Short Sales With Multiple Loans and Liens

Some short sale sellers will make your life extremely “interesting” with their talent for putting on multiple mortgages and collecting liens.  You get to negotiate them all,  because if any one will not sign off, the short sale does not close.  As the picture shows, you have to get every lender to jump into the deal.

This is why some Realtors will not take short sales with too many mortgages and liens.  Some short sales do not close, and ones with multiple liens are the hardest to close.  Once you have done some short sales, you will understand why.  Refer the short sales you do not want to another Realtor who is willing to deal with the mess.   A separate post discusses the priority of liens and their effect on how much to offer each lien holder in  Lien Priority Determines Who Gets Paid & How Much

The first issue is how do you negotiate with all the liens.  Some of the people providing Realtor training say to negotiate with the last one first .  In other words, if you have a first loan and a second loan, find out what the second loan will settle for first, then negotiate with the first loan.  There may be some merit to that, because you know what you have left to offer the first loan as a short pay.

I do short sales differently because I negotiate all of the debts at once.  The reason is that there is not a linear relationship between them.  In other words, the results of each negotiation is interdependent on the results of all the other negotiations, so you need all the answers all the time.   If the property is in foreclosure, you do not have enough time to submit the package to the second lender, wait for their review and approval, then submit it to the first lender.   I had a property in foreclosure in Palos Verdes, California with a first and second loan with Washington Mutual and a third with CitiBank.  Citibank gave us an approval on the third loan one day before the deadline set for the foreclosure on the first loan.  If I had waited to get that short pay approval first, then submitted to the other lenders, the sale would not have gone through.

To understand the interdependence, some lenders on a short sale home have guidelines for how much they will let a junior lienholder be paid.  I am working on a short sale in Rancho Palos Verdes, Calfironia where the first loan is with Countrywide and the second loan, a line of credit, is with Bank of America.  The seller cannot pay the mortgage.  Countrywide will not allow the second lender to be paid more than $3,000 on the closing statement (HUD-1).  Bank of America will not settle for less than $5,200, because they have a rule that they will not take a short sale that does not pay them at least 10% of the outstanding balance of the loan.  The entertaining part of this standoff is that Bank of America is merging with Countrywide, so it is like a one member of a couple saying you have to put all the money in my right pocket, then the other member of the couple saying no don’t do that, put money in my left pocket. 

How do you break this standoff? You have to know what is allowed under your local rules, the disclosure rules for lenders and the National Association of Realtors code of ethics.  In California, the commission is paid by separate commission instructions to the escrow officer that are not part of the escrow instructions signed by the parties.  You can consider having one of the Realtors send the amount of the difference to the junior lender.  You can also have the buyer buy something from the junior lender that happens to equal the amount of the difference.  You cannot do anything that is beyond the rules for proper presentation of information to a lender i.e. do not lie to a lender.  See the post Don’t Put Your Client In Jail for more discussion, and substitute Yourself for Your Client.

If you watch a good chef, you will be amazed at how many things can be prepared at once with all of them finishing at the same moment.  When you get good at short sales, you can handle many liens at once and get them to a closing at the same time, and be able to avoid foreclosure at the same time.

How to Communicate with the Lender/Servicer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Do Disclose Short Sales in the MLS and Advertising

The fact that a property will be a short sale has to be disclosed in the MLS.  You must disclose material facts, and the fact that a buyer will have to go through a short sale process is a material fact. 

By the way, MLS is a registered trademark of Major League Soccer.  We are not talking about that MLS, we are talking about the Multiple Listing Service.

The simplest way to disclose a short sale is to say something like “the sale is contingent on  lender approval of a short payoff of the existing loan.”   There are all sorts of other phrases to disclose this.  “The sale is contingent on the lender’s acceptance of less than a full payoff for the existing loans.”  I put this phrase in the Agent Only section of the listing in the MLS.

What about commissions?  Since lenders frequently try to cut the commission, how does the listing agent deal with that possibility?  If you specify a certain commission to be paid to the agent for the buyer, you will have to pay that amount at closing, unless the buyer’s agent volontarily lowers their commission.   If you want to be able to adjust the commission, specify in the listing that the commission is subject to the lender’s approval and may be renegotiated.   The listing agent can also specify that the commission to the buyers agent will be 50% of the total commission approved by the lender. 

This commissionectomy by lenders discourages short sales.  Agents for buyers need every dollar they can get in todays market.  If they are going to have to make an offer on a short sale property and speculate on whether it will close based on the lender’s approval, there should be a bonus to the commission to compensate for that risk.  Instead there may be a commission penalty, a risk that the sale won’t close, and a longer time for the buyer’s agent to work with the buyer holding the deal together.   On the other hand, the listing agent is taking the same risk, doing much more work in submitting the short sale package and negotiating the decreased payoff and full release of the loans, not to mention explaining lien priority, tax consequences and other issues.  So, it is not fair that the listing agent eat the entire commissionectomy.    The new guidelines by Fannie Mae are a step in the right direction to prohibit renegotiation of the commission if the total commission is 6% or less.

Some Realtors feel that the fact that a property will be a short sale should be put in advertising.  There is not enough room in most ads to put in every material fact about the property, so I do not see how that should be required.  You do not have to put all the required disclosure statemtents in your advertising, so you should not be olbigated to say it is a short sale.  Before a buyer makes any kind of offer on the property, the fact that this will be a short sale should be disclosed.  Bringing this fact up in a counter offer is too late, as it would result in the buyers feeling they have been mislead.

Most short sales are sold “as is” because the bank wants to get the amount shown on the closing statement (HUD)  that is presented at the time the lender approves the sale.  Since the seller usually has no money, any repair costs would come out of the proceeds of the sale, reducing the payment to the lender.  Do you have to put “as is” in the MLS and the advertising.  I do not believe it is required, so it should be left to the negotiating abilities of the listing agent.  If you want to frame the negotiations to start with the idea that the property is sold “as is”, put it in the MLS.  If you want to deal with it as the negotiations proceed, that may be your preference, as you may be able to get some basic repairs done as a part of the transaction.  For example, if the property does not meet the FHA standards, certain repairs are going to need to be made for the buyer to get FHA financing.  The existing lender should realize that this is an expense that is necessary to get the sale to close and allow that charge on the closing statement.   I have had an easier time convincing the existing lender to pay more in closing costs, then have the buyer pay that same amount for the repairs directly to the contractor.  For some reason, adjusting closing costs is easier for the short sale lender to swallow than to pay for repairs.  Since the amount of money for the buyer is the same by paying the repair cost instead  of the closing costs, most buyers are happy work in this manner.

To set the proper expectation, you need to disclose that the house is a short sale.  It does not make a pleasant surprise.

Owner’s Choices: Short Sale versus Loan Modification

Recent legislation encourages loan modification in an effort to decrease the number of foreclosures.   If you are meeting with homeowners, see if one of their goals is to keep their home. 

The new rules on loan modification provide relief for people who have had financial difficulty, but remained current on their payments.   There are also some new programs for those in imminent danger of foreclosure, and those who are already up to 60 days late on their payments.

These programs are only for a family’s principal residence.  It does not apply to second homes or investor owned properties.   Loans that were originated before January 1, 2009 are eligible for modification.

Loan servicers will follow a series of steps specified in the programs to reduce the homeowners’ monthly payments in order to first bring the amount of the payments down to 38 percent of gross monthly income.  As a second step, the government will share in the obligation to lower the payments even further to 31 percent of borrowers’ income. The first step in the process involves reducing the interest rate down to as low as two percent.  Next, the term of the loan can be extended to up to 40 years.  As a last resort, the principal of the loan can be reduced. The homeowner’s monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association dues and/or condominium fees.

 There is a payment to the loan servicer from the government to encourage the completion of this process.  Also, if the borrower makes the mortgage payments on time for three years, there is a principal reduction payment by the government to the lender as a reward to the borrower for staying current on the financing. 

To qualify, the borrower must still be employed and show the ability to make the payments after the adjustment.  The loan can be well over the 80% of the value of the home that is required for refinancing.  In fact the loan can be over 100% of the value of the home, so that people who want to keep their homes, even if it is worth less than the amount of the loan, can get their payments in line and stay in their home.  The borrower gets only one loan modification, so it better be right the first time, because there will be no second time. 

 Loan servicers will use a net present value (NPV) test as a standard to judge each loan that is at risk of imminent default or is at least 60 days delinquent. The NPV test compares the net present value of cash flows with and without modification. If the test is positive – meaning that the net present value of expected cash flow is greater with a modification – the servicer must modify the loan. If the NPV test returns a negative result, loan modification is optional.

To see the Guidelines issued by the US Treasury,  click here.   For details on the Making Home Affordable Plan with all of its modification opportunities, click here.  For all the details on the Financial Stability Plan that is part of this initiative, click here .  Executives from Housing and Urban Development emphasized that access to the loan modification program is free and they warned homeowners to beware of rescue scams that claim to charge a fee for a government modification

For owners who have lost their jobs, this program will not work.  If the owner needs to sell the home to move to another area, or if there are other personal issues such as divorce, these programs will not change the choice of pursuing a short sale.   But for families who want to refinance out of a bad loan but have been prevented from doing so because the value of the home has fallen or the loan qualification requirements have become too severe, this new program should work well.   In the next few weeks the loan servicers should be set up to review applications for loan modification.

For people who want to stay in their homes, this could be a godsend, if they qualify.  There is no moving, no tax consequences, no effect on credit scores and no emotional trauma.    For those who have to move, the short sale, deed in lieu of foreclosure or foreclosure itself are still the choices.

Owner’s Choices: Short Sale versus Deed In Lieu of Foreclosure

A deed in lieu of foreclosure occurs when an owner gives a deed to the property to the lender in order to avoid the foreclosure process.  It is commonly called a deed in lieu.  The benefit to the lender is it saves the time and expense of the foreclosure.  The lender will only accept a deed in lieu if there are no other liens on the property i.e. not other loans, judgments or secured debts.  The reason for this is that the lender does not want to take over the obligation to pay the other debts that are secured by the property.  If the lender has a first lien and forecloses, that foreclosure eliminates the other junior liens, other than IRS liens. So the deed in lieu has to be the same result of clean title as a foreclosure in order for the lender to be interested.

The advantage of a deed in lieu is that it only takes one negotiation.  If the bank accepts, the owner is done with the house. One of the essential goals of the negotiating with the bank is to get a complete release from the debt.  In other words, the owner wants the bank to accept the property in full satisfaction of the entire debt, so that the owner will not be chased by any debt collectors after the recording of the deed.

The byproduct of this result is a benefit for tax consequences.  If the property is taken in full satisfaction of the debt, there is no debt relief i.e. the debt was fully paid.  Without debt relief, there is no income tax consequences of the deed in lieu, unless the IRS wants to challenge the transaction by claiming that the market value of the house was less than the full value of the debt.  So, the owner needs something like a market analysis to have on file showing that the amount of the debt was equal to the market value of the property.

The owner can also negotiate as smooth transition out of the house, with a reasonable time to move to a new location.

One disadvantage of a deed in lieu of foreclosure is the effect on your credit score.  Under the Fannie Mae guidelines, a deed in lieu will make you ineligible for that type of loan for four years.  In contrast, a short sale takes two years to “season.” Also, the standard loan appllication not only asks about foreclosures in the last 7 years, it also asks about a deed in lieu of foreclosure for that same period of time. For a deed in lieu, you have to answer the question “yes” for 7 years.  For a short sale, the answer is “no.”

A lender does not have to accept a deed in lieu.  There have been owners who have written out a deed, recorded it and sent it to the lender. They do not have to accept it. So, a deed in lieu is not a sure thing.  Neither is a short sale, a bank does not have to do a short sale either.

The deed in lieu is a sale for purposes of income tax, just like a foreclosure and a short sale.  So, if you made a profit you may owe tax on the gain.  But section 121 of the Internal Revenue code eliminates the tax on a gain of up to $250,000 for a single tax filer and up to $500,000 for taxpayers filing jointly for a qualified principal residence.

Why aren’t there more deeds given in lieu of foreclosure? Many people do not know about them and some Realtors do not discuss that alternative as there is normally no commission paid. Since the short sale is a sale, the Realtor gets a commission. Since the deed in lieu is not like a normal sale, there is normally no commission.

Do Price the Home Like Goldilocks

Goldilocks 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.

Time For Short Sale Approval

One 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.

Select The Right Closing Attorney or Escrow

Closing a short sale takes more talent than closing a regular sale, so it is critically important that you use a closing attorney or escrow officer who has experience with the requirements of a short sale.

Angie Turner is one of the best paralegals in North Carolina.  She is with Clifton and Singer, one of Raleigh’s premier firms in the field of real estate law.   I asked her to write about the difference between closing a short sale and a regular sale.  While she follows the terminology in North Carolina with closing attorneys, you can substitute the term escrow officer for closing attorney in other parts of America.  Here is what she has to say:

 

Short sale transactions are very different from standard closings. They require real estate professionals that understand the process, that can negotiate with the bank, and that can coordinate with multiple parties to complete the transaction.  One of the important parts of the short sale package that is submitted for the lender’s review is a draft HUD statement, in other areas called a closing statement.  The lender will determine whether to accept the short sale based upon the amount of the payment to the lender shown on the draft HUD statement.

 

The closing attorney’s responsibility is to provide fair and upfront pricing for the seller’s side of the draft HUD statement.  While the pricing for the seller’s side of the draft HUD statement is estimated, the estimates must be as accurate as possible.  Estimating the seller’s fees is often difficult due to the lack of a closing date and other variables.  If the seller or closing attorney is in doubt about the estimated fee, the closing attorney’s office should err on the high side because the bank will be unwilling to accept a higher fee later.  In other words, if the bank settles for a certain amount as a full payoff of their loan, you do not want to go back to them with less money being paid to the bank than what was shown on the draft HUD statement.

The closing attorney’s office is also responsible for making changes to the draft HUD statement and submitting it to the bank and Realtor.  Often the HUD statement will be changed 15-20 times before the bank agrees to the short sale.

 

Once the negations are completed, the closing documents are signed, and the keys have changed hands, the closing attorney’s job is far from over.  In order for the seller to give good title to the buyer, the deed of trust securing the loan must be canceled of record.  The

loan(s) paid off in a short sale transaction have numerous stipulations and precise instructions that must be followed exactly before the bank is willing to cancel its deed of trust.  Since the bank is taking less that a full payoff, they are even more difficult on the requirements for eliminating the lien on the property that was sold.  Therefore, after closing, the closing attorney is still working with the bank and meeting its requirements to ensure that the deed of trust is successfully cancelled.

 

Due to the additional requirements in completing a short sale, you will need to choose a closing attorney that is knowledgeable in short sale transactions.  You need a firm that is willing and able to work with you and the bank before you have even scheduled a closing.  For example, even before you have a sale approved, you will need to have a draft HUD statement to estimate the proceeds to the bank.  Also, you need a firm that will follow through with the numerous detailed tasks that occur after closing.

 

Thank you, Angie, for your explanation of the requirements for closing short sales.   If you are closing a short sale with me, the closing will be at Clifton and Singer to avoid the disasters that can occur with firm that has not done many, many short sales.  My Short Sale Addendum includes a provision that the closing will be with Clifton and Singer because it protects all of the parties to the sale.  

Seller Qualifications for a Short Sale

With 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 an Accurate Closing Statement

It is all about money.  The bank is trying to minimize its loss by taking a short payment as a better choice than any alternative.  So, how much will they get?  The contract will not reveal the net proceeds.  So, the bank wants a closing statement.

I used to send a Net Sheet for my sales in California, because many of the escrows do not use the standard HUD-1 closing statement.  When Bank of America rejected an offer three times because the package did not include a closing statement that they could easily spot, I learned my lesson.  Give them a HUD-1, that is what they are looking for.

This started my second educational step on the HUD-1.  We bought software to create a HUD-1 and did them ourselves.  When we missed a couple of the charges that should have been figured more accurately, the shortage came out of my commission.

The third education came from unexpected costs that came up at the last minute.  The approval by the lender states that they will accept an exact amount of money, provided it is paid on or before a certain date, and provided that certain other conditions are met.  When your payment from the closing does not meet that amount, you have two choices.  The first is to try to get the bank to renegotiate and reduce the amount they will accpet.  The second is to find the money somewhere else, which is usually the Realtor’s commission if the buyer will not put up the difference.  When there is not enough time to get a reconsideration by the loss mitigation negotiator, the choice of taking it out of your commission is the only one that works.

So, figure the HUD-1 with some margin for error.   Figure the costs high, to set the lender’s expectations low.  Put in some items that may not be absolutely necessary.  If you get to the closing and there is more money for the lender, there is no problem.  If you get to the closing and unexpected costs come up, you may have them covered by the other items that you can adjust.  Even if there is not enough “play in the joints” to absorb every unexpected cost, you will take less of a hit to your commission.  If you get the lender to expect less and you end up paying the bank more, they will be happy.

First, create a HUD-1, not a net sheet.   Second, have it created by the professionals who will comprehensively include every imaginable cost.  Third, figure it so that the payoff aims on the low side for the bank, so that surprise costs will be covered and your short sale approval will still be valid.

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