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.

Mindy Finds Out It is a Short Sale After Making an Offer

March 18, 2009 by  
Filed under Short Sales Stories

mindy-oberhardt-headshot-1101I 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.

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.

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.

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.

Seller Qualifications for a Short Sale

March 10, 2009 by  
Filed under Short Sale How To

treasury-70With my first short sales in 1992, the seller had to be totally destitute to qualify with their bank for a short sale. If they had any money, or any way to get some money, they bank wanted it. If you were a bank, you would not want to let a borrower get away without paying you back unless there was no way they could pay you back.

Now, the qualifications are easier. Software has even been created to review the qualifications of a seller for a short sale. Just like Desktop Underwriter will review whether a borrower is qualified to receive a loan, this software will review the seller’s qualifications for a short sale.

The borrower cannot have sufficient assets to come to the closing with the money necessary to pay the loan in full. Some people say that the seller has to be insolvent. That is a bit stronger than necessary. The borrower does not have to be totally bankrupt, just unable to use any assets to raise the money to pay the balance due on the loan.

The second thing that will make it easier for the bank to approve the sale is if the seller has a negative cash flow. In other words, if the seller has less money coming in than what is going out, every month the seller is short of money to pay the household obligations. This is where some sellers will hurt themselves. Most people are used to filling out financial statements to make themselves look good. They have a hard time facing their financial problems so they will fill out their financial statement to show that they balance each month i.e. the same amount of money comes in as goes out. Encourage the sellers to be honest, if they are financially losing ground every month, put it down that way.

The third thing the lenders look for is financial hardship. The hardship letter is discussed in detail in a separate post. You want to show a reason for a change in the financial situation from when the loan was originated to the present. So, if the sellers lost a job, watched their business fail, had the mortgage payments adjust, had a family tragedy or had a medical problem, show the financial consequences of the hardship.

Having poor credit is a problem for getting a loan. Having poor credit is no problem for getting a short sale. Do not worry that the credit is bad. It should be if there is serious financial distress. But, bad credit is not a requirement for a short sale, as I have done a number of short sales for people who have made every payment right on time.

Qualifying for a short sale is the reverse of qualifying for a loan. To get the loan, you have to show that you have a positive cash flow, plenty of assets in reserve and no financial problems. To get a short sale, you have to show a negative cash flow, minimal assets and serious financial problems.

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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