What You Need to Know About Short Sales

What is a Short Sale?
A short sale is a sale of property that includes some forgiveness of debt by the lender under a deed of trust.

• The lender agrees to take a lesser amount than what is owed, and upon receipt, releases the lien from the property.
• The Contract is always between the Buyer and Seller and the closing must occur prior to the Foreclosure Sale.

Why Would the Lender Agree to a Short Sale?
The lender would rather have most of what is owed rather than none at all.

• The lender does not want the property! REOs cost money, and the bank would rather have money than property.
• It costs approximately $30,000-40,000 to sell a $200,000 property.

What are the Benefits to the Seller?
Reduced negative impact on credit, i.e., satisfaction of debt vs. foreclosure

• Lender may forgive the deficiency altogether (although this could be a taxable event for the seller)
• No more collections calls from lender and the ability to move on

Know the Financial Position of Your Seller
More often than not, a short sale could have been an option only if the agent knew ahead of time that the
Seller had “negative equity”

• Obtaining payoffs early in the game can help assess this

Don’t take your seller’s word for it that they have made their payments regularly

• Use your instincts
• Ask questions
• Sellers are embarrassed and don’t want to tell you the truth that they are behind on payments.
• A short sale usually works better when there are more than one mortgage, like an 80/20 combo, but can be done with one mortgage as well.

Easier to negotiate with the 2nd, because in a foreclosure, they are wiped out completely.

What Do I Need to Do to Facilitate the Short Sale?

Call the lender and speak to the loss mitigation department.

• Each lender has their own rules – you need to learn what those rules are and follow them to a “T”.
• Get specific contact information for correspondence. You should be assigned a loss mitigation specialist who will be your contact throughout this process.
• Authorization Letters. Your client will need to write a letter to the lender authorizing you to speak with them on his behalf.

Specifically reference the following:

• Property address
• Loan number
• Your name
• Date
• Agent’s name and contact info

• Preliminary HUD. You should contact your local closing attorney and ask them to prepare a preliminary HUD that shows all fees associated with closing for the seller. The short sale lender will use this in determining acceptable sale and payoff amounts.
• The Bain Group will help facilitate this.
• Hardship Letter. This is a statement of facts describing how the seller got into this situation. It requests that the lender accept less than full payment of the debt.

Some situations that Banks consider:

• Loss of Job; financial distress
• Family crisis
• Medical issues

• Copies of Financial Documentation. This includes copies of bank statements (usually two months), as well as documentation about your income and any other assets. Also two years of tax returns are required.

• Comparative Market Analysis – Provide this if your client can’t sell because area values have declined.

• Offer to Purchase and Contract – Additional Provision Addendum should be added making contract subject to short sale lender’s approval. Lender may not allow all commissions to be paid, and will tend not to allow “unnecessary expenses such as warranties.

The Lender Will Always Say No to Your First Offer

• If the Lender approves the sale, be sure that you meet all the lender’s deadlines; otherwise, the lender may cancel the short sale agreement and proceed to foreclosure.

• Be sure that the closing attorney knows there is a short sale involved in your transaction. The attorney will be required to send the HUD for approval in advance of closing. They will need the contact information for the loss mitigation specialist as well as the paperwork that the lender will need the seller to sign at closing.

Know the Timeline!

• You must know where the Seller is in terms of the foreclosure.

• If the Seller has been noticed with the foreclosure hearing, you usually can continue the hearing one time, or if not, at least postpone the sale after the hearing for a period of 30-45 days to buy more time to get the short sale approved.

What Happens After You Submit the Required Documentation?

• The Bank then orders an appraisal or a BPO (Brokers Price Opinion from a Realtor)

• Usually, investors who are buying these homes meet the Appraiser at the property to show them everything that is wrong with the house. The lower the number comes in, the greater chance of the bank accepting the short sale

THE BANKS DECISION IS BASED ON THIS!

• Typically, the bank accepts 80 to 90% of this number
• Do your own BPO – challenge their opinion.
• Take pictures
• Show cost to repair estimates

How Long Does All of This Take?

• Average of three to eight weeks
• Short sales are approved about 50 percent of the time.
• Each loss mitigator at the bank has about 300 files they are working on at any given time.

YOU must call them, they will not call you!