Don’t change a thing – work the market you know
Market expertise, knowledge of prevailing values and recent sales, insight into pending foreclosures and recent REOs and Foreclosure Comps will ultimately benefit the seller and aid in getting your bank offers approved. So, work the market you know. Short sale opportunities are everywhere.
If you are a leader in a particular market segment or area, why concede short sales to the competition. Your market position makes you the expert. Add short sales to your portfolio to continue to dominate your segment.
The reluctant seller. In a traditional listing, the owner has chosen to sell and is motivated to do so, something that is probably not true of an owner in preforeclosure. This is a critical stage of the process and involves direct personal contact with someone who may be emotional or in denial. To be successful, you must have good interpersonal communication skills, or a person on your team who does.
- Engage the seller. A direct, in-person conversation is the best way to initiate contact, much better than a mailing or a phone call. The most important thing is to be respectful. Many people do not know that this information is public record and are embarrassed or confused when a stranger approaches them about it.
- Educate the seller. The owners may be hiding from the problem and not even know the current status of the foreclosure, what that means, or even how much time they have left. You can provide a service by educating them, but be careful to avoid sounding condescending, which is a deal killer. Some agents provide a list of civil codes that protect homeowners from scammers and talk about their rights as a homeowner.
- Provide local information. One way to approach the seller is to provide local market information like a map of homes in the neighborhood that have recently gone back to the bank or other housing statistics as a conversation starter. Some owners have even volunteered the fact that they are in foreclosure in a discussion of the distressed properties around their home. Seeing the status of the neighborhood can push them to become proactive and pursue a short sale.
- Suggest rental alternatives. Most people facing foreclosure start to look at their options when it comes to rentals. A list of rentals in the area is a great conversation starter. Many homeowners will ask about the credit requirements and that is an opportunity to assess their current situation and see if you can assist them.
- Explain their options. It is always best to keep things positive and explain the alternatives to foreclosure. After all, homeownership is the American Dream, but we are also the land of second chances. Explaining their options helps them to understand how to close this chapter of their life and restart a new chapter..
Qualify the Seller
You will find people with short sale horror stories about multiple unsuccessful attempts to close short sales and others who have closed 90 percent of their short sales, doing over a dozen a month. What’s the difference between group A and group B? Being careful about which properties to develop and which sellers to work with.
No matter what your involvement is with a short sale, whether you’re farming for listings, a client has called you to take a listing, or you’re making an offer on a short sale for a buyer, it’s important to assess the probability of actually closing the deal before wasting your time and energy.
What is the hardship? This is probably the most important step in considering a short sale. Loss mitigators will be hard-pressed to approve a short sale and take a loss on a loan for a frivolous spender. The hardship letter tells the story, explains the qualifying life event, and assures a lender that the short sale is truly the best option for everyone involved.
There are more considerations for a short sale qualification. You must know the loan product. Are you dealing with a prime loan or a more negotiable sub-prime ARM? And how about the application itself? Was there fraud? Did the homeowner overstate his income and capacity to pay when lending practices were a bit lax? All of these are critical in the evaluation of a potential short sale client.
Qualifying life event Has there been a divorce? A layoff? A significant loss of income? Lenders require documentation of a qualifying life event to consider a short sale.
What is the seller’s motivation? Pride, credit, fear of continuing liability? All of the above? It needs to be adequate to move them to take control of the situation and, with your help, drive to conclusion. If a senior lien forecloses, junior lien holders may attempt to collect on their loss of security. A successful short sale works to minimize out of pocket expenses to sellers and relieves them of concern for recourse on junior liens.
Primary residence or investment property In addition to tax concerns, many lenders won’t consider a short sale on investment properties. Advise your clients to consult a qualified tax professional for the best possible course of action regarding the short sale or foreclosure.
What is the seller’s income? If the owner is spending the mortgage payment as if it’s discretionary income, taking vacations and buying luxury items instead of paying the mortgage, the lender will be reluctant to agree to a short sale. This is also the case if there is a co-signer on the loan who has the ability to pay.
Are they willing to contribute? Depending on the situation, the owner may be required to put up some cash to close the deal. A second lien holder may want a payment, such as $5,000, for example, to retire the loan. Is the owner able and willing to put up the money?
Fraud on loan application? Did the owner purchase multiple properties as owner occupied to get better financing? Did the owner overstate their income on a stated income loan and sign an IRS Form 4506 allowing the lender to pull their tax returns? Walk away from those situations. Short sales are enough work without adding fraud to the mix of issues to resolve.
Get the package. Is the seller committed and responsive? Committed sellers will bring you the hardship package and help you help them sell their home. There’s no short sale without a hardship and there’s no hardship without the documentation. There’s no reason to take the time to pursue the deal if the sellers aren’t willing to do the work to get it started.
The first step is the letter of authorization, which is required to the lender on your client’s behalf. It is a simple letter from your client giving the bank permission to speak to you on their behalf. The letter must include the date, the property address, loan number, the names and social security numbers of everyone on the loan, and be signed by everyone on the loan.
Once you have that call the lender for the proper fax number. Most lenders have the letter uploaded in 48 hours. Once they have authorization to talk to you, you can find out if they will allow a short sale. If so, ask for their documentation package requirements.
The typical package may include:
- Tax Returns. Tax returns for the last two years, or the most recent, at least, are required.
- Pay Stubs. Hardships must establish an inability to meet the loan payment demands. If the paycheck stubs don’t indicate this inability, a short sale is out of the question.
- Bank Statements. Get at least the two most recent statements. Massages, ski trips, mysterious cash withdrawals, sizable deposits and savings account balances will all make a lender question the validity of a hardship claim.
- Hardship Letter. Probably the most critical component of a hardship package, the hardship letter describes in clear terms the situation and addresses the personal component of any pending foreclosure. The letter presents the problem to the lender (going through foreclosure and having an REO on their books) and the solution (a short sale that minimizes the loss to the lender).
- Financial Statement. A self-employed owner must provide a profit/loss statement showing assets and liabilities.
- Loan Statements. Current statements of all outstanding loans. The lender may ask for retirement account information as a contributing factor in determining eligibility for the short sale.
For one example of requirements to qualify for a short sale, check out the Home Affordable Foreclosure Alternative website.
Qualify the Property
Even if the seller passes the test, the property itself may not. Make sure the property itself has a good chance of selling.
Are repairs required? Repairs and marketable value need careful consideration before devoting time to a short sale. Does the property have cars on blocks in the driveway? Dry rot, peeling paint, fallen trees? Have dogs been using the living room instead of the yard? If you have a buyer using financing, who is going to pay to get the property in the condition to sell because it won’t close escrow in its current condition? Or, if you find a cash buyer, will the lender be willing to accept an offer below market value because of the needed repairs?
Will it be difficult to sell? Target what is selling in that area. Use your local knowledge and expertise to focus on the type of properties you know move in your area. If this short sale property is $900K and no $900K sales have happened in the last 9 months, it will be difficult. Target the price range where most of the buyers are looking.
In addition, it is always easier to sell the most expensive house on a cheap block than a cheap house on an expensive block. When you get an odd duck house that will sell for less than surrounding houses, you’ll have a hard transaction.
The deal to look for is an odd duck that will sell for more than the surrounding houses because of some special feature that might not be apparent from AVM, BPO, or comp valuations. Some investors look for the nice odd ducks they can get at a comparable price to the area but a discounted value relative to the likely sale price based on the distinguishing features.
Tales from the Trenches: Valuation hurdles
I had a property in Stockton that looked identical to the house across the street. If you looked at the MLS you would think they were equal in value. But the target property backed up to freeway, and those houses consistently sold for $50K lower than the houses across the street that backed up to open space.
I passed on this property because I knew it would be a hard sell to the lender, who looks at AVM, BPO and comps that include the properties across the street and will be reluctant to agree that the true value is lower.
Can you get a competitive price? Properties with considerable negative equity are not the best candidates for short sale.
The biggest difficulties tend to revolve around second mortgages and total debt-to-equity. Every Realtor® should take a quick look at these things before agreeing to do a short sale. If the first and second mortgages are with different lenders and the debt-to-equity is so high that the second has to be wiped out completely you may want to pass as it is very difficult to get a second to agree to take nothing, or close to nothing, and you have to get agreement from two different parties.
It’s a Feature: Financial analysis
ForeclosureRadar provides quick financial analysis tools for determining, at a glance, the potential for a successful short sale given prevailing market rates.
Qualify the Lenders
How willing might a lender be to accept short sales? How difficult is it to get a lender to negotiate, or even respond to a short sale offers?
Check the Deed of Trust to see if the originating lender is a different lender than the current servicing lender. If multiple lenders are involved, other entities, like a lender-paid mortgage insurance company, may have a say in the approval of a short sale. If a loan is not a portfolio loan of the servicing lender, then there may be additional hoops to jump through and additional delays as the decision makers are identified.
Many Realtors shy away from short sales due to the inherent complexity and the slow response from lenders. Avoid problem lenders. Perhaps they will eventually learn that responsiveness is key to unloading these non-performing assets.
It’s a Feature: Lenders and Transaction History
With ForeclosureRadar you can qualify every short sale lender and avoid the difficult or slow lenders. Use the ForeclosureRadar search tools to find homeowners in your farm area with loans from target lenders. Focus on properties with only one lender or loan.
In addition, ForeclosureRadar provides a glimpse of the transaction history of a property.
Qualify Title History
In default or heading to default? The transaction history provides some insight into the degree of indebtedness of a potential short sale client, establishes the potential for a short sale based on equity or lack of equity and also indicates other potential liens which might prove problematic for a short sale or for the client.
The fewer the liens, the easier. Keep in mind that the fewer the liens, the greater the chance of success and the easier the short sale process. Second and third mortgages, in addition to mortgage insurance companies, all have to sign off on the short sale deal. All liens and loans must be paid or a release of lien obtained in order to close on a short sale. The more parties involved, the more there is to lose, so choose wisely.
HOA liens. Liens with low dollar amounts in a transaction history may indicate an HOA lien. There are two recorded documents associated with HOA liens, the first are the Convents, Covenants and Restrictions or CC&Rs. These always show an earlier recording date than the lien, so be sure you know which document is which in the public records. HOA liens with a recorded Notice of Default will appear as an ASL (Agricultural Services lLien).
HOA dues are not a pre-lien or super senior lien like the property taxes. If a homeowner falls behind on their HOA dues, the HOA would need to files a lien against the property and can foreclose based on the filing of the lien. It is important to know that Check your local laws as they vary from state to state.
Recourse or non-recourse loans. Deficiency judgments can only occur with recourse loans. With a non-recourse loan, the lender can only use the proceeds from the sale of the collateral (property), which secured the loan in default, to satisfy the debt. Regardless of the difference between the debt owed and the money recovered from the sale, the borrower is not held liable. In a recourse loan, the lender can pursue collection beyond the collateral to the borrowers other assets.. Read the short payoff agreement carefully to verify that the expected language is present.
In California, a purchase-money, primary residence loan is a non-recourse loan. On the other hand, there is potential liability for a non-owner occupied home, a second home, or a refinance loan. The owner should consult an attorney.
In California there is also a one-action rule, Civil Procedure Code Section 726(a). If a bank forecloses on a loan, that is considered their one action and they cannot pursue collection on any outstanding balance. If a first forecloses then that is their one action. If there is a second loan, that lien is wiped off of the property, but the lender could pursue collection as an unsecured debt.
Tales from the Trenches: Deficiency judgments
In the early days of the foreclosure crisis, lenders have not been aggressively pursuing deficiency judgments, but banks, investors, and PMI companies have years to follow up on deficiencies. As the statute of limitations begins to near, it’s likely that lenders will be more aggressive. And there is no statute of limitation for fraud or waste, so do your homework.
Judgments, tax liens or other problems. ForeclosureRadar provides links to the County Recorders Offices in the transaction history. You can use these links to research other liens and loans that may affect the successful negotiation of a short sale. All liens and loans must be cleared or released from the property to close a short sale. This includes family support judgments, IRS liens, past due property taxes, mechanics liens, or any other recorded lien or judgment against the property or the homeowner.