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Form Object
Charlotte Short Sales |
I. What is a Short Sale? As the healthy alternative to foreclosure, Short Sales have become a prevalent method for shifting debt away from a seller by way of forgiveness. Essentially, a short sale transaction asks the existing lender or mortgage holder to concede a portion of the principle balance of the mortgage in exchange for receiving the remainder as proceeds from the sale. Not all lenders are agreeable to a Short Sale arrangement and their decision typically rests upon an examination of the particular facts of the situation, taking into account not only the seller's financial condition but also the property itself. II. Why would a lender be interested? Lenders generally are willing to reduce the principal to mortgage holders if the costs of foreclosure would be larger than the reduction. That is, if it is financially advantageous for them. III. Why would a Seller be interested? Short Sales give many families in financial difficulties the possibility of salvaging their credit and avoiding the embarrassment of a foreclosure. A short sale, while still a mark against a Seller's credit, is generally much better than a discharge through foreclosure. a. The lender can attempt to collect the deficiency balance from the seller after the property has closed. b. The lender may require the seller to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale. If the new note is for less than the balance of the original debt, the difference would be considered canceled, or forgiven, debt. c. Third, the lender may agree to cancel the entire deficiency balance. d. Debt Relief Act of December 2007 clarified that principal reductions by mortgage holders will not be considered taxable events by the IRS. IV. Why would a Buyer be interested? Deal may be better, and property may be in better shape, than what is available through foreclosure or otherwise. V. Why are realtors interested? These properties are available and could be the best deal available for your Buyer or Seller. You may be forced into doing this type of transaction if your client falls in love with a specific house. VI. What does a lender need in order to approve a short sale? a. Proper Authorization - Typically delivered in the form of a letter, this document will need to be signed by the seller and authorizes one or more third parties to speak with the lender regarding the Short Sale, and vice versa. An attorney should be able to assist with providing this letter and the seller will be required to complete it and sign it. b. Settlement Statement - This is an estimated closing statement (HUD) that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. Your closing agent or lawyer should prepare this for you after a discussion with you and your realtor regarding all fees associated with the transaction. The lender is essentially making an attempt at understanding all aspects of the transaction, with a specific eye toward the reduction in loan principal balance which may be needed to make the transaction work for the seller. c. Hardship Letter - This is essentially a letter which officially explains the nature of the seller's financial situation. It establishes the need for a Short Sale and requests the lender to lower the principle balance of the loan. To the extent there is flexibility in a lender's answer, they are more inclined to entertain requests for Short Sale if the seller can establish a legitimate reason for their financial condition, as well as an urgency for the need to sell. d. Financial Snapshot - A seller's financial picture consists not only of the real property owned, but also considers any and all other income, assets and debt. Expect a lender to rightfully and fully investigate the seller's finances prior to coming to a decision on the Short Sale. e. Contract - A valid contract representing an arm's length transaction between buyer and seller is necessary. The lender will require this not only to establish your ability to sell but also to establish market value. The contract, along with a market analysis taking into consideration other homes in the area, will be used to determine whether the request for Short Sale is reasonable. It is not uncommon for a lender to renegotiate items contained in the contract and/or refuse to pay for certain items. Sellers should be careful when negotiating contracts to not offer Seller Paid Closing Costs or other items to the buyer, if the parties know up front they will be approaching the lender regarding a Short Sale. |
Steps in a Short Sale |
I. List property "For Sale" with an agent on the MLS at fair market value. Fair market value is the listing price which will procure a buyer in 2-4 weeks. The agent much project ahead of the curve to foresee what the house will sell for quickly. Do not use old, past sold comps as most of those will not be helpful in determining today's value. Most current listings are worth far less than the comps from even four months ago. II. Secure a buyer at fair market value. The agent should negotiate the best possible contract and include concessions and commissions. The best possible contract does not always mean price. Short sale lenders prefer a quick closing to get the property off their books. The closing date on this contract should be for about 60-70 days after the contract is finalized. III. Gather the short sale documents from the homeowner. Those documents include the hardship letter, FDMC financial form, 2 years tax returns, 2 month bank statements, last 2 pay stubs, and copies of the mortgage statements. You should also gather repair estimates, a listing agreement, comparable sales, and a current market analysis from a realtor. IV. Develop short sale package to submit to the lender. Also, develop the HUD 1 to match the purchase and sales agreement. V. Fax the authorization to release loan information to the customer service department to make sure you are authorized to talk to the lender about the account. VI. Order payoffs from each lender. VII. Fax the short sale package to the lender. The short sale package should include the following: a. Fax cover letter b. Authorization to release loan information c. Cover letter explaining the offer d. Contract for purchase and sales with offer price e. HUD 1 f. Listing agreement g. Financial form FDMC h. Hardship letter from the seller outlining their situation i. Last 2 pay stubs j. Last 2 bank statements k. Last 2 years tax returns l. The pre-approval letter for funds for the buyer m. Once completed, you should send the package to each mortgage holder. Send just the purchase and sales as well as the HUD 1 to the lien holders. VII. The package will then be assigned to a loss mitigator (LM) at each lender. The loss mitigator is really who does the negotiating for the seller. IX. The file will be reviewed by a loss mitigator and an interior BPO will be ordered by the lenders. X. The interior BPO appointment: the realtor must meet the BPO agent. A BPO is short for broker's price opinion. The BPO is a third party report of the value of the property. This value could be determined by either a real estate agent or an appraiser. Take the purchase and sales agreement, low comps, repair estimate and the hardship letter to the BPO. XI. Interior BPO completed. This is the most crucial part of the entire short sale process. In order for a short sale offer to be accepted the interior BPO needs to come in near the offer price. The real estate agent should meet the BPO agent to try to validate the offer price. The lower the BPO value the better. This creates more options for the homeowner. The agent for the buyer should bring the purchase and sales agreement, the comparables that are near the offer price, the construction repair estimate, the listing history, and the hardship letter written for the homeowner who's trying to sell the house. XII. Find out the interior BPO value. Learn the value of the interior BPO by contacting and asking the mitigator "Where did the value come in?" You can also call the agent or appraiser who performed the BPO and ask them the same question. XIII. Make sure to also ask the mitigator "Who owns the loan?" and "What is the PMI coverage ratio?" Depending on the investor who owns the loan the rules of negotiation will vary widely. XIV. Send counter offers to each lender. Following are general guidelines for what each line holder will accept: 1st Mortgage (80-100% of BPO). 2nd Mortgage (5-20% of balance owed). 3rd Mortgage (5-10% of balanced owed). Liens (5-10% of balance owed). Counter offers are done via fax. Fax the counter offer to the loss mitigator at the bank. The counter offer should include the option contract with an adjusted offer price and the HUD1 along with a cover letter explaining the counter offer. XV. Fax purchase and sales agreement and the HUD1 with adjusted offer price to the lenders. Increase the buyer's offer price through negotiations. All counters must be made in writing with purchase and sales agreement as well as the HUD1. For both the HUD1 and the purchase and sales agreement the price must match. The fax the purchase and sale and the HUD1 to the loss mitigator for approval. Counter offers are done via fax. Fax the counter offer to the loss mitigator at the bank. The counter offer should include the contract with an adjusted offer price and the HUD1 along with a cover letter explaining the counter offer. XVI. Negotiate the final purchase price. The buyer must increase the offer price through negotiations. All counter offers must be made in writing with purchase and sales agreements and the HUD1. XVII. Receive the approval letters. Approval letters are issued by the loss mitigators when they accept the offer price. the approval letter will explain the closing date, the gross offer price, the net proceeds that the lender will accept, the real estate agent commissions, the acceptable closing costs and any other lender closing instructions. The approval letter will need to be faxed to the title company or closing attorney. XVIII. The attorney will then pull the title. If the title is not clear, you must negotiate additional liens. XIX. Establish buyer's financing and receive "clear to close" from buyer's lender. XX. Seller and buyer sign HUD1 and closing documents to close. XXI. The attorney files the deed and funds the closing. |