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.

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.

Do Price the Home Like Goldilocks

March 13, 2009 by  
Filed under Short Sale Do's & Don'ts

goldilocks-70Goldilocks found that one item was too hot, another was too cold, and one was just right. The pricing a short sale listing needs to follow the Goldilocks principle, not too high, not too low, but just right.

If you price the house too high, you will not get showings and offers. To get the short sale process started, you normally have to present an offer to the lender. There are some lenders who will pre-approve the seller’s qualification for a short sale, but that is in the minority. So, you need to price well to get an offer.

You might have to ignore this rule briefly, depending on the lender you are working with. Some lenders want to see that you tried to get them fully paid. In other words, they want to see that the listing price started at a figure that would give enough money to fully pay the lender. If the market tells them there is no way to get that amount after you tried, they are more satisfied that it is the market, and not the Realtor, who is forcing them into a short sale situation. If you have to do this, leave the price high for a while, then drop it. How long is a while? That depends on whether you are facing foreclosure or not. If not, a while is a couple of weeks. If foreclosure is looming, you might want to skip this altogether, or price it high for a few days.

Why not price too low? You want to get an offer to start the short sale process, but if the offer is outrageously low the lender will not even open a file to review it. Also, if you do not generate an offer that is close enough to the market value for the lender to accept, you will not get the lender approval so you will not close the sale. Generally, most lenders will take 90% of the market value from a Broker Price Opinion (BPO) or an appraisal, although some will go as low as 80%. In some markets, the buyer’s agents will not bring you offers above the asking price. So, your low price generates offers that are too low and you do not close.

What is just right? You want to stand out below the price of the other homes for sale, because you will have to give the buyer an incentive to go through all the difficulties of a short sale. What it takes to stand out depends on your market. In Raleigh, a 5% discount is enough to get the buyer’s attention. In other markets, it may take more or less, depending on the inventory of homes for sale.

There is an exception to the Goldilocks rule. If you are facing foreclosure, do whatever it takes on the price to get an offer. Some lenders will not proceed with a foreclosure if they see that the home is being aggressively marketed and they will keep the property in the loss mitigation department. But, once your file is transferred to the foreclosure department, the lender goes full speed ahead to foreclose. The foreclosure department’s mission is to either get the loan fully reinstated, or to sell the property on the couthouse steps. The only thing that will stop the run away train heading toward foreclosure is an offer.

On one property in Raleigh, I was trying to sell it around $450,000. When the foreclosure notice came out, we dropped the price to $425,000 and got more showings but no offers. So, we dropped it to $400,000 and got multiple offers that bid the price back up to $420,000. If you want to see how to get multiple offers to bid up the price, go to www.CreateAGreatDeal.com. Without an offer, the home would have been foreclosed.

Which side to your err on? Go toward the low side in pricing instead of the high side. It is better to have offers to submit, and get a counter offer from the lender, then try to get the buyer to accept the lender’s counter offer than to have no offers at all. One monkey wrench in this plan is the occasional lender that will just turn down your offer without a counter offer, leaving you with nothing to present to the buyer. Luckily lenders are getting smarter in short sales, so they are doing this less.

Go Over The Negotiator’s Head to the Investor

time-running-out-70x70The first place you negotiate is with the loss mitigation department, and hopefully you get what you need. Sometimes, you run into problems, like having them turn down the short sale with no response. In other words, they just turn you down, but do not give you a counter offer to work with. This is particularly upsetting if you are facing a foreclosure. So, how do you stop the foreclosure?

It is extremely unlikely that the loan belongs to the lender you are dealing with. On average, banks keep only 15% of their loans. So, there is an 85% chance that they are only servicing the loan. When the payments are not being made, they have lost the servicing income and want to get it back to producing income for the bank either by reinstatement or foreclosure.

So, when you have a problem with the lender that is servicing the loan, go around them to the actual investor. The investor’s motivation is different from the servicer. Instead of looking at a lost income stream, the investor is trying to get as much principal back as possible.

If you can get in touch with the loss mitigation negotiator at the servicing bank, just ask who is the investor. They do not have to tell you, but if you establish some raport before you ask, they might. If they do not tell you, change the subject, talk about something else, then casually ask them what team they are on. The lenders divide their loss mitigation departments into teams based on who the investor is, so the team members only have to learn the rules of one investor. Once they tell you what team, you know the investor.

If you cannot get the information about the investor directly, play the odds. If the loan is within the limits of a conforming loan, it is most likely Freddie Mac or Fannie Mae. Start with Freddie Mac by going to www.FreddieMac.com, because there is only one loss mitigation department in Freddie Mac, in McLean Virginia. If Freddie does not have it, try Fannie Mae at www.FannieMae.com. They have five offices. The office that will regulate your lender is the one closest to its headquarters. So, figure out which one is the closest to the headquarters and call.

If it is a HUD or a private investor, they are much harder to find.

Once you get in touch with the investor, they may have more interest in accepting your short sale. They will need to get in touch with the servicing bank to postpone any foreclosure and discuss the acceptance or counter offer to your short sale proposal. In other words, it is not the end of the line if he servicing bank will not work with you. Try the guarantor, as we discuss elsewhere in this website or try the investor. The investors and guarantors may have a different reaction to your proposal.

Step By Step Short Sale

February 24, 2009 by  
Filed under Short Sale How To

baby-on-steps-70x70You 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.

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