other clients have seen their company go out of business, so being the best salesman of a product that no longer exists will ruin a family financially. Others have watched their restaurant fail completely, shut its doors, and take all their money with it. Do not just say, “we cannot afford to pay you”. You need explain why in vivid detail so that a hardened loss mitigation negotiator who reads these letters all day long can feel sympathetic to your client.

Do not stop with the description of the problem. Explain what you have done to try to eliminate the problem, deal with it, or make it better. The clients with breast cancer have a payment plan for their medical expenses. The salesman has sought work everywhere, but is working at a low hourly wage to put food on the table while he is still looking for a sales job. You do not want the negotiator to just see that your client has fallen down, you want to describe the efforts to get back up again.

At the end of the letter, tell the negotiator that the owner wants to sell the house so that they can pay back as much of the debt as possible. In areas where the market is going down, the owner can emphasize that this is the best way to honor the obligation to repay the bank, because waiting longer or going through foreclosure will yield less and less money for the bank as the value of the house declines.

The hardship letter has to be signed by the seller, and preferably by both sellers.

Do not try to be brief, because brevity leaves out the detail that makes the story poignant. Do not write the letter for your client, as it will sound like a Realtor instead of a person in trouble. Do not let your client lie, as this is a representation made in writing to a bank. Just let your client tell their whole tale of woe.

The hardship letter is not the place to vent all the seller’s frustration with the lender. If there are some things the lender has done that violate the law, you can raise them in negotiating with the lender. The seller is looking for sympathy in the hardship letter and the best way to get no sympathy is to antagonize the loss mitigation negotiator who works for the lender being criticized.

This should be on top of the short sale package, setting the stage for why this owner deserves to be allowed to pay less than what is owed to the bank. It is probably the most important document in the entire package, so give it the attention it deserves.

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