Notes from Short Sale Specialist
SHORT SALES - DO YOU REALLY WANT TO KNOW?
I recently attended a full day seminar on Short Sales, thinking this was the 'new wave' in real estate. I've got to tell you I cam away very disapointed if this is the direction the market is headed. To sum it up, they are a lot of work, will take at least twice as long as a normal transaction and ther is no guarantee that the deal will happen (is there ever?) or what your commission will be at the end of the day.
I really hope we can avoid this dierection, both for the sakes of the poor souls going through the drama in their lives and for us as REALTORS - let us do what we do - sell houses!
Anyway, look the notes over, and if they can help you, then so be it Let me through in a disclaimer though, these are notes from a seminar, they are not researched facts. Is it possible I either heard wrong or wrote wrong or even copied my notes wrong? Yes to all of the above. So, if you need a definitive answer, please look for one elsewhere.
THE LEAST YOU NEED TO KNOW
•q "RISKY" ALTERNATIVES TO THE SHORT SALE:
Become an "Equity Purchaser," aka "Shark." One who is a Non-Owner occupied "equity investor," buying a sellers equity at a DEEP DISCOUNT, to bring loan current. The EP is often deeded onto title. Seller's often remain in the property as co-owners, or rent back from the EP. The plus for the seller is no damage to credit, with a place to live, without moving.
Beware of the "Foreclosure Consultant," who charges a separate fee (not a commission) for a "Rescue Plan" Consultation, and does not have any agency with bank, buyer, or seller. This means no fiduciary responsibility. "Consultants" often do not hold real estate licenses. Both Equity Purchasers and Foreclosure Consultants invite Civil Code Violations CC 2945 and 2945.11, which protect distressed sellers from fraud by the above.
Be aware of the: "Soldiers and Sailors Act" by Congress, which provides protection with an Automatic Stay of Foreclosure, for military.
•q A "SHORT SALE" IS DEFINED BY: "ALL liens of record PLUS costs of sale, EXCEEDING CURRENT MARKET VALUE." Said to be "Upside- Down" in payment.
Simply put: Seller owe's more than what they can sell for.
This includes, but not limited to: Tax Liens, Mechanics Liens, 1st TD, 2 TD, 3TD et al., Unpaid Judgments and Small Claims, and Unpaid HOA Dues. (Many people who do not pay their mortgage are also not paying many other bills, which may be secured by real property. For example: Home Equity Lines of Credit (HELOC's), Mechanics Liens, and Boat Notes).
•q BANKS DO NOT INITIATE SHORT SALES. SELLERS & AGENTS DO:
The above Beneficiaries (aka "Bennies") are always negotiated with by the seller, or assisted by the agent. Lien holders rarely agree to 6% listings. Commissions can range from 1-5%, depending a number of factors.
•q "VALUE OF A SHORT SALE VS. THE COST OF FORECLOSURE" ANALYSIS:
This is performed by the bank. Banks take up to 45 days to perform this analysis, only after a Short Sale Package is submitted. All lien holders must weigh options before committing to a Short Sale, IN LIEU OF A FORECLOSURE. By foreclosing, lien holders assume all the risks by taking back the property:
•q RISKS INCLUDE:
Exposure to vandalism by the seller, deferred maintenance costs, cost of actual foreclosure process, the months of unpaid mortgage, (at least 4 months!). Also, the cost spent marketing the REO (Real Estate Owned), and commissions paid to future agents.
•q A four-month process is typical from Notice of Default (90 Days/ 3 Moths), to a Notice of Trustee's Sale (21Days/3 weeks), and is sold at auction by Trustee's Sale on day 22 if no resolution is reached, AND NO BK IS FILED.
•q Many sellers will file chapter 7 Bankruptcy, forcing a "Stay of Foreclosure." Some sellers do this simply to buy time sufficient to close a current escrow, and then just cancel the BK application. This is known as "Stopping the Clock" of the four month process. Once a bankruptcy is accepted, a bank IS NOT ALLOWED to offer a Short Sale to the seller, and will be sold at a BANKRUPTCY SALE.
•q The bank then hires attorneys to file for a "Relief of Stay" which allows them to continue foreclosing even though you are in BK.
•q However, courts are reluctant to approve this, and prefer a BANKRUPTCY SALE in order to pay off more creditors than a NON-JUDICIAL FORECLOSURE would, provided there is more equity over and above paying off the lien holders. Other "Non-Secured" creditors may be able to be paid off.
Example: If 450k is owed on the home, and the home can sell for 600k, the courts know the bank will "under price it" to recapture just the loan and costs- but not a penny more, especially in a declining or even a flat market. Banks want to "cut their losses." Courts want to realize the MAXIMUM RETURN, where Banks want only the note value and costs.
(In a rising market, banks are willing to price REO's along side the competition, going with the upward trend).
•q WHAT TO ASK A SELLER:
It is very much like a traditional listing except for the "sense of urgency," caused by deadlines and a sense of doom by the seller. Ask the seller: Did the seller disclose All Liens and encumbrances? Are there Late Payments, Notice of Default, or Notice of Trustee's Sale? Determine with a net sheet if there is enough equity to pay all liens AND costs at a "marketable" price? If NO: You have a potential Short Sale.
•q Many sellers are out of touch with who their current lender actually is. The loan is sold many times in the secondary mortgage market.
•q On counter offers and the MLS, be sure to write in: "subject to lenders approval," or if you are the buyers agent, GET COMMISSION AUTHORIZATION IN WRITING from bank.
•q Banks prefer NON-DELINQUENT sellers (Not easy to get SS accepted), with payments current, and good credit, because they leverage and threat with "derogatory credit reporting." They want to "milk" the seller as long as possible, staving off the NOD process. It's very difficult to have banks agree/ negotiate on a SS with Non-Delinquent sellers.
•q They have to miss payments first; Or otherwise seller will request forbearance or restructuring.
•q DELINQUENT Sellers have much less to lose, as their credit is already damaged by "Mortgage Lates," and are in "arrears." They are typically IN DENIAL as well.
•q LENDERS HAVE TO BE "SOLD" ON THE IDEA OF A SHORT SALE:
FHA Does not do Short Sales. FreddieMAC does not accept SS, but is known to renegotiate loan terms, or created a window of forbearance. Conventional Lender's may do the same, but typically foreclose. Much depends on "The Market." This is best negotiated before delinquency.
Many Lenders will not respond at all.
"Private Money," such as a Second Trust Deed, will be the most resistant to agree to a SS, and almost always prefer to foreclose. They feel their investment is secured by the deed.
In our current cycle, persuading 2nd's will be key, as many loans are 90-110% financed.
(500K 1st/ 100K 2nd = Owe 600k) Property can sell for 520, leaving 2nd with "0" after commissions. 2nd does not agree to SS. Seller or Agent approaches 1st with 450k (50k less to 1st @500k) and 50k to the second... Both agree to Short Sell in a declining market. The 2nd can easily stall a short sale by refusing to cooperate.
*ALL LIEN HOLDERS MUST AGREE TO A SHORT SALE. THIS MEANS A LOSS OF CAPITAL TO ALL THE LIEN HOLDERS. It is used for lien holders to "cut their losses," usually only in a "flat or declining market." Otherwise FORCLOSURE IS PREFERRED.
"Anti-Deficiency Law" states that a lender CANNOT go after personal assets if foreclosing on a "PURCHASE MONEY" loan.
•q A BIG "HOWEVER"...
Foreclosures on "REFINANCED MONEY," 2ND TRUST DEEDS, AND MECHANICS LIENS ARE NOT SUBJECT TO THIS LAW, AND CAN GO AFTER PERSONAL ASSETS! So, lien holders like to know this and use it to threaten and motivate the seller to make payments. (Phone calls and letters).
*Even if it is an original "Purchase Money Loan," 2nd Trust Deeds MAY STILL GO AFTER
PERSONAL ASSETS! However, JUDICIAL FORECLOSURE to obtain a DEFICIENCY JUDGMENT is a costly option, and takes a long time.
The MOST difficult option to get Short Sale Approval is when the seller voluntarily stops paying. Seller walks away, or disappears.
•q OBTAIN CLARITY ON HOW THE BANK WILL REPORT THE SALE
TO THE CREDIT BUREAU'S:
Anything less than "Paid In Full" IS DEROGATORY, and will damage credit scores greatly.
This is within the control of the seller and/or agent, assuming the bank will cooperate.
Lenders will "1099" (report to the IRS) the seller in the amount of ANY deficiency (unpaid principal), and the seller WILL BE taxed. A deficiency judgment is treated as "income" by the IRS, and is taxed accordingly.
Example: Shortfall of $50,000? IRS expects $12,500 as income tax, based on a 25% Income Tax bracket. Often the seller will sue the assisting agent for not disclosing this, of course.
•q BANKS TAKE UP TO 45 DAYS TO CONSIDER SHORT SALE:
And ONLY after receipt of a Short Sale Package. For this reason, prepare all parties involved for a longer escrow. Banks vary on their "consideration time." Contact lien holders for negotiation ASAP, at the time of the listing, and before you have a buyer. The banks need the time to weigh options: Lenders analysis of marketability in a SS, vs. the expected return or expense of foreclosure.
•q OBTAIN WRITTEN AUTHORIZATION FROM SELLER
This is needed for the access and release of information from lender about the seller and loan information. They will deny you information without written approval from seller. You will also need the loan number, zip code of Payment Notice is sent, and seller's SS #, to communicate with the Lender. Ask for a "Delinquency Dept," and for any known short sale procedures, current loan status, and ask the bank if they have filed for foreclosure, as the seller may claim to be unaware, or "with-held."
•q NEED TO JUSTIFY SS TO BANK AND/ OR SELLER:
Show comps that demonstrate the inability of the subject property to sell and still cover debts. Show declining market trend. If trend is increasing, there is little motivation by the bank.
To the seller, justification may be made on NOT having a short sale on the estimate of FUTURE INCOME. If they are expecting a return of income, it may actually be in their best interest to request forbearance or restructure. Have seller demonstrate future income to bank.
•q RE/ DEFICIENCY JUDGMENTS:
Occurs when "NON-Purchase Money" lien holders (ex. a Refi, a Mechanics Lien by a sub-contractor) files for a "JUDICIAL FORECLOSURE." Lien holders who have remained unpaid (IN PART OR IN FULL) after a traditional bank NON-JUDICIAL FORCLOSURE (AND NO BK WAS FILED) will file this.
DEF. JUDGMENTS are equal to the shortfall amount of the unpaid lien, PLUS the Lien Holder's costs, fees, and penalties. Remember: Only if there is a recorded lien, can you file for a deficiency judgment.
This amount WILL BE SENT TO COLLECTIONS.
•q SHORT SALE PACKAGE TO INCLUDE;
MARKET ANALYSIS (& APPRAISAL IF POSSIBLE)
SELLER'S FINANCIAL STATEMENT & 2 YEARS TAX RETURNS
PROOF OF CURRENT INCOME & MOST RECENT PAY STUBS
PAST 4 MONTHS BANK STATEMENTS
ESTIMATED NET SHEET
•q BE SURE TO CONTACT ALL OTHER LIEN HOLDERS TO NEGOTIATE SHORT SALE. THIS MUST BE DONE SEPARATELY WITH EACH LIEN HOLDER.
•q SOME TYPICAL SHORT SALES "CONDITIONS":
CLOSING DATE MUST BE FIRM
SALES PRICE MUST BE FIRM
BUYER MUST BE FIRM- NO ASSIGNMENT
AMOUNT OF PROCEEDS TO LENDER MUST BE FIRM
SALE "AS IS" MUST BE FIRM- NO REPAIRS PAID BY LENDER
THERE MAY BE CONTRIBUTION REQUIRED FROM SELLER
ZERO PROCEEDS MAY BE PAID TO SELLER
ZERO PROCEEDS TO BE PAID TO ANY ENTITY NOT DISCLOSED ON ESTIMATE
SELLER CANNOT ASSUME DEBTS OR COSTS OUTSIDE OF ESCROW
ONLY WIRE TRANSFER OF FUNDS ACCEPTED AT CLOSING
ANY REFUNDS AFTER CLOSING WILL GO TO THE LENDER
LENDER TO APPROVE FINAL HUD (NOT ESTIMATE!) PRIOR TO RECORDING
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