What is a short sale?

A short sale is when the lender of record agrees to discount their payoff to accommodate a sale when:

  • The borrower/seller has experienced hardship.
  • The value is proven to be less than the amount needed to pay off all loans, encumbrances, and real estate selling costs.
  • The loan is delinquent or in default.

How Do the Sellers Benefit?

  • The seller can avoid foreclosure. Recent reports state that if a borrower misses 2-5 mortgage payments their credit score will be affected. If a borrower experiences foreclosure their credit score will be affected. Keep in mind that credit score and credit report are two separate things. You may find more information at www.myfico.com.

  • Assuming the seller is already not making mortgage payments, they can continue to live in the property and not make payments during the lengthy short sale process.

  • Most sellers feel it is the “right thing to do” when in default. They tend to feel that walking away from the house is irresponsible and unfair to the lender.

How do Lenders Benefit?

  • Not having another bad debt on the books. Most investors require their lenders not to exceed 3% of bad debt on the books.

  • Not having to complete the expensive foreclosure process including all of the legal fees and procedural duties.

  • Not having to evict occupants and pay for their cooperation.

  • Not having to rehab the property.

  • Not having to later sell the property for no more than the proposed short sale would generate, or even less when the market continues to decline.

Keep in mind that lenders may include but not be limited to lien holders, investors, PMI etc.

 

Know Who You are Talking With

  • I/You may have to deal with any of the following during a transaction:
  • Lender / Servicer – representative of lender - can be public or private
  • Investor – fronts or guarantees money
  • Underwriter – determines eligibility or approval
  • Loss Mitigation Department – representative of servicer
  • Negotiator – representative for the investor
  • Asset Recovery Department – post sheriff’s sale
  • Legal / Attorney – clients personal attorney, Trott & Trott etc

When are Short Sales Highly Likely?

  • A short sale is highly possible when the following variables exist:
  • Seller has experienced legitimate hardship that can be proven either: Medical, Money or lack of it, Marital
  • Property is in marketable area & decent condition
  • Remaining value would give junior loan min of 15-20%
  • Multiple loans with same lender
  • Seller provides documents the lender requires & financials showing insolvency (more going out than coming in)
  • Enough time

When are Short Sales Highly Un-likely?

No hardship (If you cannot prove a hardship it is not probable a short sale will be successful)

  • Chapter 7 or 13
  • Seller has recent re-fi with cash out
  • Not enough value to pay multiple mortgages
  • Seller doesn’t provide full package
  • Liens & judgments clouding title – mechanics, IRS, HOA’s, etc.
  • Not enough time
  • Very new or recent loan

What is open market seasoning?

Sometimes in the short sale process, you have to follow the lender’s requirements for market seasoning. Even if you know that the property is upside down in value, some lenders will require proof that you have attempted to sell the property at break even price.

 

Possible Tax Ramifications for Seller

We are not accountants or attorneys. Have available the handout that includes different options available for them to investigate with their legal and tax professionals.

· Mortgage Forgiveness Debt Relief Act of 2007

· IRS Tax Code HR 3648

 

Recourse vs. Non-Recourse Loans

Know the difference between recourse and non-recourse loans. (To cover economic issues and choices, certain legal concepts must be mentioned, under no circumstances should real estate licensees attempt to explain or give advice on these issues. This must be left to legal professionals).

 

Non-Recourse Loans

The borrower is not personally liable for the loan. The lender’s only security is the property itself, not the borrower’s personal assets.

  • 1. Loans secured by and used to purchase an owner / occupant 1-4 unit residential property.
  • 2. Any seller carry back real estate loan secured by the property that is being sold.
  • 3. Must be original purchase loan. Not a refinance.

Recourse Loans

The borrower is personally liable for the loan. The lender’s security is primarily the property but also the borrower’s personal assets. The lender may file a deficiency judgment if the property forecloses and the loan is not fully satisfied. Likewise, the lender may file a deficiency judgment against the borrower based on the lender’s total losses absorbed in a short sale transaction.

Examples of a recourse loan would be:

  • Refinance loans
  • HELOC’s (Home Equity Line of Credit) that were not obtained to purchase the property.

Postponement Tips:

Voluntary Postponement

Most lenders will voluntarily postpone a sheriff sale under the following guidelines:

1. Offer / loan approval

Involuntary Postponement

1. Chapter 7 or 13

Pricing the Listing for Short Sale

  • Low Ball Pricing
  • Break Even Pricing
  • $15,000 to $20,000 below lowest comp pricing / 15-20%

Timing if foreclosure is emanate

  • Notice of Default – 30 days
  • Good time to seek forbearance
  • Be sure to ask for a non-recording forbearance
  • Notice of Foreclosure - 30 days – If you have an offer, you can get an adjournment for up to 90 days to buy more time.
  • Deed in Lieu of Foreclosure
  • Sheriff Sale – Usually need an offer to get sale adjourned or set aside.
  • Lender could bid in less; you need to know from the title company how much your client may have to pay.

Why banks bid amount is less than what is owed:

  • Mortgage fraud
  • Deficiency judgment against borrower
  • Fair market value

Redemption Period - 6 months for properties under 3 acres – 1 year for most others

 

Checklist for Short Sale Submission Package

  • Cover letter with a checklist of items enclosed. Include a brief synopsis.
  • Authorization letter for agent to negotiate on behalf of seller.
  • Purchase Agreement / Contract.
  • Copy of Earnest Money Deposit.
  • Copy of new buyer’s pre-approval letter.
  • Net sheet or HUD 1 Settlement Statement.
  • Hardship letter (hand written).
  • Complete financial worksheet (form typically provided by lender).
  • Proof of income for past 2 pay periods.
  • Copies of last 2 bank statements.
  • Copies of last two years of full tax returns with W-2’s and 1099’s (If self-employed, last 2 quarters of P&L statements).
  • List of monthly expenses.

Highly recommended

  • Deferred maintenance photo pages with captions.
  • Broker’s Price Opinion (BPO)/ CMA
  • Itemized cost breakdown.
  • Neighborhood foreclosure statistics.
  • Proof of active listings in the area that are lower in price and not selling.
  • Copy of MLS printout if the property has been on the market for a long time.
  • Exclusive right to sell.
  • Showing desk record of showings and feedback.

Remember when you are submitting an offer to include the every document every time with the name of borrower and loan number referenced on each page that you submit.