Short Sales
Short Sales may look like a good deal when you are looking them up, but aren't always. Agent often use a short sale as a way to capture buyer leads. Agents will often price sales aggressively, hoping to attract buyers or hoping the lender will temporarily lose their mind long enough to accept a lowball offer or hoping to get an offer they can present so they know what a lender is thinking. Unfortunately, short sales are often listed for prices lower than any reasonable lender will accept.
Here is how they work.
The homeowner needs to sell the property because they've been transferred to TImbukto and have to start the new job in a month. The house is worth $415,000. The first, with Wonderful Bank USA, is a balance of $399,000 and the second is with Stagecoach Bank and Trust with a balance of $45,000, for a total of $444,000 owed. On sale the property will have to pay back property taxes of $2,456, a mechanics lien of $12,345, a child support lien of $11,789 and, on sale, a real estate commission of $17,500.
1st $444,000
2nd $ 45,000
RE tax $ 2,456
mech lien $ 12,345
cs lien $ 11,789
re comm $ 17,500
-------------------------------
TOTAL $533,180
Value $415,000
Short $118,180
Now THAT'S a short sale. A mere $118,180 in the red.
This poor seller has an even more complicated problem. Both lenders would have to agree to the short sale. A standard sale has only two parties who have to agree, the Buyer and the Seller. In a short sale, the Lender is taking a loss of some kind and must agree to voluntarily take that loss. The lender can always foreclose. As you might suspect most lenders are not real happy about taking losses. Getting two lenders to cooperate, where one gets wiped out and the other gets something is not easy.
In cases like this the primary lender (1st) might allow the 2nd to get a $1,000 or so, but they might not. Remember, when involved with a short sale, you've invited mom-in-law to the party. Everything done has to have the approval of the lender.
Confirmed short sales are transactions in which the lender has already agreed to a price and conditions. Unconfirmed short sales require long periods of time, sometimes months, to get an answer.
Money Back
Money back to anyone that is not approved by the first lender is loan fraud. Sellers cannot receive money back unless it is approved by the shorted lenders. The first lender, by nature of the fact that they are in first position, has prioirty claim to all monies flowing through escrow. If the first is short (not paid off) then only they have the right to approve sending money anywhere else. Subordinate lenders (typically seconds) or agents who claim they can give money legally to anyone without prior approval from the first, are lying through their teeth. There, was that strong enough?
Every dollar distributed must be on the nationally approved HUD-1 form to be legal.
Short Sale Negotiators
In the State of California, anyone talking to a lender on behalf of a client must be DRE licensed. Escrow companies, real estate agents or sellers using a non-licensed negotiator can be found guilty of a felony criminal offense and fined. Don't take a chance. Use a licensed short sale negotiator.
Short Sale Package
Before the lender will agree to a Short Sale, the listing agent must prepare a short sale package which often includes the following information:
- Short Sale application (or Fanniemae 1003)
- Current Financial Statement
- Tax returns
- Recent pay stubs
- Hardship letter (SOB STORY) and documentation
- Bank statements
- Property tax information from assessor
- Property profile
- Bio or resume of realtor
- Marketing Plan and timeline
- Accurate CMA including DOM
- Cost of Sale Estimate
- Commission (including disclosure of how much is paid to Selling Agent)
- Staging and repair costs to bring it to market standard (lender won’t care)
- Estimates of costs for termite inspection (not repair), disclosure packet, escrow, title
Yes . . . it is a lot like applying for the loan all over again, but that is what is being done, only backward. The lender is trying to decide if the borrower is really in trouble or just trying to duck out. Before you get all upset, remember that the lender doesn't have to do this at all, and will do so if it is easy for them and only if they will lose more if they foreclose.
If the lender agrees to the Short Sale it is seldom done in writing and almost always has deniability. This changes in longer term economic downturns. When lenders come to the realization that short sales may save them money, they often implement procedural changes allowing short sale pre-approvals and documented acceptance of deals. They will agree to a price based on an agent's BPO. They will often contract for their own BPO to assure themselves that the short sale listing agent isn't pulling a fast one. It can take three to twelve weeks to get a lender response on a short sale and the listing agent is free to accept offers while waiting for a response. Being first means nothing, unless the listing agent agrees to remove the property from the market..
It seems logical that lenders would cooperate with short sales since, in a declining market, the longer they wait the more they lose. But there is contingent liability for the lender in a short sale. What if the lender and agent were both wrong and the property was worth more than agreed. Could the borrower come after the lender. Sounds far fetched, but yes.
As you can see from the above, short sales have many moving parts and while there are success stories for short sale buyers, there are far more failures. If you have the time to be patient and you are in love with that particular home, the wait might be worth it. If pressed for time, short sale is probably not the best direction. But if you insist, follow the below when making a short sale offer.
Short Sale Offer
The seller will agree to anything. They get nothing anyway. They have no equity and will receive no money. What do they care? Until the LENDER approves your deal, you have nothing too.
Instruct your agent to hold onto your good faith money. DO NOT PUT MONEY INTO ESCROW until the short sale offer is ACCEPTED by the LENDER. There is a little box on the purchase contracts which allows for this (SSA). You don't want your money tied up. You want to remain free to make other offers. There is no responsibility owed to a short sale lender that does not answer quickly. Make sure your agent gives you a Short Sale Addendum (SSA), which explains everything that could occur in a short sale.
Have your agent ask the listing agent to put the sale in HOLD status in the MLS while the lender looks over the short sale offer. If the listing agent is smart, they won't, but they might. Putting the property on hold effectively protects the buyer while the lender thinks about it. Offer what the property is worth or slightly less. In a declining market there is danger that the property will fall in value while the lender is making up their mind, and will not appraise when the dust settles.
Keep looking. Until you get an answer, you've got nothin' till the lender says you do. Maybe something better will crop up. Maybe a good looking REO will pass by. Ask your agent to put you on a drip campaign with your search criteria built in. Until it's over it ain't over.
Short sellers and short sell lenders will not agree to pay for much, usually not even termite. No repairs, no buyer credits. They may even try to pawn off escrow and title. but they must pay for their part of title. Here's the rub. The short seller is getting nothing from the sale and usually has no cash, at least cash they are willing to spend on a lost cause. This means that buyers often have to pay for more costs than are customary.
There is a disturbing trend toward using expensive short sale negotiators which sellers require the buyer to pay for. While experienced short sale negotiators can be valuable, many short sale negotiators turn out to be worth far less than what they charge. To a certain extend negotiators are performing the function short sale listing agents should be doing themselves. One has to question the veracity of agents pawning off their work, then requiring the other side to pay for it. At PSR we encourage our agents to pay for half the negotiator fee when they choose to use one. It's only fair.
Short Sale Listings
There is no listing more difficult or time consuming than a short sale. The sad truth is that only one in ten will actually result in anything other than foreclosure. There are companies specializing in short sales that have a better record, but they cost money and a homeowner with no equity has a tough time throwing good money after bad.
After putting together a short sale package and submitting it to the lender or lenders involved, followup is required. Daily, or at least every other day, calls must be made to the admin or asset manager responsible for making the decision. They don't like it, but if you don't bug them, your package goes to the bottom of the pile. Those who harrass get served. Those who do not, don't.
This seems harsh, but it stands to reason. Lenders don't like short sales and don't want to deal with them. They appoint lower level employees to handle and dismiss short sales. That is, until they wake up and realize they are costing themselves money and that short sales may represent an opportunity to sell quicker and for more.
In the early ninties, when short sales started to pop up, lenders refused to acknowledge there was a problem. It was not unitl '93-'94, when a recession was in full swing, that lenders started to realize short sales were superior to foreclosure. The home was sold quicker in short sale and in a declining market, that was important. By '95 most lenders had the short sale business down and were approving short sales so agents could actually help liquidate the growing inventory. Lenders, like the rest of us, have short memories and every time a downturn happens, it takes them a few years to catch on. Every housing slowdown seeme to create the same pattern for lenders; initial denial, eventually short sale acceptance and loan modifications, then better liquidation of assets. Judge for yourself where lenders are in any economic slowdown.
For sellers, a short sale is slightly better for their credit than a foreclosure. Foreclosures ding credit more harshly and stay on credit reports longer than a charge off, which is how a short sale is reported. In some cases lenders even forget to file a short sale against the borrower's credit report, but don't count on it. The lender may also, as terms of acceptance of the short sale, ask for an unsecured note. If the terms are good and the payment is reasonalbe, comply, but only if the lender agrees not to record the shortsale and related charge off on your credit. If they are going to ding you anyway and the payment creates a hardship, why make the payment? On the other hand if the lender agrees not to ding your credit and the payment is affordable, your credit report will be in far better shape. If no note is offered or agreed, try to get a release from recourse, an agreement that the lender will not come after you. A long shot, but it could happen.
A short sale does not wipe out recourse. Where California foreclosure on purchase money loans eliminates the possibility of the lender coming after deficincies later, a short sale does not. A short sale triggers both deficiency and recourse. The lender can come after your other assets and can, if they are nastily inclined, file a 1099 with the IRS for the shortfall.
