Fannie & Freddie Say 30 Days for Short Sale Review, 60 Days Maximum for Raleigh, Durham, Cary & Wake Forest North Carolina
The only thing short about a short sale is the payment on the existing mortgage. The time for review is way too long. To correct this problem, Fannie Mae and Freddie Mac issued new guidelines to their servicers. See http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1209.pdf for Bulletin 2012-9 by Freddie Mac. Similarly, see https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2012/svc1207.pdf for Servicing Guide Announcement SVC 2012-07
The servicer is supposed to respond to the submission of a short sale package within 3 business days. From the time a complete package is submitted, including a proposed North Carolina Offer to Purchase and Contract and Short Sale Addendum, the servicer is supposed to respond to the proposed short sale within 30 days. If the servicer does not approve or disapprove the short sale within that time limit, the servicer is required to give the borrower a weekly report until there is a decision. The regulations say the decision must be made within a masimum of 60 days.
Are all the servicers in compliance with this requirement? Are you kidding? The last one I talked to on a Freddie Mac loan for a Raleigh Short Sale listing laughed when I pointed out this regulation, then said it would take 90 to 120 days.
Other programs like Home Affordable Foreclosure Alternative (HAFA) specify that the servicer is supposed to respond the the short sale offer within 30 days if you have a HAFA approved short sale in process. Watch this video for a better understanding http://www.youtube.com/watch?v=qFH6tpdAZXI
Once the servicers get into compliance with these requirements, short sales will become much more acceptable to buyers. The number of buyers who will wait 30 days for an answer is much higher than the number of buyers who will wait 6 months. Any suggestions on how to get wider compliance with these rules?
If you own property in NC or are in the Research Triangle area and perhaps may need to Short Sale your home or business, please call or email Tim to request a confidential appointment regarding your specific requirements to Short Sale real estate in Raleigh, Durham, Cary, Wake Forest or other surrounding Research Triangle area towns in North Carolina.
In the first edition of Create A Short Sale, Your Guide Through the Short Sale Maze, I devoted a chapter to singing the praises of mortgage insurance companies. The mortgage insurance company had helped me get a short sale approved by explaining to the servicer that the short sale created a smaller loss for the investor (and the mortgage insurance company) than the foreclosure. As a result, the short sale was approved. Those were the good old days. I had other sales where the review by the mortgage insurance company was quick and supported the approval of the short sale.
Mortgage insurance companies are involved in any sale that does not have a substantial down payment, usually 20%. They are also involved in other real estate purchases to lessen the risk to the investor. Typically, they insure the first dollar losses on a loan. Normally they will cover the first 15% to 28% of principal balance of the loan. So, if the insurance company covers 15% and the re-payment on the principal of the loan is 12% short, the mortgage insurance company covers the loss and the investor recovers the full principal balance of the loan. In contrast, if the mortgage insurance company insures 15% of the loss and the loss is 21%, the mortgage insurance pays for the 15% and the investor takes the rest of the loss. While the laws vary from state to state, it may be possible for the mortgage insurance company to pursue the borrower to recover some of the loss.
When you have an FHA Short Sale, there is almost always mortgage insurance if the borrower used the low down payment allowed by FHA. The low down payment is the primary reason that most borrowers use FHA financing, so you almost always have mortgage insurance with an FHA Short Sale. Many of the mortgage guarantee companies have given the servicers ?delegated authority? i.e. the ability to approve a short sale without further review by the mortgage insurance company if it meets certain standards. You can find the standards at https://www.efanniemae.com/lc/sir/pdf/midelauthchecklist.pdf . One of the requirements is that the borrower has to be at least 60 days delinquent and considered past due for the third payment. This requirement bothers me because it penalizes people who work hard to keep their payments current.
For buyers without sufficient down payment, mortgage insurance companies perform the valuable function of allowing those buyers to buy a home. In the good old days, they also helped Realtors to close short sales because they realized that the loss would be lessened by a short sale.
Mortgage insurance companies have gone from good to bad and ugly. John?s story will explain it all.
John owned a condo in Raleigh that was underwater. He never should have paid the original purchase price for it because it was never worth that much. However, he was from California and compared to California prices, it looked like a good deal. To make a long story short, some of the people who converted the property from a rental community to condos are doing long jail terms. Almost no one in Raleigh bought them, they were sold to out of state investors during the run up of the real estate bubble.
Because the price was too high, the loan was too large and the payments were too big. As a result, the property could not be rented for enough money to cover the mortgage payments and homeowners dues. John tried to handle the negative cash flow, but had a huge financial setback so he desperately needed to sell the property.
My team found a buyer agreed to pay the market value for the home. My team includes attorneys involved in the negotiations, so the term “we” includes them. A short sale package was submitted to Chase who took way too long to review it. That buyer walked away. We found another buyer, but John?s financial condition worsened. Finally, the file was reviewed by a negotiator for Chase who asked for a $1,500 contribution from John in order to submit the file for approval. In response, we submitted John?s latest financial statements showing he did not have $1,500. The negotiator for Chase said with the new information there was no need for him to make a cash contribution. She submitted the file to the investor who approved the short sale. Chase has good quality negotiators but a slow system for reviewing short sales, so the delay problem is not the people but it is their process.
Then, the file was submitted to the mortgage insurance company. Their review stated that John would have to make a cash contribution of $9,500. You have to enjoy their logic, since he could not afford $1,500 then he could afford $9,500. They would take the $9,500 on a note over several years, but that made payments that John could not afford. So, we took up a collection among everybody involved and raised $4,000 with the buyer, seller and Realtors all throwing in some money. We offered that to the mortgage insurance company. Most financial analysts would prefer guaranteed cash at closing to the hope that an unsecured note would be fully paid by a borrower who is broke. The mortgage insurance company refused the offer. At first, they said the $9,500 was non-negotiable, regardless of whether the payment was cash or a note. Anyone who buys and sells notes knows that makes no sense, notes are sold way below the face value for cash.
We took up another collection and increased our offer to $5,500. I will spare you the details, but after much gnashing of teeth, we got it approved by decreasing the amount
The process took so long that Chase started a foreclosure proceeding. When the foreclosure notice hits the front door, the tenants stop paying the rent. So, John was in even bigger trouble. We got the tenant out, but the security deposit was depleted before it could be used to fix the damage done by the tenant. So, we had a buyer who had been forced to pay top dollar for this unit. When he did an inspection, he got a discount inspector who wrote up all sorts of items to try to show that he was as good as the inspectors who charged the market rate. Some of the items I could get fixed under the home warranty that I put on the property. But, others were not covered. For example, the report said the sink in the hall bath did not work. I ran it and it worked fine. In short, the buyer believed that the cost of the repairs justified a $5,000 reduction in the price. That would not work for Chase, the investor and the mortgage insurance company. The investor would take less, but the mortgage insurance company would not budge. So, the buyer walked.
I found a first time homebuyer who really wanted this one bedroom condo, because he could buy it for around $70,000. It was in the Brier Creek area, a prestigious section of Raleigh normally associated with an Arnold Palmer golf course community, fine restaurants and quality shopping. My team cleaned and repaired it with our own hands. We fixed everything that could be fixed under the warranty. The buyer?s girlfriend loved it. His mother wanted him to hold out for a better deal, but went along with the program when we showed her all the numbers. The buyer got his father to co-sign on the loan. My team resubmitted the short sale with the new buyer.
It took a great deal of re-structuring of the short sale proposal to get the numbers to work out so that the mortgage insurance company would get its $5,500. The proposal was explained in detail in an email directly to the negotiator, with less to the investor and more to the mortgage insurance company. However, there is only one way that Chase allows for a review of the short sale, so the approval we got did not match the structure of the sale that we submitted. In short, we needed even more money.
In the meantime, the actual sale date for the foreclosure was set. Freddie Mac, the investor that owned the loan, was tired of postponing the sale. The buyer called Chase and talked to everone he could. I called several levels of reviewers at Chase. I work regularly with the law firm that was handling the foreclosure and got the managing partner to assist in requesting that the sale be postponed. The sale was set for Monday. Friday afternoon, Freddie Mac refused to postpone the sale.
Monday morning, the effort started all over. We had to accept the short sale approval from Chase even though it took more money, because there was no way to postpone the foreclosure without the promise that the approved short sale would be completed and closed soon. With a little over an hour to spare, Freddie Mac allowed the sale to be postponed, authorizing a delay of 45 days. Forty five days is plenty of time to get a loan, so I had nothing to sweat about, right? Wrong
The notice from the law firm postponed the sale about 20 days. Can you say heart failure? North Carolina?s foreclosure procedure allows a sale to be postponed only so long without re-publication and certain other procedures that require a payment of several hundred dollars. Twenty days was all they had left. I tried to get the buyer?s lender to be ready to close before that sale date. When she sent out a series of emails asking for unnecessary items and misunderstanding the terms of the transaction, I knew that was not going to happen. This conclusion was reinforced when she did not return any of my phone calls. Unfortunately, the buyer had gone with a person at BB & T who was recommended by a friend instead of the person I recommended who had previously done several of the complicated loans that this condo complex requires. The buyer was fabulous, he would drop everything and deliver documents, pay stubs and anything else the lender wanted along with pies and gifts to encourage the lender?s team to hurry things along. If you want to see him, look at the video on the Buyer tab of the CreateAShortSale.com website.
Thank goodness Chase managed to get the additional payment to the foreclosure lawyers approved and the foreclosure sale postponed again. There is one positive result from this experience. I get to return the favor to that lender at BB & T by not returning her calls when she tries to get more business from my team. The other lender I recommend at BB & T has closed several more loans at this complex, so ?what goes around comes around?.
We have a short sale approval. We have a foreclosure delayed. We have the buyer?s loan approved. All we lack is enough money to close the sale because I know we cannot go back to Chase and the mortgage insurance company to get a revised approval. Everyone else was pushed to the limit, so I covered the rest of it. The other choice was to sacrifice John to a foreclosure and the first time homebuyer would not get the home he and his girlfriend loved. That choice would pay me nothing, get me no referrals and it would not help me stop the foreclosures in that neighborhood.
So, the sale closed, I made a little money, John was rescued and the buyer has become one of my strongest supporters and his mother loves me. My wife and I are going to his new home to have dinner with the entire family just as soon as he finishes the repairs. If we did not have a slow review by Chase and unreasonable requirements by the mortgage insurance company, I would have closed this sale more easily and made a much larger commission. However, I would not have this new client who is a raving fan of my team.
Short Sales Need Artful Negotiating
Negotiating a short sale requires an understanding of the process. When you submit the short sale package, you are dealing with a servicer, who collects the payments and administers the loan. They do not have as much “skin in the game” as the investor who owns the loan. So, you need to be able to involve the investor to get the right result.
How do you find the investor? You can ask the servicer. Sometimes they will not tell you if you ask “who is the investor”? However, some servicers like Bank of America have rules that if you ask a question that can be answered yes or no, they will answer. So, ask if the investor is Fannie Mae? If no, ask is the investgor Freddie Mac? You might get lucky.
The Internet provides an abundance of information. To see if the investor is Freddie Mac, go to
www.freddiemac.com/mymortgage and look it up. You can also call them at 1-800-FREDDIE (8am to 8pm EST). Similarly, to find out if the investor is Fannie Mae, go to www.fanniemae.com/loanlookup or call them at 1-800-7FANNIE (8am to 8pm EST). This brings up some legal requirements.
In order to use the online services for Fannie or Freddie, you need written authorization from the borrower. So, include this in your letter of authorization that you get the seller to sign at the first meeting, so you are not only authorized to talk to the lender, but you are authorized to look up the investor on the Fannie, Freddie or any other website.
What if Fannie or Freddie are not the investor, which is a frequent even for luxury housing. Many servicers will not tell you who the investor is, possibly because they do not want the investor to know how poorly they are processing your short sale request.
However, many servicers have rules that require them to furnish the investor’s information if the borrower/seller requests that information in writing. So, add that to your letter of authorization, i.e. the borrower requests the lender to furnish you with the name, address, phone number and contact person for the investor who owns this loan.
Some commentators say that another way you can find the investor is to look them up in MERS, the Mortgage Electronic Registration System. It allows borrowers to see which company manages and owns their loan. The site was made public as part of The Helping Families Save Their Home Act. The claim is that the site will inform borrower’s when the ownership of their loan changes. However, the only part of the site that is directed to homeowners allows you to check the servicer of your loan. How to check the owner is well hidden. So, if you can make this site work, please leave a comment on this post so we can share this service with everyone.
Why do you want this information? I was dealing with Bank of America/Countrywide on a California short sale. They were taking way too long to assign the request to a loss mitigation negotiator. Wells Fargo had the second loan on the property, and they had already assigned their short sale request to a negotiator, obtained a Broker Price Opinion (BPO) and were ready to negotiate a short payoff. Meanwhile, Bank of America/Countrwide is still waiting to get it to someone’s desk to order the BPO. On my weekly phone call, I made it clear to the “gatekeeper” that a written request to get the contact information for the private investor who owned the loan had been submitted. She found a way to order the BPO immediately to speed up the process. In other words, when the servicer knows that their client, the investor, will be looking into how the short sale is being processed, the servicer wants to make it look better.
If you want to get more tools for negotiating in real estate, look at my book, Create A Great Deal, the Art of Real Estate Negotiating by going to http://www.CreateAGreatDeal.com
Short Sales Will be Streamlined and Encouraged by the Treasury
On May 14th, 2009, the Making Home Affordable program created by the Obama administration was expanded by the Treasury Department to provide incentives for homeowners and lenders to engage in short sales. The program also encourages deeds in lieu of foreclosure. The Treasury Department unveiled this plan by calling these provisions Foreclosure Alternatives in the Making Home Affordable program.
To begin the process the lender evaluates the sellers to see if they qualify for the program, because the borrowers/sellers must meet the requirements of the Home Affordable Modification program. In other words, the borrowers who want to be sellers must meet the same standards applied to borrowers who are looking for loan modifications under the Making Home Affordable program, but are unable or unwilling to go through with the loan modification. Also, the lender will evaluate the property to see if it is reasonable that a sale will produce enough money to allow the lender to approve the short sale, i.e. will the net proceeds of a sale at the estimated sales price be an amount the lender would accept. A related step that the lender must take at the beginning of the process is to see if the condition of the title makes it plausible that all of the other loans and debts secured by the property will be able to be satisfied by a short sale. If the sale will produce enough money to satisfy the first loan, but not enough to take care of the second, third or fourth liens, then the property is not a good candidate for this program.
Sellers who complete a short sale can receive up to $1,500 when the sale closes. In nearly all short sales, the sellers get nothing out of the sale. With this program, they can use this money to pay some of their moving expenses when they finish the short sale. This helps the recurring problem that sellers need funds to be able to relocate when the home sells. This same $1,500 incentive payment applies to borrowers who give their lender a deed in lieu of foreclosure.
Loans have servicers and investors. The servicer collects the monthly payment and otherwise deals with the administration of the loan. The investor owns the loan and gets the net proceeds of each payment, after the servicer gets paid for its work. The servicer can get up to $1,000 for completing a short sale or accepting a deed in lieu of foreclosure. This is a decent incentive when you consider that the servicer gets a few cents from collecting each monthly payment.
In addition to these incentives, this expansion of the Making Home Affordable program creates a standard process to follow in a short sale. It creates timelines for the performance of the short sale, which is a welcome addition as they frequently drag on and on. The program also creates standard documents for use in short sales and deeds in lieu of foreclosure. The standard documents will include a Short Sale Agreement and an Offer Acceptance Letter. This standardization will make short sales easier to do, and the performance timelines should speed up the process. The Treasury update issued to explain this program says the Short Sale Agreement will “establish clear time frames for performance.” I hope this means there will be clear time limits for a response from the lender to a proposed short sale contract. If so, this could greatly encourage buyers to purchase short sale properties. A quicker decision by the lender will make it easier for the buyer to wait for the short sale to close, as some short sale buyers get frustrated with the process and buy another property.
The lender has to allow the sellers/borrowers a minimum of 90 days and a maximum of a year to sell their property. The time will vary depending on local market conditions. The property to be sold must be listed with a real estate agent that has experience in selling properties in the neighborhood. So, it would be wise for more real estate agents to take short sale training classes.
The seller and the lender will spell out “reasonable and customary real estate commissions and selling costs” in the Short Sale Agreement according to the guidelines for this program. These selling costs and commissions will be paid at closing from the proceeds of the sale. One of the best parts of the entire initiative is that once an offer is received the lender cannot try to negotiate a lower commission to be paid to the real estate agents. In other words, the Short Sale Agreement establishes the rate of the commission and the lender cannot try to cut it during the negotiations on the Offer to Purchase in the short sale. This will encourage more real estate agents to do short sales.
The lender will establish both the property value and the minimum amount that the lender will accept. So, the lender will order an appraisal or a Broker Price Opinion (BPO) and use that to establish a reasonable sales price for the property. By the way, the appraisal or BPO will have to be current, as the program requires that they be done within 120 days of the Short Sale Agreement. This appraised value will be the basis for the lender’s decision of how much they will accept as the short payment of the balance due on the loan. Many lenders will accept 80% to 90% of the value established by the appraisal or BPO, which allows buyers to purchase the property at a favorable price.
This procedure of establishing the acceptable value of an offer will be a wonderful improvement to a short sale, as the seller will get this information at the beginning of the marketing effort. In short, the seller will know what offers will be acceptable to the lender. This should eliminate the “guess again” feature found in some current short sales, where the lender will occasionally turn down an offer without giving a counter offer or any guidance to the seller. The opposite should happen under the current program, i.e. the lender will instruct the seller concerning the price at which the property should be listed and also provide guidance on price reductions.
One of the biggest problems in short sales comes when the property has a first loan and additional junior liens. For example, many homes have a first loan and a home equity line of credit that is a second loan. There is some assistance from this program because the Treasury will contribute money to help pay off second loans and other junior liens. For every two dollars that the lender allows to be paid to the junior lien holder, the Treasury will put in an additional dollar, up to a limit of $1,000 from the Treasury. Since many lenders in first position will only allow a junior lien holder to get $3,000, this program should make it easier to pay off junior liens.
If the borrower is unable to sell the home within the time specified in the Short Sale Agreement, the lender may consider a deed in lieu of foreclosure, in which the borrower voluntarily transfers ownership of the property to the lender. However a deed in lieu of foreclosure only works if there is only one loan on the property because the lender will not want to accept the property burdened by the obligation to pay off the junior loans.
If you want to read all the details, the entire Treasury Update: Foreclosure Alternatives and Home Price Decline Protection Incentives is found at http://tinyurl.com/qlbn9m. or http://www.treas.gov/press/releases/docs/05142009FactSheet-MakingHomesAffordable.pdf
This program will be available until 2012. Let?s hope we are done with short sales long before that.
Special Military Benefits Make Short Sales Easier
One of the causes of financial distress is relocation. Being in the military is a frequent cause of relocation, so it makes sense that there are special programs for short sales and other assistance for the military. Members of the Armed Forces do so much for our country that it is important for real estate agents to provide special service to them.
Military personnel and federal employees who are ?under water? with their mortgage can benefit from a program by the Department of Defense that is administered by the US Army Corps of Engineers under the Base Closure Act known as HAP (Homeowner’s Assistance Program). This program was extended under the American Recovery and Reinvestment Act of 2009. For full information, go to http://hap.usace.army.mil/
This program was originally designed to apply to members of the military or federal employees who owned a principal residence in an area where a base closure or realignment caused the values of the homes to decline. However, it has been extended to military personnel who were reassigned and had to move more than 50 miles during the mortgage crisis. These military homeowners qualify if they were reassigned between February 1, 2006 and September 30, 2012, they purchased the principal residence that they are selling before July 1, 2006 and they sold it between July 1, 2006 and September 30, 2012.
It also applies to members of the military and federal employees who were wounded in the performance of their military related duties after September 11, 2001, as well as the surviving spouse of someone who was killed in action after that date. The website encourages people who may not fit all of the requirements to apply anyway to see if they can get benefits.
The website says that ?HAP provides assistance in four ways. For eligible applicants, the Government may:
- Reimburse you for part of your loss from selling your home.
- Assist you, if you don?t have funds from the sale of your home to pay-off your mortgage.
- Purchase your home by paying off the mortgage.
- Help, if you default on your mortgage. ?
For short sales, the private sale reimbursement program is the most applicable. Under that program, the military member or qualified government employee sells their home and gets reimbursed for some of the losses on the sale of the home. This reimbursement is used to pay off the lender so that if there are enough proceeds the lender gets fully paid. If not, it is a short sale that is partially reimbursed. The website indicates that the amount of reimbursement can be 95% of the difference between the value of the house before the base closure and the current value (or sales price), but it also indicates there can be a payment of 90% of the original value of the home, with the added value of any improvements to the home. The seller can also be reimbursed for closing costs, including the real estate commission.
So, the home is sold with a short payment to the lender, but with an agreement to reimburse the lender later when these benefits come in. This is an excellent use of the short sale process, as it gets the seller moved gracefully and may get the lender fully paid. At a minimum, the lender will get more than just the sales proceeds of the short sale, as the reimbursement is in addition to what the buyer will pay for the purchase price.
So, if your seller is in the military or a qualified federal employee, look into these special benefits. The members of the Armed Forces deserve to get every benefit allowed, as they have definitely earned it.
Unfortunately, there are people who will try to take advantage of other people’s misery in a real estate short sale. I get emails daily by “coaches” who want to sell me a program of how to short sale a home in order to make money off shorts sales in a manner that I find distasteful. This is not the kind of Realtor training that I want to be involved in.
The schemes have two basic approaches for the property for sale, one by using an option to purchase and another using a trust. Basically, they start by teaching their students to find people in trouble with houses for sale, then put those people in even more trouble. I do not think it is right to do that to one of my neighbors in Raleigh, or anywhere in North Carolina.
The student is supposed to approach someone selling a home who needs to short sale their home and tie up the property using an option or a trust agreement. In other words, the student looks for a MLS listing that should sell for $200,000 and makes an offer of $160,000 to a family that is desperate to sell. Using the option, the student pays as little as one dollar to have the option to purchase the home, and gets the owner to sign the contract. Remember, this is an option to purchase, not a promise to purchase for a traditional sale.
The student submits a short sale package to the lender, saying that they are paying a reasonable price. At the same time, the student puts the home back on the market, tries selling the home for $200,000 or more. If the student can get the mortgage loss mitigation department to take a short payment based on the price of $160,000 and if the student can find another buyer to pay $200,000, then the student exercises the option, buys the property and immediately resells it for a profit. In short, the holder of the mortgage does not get the payoff it deserves, the property owner does not get to the equity they deserve, and the student takes the money that should be paid on the home mortgage. In stead of loss mitigation, this is loss maximization for the lenders who make mortgage loans.
So, what is wrong with that? If all the other parties are willing to let the student take advantage of them, why shouldn’t the student profit?
Lets analyze a completed sale first. The student is telling the holder of the home loan that they are paying off as much as possible of the loan on the home. Also, the student may be leaving the people with homes for sale with the obligation to pay the balance of the money that is not paid on the home mortgage. The owner of the home may also have an obligation to pay income tax on the amount that the payment to the bank is “short”.
After the sale closes, there will be some mortgage lender that will take a simple look at the tax records and see that the home sold for much more than the lender saw on the HUD-1 or closing statement. Then, the mortgage lender will get its lawyers to work to recover the ill gotten gains, as well as any other damages they can claim. The government prosecutors may get involved to teach the student what happens when you mislead institutions that make home loans.
Next, let’s analyze sales that do not close. In today’s market, a well priced home sells, an overpriced home does not sell. When the student raises the price to try to make a profit, the chance that the home will sell decreases dramatically. The family that owns the home is expecting a normal home buying experience, possibly hoping to stop foreclosure when the student buys the home. That family gets an education on the difference between an option and a sales promise when the property does not sell. When the student does not get another buyer to pay an inflated price, the student leaves the option money behind and does not buy the home. In many of these schemes, the option money is one dollar. So, the family does not get to stop foreclosure, they get to endure a foreclosure sale, and have one dollar for all the heartache they went through. Also, America gets more foreclosure homes.
I have a hard time with teachers who tell students to find people who are begging for a life preserver to keep them afloat. Then, they teach the student to throw them an anchor that is disguised as a life preserver that will drag them under. These teachers have stories about a few of their students who have made large amounts of money taking advantage of uneducated sellers and mortgage lenders that are so desperate for cash that they will approve a low short sale. This is not how you do a real estate short sale, this is how your increase your chance of a foreclosure. We should provide Realtor training to prevent foreclosures.
When someone approaches you with a scheme like this, just remember “thou shalt not steal.”
In 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.
Housing and Urban Development (HUD) has a Preforeclosure Sales Program that will allow a homeowner in default on a HUD mortgage to prevent a foreclosure and sell a home, even if it results in a short sale. To read all the details of this program to avoid foreclosure, click here
The short summary of the program is that owners who are 31 days or more late on mortgage loan payments on certain loans related to HUD can contact HUD to start the process. They will fill out applications and get a Information/Disclosure form 90035 mailed from HUD. If the owner is approved for the program, they receive an Approval to Participate notice from HUD. The owner must then list the property with a Realtor, who is not a relative for an arms length real estate sales effort, including an MLS listing. This sales program gives the owner four months to get a contract to sell the short sale home, and the sale must close within 6 months of when the owner is accepted into the program (or 8 months with special qualification) . During that time, the home mortgage lender will stop foreclosure.
As a part of selling a home using this program, the owner will need to get an FHA approved appraisal to establish an “as-is” value. Then, the owner can place the property for sale, sell for less than the appraised value. and use the proceeds to pay as much as possible on the home loans. The amount of the allowed sales price goes down as time goes on. During the first 30 days on the market, the sales price has to be at least 88% of the appraised value. In the next 30 days, the sales price can be at least 86%, and for the rest of the program it has to be at least 84% of the appraised “as is” value. This approved sales price creates a quick form of mortgage loss mitigation, as the loss mitigation department should give a quick approval to any offer that meets these guidelines.
As a part of the sales program, the owner may receive some portion of the sales proceeds, which is extremely unusual for short sales because the seller is typically required to walk away with nothing. If the home sale is closed within 3 months, the incentive is $1,000 and it decreases to $750 after that. The program has an additional $1,500 that can be used to pay off any junior mortgage loans after the incentive payment is applied, i.e. to pay off a second trust deed loan or a home equity loan.
The program allows the seller to pay up to 1% of the sales price as a payment toward the buyer’s closing costs which is also unusual for short sales. In order to encourage good marketing, this program to prevent a foreclosure sale allows a real estate commission of up to 6% of the sales price, which is consistent with the new Fannie Mae policy on reasonable commissions in real estate short sales.
This program applies only to owner occupied homes for sale. If it is an investment property, or a property abandoned by the owner, those houses for sale do not qualify.
For homes that qualify under the Preforeclosure Sales Program with home loans associated with HUD , you can do a sale that is up to 16% below the appraised value and those proceeds will be approved to satisfy the HUD related mortgage loans. There is no restriction on how short the payment is in comparison to the mortgage balance, just a limit on how low the price can be in relation to the appraised value. So, if the mortgage balance is above the appraised value, the sale could be well over 16% “short”. In other words, you can get this short sale approved easily by the loss mitigation department if you comply with the procedural requirements established by HUD.
This program is a little know part of the Realtor training of how to short sale a home, but it decreases the number of foreclosed homes and gives the buyer a smooth home buying experience.
I worked with Mindy Oberhardt on a short sale home purchase. She had a surprise after she made an offer, because the sellers had used a limited service agent who only entered the home as a MLS listing and that was the extent of the listing agent’s service in selling a home. The fact that it was a short sale was not in the MLS, which resulted in a surprise that Mindy did not deserve as a part of the home buying process. Homes for sale with limited service agents that have high balances on their mortgage loans may put you in an unintended short sale. Here is what she has to say:
During August of 2008, I represented a buyer in his pursuit of a home in Raleigh, North Carolina, that was involved in a real estate short sale. The fact that it was a short sale had not been disclosed in the MLS listing. The listing agent, a limited service agent, had posted the property in the MLS but took no further responsibility in making the property for sale. I was notified by the Sellers directly that the property was a Short Sale Home. I immediately disclosed this material fact to the Buyer and discussed the uncertainties involved in securing a home which was involved in a short sale. My client indicated that he wanted to go forward with the offer. Having not dealt with short sales in the past and putting my client?s best interests as my highest priority I approached Tim Burrell, a colleague in my office who had done many short sales. He partner with me to represent the Buyer and provided a bit of Realtor training at the same time. I explained to the Buyer that Tim had experience which in combination with mine, would increase the likelihood of the offer getting approved by the mortgage lender and would increase the potential of the real estate sale being approved in a more timely manner.
Tim and I worked together to not only explain the process to the Buyer but to guide the Sellers through the process as well. Tim took the lead in securing the detailed paperwork that was necessary to provide a complete package to the loss mitigation department. He interfaced with the mortgage lender on a regular basis to keep the process moving forward. Both Tim and I interfaced with the Buyer on a regular basis to explain where we were in the sequence of events, to answer questions and to keep him realistic regarding his expectations. Both Tim and I were in contact with the Sellers on a regular basis to keep them informed as well.
Tim was able to get short payoff on the home loan approved in less than two months, an amazingly short time frame for this type of transaction. Tim was out of town at a CyberStars Summit, but keeping in touch with the home mortgage lender. While he was checking out of the hotel, he took the mortgage loss mitigation negotiators call. She said the short sale was approved, and we had to close the sale on Monday. Calling on Thursday to get a closing on Monday got Tim’s attention, as it woudl be impossible to get the home buying process completed in that time. After exploring the reason, the negotiator said the Monday closing was necessary to get the exact amount shown on the closing statement paid to the investor. Tim explained that there was no way to get the insepction accomplished, the appraisal done and the loan approved by then. However, he was able to convince the negotiator that the exact amount would be paid to the investor when the closing occurred in a couple of weeks. The negotiator was worried that the payment required for the taxes would decrease the payment to the investor. The buyer paid the little bit of extra money to cover the few days of taxes. The home closed within a reasonable time after approval, once the inspections and the appraisal were completed.
Both parties involved in this transaction were extremely fortunate to have the attention of Tim and myself in this transaction. If they had been left to the limited service agent who did not know how to short sale, I shudder to think what would have happened. I don?t know of many agents that would have had the knowledge that Tim brought to the table to take it from a shocking surprise to a seamless transaction. In addition, both Tim and I took great care to respectfully keep both parties up to date at all times and to calmly guide them through what was undoubtedly a very stressful process.
Even more than usual, you need to be able to rely on your seller in a short sale.
When you are short selling a home, there is great deal of material that has to be gathered by the sellers for the short sale package. It all has to be accurate, with no misrepresentations, in order for the mortgage lender to accept the short payment.
You have to stare down the bank and stop the foreclosure, with the assistance of the sellers contacting the bank. You get to go through the foreclosure version of waterboarding as the lender takes the property right up to the sale date, then postpones it.
The sellers have to understand, and accept, the tax consequences of the short sale and not change their minds.
The sellers have to get nothing out of the short sale, then move out gracefully. If they try to get money out of anyone at the time of closing, it can be a misrepresentation as they have told the lender that they are walking away from the short sale with nothing. Although, some lenders are allowing the equivalent of moving assistance to the seller, so this may be getting better. If this comes up, you might consider having someone buy some furniture from the seller to give the seller the funds to move in separate transaction from the short sale.
In essence, you need to pick good people to work with. Short sales are difficult enough. If you represent a jerk, you get all the features of hell without the inconvenience.
I act as a short sale consultant for Realtors all over America. In the Triangle of North Carolina (Raleigh, Durham, Chapel Hill and lots of smaller towns like Cary), I get to select my own clients, and I try to choose wisely. But, when I am a consultant, I do not get as much input in chosing the clients as I would if I interviewed them myself. A delightful agent that I have known for many years asked for my help in an extremely complicated short sale and did not want to go through the Realtor training or Realtor education to learn how to short sale on such a complicated transaction. It took months. We got to avoid foreclosure three times, getting it postponed at the last minute each time, because the seller cannot pay the mortgage. The seller was able to sell a home for $1,500,000 when it had four liens and unpaid taxes that added up to about $2,100,000. Much of the unpaid debt was completely cancelled. Yet, he yelled at me when the judgment debt that was the fourth lien was only released as a lien on the property and not completely cancelled. We were only able to get the three preceeding lenders who were not getting fully paid to let us pay $5,000 on a $15,000 judgment. At first the creditor who had this judgment was so angry at the seller that he would not settle at all, but his attorney persuaded him it was better to get some money out of the seller’s only asset. When you figure that second loans of $250,000 are frequently settled for $2,500, you will understand what an accomplishment getting $5,000 to a fourth lien was. But, it was not good enough.
He insisted on documents being hand carried to him for his review, with deliveries made by the Realtors. When it came time to close, the seller would not even go to the escrow office to sign the papers at the proper time. The escrow was delayed due to his delay. Then, he would not agree to move out when the escrow closed. He wanted money to pay for moving and storage, and he wanted to stay in the house he was sellling for two weeks, rent free. Possession was supposed to be delivered at the close of escrow, not two weeks later. We worked out the money by selling some furniture at a public auction. The buyer was amazingly gracious on the move out date, but the seller made it difficult for the buyer to bring contractors to the house to measure for future work. I had everyone prepared to have to evict the former owner, but he moved out on his own.
Learn from my experiences. If the sellers are not truly fine people who deserve to be rescued, do not rescue them. So, if you have a hard working family in Garner or Knightdale, North Carolina, take good care of them and they will treat you well, But, I learned in lifeguard training that you can swim up to help someone who is going down and they can take you down with them. It is a tough time for the seller, so you do have to put up with a great deal to provide a needed service. But, do not sign up to be abused.
One of the reasons to do short sales is to get undying loyalty from clients and referrals of all their friends. If the client is the “south end of a north bound horse”, most of their friends are probably jerks. Do you want to spend your life working for people like that?
Pick your clients wisely, rescue the good people and help save America from the financial crisis. But, there are some people you should walk, no run, away from.