A Real Estate Agent s Guide to Successful Short Sales

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Britton Morrison
5 years ago
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1 A Real Estate Agent s Guide to Successful Short Sales

INTRODUCTION Many homebuyers have heard that short sales oﬀer excellent opportunities for investment, but few of them understand what s behind buying a short sale home.

2 INTRODUCTION Many homebuyers have heard that short sales oﬀer excellent opportunities for investment, but few of them understand what s behind buying a short sale home. As a real estate agent, you ll most likely need to educate your homebuyer if they re interested in one. It s also important to know the process if you re representing the seller in a short sale. Buying a short sale home is very diﬀerent than a traditional sale. If you re aware of the nuances of a short sale, you can begin to manage the expectations of those involved. After all, while a short sale is usually an excellent, deeply discounted way to purchase, there may be some unexpected issues that crop up with an as is sale, not to mention the length of time involved. On the following pages, you ll ﬁnd everything that you need to know about conducting a successful short sale so that you can better prepare your client and answer their questions, helping them make the most of their investment or protecting their interests. Don t Think You Own. Be Sure. Call us at

WHAT IS A SHORT SALE & HOW DOES IT WORK? A short sale occurs when the homeowner of the property is unable to pay the mortgage, and they are facing foreclosure.

3 WHAT IS A SHORT SALE & HOW DOES IT WORK? A short sale occurs when the homeowner of the property is unable to pay the mortgage, and they are facing foreclosure. The borrower and lender opt for a short sale instead of a traditional sale because there is not enough equity in the home to pay off the mortgage at closing. Most often short sales occur because of: Bankruptcy Over-inflated real estate market that then crashes coupled with financial difficulties Illness or job loss Divorce or any other reduction in income The lender makes a deal to unload the property, often at a fraction of what it is worth. In a short sale, the real estate transaction is between the buyer and the borrower (on paper), but the borrower doesn t receive any of the proceeds of the sale. Those go to the primary and secondary lenders and/or lien holders.

Even though the lender is not technically on the title of the home or property, the financially-struggling borrower can t simply decide on their own accord that they want a short sale.

4 Even though the lender is not technically on the title of the home or property, the financially-struggling borrower can t simply decide on their own accord that they want a short sale. They must get approval from the lender and other lien holders. For a short sale to gain approval from the lender, the borrower must prove a financial hardship and an inability to satisfy the debt, not just from the sale of the home and lack of equity but also from any other money or investments the borrower may have that could be applied to the debt. Generally, a borrower is in default on the loan (hasn t made their payments) before a short sale is considered, but that isn t always the case. They just need to prove they can t make the payments now or in the future.

5 WHAT MAKES SHORT SALES UNIQUE? All lienholders must agree to the terms. This means the lender on the mortgage, but also any secondary lien holders including: Homeowners associations (if they haven t paid dues, a lien may have been put on the borrower) Secondary mortgage lien holders Contractors or subcontractors who weren t paid Government entities (such as the case of a tax lien)

6 It s important to know that the more lien holders there are, the less feasible it may be to reach approval for a short sale. A short sale is not a right. The borrower will need to submit a seller s short sale package including financial information and comparable home sales in the area to the primary lender. The lien holders don t have to agree to it. They can deny the borrower s request. There are no calculations or laws to dictate percentages. The deal is considered fair if it is approved by the lending parties, not the borrower. The short sale does not completely forgive the debt for every lien holder. For instance, if the short sale only satisfies the primary lien holder, the secondary lien holders can sue the borrower to recover the deficiency.

FORECLOSURES AND SHORT SALES A short sale helps a borrower avoid a foreclosure. The benefits to the borrower are: Foreclosures require attorneys.

7 FORECLOSURES AND SHORT SALES A short sale helps a borrower avoid a foreclosure. The benefits to the borrower are: Foreclosures require attorneys. Borrowers who are already in debt often want to avoid additional expenses. Foreclosures are public, and a borrower s credit history will take a hit from it. Their credit score will also take a dive from a short sale, but it will be easier to get credit again for a short sale than a foreclosure. Lenders don t want a foreclosure either because of: Lawyer s fees and court fees. In a foreclosure situation, they hold title on the property. This means they are liable for it when it comes to lawsuits and other forms of risk. To mitigate that risk, lenders often prefer to short sell a home before they are forced to take ownership of it. The lender is already out of its monthly mortgage payment on the property but in a foreclosure situation, the borrower is also no longer covering insurance payments, which the lender will need to assume or leave the property uninsured.

8 The same is likely true of taxes and homeowner s association fees. These entities will expect payment as well. Short sales occur to avoid these situations for the lender and the borrower. It s often the lender s opportunity to unload what will become a potentially costly situation under a foreclosure. While short sales often make the best of a bad situation for all sides, there are several things to be aware of: Because of the approval process, they can be lengthy. The lender can decide to foreclose on the property before the short sale goes through. This could mean starting the whole process over again if you were a potential buyer as the transaction will now be between you and the lender, not you and the borrower. People who are losing their homes often do not have the funds or the inclination to maintain them. Some may even take out hard feelings toward the lender on the property walking out with items you wouldn t normally take like sinks, fixtures, and appliances.

9 PREPARING FOR A SHORT SALE The borrower begins the short sale process by securing a listing agent. An attorney and tax advisor may also be involved to decide the likelihood of a short sale acceptance from the lender and the costs involved. If the lender agrees, these parties will most likely meet with a member of the loss mitigation team. The next step is similar to a traditional home sale. A sales contract is drawn up with the listing agent, the property is marketed, and a potential buyer is found. Most lenders prefer to short sell a home near market value, if possible. However, sometimes they lower a home price in the hopes of securing multiple offers.

10 Regardless, the asking price and the offer process in a short sale often resembles a traditional one until the offer is made. At that point the listing agent needs to send the following information to the lender: Listing agreement Offer Seller s short sale package proving an inability to meet their financial obligation Buyer s credit approval letter, a copy of the earnest money check, and proof of funds Do not send these parts individually as you receive them. Anything missing from the packet will delay the process and could jeopardize it all together. Some lenders have unique requirements so make sure you verify what they are before submitting it. Lenders also have the right to divest the property at any time, even if you re in the middle of a short sale. If they do, you ll likely have to begin the whole process again. The lender then reviews the packet and does its own due diligence. It may negotiate the terms with the borrower s agent. The lender either approves the transaction, rejects the offer, pushes back on the offer with requested changes, or doesn t respond at all. The listing agent may have to contact the lender weekly until a response is given.

11 SHORT SALE ERRORS TO AVOID Short sales can be lengthy processes. Avoid these errors if you want to move things along as smoothly as possible. ISSUES FOR THE LISTING AGENT TO AVOID: 1) Incomplete packet. Make sure the listing agent s packet is complete (as detailed in the previous section). 2) Not contacting the lender. Lenders often have backlogs when it comes to short sales. The listing agent should keep in close contact with the lender to check on the process of the short sale and keep it moving. 3) Not realizing your power. The listing agent may need to request a replacement for the negotiator assigned to the sale if that individual seems incompetent. It is within your power to do so.

12 4) Not ensuring the borrower understands the process. The seller s agent should ensure the borrower understands a short sale may result in further litigation if there are lien holders who didn t receive any proceeds. If the borrower receives any loan forgiveness they may have to declare that amount on their taxes. It s these two components that make it necessary to have legal and financial professionals involved in the process. Some borrowers are under the impression that a short sale forgives everything. 5) Taking the sign down when a contract is received. It is not uncommon for buyers to withdraw offers when months go by, and closing is no closer. Even with a contract, leave the sign-up and keep marketing the property just do so at a slower pace or with fewer resources. Some short sales will go through 3-4 potential buyers before one sticks. 6) Not authorizing the listing agent to speak to the lender. In the interest of efficiency, the borrower should authorize the lender to speak to the listing agent. Otherwise, the lender will only talk to the borrower, and sometimes they don t speak the same language.

13 THINGS FOR THE BUYER S AGENT TO BE AWARE OF: 7) Understanding financing. It may not be possible to get financing through the same lender that is short selling the house, so make sure you find out who is the lender on the property. 8) Not communicating to the buyer. Make sure the buyers know that the short sale approval process takes much longer than a traditional sale. 9) Not getting an inspection. Most short sales are sold as is but that doesn t mean you should pass up the home inspection. Yes, a homebuyer is most likely getting a good deal on the house but not if it requires extensive repairs. 10) Not doing research. If the property is bank owned, a property disclosure may not be included. In this case, the potential homebuyer should check to see if it s in a flood zone or has lead-based paint, etc. 11) Not keeping an eye on the buyer s lender approval letter. Some mortgage approval letters expire in days. As the final review on the short sale arrives, make sure that mortgage approval is up to date or your buyer may need to reapply.

14 HOW TO SUCCESSFULLY COMPLETE A SHORT SALE Often short sales fall under a wait and hurry up time frame. It s possible that the approval process on the lender s end takes months, but once it s approved, the lender may want to close immediately. Staying in close contact with all the parties involved can give everyone insight into the projected time frame of conclusion. Once you know it s getting close, ensure everything is prepared for closing including the buyer s mortgage. As mentioned earlier, financing offers can expire. Don t wait until the last moment to check that out. Once you finally get to the closing, a short sale closing is similar to a traditional closing except that the proceeds are not given to the borrower/seller but disbursed to the lender and other lien holders.

CONCLUSION Short sales can be a cumbersome process, but they re often in the best interest of the lender and the borrower, making a bad situation a little better.

15 CONCLUSION Short sales can be a cumbersome process, but they re often in the best interest of the lender and the borrower, making a bad situation a little better. The key to navigating them successfully as a real estate agent is communication. It s important to stay in touch with the lender if you re the seller s agent and it s equally important for the buyer s agent to maintain contact with the seller s agent and the buyers. Communicating expectations before buyers fall in love with the home can save everyone a little heartache in the end. Finally, if you re the listing agent make sure you understand the requirements of the specific lender. Some have fast-track, short sale processes that can make the undertaking much easier.

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HOMEOWNER WELCOME PACKAGE. Short Sale Frequently Asked Questions

HOMEOWNER WELCOME PACKAGE. Short Sale Frequently Asked Questions HOMEOWNER WELCOME PACKAGE Welcome to LA City Short Sales! We understand that this can be a challenging and stressful time in your life and our goal is to make the short sale process as easy as possible