A. Short Sales can be Successful! I am frequently contacted by buyers, sellers and agents who get frustrated halfway through the short sale process. Negative comments start to emerge that only one out of five short sales are successful. The truth is short sales require the determination of an olympic athlete. With hard work and perseverance, banks will approve the vast majority of short sales offers that are submitted with a reasonable contract price.
Recognize, for banks, a short sale is a difficult consumer real estate transaction to approve which actually requires substantially more paperwork than an original mortgage application. Instead of proving credit worthiness and financial stability, the seller must now prove they are in dire financial straights. They must have limited cash flow, including savings, investments, trusts, liquid retirement funds or other finances to tap. Sellers with fairly deep pockets clearly are not candidates for a short sale. Unfortunately, buyer’s have no control over this process.
The truth is, no matter how much you discourage a buyer from submitting a short sale offer and no matter how much you hold both parties hands, short sales are an emotional roller coaster for both the buyer and the seller.
One of the biggest problems frequently encountered with short sales is misguided expectation factors, particularly on the part of the buyer. In most instances, the agent should insist and find non-short sale property for the majority of the buyers.
B. Creating and Managing Expectations
1. Reasonable Offers: When qualifying a short sale buyer, education is the key. The property is most likely extremely aggressively priced to begin with. The offer need not be for full market value but it must be reasonably close. Banks are not concerned about percentage of the offer to the outstanding mortgage. They are concerned how close the offer is to fair market value. Experience has taught me any offer less than 85% of fair market value will be summarily rejected.
I have seen banks reject offers of 90% of the outstanding loan balance and accept as little as 40% of the loan balance. The key component is market value.
2. Additional Consideration: You must create buyer’s expectations not only with pricing but with other considerations as well.
a). Are you willing to wait up to 120 days for an answer?
Typically speaking, most short sale approvals take approximately 90 to 150 days to approve. I previously was under the mistaken belief that if banks were given a shorter time to approve the short sale, the bank would act quicker. After all, Parkinson’s Law stands for the axiom “work expands as time allows.” In reality, banks are overwhelmed, short sale departments are unorganized and it is unrealistic to believe that a bank will ever make a decision in less than 90 days. Properties with two mortgages will take even longer to get approved.
b). Are you willing to pay for a home inspection immediately after the seller accepts your offer?
The buyer should recognize that even if the seller accepts the contract, it is still a gamble and certain out of pocket expenses will be at risk. In my experience, it is far better to discover problems up front through an inspection. If the inspection reveals problems that exist that relate to the structure of the residence, mold or other serious issues it is imperative to include these repairs on the preliminary HUD (net sheet). Many times banks will provide allowance for repairs if this is submitted with the original offer. For buyer’s it is better to discover problems up front rather than being tied into a property for 90 to 120 days only to discover unanticipated issues. Failing to schedule a prompt inspections creates lost opportunities.
c). Are you willing to put up a second deposit upon completion of the inspection period with the balance of 10%upon lender’s acceptance?
The unwritten customary rule in Florida is to require the buyer to put down a second deposit representing 10% of the purchase price within 10 to 15 days of the effective date of the contract or upon completion of the inspection period, whichever first occurs. Unfortunately, many buyers are tying up properties, with low ball offers moving them to pending sales with only a $1,000.00 deposit with the balance due upon lender’s acceptance. In many instances, I have witnessed buyers taking a shot gun approach at multiple offers creating substantial burdens of paperwork only to later walk away.
• Are you aware that backup offers may be submitted at any time up until the bank approval is finalized?
Banks typically look at one offer at a time, however, I have witnessed patient buyers wait over 100 days for a response only to discover that another offer came in and was accepted by the bank at the 11th hour. Banks are under no obligation to go back and allow the buyer to counter offer.
2. Sellers: When working with a seller it is critical to obtain their commitment and cooperation. Sellers must recognize that this is a long arduous process. Prepare the seller that numerous items will be required of them.
Sellers as well as some agents are often under the misconception that once our office receives their sales contract, we are able to submit the offer to the lender. To the contrary, lenders will not accept or even look at the offer unless certain items from the Sellers are submitted.
To expedite the process, have the seller start getting the following items together, preferably when the short sale listing is signed and at a minimum when the sales contract is signed. Note: A lender will not customarily process a short sale file without a bona fide contract as they typically view this as putting the cart in front of the horse.
1. A written authorization signed by the seller authorizing the realtor and the closing agent to speak on behalf of the seller.
2. A copy of the listing agreement. Be sure to include several price changes where applicable, to demonstrate no previous buyer response in current market.
3. A signed contract of sale.
4. Preliminary net sheet (settlement statement) prepared by the closing agent.
5. Completed updated financial statement form.
6. Two years of tax returns.
7. Two months of the seller’s most current bank statements.
8. Hardship Letter.
9. 2 months pay stubs (if applicable)
10. Comparative Market Analysis prepared by the realtor. Often banks require and order their own appraisal as well.
11. Proof of funds. Typically, the lender will request the buyer show proof of funds for the closing. If a lender is involved, we need a buyer approval letter. If this is a cash deal, a bank letter demonstrating they have ready funds to close.
Seller should be aware it typically takes the lender 14 days to get this information into their system, therefore, you are not likely to get any information or updates until after that two week timeframe. Some lenders can take up to 20 days.
C. Strategies for dealing with hesitant short sale sellers: Many times sellers ill advised and suggest they would prefer to allow the bank to take the property back through foreclosure. It is important to point out that is a losing proposition.
1. Inform sellers of the adverse effect a foreclosure will have on their FICO Credit Score versus a short sale as well as the ability that will afford them to obtaining financing again once they are financially sound.
2. Advise sellers of the potential for deficiency judgments if they allow themselves to be foreclosed upon.
3. Explode the myth of 1099’s and the impact it will actually have unless this was strictly a second home and never intended to be an investment or rental.
a. Mortgage Debit Relief Act of 2007 allows taxpayers to exclude income from the discharge of debt on their principal residence through 2012. Up to 2 million of forgiven debt is eligible for married couples, 1 million if single.
b. Investment properties may offset the income if losses associated with ownership of the property can be demonstrated. Treat the property as a business loss.
D. Short Sale Deal Killers. There are many ways for short sales to fail. Thirteen is deemed to be an unlucky number. Below is a list of the thirteen common reasons why short sales fail. These mistakes should be avoided at all costs.
1. Offer an unreasonable price. Short sales are already aggressively priced to begin with. The number one deal killer for short sales is having the buyer submit a totally unrealistic contract price.
2. Do not have the seller sign the sales contract. Without a contract signed by the seller the buyer is not likely to stay committed. Make certain the seller signs the sales contract. If additional contracts come in, perhaps for higher prices, they should be written as back up offers.
3. List the buyer’s name and/or assigns. Lenders are always suspicious of fraud in short sales. If they suspect that the buyer may be flipping the property for profit they will not consider the short sale.
4. Do not ask for a deposit. Without a deposit there is no commitment from the buyer and no legal contract. If given the chance, some buyers will tie up multiple properties and distort the integrity of pending sales.
5. Write the buyer can withdraw at anytime. With all the efforts real estate agents, closing agents and lenders are required to put into a short sale package no one will want to waste time working on a file if the buyer is not committed to the property.
6. Request a 30 day lender approval. In this environment it will often take the lender 30 days to simply process the file into the system.
7. Submit multiple contracts to the lender like an auction. While practices differ from lender to lender, many lenders will only look at one offer at a time so it is often wisest to submit the best and highest offer from a committed buyer with a deposit.
8. Request that seller provide credits. Ironically, we receive contacts requesting seller to pay buyer’s closing costs. Personal experience has demonstrated the buyer is better off submitting a lower offer. Lenders are not inclined to approve credits and seller’s do not want to bring anything to the closing table.
9. Submit an incomplete seller’s package. Although lenders do not have strict underwriting guidelines for approving short sale like they do for approving loans, all lenders require a completed financial package which includes all of the seller items set forth above.
10. Submit an inaccurate or outdated settlement statement. Perhaps the number one deal killer and/or source of frustration is that when a bank accepts a settlement statement it is accepting a bottom line figure. Often agents, in haste, fail to look into past due taxes, condominium liens, assessments or pro-rate taxes and maintenance 60 days out. Be safe – use 150 days out as a general rule for proration.
11. Failing to promptly address the second mortgage holder (if applicable). If two mortgages are involved, two approvals are necessary. Typically, the first lender, once approved, will insist on closing within thirty (30) days. Often this does not allow enough time to begin negotiations with the second lender. Start the dialogue upfront. Even if it is not the second lender’s policy to look at the file until after the 1st mortgage approves the short sale.
12. Letting the seller be foreclosed upon. Foolishly, approximately 90% of all foreclosure complaints go unanswered. If the seller has a foreclosure action filed against him he can forestall the process up to 12 months or longer to allow a short sale by engaging an attorney to file a response on the seller’s behalf. Frustrating foreclosure attempts can do wonders for negotiating a short sale.
13. Giving up too easily. Short sales are like running marathons. If you stay in the race long enough you will eventually finish.
E. Second Mortgage Issues. Many times second mortgage holders can be roadblocks to successful short sales. Issues which arise include:
1. The first lender will always limit and dictate what the second mortgage holder will receive from closing. The most common unwritten rule is to throw a small bone, typically $3,000.00 to $5,000.00 to the second mortgage holder to obtain their release.
2. Often second mortgage holders will not commit to a number until they see a settlement statement approved by the first lender. This creates a time crunch problem.
F. Personal Property. Personal property is not part of the lender’s security and any agreement should always be separate and outside of the contract and closing statement.
1. There is nothing wrong, illegal or illicit about the seller of a short sale making a deal with the potential buyer to purchase property at closing. Personal Property is not encumbered by the mortgage and therefore these funds do not belong to the lender. One effective strategy for contributing more money to the second lien holder is to strike a deal using funds from the sale of personal property.
2. Side agreements for personal property must be artfully drafted. Many times the first lender will insist that the buyer and seller sign a statement they are not related as well as incorporate language that there are no other agreements between the parties.
3. Word of caution. In an attempt to put cash in a seller’s hands or address the monetary demands of the second lender it is important not to artificially deflate the true value of the real property while as the same time artificially inflated the true value of the personal property. This behavior, if stretched too far can be tantamount to mortgage fraud.
G. Communicating with Lenders. Probably the biggest key to success with short sales is communicating properly with the lender.
1. Size matters! One of the biggest challenges in dealing with lenders is finding someone with authority. Bigger banks have bigger chains of command. Small banks have the ability to respond much quicker. Unlike large institutions, often portfolio loans held by small community banks do not need investor approval.
The biggest challenges and longest lender approval times I have personally worked with have been:
Countrywide/Bank of America
WAMU/Chase
Wells Fargo
2. Label everything. Documents sent to a lender should be no different than labeling a test tube on blood samples sent to the lab. Making sure every document has the sellers name and loan number makes it easier for the lender to process.
3. Be patient. Buying property is stressful enough for buyers and sellers and short sales take this to a new level, however, spending a couple of hours a day trying to push the lender for a decision is a bad idea. Every contact you make to a loss mitigation call center or negotiator gets logged into the contact data base. Too much contact will give them an incentive to tank your deal. There is no reason to call so often unless there is a promise of something by a certain date. The idea of pushing a lender for a decision is human nature, unfortunately, it doesn’t work.
4. Be polite. Servicing lenders typically do not like real estate agents or attorneys. They view our profession as pushy, rude arrogant and obnoxious. The call center employees and negotiators are low paid employees with a lot on their plate. Whenever possible be empathetic and use self deprecating humor. People like to work with people they like.
5. Be persistent. This does not mean be annoying. One of my most successful tactics in dealing with people in decision making positions is to be the persistent student. Rather than being the "know it all" no one likes, I often get them to teach me something even if I know the answer. By getting them to teach me things they often go out of their way for me and do things behind the scenes to help resolve issues. On more than one occasion I have been put on hold while an individual has walked to another department just to resolve a problem.
H. Selecting the right closing agent. One of Woody Allen’s most famous quotations is “Eighty percent of success is showing up!” This may be true in most instances, however, not with handling short sales.
My experience has taught me that when the buyer and seller select the same closing agent the success rate goes up dramatically. This does not create conflicts, to the contrary, both parties have the common goal of seeking lender approval. One of the keys with short sales is to keep an honest line of communication open with the buyer.
Having first hand knowledge to pass onto the buyer as to what stage the file is at can be very reassuring to skittish buyers unfamiliar with the process. If the left hand knows what the right hand is doing, things definitely go smoother. Additionally, there are many balancing acts to be performed including agreements outside of closing that can best be balanced by one closing agent.
FINAL THOUGHT
“You miss 100% of the shots you never take” -Wayne Gretzky