I wrote earlier about the fact that 34% of the homes subject to mortgages in the Hampton Roads area of Virginia are now "under water" or "upside down" with mortgage balances that exceed the homes' market values. This leaves homeowners with the prospect of potentially having to just walk away if they hit a financial bump and become delinquent and find themselves headed toward foreclosure. A "short sale" is one way to potentially avoid foreclosure even though it may result in phantom income from whatever debt is written off by the mortgage lender. The following are the basic steps a distressed homeowner needs to know in seeking this foreclosure avoidance remedy which seeks to negotiate a discounted pay off with the lender (NOTE: From my experience, utilizing an attorney or realtor experienced in short sales is essential because it lends credibility in the eyes of the lender):*
1. Gaining Control of Title; Authorization to Release Information. To a potential buyer in a short sale situation, one of the most important steps in the short sales process is getting the property under contract. As a homeowner seeking short sale approval, you must have a contract with the buyer that specifies the terms of the transaction with a discounted mortgage pay off – e.g., closing is to be as soon as possible, but expressly contingent upon a successful short sale on terms mutually approved by the buyer and the lender. The other essential document is a signed Authorization to Release Information signed by the sellers. Without one, the lender will NOT talk or otherwise discuss the seller’s loan with a realtor or an attorney or anyone else.
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2. Contacting the Lender. When the buyer, the realtor, or the attorney, as applicable, contacts the lender, you never want to tell them that the buyer is a real estate investor. This is one of the biggest mistakes rookies make and will almost always result in the lender not accepting short sales. Therefore, when you call the lender, to request a "short sales packet" or "workout package," indicate that you are the buyer or that you represent the homeowner. Sometimes they may ask if you are a real estate attorney. Just restate what you told them before. Then you'll want to request the "short sales packet" or "workout packet". When the packet arrives it will explain exactly what you need to make this short sales deal successful. Generally among the things you will need to document are distress concerning:
2. Contacting the Lender. When the buyer, the realtor, or the attorney, as applicable, contacts the lender, you never want to tell them that the buyer is a real estate investor. This is one of the biggest mistakes rookies make and will almost always result in the lender not accepting short sales. Therefore, when you call the lender, to request a "short sales packet" or "workout package," indicate that you are the buyer or that you represent the homeowner. Sometimes they may ask if you are a real estate attorney. Just restate what you told them before. Then you'll want to request the "short sales packet" or "workout packet". When the packet arrives it will explain exactly what you need to make this short sales deal successful. Generally among the things you will need to document are distress concerning:
(A) The distressed nature of the seller (see paragraph 3 below).
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(B) The property: list out all defects to the property and needed repairs to make it marketable (including price estimates). Photos of any major defects can speak volumes to a lender.
(B) The property: list out all defects to the property and needed repairs to make it marketable (including price estimates). Photos of any major defects can speak volumes to a lender.
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(C) The neighborhood where the property is located: is there a crime problem? What are the number of days on market for sales that have occurred and are they below assessment and/or past sales? One web site that may help in checking comparables is http://www.zillow.com. The other option is to secure comparables through a realtor who is experienced working with investor properties. Remember that many of your big established real estate companies may NOT be familiar with short sales, so do your homework on any realtor you decide to use.
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(D) Itemize in detail the lender’s cost of not doing the short sale: (1) foreclose costs, (2) bankruptcy costs if the sellers file either a Chapter 7 or 13 under the Federal Bankruptcy Code, and (3) the costs the lender will face if it ends up bidding in the property at foreclosure: (A) repair costs, (B) costs of marketing and selling the property, including realtor commission, and (C) carrying costs, including insurance and real estate taxes.
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Lenders do not like to end up owning property, so the more data provided in 2.(B), (C) and (D), above, the more apprehensive the lender will be of holding out for a full payoff amount.
(C) The neighborhood where the property is located: is there a crime problem? What are the number of days on market for sales that have occurred and are they below assessment and/or past sales? One web site that may help in checking comparables is http://www.zillow.com. The other option is to secure comparables through a realtor who is experienced working with investor properties. Remember that many of your big established real estate companies may NOT be familiar with short sales, so do your homework on any realtor you decide to use.
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(D) Itemize in detail the lender’s cost of not doing the short sale: (1) foreclose costs, (2) bankruptcy costs if the sellers file either a Chapter 7 or 13 under the Federal Bankruptcy Code, and (3) the costs the lender will face if it ends up bidding in the property at foreclosure: (A) repair costs, (B) costs of marketing and selling the property, including realtor commission, and (C) carrying costs, including insurance and real estate taxes.
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Lenders do not like to end up owning property, so the more data provided in 2.(B), (C) and (D), above, the more apprehensive the lender will be of holding out for a full payoff amount.
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3. Hardship Letter. A hardship letter tells the lender why the homeowner is not making their mortgage payments. If a job loss or family illness is the cause, explain it in detail and make the lender feel sympathetic, and seek to secure for the seller a Waiver of Deficiency – i.e., a no-collection agreement where the lender agrees to write off of any discounted balance and not pursue collection against the seller. The letter should suggest that the seller is contemplating filing bankruptcy, but would prefer to avoid doing so, if at all possible. Be prepared to provide documentation: sometimes lenders will request bank statement, pay stubs, income statements, and so on to document the hardship.
3. Hardship Letter. A hardship letter tells the lender why the homeowner is not making their mortgage payments. If a job loss or family illness is the cause, explain it in detail and make the lender feel sympathetic, and seek to secure for the seller a Waiver of Deficiency – i.e., a no-collection agreement where the lender agrees to write off of any discounted balance and not pursue collection against the seller. The letter should suggest that the seller is contemplating filing bankruptcy, but would prefer to avoid doing so, if at all possible. Be prepared to provide documentation: sometimes lenders will request bank statement, pay stubs, income statements, and so on to document the hardship.
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Remember, you must be prepared to send them everything they ask for because if you don't, the short sale will not be accepted. They will always ask for a HUD-1 and a real estate purchase and sales agreement. Have your real estate attorney’s office prepare a draft HUD-1 and make sure that you have included all amounts payable by the seller for judgments, delinquent taxes, if any, and any other liens (e.g., homeowner association dues). Remember, lenders want to see ZERO net sales proceeds going to the seller. Send everything the lender asks for back ASAP. It usually takes 3 weeks or more - sometimes months - to get an answer back from the lender, so you can't afford to wait. If the foreclosure auction is approaching, you can ask to extend the auction which in most cases they will, if they know it is a legitimate offer.
Remember, you must be prepared to send them everything they ask for because if you don't, the short sale will not be accepted. They will always ask for a HUD-1 and a real estate purchase and sales agreement. Have your real estate attorney’s office prepare a draft HUD-1 and make sure that you have included all amounts payable by the seller for judgments, delinquent taxes, if any, and any other liens (e.g., homeowner association dues). Remember, lenders want to see ZERO net sales proceeds going to the seller. Send everything the lender asks for back ASAP. It usually takes 3 weeks or more - sometimes months - to get an answer back from the lender, so you can't afford to wait. If the foreclosure auction is approaching, you can ask to extend the auction which in most cases they will, if they know it is a legitimate offer.
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4. Broker's Price Opinion. Basically a real estate broker will come out and give their opinion on what the house is worth in the form of a Brokers Price Opinion ("BPO"). The key to short sales is the BPO. A glib letter will not suffice. The BPO needs to be documented and show supporting market time to sale and final sale information as available. You want to try everything you can to influence the BPO to come in as low as you can in order to induce the lender to discount the loan payoff.
4. Broker's Price Opinion. Basically a real estate broker will come out and give their opinion on what the house is worth in the form of a Brokers Price Opinion ("BPO"). The key to short sales is the BPO. A glib letter will not suffice. The BPO needs to be documented and show supporting market time to sale and final sale information as available. You want to try everything you can to influence the BPO to come in as low as you can in order to induce the lender to discount the loan payoff.
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There are two (2) other things to keep in mind in making the short sale request. (A) Letters of Recommendation. If the buyer, realtor or real estate attorney involved has successfully closed short sales previously, obtain a letter from the lenders involved that will help convince the current lender that you can deliver. The other issue is (B) How Much to Offer. Part of the answer to this question is a function of what you intend to do with the property. If the intent is to (i) live in the property, then offer a price that calculates in the rehab costs and some immediate built in equity; (ii) rehab it and resell it, then the offer should be calculated to allow for satisfactory rehab costs and a profit margin after sale; or (iii) wholesale the deal - i.e., assign the contract to another buyer, then the offer should be lower to build in an assignment fee and still leave in profit for rehab costs and a profit margin for the ultimate purchaser under the short sale.
There are two (2) other things to keep in mind in making the short sale request. (A) Letters of Recommendation. If the buyer, realtor or real estate attorney involved has successfully closed short sales previously, obtain a letter from the lenders involved that will help convince the current lender that you can deliver. The other issue is (B) How Much to Offer. Part of the answer to this question is a function of what you intend to do with the property. If the intent is to (i) live in the property, then offer a price that calculates in the rehab costs and some immediate built in equity; (ii) rehab it and resell it, then the offer should be calculated to allow for satisfactory rehab costs and a profit margin after sale; or (iii) wholesale the deal - i.e., assign the contract to another buyer, then the offer should be lower to build in an assignment fee and still leave in profit for rehab costs and a profit margin for the ultimate purchaser under the short sale.
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I hope the foregoing will be of assistance to readers in need of doing a short sale or of people they may know who find themselves in that position. My firm has negotiated many short sales and/or assisted buyers and sellers who are involved in the process.
