How to Succeed at Short Sales

Unfortunately, short sales are a reality for home owners who owe more than their property is worth. If you have patience, persistence, and a knack for problem-solving, this niche could be for you.

To help you gain a better understanding of short sales and what it takes to specialize in this growing area, we took a look at some of the most common questions on this topic that you likely will face today. Armed with this information, you can decide whether short sales are an avenue worth exploring for your business.

What is a short sale?

A short sale occurs when the net proceeds from the sale of a home are not enough to cover the sellers’ mortgage obligations and closing costs, such as property taxes, transfer taxes, and the real estate practitioner’s commission. The seller is unwilling or unable to cover the difference.

Some — although by no means all — short sellers may also be in default on their mortgage loans and be headed for foreclosure. However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves upside down, owing more than the home is currently worth when closing costs are factored in.

Other sellers simply don’t understand that if they have assets, such as stocks or a high-salaried job, a lender is not going to let them just walk away from a short sale without signing a note to repay what they owe, says Steve White, broker with Keller Williams VIP Properties, Santa Clarita, Calif.

How do I know it’s short?

A CMA will be your first indicator, but you also need to ask the seller what their outstanding debt is and calculate the cost associated with a sale

Check with the title company and the lender to get exact figures on closing costs and loan balances and to find out what procedures they have in place. If they can afford it, sellers should also consider getting a home inspection to determine what repairs are needed on a home and how this might affect its value, says White.

Who do I and the seller need to talk to about the problem?

If there are a first and second mortgage or a home equity line of credit, you may have to talk to more than one lender to get approval for a short sale. In addition, you may also need approval from the entity that holds the pool of loans if the mortgage has been securitized.

"The presence of two lenders makes a short sale more complicated since it’s often the lender holding the second, or junior, mortgage that has to absorb most of the loss.

Opinions differ, but most experts suggest that you let the lender involved know as soon as possible of the potential short sale. Others say you should wait until you have an offer because you’ll get no action until then. Without a viable purchase offer, your deal won’t be considered by mortgagees.

Tip: Be sure you contact the bank’s loss mitigation department, which will be the group to decide whether to accept a short sale, rather than the collection or customer service department, which is only interested in recouping past due loan payments. Finding the decision maker is often one of the biggest initial challenges in a short sales.

What information will the bank need to decide whether to accept a short sale?

The sellers’ submission package should include W-2 forms from employers (or a letter explaining the seller is unemployed), bank statements, two years of tax returns, and other financial documents outlining income and debt obligations. The bank will also need comps or a broker’s price opinion showing your estimate of value.

In addition, the sellers should submit a “hardship letter,” explaining the circumstances that make it impossible for them to pay the full amount of the loan. The seller needs to be able to show true financial hardship. Someone with the assets or the income to pay is unlikely to be considered, say most interviewees.

Tip: In preparing the package, be careful about discrepancies between the seller’s income and the income used to obtain the loan, cautions Lance Churchill, an attorney and instructor on short sales and REOs with FrontLine Seminars. A big gap may indicate mortgage fraud, unless employment circumstances have drastically changed.

What are the options besides a short sale?

Thanks to programs such as those proposed by Fannie Mae and Freddie Mac to assist subprime borrowers, many lenders are more willing to offer loan modification options. This option can extend the term of the loan, add on delinquent payments to the loan principal, and/or reduce the interest rate to make the loan more manageable for the home owner.

Another option is a repayment plan that requires home owners to increase their monthly payments until the loan is current, says Loni Parmelly, a real estate practitioner and consultant who specializes in short sales. Parmelly also is author of Success in Short Sales (2004), a book she sells on her Web site. It may be possible to refinance an adjustable rate loan with a Federal Housing Authority or conventional fixed loan. Note that lenders will not postpone a foreclosure just because a property is listed, although they may postpone if you have a reasonable offer in the works.

Tip: The ideal candidate for a short sale is still making loan payments and has a credit rating worth preserving. Otherwise, it may not be worth going through the complicated process, says Steve Pierce, broker and operating principal of Keller Williams Benchmark Properties, Fremont, Calif.

How should I price a short sale property?

In general, most short sale experts say to price the property at or near fair market value, although a few will begin with the total payoff amount owned by the seller. How frequently prices are dropped will depend in part on whether the property is in preforeclosure. Most banks have a formula for what percentage under market value they will accept, say interviewees. Figures cited vary from 8 percent under to almost 20 percent under.

"I always price the property 10 percent lower than comparable to peak buyer interest and initiate buyer activity," says Cole-Murphy, who’s also founder and curriculum developer for Real Estate Pro Guides, a line of educational books for practitioners. However, it’s important for buyers to understand that the bank will not give away the property, she says.

Tip: Most lenders will want to get a broker’s price opinion or even an appraisal to see what the property is worth before you and seller set a list price. One way to help ensure that the bank’s estimate of value is realistic is to offer comps of recent sales — both traditional and REO, says Churchill, who is also the author of The Foreclosure Specialist: A Real Estate Agent’s Complete Guide on Working in the Foreclosure Market (Valco Press, 2007).

“Practitioners who do BPOs are rated in part on how close their estimates are to the final sale price, so they usually welcome information on legitimate comps,” he says.

What and how should I disclose about the short-sale property to prospective buyers?

Opinions vary on this topic, although most experts favor disclosing that a property is a short sale in the comments section of the MLS listing. Others suggest waiting to disclose the need for lender approval of the sale until a buyer is ready to make an offer. Debra Allen, ABR®, e-Pro®, with Prudential Arizona Properties, Gilbert, Ariz., uses a disclosure form prepared by her brokerage just for short sales. She also had a special sign rider for the yard sign made indicating a property is a short sale.

Tip: Watch out for unethical investors who will try to convince an owner facing foreclosure to sign a quit-claim deed for the property, and then lease the property, warns Jim Cacioppo, broker/owner of Grand Realty Group. Grayslake, Ill. In such cases, the former owners will still be liable for the mortgage payments, even though they no longer own the house.

How long does it take to complete a short sale?

Although response times vary from lender to lender, it can take two weeks or as long as 60-90 days to receive an approval of a short sale from a lender. That’s why it’s critical that buyers and their representative understand and accept that time frame before they make an offer.

Tip: Keep in mind that the purchase contract on a short-sale property is a legally binding agreement once the earnest money has been deposited. Without language in the contract stating that the lenders must approve the offer and release all liens on the property, the seller may face a legal problem for failing to execute the contract if the short sale is not approved, says Hollingsworth.

What can the seller do to make a short sale more attractive to a lender?

Getting a lender to approve a short sale is primarily a question of economics. You have to provide hard numbers to show that the amount of money a bank will realize on the short sale is better than the amount it may recoup from foreclosing on the property and selling the property as an REO, says Todd Ruckle, ABR, RE/MAX Associates Inc., Newark, Del.

A 2002 study by Craig Focardi of the Tower Group estimated that the entire cost of a foreclosure was $58,759 and took 18 months. Other factors that can influence a bank’s decision include the liability risk it assumes by owning the property after foreclosures, the money tied up during the holding period for a foreclosure and REO resale, additional costs associated with an REO such as attorneys’ fees, and the additional reserves it will need if REOs rise in the bank’s portfolio.

Tip: A buyer that is willing to close in 30 days and who can make a substantial down payment may make the deal more attractive than a buyer who wants 95 percent financing, notes Michael Termine, GRI, CRB, associate broker, Prudential Rand Realty, New York City. All buyers should be preapproved for a mortgage before submitting the offer.

However, to avoid unnecessary costs, buyers should wait on having a home inspection and an appraisal for the loan until after the bank has accepted the short sale proposition, say Cole-Murphy. Genuine hardship, such as a lost job or high medical bills from an illness may also have an influence, says Covello.

What are the seller’s options if a short sale is rejected by the lender?

There are a variety of reasons a bank will reject a short sale — from too low a price to too many files on the loss mitigator’s desk. You can look for another buyer or even try resubmitting the same contract. "Banks don’t want to take properties back in foreclosure, so they are going to do everything they can to make it work," says Pierce. You also need to prepare your seller in advance for the possibility of foreclosure if a short sale fails, says Parmelly.

Tip: A short sale might be rejected if the loan is less than a year old. In such cases, the servicer that’s bought the loan can often require the original lender to buy it back, says Hollingsworth.

What financial or credit liabilities will a seller have as a result of a short sale?

Many lenders ask sellers to sign a promissory note for all or part of the difference between the proceeds of the short sale and the debt obligation as a condition to a short sale. In such cases, the note gives lenders the right to sue a seller and attach other assets if the note is not paid when due.

It’s particularly important to understand this distinction if you work in states such as California that have a nonrecourse mortgage, says Churchill. In such states, the lender cannot pursue a deficiency judgment against a seller for any deficiencies after a property is foreclosed. Because of this distinction, sellers who are already in default on a mortgage and do not have the resources to pay off a separate promissory note after a short sale might be better off letting the lender foreclose, he says. If you are working in a state in which mortgage loans are nonrecourse, be sure and alert your seller-clients to this distinction.

Tip: Having a portion of a loan forgiven may have an adverse affect on the seller’s credit. Encourage your client to try and sign a lease on an apartment before credit is further damaged, suggests Roberta Murphy, an associate broker with Windermere Exclusive Properties, San Diego.

What tax liabilities will a seller have as a result of a short sale?

One often overlooked aspect of short sales is that a seller must count any amount forgiven by the lender as income and pay taxes on that income, even if no actual money was received. The IRS requires lenders to submit a Form 1099 stating the forgiven amount. Sellers who meet the Internal Revenue Service definition of insolvency (either in bankruptcy or with debts exceeding assets) will not have to pay taxes on the forgiven amount.

Tip: The U.S. House of Representatives has introduced the Mortgage Cancellation Tax Relief Act (H.R. 1876), which would eliminate taxes on any debt forgiven on a principal residence through either short sale or foreclosure. The NATIONAL ASSOCIATION OF REALTORS® has been working to support this bill.
Published June 2007, REALTOR® Magazine Online MARIWYN EVANS

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Selling Your Home As A Short Sale While Short Sales were virtually unheard of only a few years ago, now the majority of banks and lenders are negotiating and closing these deals. They allow a homeowner with a legitimate hardship to sell their property for less than the balance of their mortgages and avoid foreclosure.	Buying A Short Sale Home Buyers pursue short sales to get a good deal. Making an offer on a pre-foreclosure, short sale home is not as simple as you may believe, and very few can close in 30 days or less. You want to work with a Phoenix Certified Distresses Property Expert (CPDE) who is specifically trained to work through the intense process of assisting you in securing the home you wish to buy.
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Samone Bollerud-Beitler
GRI. CDPE. Realtor®
Certified Distressed Property Expert
RE/MAX Desert Showcase
14155 N. 83rd Ave.
Suite 120
Peoria, AZ 85381
Email: samoneb@remax.net
Phone:602-390-1462

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