Welcome to “Short Sale 101”

Presented by J Scott Jones GRI reMBA CREX

PREFACE

Mr. Jones has over 35 years of experience, 25 years as a licensed Real Estate Instructor and another half dozen years originating loans for some of the largest lenders in the country.

The purpose of this page is to help you truly understand what a “Short Sale” really is. There is a great deal of information currently being given to the public by that is either incorrect or out and out fraudulent. There are numerous unlicensed individuals offering seminars and workshops. Frequently the ultimate goal is to try to sell you an expensive “how to” course or boot camp of some kind. Still other want to convince you that it is in your best interests to sign your deed over to them and they will solve all of your problems.

Don’t!!! Signing a “quit claim” deed, often called a “quick claim” deed by fast talking individuals that really know nothing about real estate practices or law will not change your legal obligations in any way. And, unfortunately a lot of the incorrect information is coming from well meaning real estate agents that just don’t have all of the necessary facts to be giving competent advice on this serious undertaking. In fact, the Florida State Attorney’s office is in the process of getting emergency legislation passed to combat the many fraudulent “foreclosure rescue” companies that have popped up almost overnight. Please visit their site to read more about this important consumer protection legislation. This legislation passed and became effective Sept. 1 2008. Please become familiar with this new law before you pay an up-front fee or sign the title transferring ownership to one of these companies.

WHAT DOES A “SHORT SALE” MEAN?

A short sale is simply the term used by the real estate and lending industries to describe an abnormal situation that results in the net proceeds of a sale, after all closing costs, is not enough to cover the outstanding mortgage loan payoff. In other words there is a shortage of funds necessary to successfully close the transaction.

If the loan can not be paid off with the former lender issuing a Satisfaction of Mortgage, then the title insurance company can not issue a clear title and close the transaction. Without the title commitment, the buyer’s new lender will not make a new loan.

In order to complete the transaction one of a number of things need to take place.

The buyer needs to pay a higher price. When there are many buyers and few homes we refer to that as a Seller’s Market, and in those kinds of competitive situations sometimes a buyer would agree to do that, but rarely when there is an over supply of homes in relation to the number of qualified buyers.

Bear in mind that there are many un-qualified buyers still anxious to purchase your home but the “loose”, “look the other way”, type financing no longer exists.

The real estate agent, title insurance company, county tax collector, appraiser, surveyor, and all of the other parties that spent their time and money to get the “Seller” almost to a closing could donate all or part of their services. Not a very likely prospect. The tax collector can not budge an inch. While some of the others can, the amount would not usually be enough to solve the problem, and if they were expected to invest time and money and then not get paid, they would soon be out of business.

The Seller can go into their savings or borrow from family or friends to bring the needed shortage to the table and complete the transaction. Some Sellers just do not have the ability to do this.

The last option is that the current lender agrees under some set of circumstances to accept less than owed. Or, in other words allow the sale to close with the funds available even though they are “short” of what is actually needed.

WHY WOULD A LENDER EVER TAKE LESS THAN THEY ARE OWED

In the not so distant past a lender never would accept a dime less than the full mortgage balance together with some added pay off and processing fees in some cases. The alternative for the borrower and lender was to begin a foreclosure which would “close out” all other claims on the property other than the lender.

But, in the not so distant past, due to the high demand for property and the continuous rise in prices, if a property had a foreclosure suit filed in the public records, eager investors would either buy it directly from the Seller before the final sale on the courthouse steps, or actually buy it on the courthouse steps and pay the lender the balance due. So, most lenders have adopted a posture of not really worrying too much about actually having to take back a property and then becoming responsible for it.

In today’s sluggish market and considering the steady decline in prices, the eager investors are no longer interested in buying these pre-foreclosure properties especially if the mortgage loan payoff is higher than the present market value.

So now lenders are actually having to take ownership of these properties. Along with the ownership comes obligation.

The Homeowner and Condo Associations are not going to give the lenders a “free pass” on the monthly fees and dues. The Property Tax Collector can not give them free property taxes. The insurance companies will charge them substantially more for insurance than a homeowner would pay because of the increased risk of vandalism and theft on an obviously vacant / abandoned property. The next thing the lender gets to do is start paying for utilities and lawn service. If they leave the electricity off for very long the house will start growing mold and mildew at an alarmingly fast speed. Once the mold gets serious, remediation and proper removal can cost tens of thousands of dollars before the home can safely be occupied again.

BUYERS SAFETY ALERT ! ! !

If you care about the health and safety of your family, be extremely cautious when considering the purchase of a foreclosed home currently owned by the bank, or one that was foreclosed and then sold by the bank to an investor that has now “cleaned it up” and is re-selling it for a profit.

If you are buying a foreclosed home you will be forced to sign numerous documents that force you to give up all of your legal rights if you later find something wrong with the house. This could and would include any short or long term health problems caused by toxic mold that was not properly dealt with.

The bank tells their listing agent to clean it up for as little as possible. “Spray a little bleach.” “Use a stain blocker paint.” “Make the buyer sign our addendums.” The banks claim that they have no knowledge as they never actually occupied the property. This is, of course, not true! They had a representative check the property before the foreclosure sale. They have had another representative involved in the clean up and fix up. And, finally a sales representative that has the property listed and has to send in a weekly written report.

At least when you buy the home in the pre-foreclosure stage of a sale, you, in most cases, are still dealing to some degree with the Owner / Seller of the property. They have completed a seller’s disclosure form and you really have a much better idea of what you are buying. If the seller has not been making their mortgage payments, then they have also not been spending money trying to cover up flaws in the property that they are about to lose to the bank.

SO, THE BANKS ARE RE-THINKING THINGS

Some of the lenders are re-assessing what the true costs (losses) might actually total up to over the course of approximately a year from start to finish. Calculating all of the obligations spelled out earlier, plus the repair costs, real estate commissions, title insurance, documentary transfer taxes and other assorted closing costs along with the unknown factor of how much further values might drop, some are estimating that they could lose 25% to 50% of the value of the loan. How a bank holds foreclosed property and non-performing (delinquent) loans also has an effect on how much money they are required to hold in “reserve” according to Federal Banking Regulations.

Some banks will never budge off of their old policies and some of those banks will survive, but many will not.

Some banks will make a sound business decision to accept a minimal amount of loss and liquidate these problem loans at a small loss, which frees up their resources to make profits elsewhere. These banks for the most part will survive and still be around when the market cycle shifts back the other direction.

While some think banking is so complicated, it is still a business and businesses have to answer to their owners whether it is Mom and Pop Smith or thousands of shareholders.

It doesn’t make any difference if it is Kmart or Nieman Marcus. What do those businesses do when they have a non-performing asset? (last year’s bathing suits in January) They both do exactly the same thing. They put them on sale. And they keep marking them down until they are finally gone. They made a handsome profit on 97% of those bathing suits last summer, and a small loss on the remaining few after the season.

Not a lot different than a bank that feels they can hold out for full price forever. At the time this page was written approximately 97% of the loans in the U. S. were not in default. All of the banking crises we read about daily is a result of just 3% of the mortgage loans.

AS A SELLER, DO YOU QUALIFY FOR A SHORT SALE?

Here is a list of the basic requirements and then I will go into more detail.

A true hardship must exist. Examples could be death of a borrower’s spouse, illness or disability, loss of job or divorce. There are certainly others that could be considered legitimate hardship. You will have to document this in a detailed letter to the lender.
You must be able to prove to the lender that you can not pay the difference between the net sale price and the payoff balance. (the shortage) To do this, you will be asked to provide virtually the same documents as if you were applying for a new loan. Pay stubs, bank statements, w-2’s, and tax returns.
Your real estate broker is going to have to provide substantial evidence to the lender that the sales contract represents the best possible price available in the current market. This may take dozens of hours of research and time invested by your broker.
The closing agent will be required to submit numerous pre-closing statements throughout the process for the banks review at each level of the bank’s decision making process.
And lastly, under no circumstances will you be able to receive any proceeds at or after the closing. Not a penny!

SO, YOU FEEL YOU MEET ALL OF THE ABOVE CRITERIA

Let’s go into a little more depth.

Hardship: The bank is not likely going to consider the fact that you took out a home equity 2^nd mortgage or refinanced and pulled all of your equity out, and then proceeded to buy new cars, boats, motor homes, etc. a legitimate hardship. The simple solution in the loss mitigator’s eyes at the bank would be that you should sell the new boat or car and pay what you owe.

Documentation: Be very careful before you give the lender w-2’s or tax returns. If, for example, you financed or refinance within the last two tax reporting years, which at this time would be any time in 2006 or 2007, your tax returns and w-2’s will reflect the income that you reported to the IRS. It is a Federal criminal offense to understate the actual amount of your income to the IRS.

Here’s where it gets a little sticky. If you took out a loan that was “no income verification” or “stated income” or “low documentation” or “no documentation” loans, you still had to provide a dollar amount for your monthly or annual income on your loan application and you had to sign your name at the bottom line stating that the information in the application was “true and correct”.

If the income you stated is not the same as what you reported to the IRS, you have a potential problem with either tax fraud, or mortgage fraud. Both are criminal offences. You may want to carefully consider whether you are willing to provide a lender with incriminating evidence that can be used against you in a court of law.

Once you have crossed those two hurdles and still feel you are a candidate, now you must determine which real estate broker, closing agent, attorney, etc. you are going to hire to bring about a successful transaction and let you walk away from closing with only a loan delinquency on your credit file instead of a foreclosure. A loan delinquency that lowered your score can be overcome in a relatively short period of time. A foreclosure will be on your file for at least 7 years or longer.

NEW CRITERIA FOR BROKER SELECTION

Throw all of the normal marketing hype you have ever heard out the window. It will make no difference how many homes an agent sold in a new homes subdivision. It will make no difference whether the agent is part of the golden retriever rescue club. It will make no difference how many million dollar listings they have. It will make no difference whether they are part of a national franchise company.

What you need in this environment is a seasoned broker with many years of full time real estate experience. One that has been through both the highs and the lows in real estate cycles over the last 20 to 30 years. One that is extremely knowledgeable regarding the precise language of the real estate contracts and addendums. One that has enough presence and substance to be able to have the phones answered around the clock and enough financial reserves to properly market the property. The bank will not be impressed that your real estate company ran full page ads on its “other” listings, but not yours, when they are trying to convince the lender that the market would not pay a higher price on your specific property.

THE LEGAL CONNECTION

Some brokers that have made the decision to invest in these high risk listings have also gone a step further and made arrangements for an attorney to be involved in the negotiations with the lender. If you are a lender and there are currently 862 proposals on your desk from real estate brokers pleading their case for a “short sale”, and 6 more letters from an attorney, whom do you suppose might get more immediate attention.

PAYING FOR SERVICES

As stated in Number 5 above, you will not receive any money at closing should the lender agree to a short sale.

So, a logical question is: “Who is going to pay the broker, the attorney, the State of Florida, the title insurance company?”

The answer is: “THE BUYER”.

All of the money to cover these items has to be produced in the price the buyer agrees to pay. So it doesn’t make a single bit of difference to you what the final sale price is because your share is still $0. It doesn’t make any difference what the Broker and the Attorney receive at closing for their services because you are not paying them and your net check at closing will still be $0.

A discount or limited services broker would be the absolute worst possible choice for this kind of a situation. The reason they are able to discount is that they do less for you and therefore can charge less, which in a good market might increase your net proceeds check a little.

In a “short sale” your net proceeds check will always be $0, so why would you want someone who by the very nature of their business model, will DO LESS?

BUYERS

We realize that some of you that have read this information are not Sellers, but Buyers. Understanding how the process works from start to finish will help you find a property and an agent that have enough knowledge and experience to actually get your offer accepted by the Seller’s lender and successfully closed. If after reading this information, you discover that you know more about the process than your Agent, you have the Wrong Agent.

For a Buyer, there are some unique aspects to the transaction as well. First, your offer must be written and submitted on an “AS-IS” contract. This does not mean that you might get a lemon. In fact, many homes that are being offered as a Short Sale are in excellent condition, but the Lenders will only approve an “AS-IS” contract. These contracts do provide you an opportunity to have any inspections done by qualified contractors or inspectors, “after” the Lender has approved the offer. Typically you will have 5 to 7 days to accomplish this.

Usually there is an Addendum to Contract that addresses some of the unique aspects of a Short Sale. For example, the contract usually specifies certain time frames for inspections, loan applications, loan approvals, and the closing date. The Addendum modifies the contract such that these time limits do not start until the Seller’s Lender has approved the offer.

If you are paying cash and not getting a loan, they will need to see a printed copy of your bank or investment account statement showing that you actually have the funds available to close the transaction. Internet or on-line bank statements will not be accepted.

If you are financing the purchase, you will need the proof of funds on the amount needed to close after deducting the new loan amount, and you will need a full pre-approval letter from a recognized Lender, with your loan officer’s name and contact information. A pre-qualification letter will not be sufficient. A pre-approval differs from a pre-qualification in that you have actually completed an application and had credit run and funds verified in order to be pre-approved.

There is no flexibility on these requirements. If you have not taken care of the financial aspects already, then you should not be looking at property. It’s that simple.

FINAL ANALYSIS

We hope that this information has been valuable to you in determining whether you are truly a candidate for a short sale. There a lot of Agents talking about short sale as a tool to obtain a listing, but don’t really know the first thing, let alone the second, third, fourth, etc. And there are a lot of predatory non-licensed individual also attempting to take advantage of your lack of knowledge or experience in this area.

Be careful! Know who you are doing business with. Check them out. Drive by their office, if they have one. Check the phone book. Are they listed in the business pages? Do they hold the proper licenses, including city or county occupational licenses? What is their educational background in the real estate business, beyond the bare minimum to obtain a license?

And finally, if you have any further questions you are free to call us and we will do our best to give you truthful and accurate information.

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