Short Sales and Foreclosures: What Real Estate Professionals Need to Know

Transcription

1 .+F Short Sales and Foreclosures: What Real Estate Professionals Need to Know A program by the Real Estate Buyer s Agent Council, Inc. of the National Association of REALTORS Student Manual V 1.1

2 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Copyright 2009 by the Real Estate Buyer s Agent Council Note: The Real Estate Buyer s Agent Council (REBAC) and National Association of REALTORS (NAR), its faculty, agents and employees are not engaged in rendering legal, accounting, financial, tax, or other professional services through these course materials. If legal advice or other expert assistance is required, the student should seek competent professional advice. National Association of REALTORS Short Sales and Foreclosure Resource (SFR) Certification 430 North Michigan Avenue Chicago, Illinois (fax) SFR@Realtors.org 2

3 Introduction Table of Contents Introduction Homeowners in Jeopardy 8 Foreclosure Defined.. 8 The Faces of Foreclosure 9 A Look at Terminology.. 10 Foreclosure Can Proceed Quickly or Not Counseling Sellers.. 13 The Real Estate Professional s Role in Helping Distressed Homeowners. 13 Let Homeowners Know What Their Options Are 15 Why Short Sales Are Considered Preferable to Foreclosure..18 Recourse or Non-Recourse Loans. 21 The Mortgage Debt Relief and Emergency Economic Stabilization Act. 22 Understanding HAMP and HAFA.. 23 Qualifying Sellers.. 24 Pricing Short-Sale Listings 28 Commission Concerns 30 Taking the Listing..33 Short Sales and Servicer Guidelines for Federal Programs Counseling Buyers. 49 Not All Buyers Ideal for Short Sales. 49 Questions to Ask Listing Agents. 52 Writing the Short-Sale Offer. 52 Contract Acceptance. 56 Common Results of Short Sales Components of an Effective Short-Sale Package..58 Purpose of the Short-Sale Package.. 58 Contents of a Short-Sale Package. 59 Follow Up 69 Why Short Sales Fail Foreclosed and Real Estate Owned (REO) Properties.. 75 When All Alternatives Are Exhausted: Foreclosure..75 A Closer Look at Foreclosure Sales.. 78 When the Property Fails to Sell at the Foreclosure Sale: REO.. 80 Writing Offers on REO Properties. 82 Negotiating the REO Contract. 83 Appendix.86 3

4 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Introduction ACKNOWLEDGMENTS The Real Estate Buyer s Agent Council (REBAC) expresses gratitude and appreciation to the following individuals for their subject matter and industry expertise, input and feedback, and commitment to providing the best education for today s real estate professionals: Edward A. Bugos, ABR, SFR Lynn Madison, ABR, ABRM, GRI, SFR, SRES Lori Cox, ABR, GRI, SFR, SRES, e-pro, CRB, CRS, GREEN NAR S SHORT SALES AND FORECLOSURE RESOURCE (SFR) CERTIFICATION Today s class is qualifying education for the Short Sales and Foreclosure Resource (SFR) certification from the National Association of REALTORS (NAR), the only distressed property certification for real estate professionals recognized and endorsed by the NAR: 4

5 Introduction Steps for earning this certification are outlined below. Figure I.1: How to Earn NAR s SFR Certification Be a member in good standing with the NAR Complete this course and pass the exam View three one-hour Webinars Download the certification application Submit your application to SFR@realtors.org The passing score is 80%. For links to the Webinars, visit These Webinars are pre-recorded, so you can listen to them at any time. For the application, visit The application requires you to provide your National REALTOR Database System ID. If you don t know your ID, contact NAR s Info Central at Info Central Customer Support Specialists are available 8 a.m. to 6 p.m. Central time, Monday through Friday. There is a one-time SFR application processing fee of $175. If you are unable to your application, you may fax or send it to the addresses listed in the application. 5

6 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Benefits Achieving SFR certification offers a number of benefits: Electronic toolkit with practical forms and worksheets Free Webinars that you can download anytime, anywhere Access to SFR logo and marketing materials Differentiation as an SFR at and at Online networking with your peers In addition, this course is an approved elective for the Accredited Buyer s Representative (ABR ), Certified Residential Specialist (CRS) and Performance Management Network (PMN) designations. To learn about these programs and the benefits they offer, visit and respectively. ABOUT THIS COURSE Although short sales and foreclosures are not new trends in real estate brokerage, current economic conditions, rising rates of unemployment, and depressed home values in many markets point to continued increases in mortgage defaults, short sales, and sales of foreclosed and REO properties. This course was specifically designed to show how the real estate practitioner can serve as a resource for sellers and buyers in the brokerage of distressed properties. Real estate professionals play an invaluable role in helping homeowners and home buyers navigate these transactions and, as a result, real estate professionals can help contribute to the real estate recovery in their markets. WHAT YOU WILL LEARN The content of today s class is divided into five chapters with the following goals: Chapter 1: Homeowners in Jeopardy > Define the term foreclosure > Differentiate between preforeclosure, foreclosure, and real estate owned (REO) 6

7 Introduction > Understand that the type of loan instrument impacts the foreclosure timeline Chapter 2: Counseling Sellers > Explain the roles of the real estate professional in helping distressed homeowners > Discuss the options available to distressed homeowners, including refinancing, lender workout, selling and bringing cash to closing, short sale, deed in lieu of foreclosure, and foreclosure. > Explain why short sales are considered preferable to foreclosure > Explain how to qualify sellers > Discuss the considerations in pricing a short-sale listing Chapter 3: Counseling Buyers > Identify the buyers who are and who are not ideal candidates for shortsale properties > Discuss the questions that buyer s representatives should ask of listing agents > Understand the considerations in writing a short-sale offer > Identify the factors that strengthen the buyer s chances that the offer will be accepted > Explain common results of short sales Chapter 4: Components of an Effective Short-Sale Package > Identify the components of an effective short-sale package > Understand why short sales fail and discuss possible solutions Chapter 5: Foreclosed and Real Estate Owned (REO) Properties > Differentiate judicial foreclosure from nonjudicial foreclosure > Understand the process of foreclosure sales > Explain the steps in listing REO properties > Understand how to counsel buyers who wish to pursue REO properties > Identify the negotiation and contract issues for REO properties 7

8 Short Sales and Foreclosures: What Real Estate Professionals Need to Know 1. Homeowners in Jeopardy In this chapter: Foreclosure defined The faces of foreclosure A look at terminology Foreclosure can proceed quickly or not FORECLOSURE DEFINED There is much confusion in the marketplace and the term foreclosure has become what most consumers and some real estate practitioners use when referring to all distressed properties. The reality? Foreclosure is a legal process by which a defaulted borrower is deprived of his or her interest in the mortgaged property. Reasons for Foreclosure The underlying reasons for foreclosure filings are numerous: Change in employment Business failure Payment increase or mortgage adjustment Divorce or death of a spouse Illness Relocation Reduced income Mortgage fraud Predatory lending Getting the keys at closing and moving into a new home or obtaining additional funds through a home equity line was what was on the minds of home buyers, not mortgage default and foreclosure proceedings. This new climate represents uncharted territory for homeowners and real estate professionals alike. 8

9 1. Homeowners in Jeopardy THE FACES OF FORECLOSURE The financial profile of borrowers who experience foreclosure is changing. While foreclosure rates are historically higher for subprime mortgages than for traditional mortgage products, rates of mortgage default are increasing among the most credit-worthy individuals: prime borrowers. As charted in Figure 1.1, the percent of prime loans that were seriously delinquent loans 90 days or more past due or in the process of foreclosure increased more than three times from the end of 2006 to the end of the third quarter of Figure 1.1: 90+ Days Delinquent Rates for Subprime and Prime Loans, Source: Mortgage Bankers Association. National Delinquency Surveys: Q100-Q309. Washington, DC: Mortgage Bankers Association. 9

10 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Foreclosure Wave or Tsunami? Foreclosures are often expressed in the media as occurring in waves, e.g., the foreclosure wave due to the reset of option adjustable-rate mortgage (ARM) interest rates, the foreclosure wave due to increases in unemployment. While it may be adequate to describe the number of foreclosures as waves, the individuals who have experienced foreclosure first-hand might describe a foreclosure more in terms of a tsunami. In some situations, owners may be forcibly evicted from their homes. Abandoned properties may be boarded up, gutted, or vandalized. Foreclosure also has a lasting ripple effect on neighboring home owners by applying downward pressure on property values. A LOOK AT TERMINOLOGY Earlier in this chapter we defined the term foreclosure. There are, however, related words and acronyms e.g., pre-foreclosure, REO that are sometimes used incorrectly. What do these mean exactly? For a review, see Figure

11 1. Homeowners in Jeopardy Figure 1.2: Differentiating Pre-Foreclosure, Foreclosure Sale, and Real Estate Owned (REO) FORECLOSURE CAN PROCEED QUICKLY OR NOT Depending on the instrument the distressed homeowner used to secure his or her loan as well as on state laws, foreclosure proceedings can occur quickly, as in Georgia where the process period is a little more than 30 days. In other states, like New York, foreclosure proceedings can take more than 400 days. 11

12 Short Sales and Foreclosures: What Real Estate Professionals Need to Know The type of loan instrument deed of trust vs. mortgage is a significant factor when foreclosure timelines are concerned as: With deeds of trust: > NO court action or permission is required for the properties of defaulted borrowers to be sold at a foreclosure sale. > This type of foreclosure is known as non-judicial foreclosure. > Process may take anywhere from 4-12 weeks. With mortgages: > Lenders must work with attorneys and courts to obtain a judgment of foreclosure and sale before foreclosing on a defaulted borrower. > This type of foreclosure is known as judicial foreclosure. > Process may take anywhere from 6-18 MONTHS or longer. To get information on the length of foreclosure proceedings in your state, please consider the following Web sites: Be sure to cross-reference all foreclosure information found on the Internet against your individual state laws. We will cover the specific steps in the foreclosure process in Chapter 5. 12

13 2. Counseling Sellers 2. Counseling Sellers In this chapter: > The real estate professional s role in helping distressed homeowners > Let homeowners know what their options are > Why short sales are considered preferable to foreclosure > Understanding HAMP and HAFA THE REAL ESTATE PROFESSIONAL S ROLE IN HELPING DISTRESSED HOMEOWNERS Homeowners at risk of default or who have defaulted on their mortgage may turn to their real estate agents for guidance. And in these emotional situations, real estate practitioners may be tempted to do everything they can to help owners save their homes. However, in doing so, agents may place themselves, their real estate licenses, and professional livelihoods at risk. When faced with a distressed owner situation, what should real estate professionals do and say? What should they not do and say? As a guiding principle in this course as well as in NAR s Short Sales and Foreclosure Resource (SFR) certification, real estate professionals should serve as a resource for their clients. Do: Make state-required agency disclosure indicating your role when first meeting with distressed homeowners. Let homeowners know whether what they share with you will remain confidential, unless they give you the authorization to share such information. Note, however, that pertinent material facts about the property would not be confidential. Assist owners in understanding options they should consider and, when necessary, make appropriate referrals. 13

14 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Recommend in writing! that homeowners seek advice from qualified finance, tax, and legal professionals Suggest that homeowners seek foreclosure avoidance counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD); visit the HUD Foreclosure Web page for more information: (Figure 2.1). Figure 2.1: Alert homeowners to rescue scams. There are numerous opportunities for homeowners to be lured into too-good-to-betrue rescues. The Office of the Comptroller of the Currency (OCC), which supervises all national banks, has published a consumer advisorythe following Web sites: Homeowners should seek legal counsel prior to responding to or entering into any agreement with anyone or any organization that contacts them with an offer that seems too good to be true. 14

15 2. Counseling Sellers Don t: X Overstate your knowledge or experience in handling distressed property transactions X Advise on finance, tax, or legal consequences of selling or purchasing short sales and/or foreclosed or REO properties X Make significant changes to approved forms or interpret legal clauses of contracts and addenda X Participate in negotiating modifications of the current loan X Participate in loan refinancing As a reminder, NAR Code of Ethics Article 13 states: REALTORS shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it. LET HOMEOWNERS KNOW WHAT THEIR OPTIONS ARE Many homeowners who are at risk of default or who have defaulted on their mortgage believe that foreclosure is their only solution. There are, however, many options other than foreclosure. And although real estate professionals will not participate directly in all of the options (for example, a lender workout), real estate professionals have an obligation to inform distressed sellers of all available solutions. 15

16 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Article 1 NAR CODE OF ETHICS When representing a buyer, seller, landlord, tenant, or other client as an agent, REALTORS pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS of their obligation to treat all parties honestly. When serving a buyer, seller, landlord, tenant or other party in a non-agency capacity, REALTORS remain obligated to treat all parties honestly. (Amended 1/01) Whether the owner intends to keep the property or needs to sell will determine which of the following options is best for them. 1. Refinance. If the homeowner meets the required eligibility criteria, one of the best options is Home Affordable Refinance, a component of the Making Home Affordable initiative launched in early 2009, both of which will be covered in greater detail later in this chapter. Figure 2.2: 16

17 2. Counseling Sellers 2. Do a Lender Workout In a forbearance, the lender spreads the back payments, fees, penalties, etc., over a fixed number of upcoming payments to allow the homeowner to catch up. With a loan modification, lenders will often work with the homeowner to help them keep the home by reducing or rolling back interest rates, forgiving back payments or adding them to the loan amount or possibly re-casting the entire loan into a fixed rate that wraps all the fees into the new loan. Note: Lender workouts are not transactions where real estate professionals may act as agents on behalf of their clients. In most states, lender workouts are not considered real estate transactions. Therefore, real estate professionals who try to broker lender workouts could be considered practicing law without a license. 3. Sell and Bring Cash to Closing. It is imperative here that real estate professionals assure themselves to the best of their ability that the seller has the necessary funds to do this. It is equally critical that sellers speak with their finance and tax professionals about possible tax consequences, e.g., liquidating one s 401(k) account, before bringing cash to closing. 4. Offer the Lender a Deed in Lieu of Foreclosure. This is a situation where the borrower offers to trade the property to the lender in exchange for the cancellation of the note. This is more likely to work in states where there is a long foreclosure timeline. The lender will be able to get the property much sooner, which lessens the probability of the property being in disrepair as well as lessens the lenders expenses. Like the workout, a deed in lieu of foreclosure should be done by sellers and/or their attorneys. 5. Request a Short Sale. The lender has not yet foreclosed on the property, and there may be a window of opportunity for the seller to put the property on the market and try to sell it in order to at least partially pay the lender what is owed. 6. Go to Foreclosure. If you are contacted by someone in late stages of pre-foreclosure, the homeowner should immediately contact an attorney with distressed property expertise to determine if there is any way to take advantage of the other options. 17

18 Short Sales and Foreclosures: What Real Estate Professionals Need to Know There are numerous resources to help distressed homeowners understand their options. Those resources include, but are not limited to: Phone Lines To find a HUD-approved housing counselor: (800) To contact the Homeowners Hope Hotline: (888) 995-HOPE Web Sites Fannie Mae: reoptions Freddie Mac: Making Home Affordable: State-Specific Resources In addition to federal programs like Making Home Affordable, there are many state-specific resources to help distressed homeowners. For example, the Maryland Association of REALTORS has developed a Foreclosure and Short Sale Maryland Consumer Resource Guide, available to members of the Maryland Association of REALTORS. The Arizona Department of Real Estate established a Short Sale Seller Advisory, which is published by the Arizona Association of REALTORS and can be found on page 90. WHY SHORT SALES ARE PREFERABLE TO FORECLOSURE Short sales are considered preferable to foreclosures because short sales (1) may not damage the distressed owner s credit report and/or ability to obtain financing in the future as much as a foreclosure and (2) lessen the impact a foreclosure can have on the surrounding community. There are varying opinions on the number of points by which a short sale or foreclosure will lower a distressed homeowner s credit score. Some consumers report that a short sale lowered their credit score by only 50 points. Others attest that a foreclosure decreased their score by 200 points or more. The reality is that credit-scoring algorithms are complex 18

19 2. Counseling Sellers and take into consideration a number of factors, including, but not limited to, the following: 1 > Payment history > Amount of debt compared to credit limits > Length of credit history > Number of credit inquiries > Number of credit accounts > Types of credit accounts In addition, when calculating an individual s credit score, agencies compare the above information to the loan repayment history of consumers with similar profiles. Therefore, it is impossible to specify the exact number of points by which a short sale or foreclosure will lower a consumer s credit score. (For a further discussion of credit scoring and the impact of negative events like foreclosure, see page 96 for the article Credit Missteps How Their Affect on FICO Scores Vary from Fair Isaac, the company that created the FICO credit score. The article Homeowners Can Rebuild Credit after Foreclosure or Short Sale on page 98 offers consumers useful tips on repairing damaged credit.) Where short sales and foreclosure proceedings are concerned, what is certain is that a distressed homeowner who completes a short sale will be able to qualify for a loan owned by Fannie Mae sooner than if the homeowner allowed the property to go into foreclosure. See Figure 2.3 for a further comparison of short sales and foreclosures. 1 Federal Trade Commission. Need Credit or Insurance? Your Credit Score Helps Determine What You ll Pay. Available at: 19

20 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Figure 2.3: Comparing the Impact of Short Sale and Foreclosure Issue Short Sale Foreclosure Credit report and credit history The term short sale or short sell does not appear on one s credit report. However, one s account status with the lender does appear, which may impact the homeowner s credit score. After the sale, a lender may report a short sale as: A foreclosure remains on one s credit history for 7 years. 1. Paid in full paid as agreed 2. Paid settled 3. Paid unrated 4. Paid less than owed Ability to obtain a loan owned by Fannie Mae Ability to obtain FHA loan How the lender reports the closed account is negotiable. The homeowner is eligible for a new loan in 2 years. No information available at this time. The homeowner is eligible for a new loan in 5 years. The homeowner is eligible for a new loan in 3 years if the foreclosure was a conventional loan foreclosure. 20

21 2. Counseling Sellers RECOURSE OR NON-RECOURSE LOANS In short sales as well as foreclosures, whether the loan is recourse or non-recourse has impact on the seller. In a recourse loan, the borrower retains personal liability for any deficiency after a short sale or foreclosure. The lender reserves their right to pursue the personal assets of the borrower by obtaining a court ordered deficiency judgment. In a non-recourse loan, the lender may be limited to whatever funds are available from its security interest in the property itself and may not be able force the borrower to repay any deficiency. Each state has its own recourse debt laws and in some states a loan can be either recourse or non-recourse depending on factors such as whether it was a purchase-money loan or a refinance. Each non-recourse state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In some states (such as California) non-recourse laws apply only to purchase-money loans (i.e., original home loans that are used to purchase property). Almost all home equity lines of credit (HELOCs) and home equity loans are considered recourse loans and lenders may sue borrowers to recoup their losses. State Specific Issue: What's Your State Requirement? 21

22 Short Sales and Foreclosures: What Real Estate Professionals Need to Know THE MORTGAGE DEBT RELIEF AND EMERGENCY ECONOMIC STABILIZATION ACT > Prior to the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008 being put into effect, money forgiven by a lender in a short sale was considered taxable income. > In many circumstances, the new law no longer requires taxpayers to pay federal income tax on the forgiven debt, provided the property is their principal residence only. > Taxpayers may exclude debt forgiven on their principal residence if the loan balance was less than $2 million. The limit is $1 million for a married person filing a separate return. > The law originally applied to debt forgiven in 2007, 2008, and 2009, however, the Economic Stabilization Act of 2008 has extended this forgiveness through > It includes debt reduced through mortgage restructuring, refinancing, home equity lines of credit, short sales as well as mortgage debt forgiven in connection with foreclosures. > As a reminder, this is debt that was used to buy, build, or improve a principal residence ONLY. A reminder: Although real estate professionals should be knowledgeable of the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008, professionals should not counsel clients or provide finance, legal, or tax advice. Agents are encouraged to explain to clients that there has been a change in the laws for debt forgiveness and that clients should consult with their tax advisor. 22

23 2. Counseling Sellers UNDERSTANDING HAMP AND HAFA Home Affordable Modification Program (HAMP) HAMP was enacted in 2009 to attempt to help homeowners who wanted to remain in their homes. This program provides for lenders to modify the current loan to reduce the payment to an affordable level for the borrower. Home Affordable Foreclosure Alternatives (HAFA) To help homeowners who are unable to keep their homes under the Home Affordable Modification Program, the HAFA program may make a short sale or a deed-in-lieu of foreclosure a viable option to help them avoid foreclosure. The HAFA Program, which took effect on April 5, 2010, provides servicer, seller, and junior lien holder incentives for these transactions and is designed to simplify and streamline the use of short sales and deeds-in-lieu of foreclosure. The qualifications for the HAMP and HAFA programs are: Home Owner occupied One- to four-unit property Existing Mortgage Unpaid principal balance that is equal to or less than $729,750 for one-unit properties (higher limits are available for two-, three-, and fourunit properties) Originated on or before January 1, 2009 Payments exceed 31% of borrower s gross monthly income Borrower Experiences a change in income or other financial hardship At risk of imminent default or in default HAFA is explored in greater detail beginning on page 40. These guidelines can also be accessed by visiting NAR s Short Sales Web site: 23

24 Short Sales and Foreclosures: What Real Estate Professionals Need to Know QUALIFYING SELLERS If a short sale is judged to be a distressed homeowner s best option, the real estate professional must be exacting and thorough in qualifying the homeowner for a short sale. Not every owner is a short-sale candidate and, unfortunately, not every owner can be saved from foreclosure. Defining Hardship Many panicked homeowners seeking a short-sale solution may be unclear on what constitutes a valid hardship an event or events that change a homeowner s ability to keep current in mortgage payments. Loss of equity, or choosing to purchase another property simply to upsize or downsize for example, is not considered valid hardship. However, lending institutions may entertain short sales for homeowners who have experienced any of the following that would cause their payment to no longer be affordable: Employment changes Business failure Illness and medical costs Divorce or death of a spouse Increase in monthly mortgage payment Natural disasters Determining What Is Owed and Estimating Net Equity Distressed owners may be reluctant to volunteer any information about their financial position. It is critical that you have an accurate assessment of what their equity position is or isn t. To facilitate this, consider using the Pre-listing Worksheet and the Seller s Net Equity Calculation Worksheet, Figures 2.4 and 2.5, respectively, on the following pages. Note that real estate professionals are encouraged to verify liens by: Accessing any sources that can help you determine any liens or encumbrances on the property. This might be done through public records or your MLS system if it is connected to a database that has this information. Alternatively, you may have a title company do a preliminary title search (lien search). If there is a homeowners association, determine whether or not the seller is current with all association dues. 24

25 2. Counseling Sellers Figure 2.4: Seller Pre-Listing Worksheet Seller s name Address of property Date of preparation Estimated closing date 1. Do you have a mortgage on the property? Yes No More than one? Yes No First mortgage $ Lender Type: FHA VA FNMA Other Second mortgage $ Lender Do you have mortgage insurance? Yes No With whom? 2. Are you current on all loan payments? Yes No If no, how many payments are in arrears? 3. What is the situation that caused you to miss or will cause you to miss your payments? 4. Have you spoken with anyone at the lender/lien holder s office? Yes No Whom? What department? What was discussed? 5. Are your real estate taxes escrowed? Yes No If not, are they current? Yes No 6. Is there any legal action pending related to this property of which you are aware? Yes No Pending foreclosure: when filed? Bankruptcy: when filed? 7. Are there any other liens that could affect the sale? Yes No Homeowners association (HOA) liens IRS tax liens Mechanics liens 8. Are there any bills for municipal services that are unpaid? (water, sewer, etc.) Seller Seller 25

26 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Figure 2.5: Sample Calculation Worksheet for Estimating Seller s Equity Estimated sales price (or offering price) $ Mortgage balance primary loan $ Junior liens/equity loans $ Prepayment penalty $ Title expense $ Attorney fees $ Transfer taxes state/county $ Transfer taxes local $ Survey $ Marketing fee $ Assessments $ FHA/VA fees $ Seller concessions $ Tax prorations $ Other $ Other $ Total estimated expenses LESS $ Estimated net equity to seller - OR - $ Estimated funds needed to close $ Note: This is not a closing statement. This is intended to give the seller an estimate of what their expenses could be in a typical real estate transaction. The broker and designated agent cannot be responsible for miscalculations resulting from changes in fees, differences in mortgage balances or escrow balances, changes in taxes or any other item that may affect the accuracy of this estimate. This is an estimate and all figures should be reconfirmed with your attorney and possibly your lender. Source: Reprinted with permission of Lynn Madison, Lynn Madison Seminars, and Lori Cox, Life Successes, Inc. 26

27 2. Counseling Sellers Confirming Property Condition If the homeowner has experienced difficulty keeping current with the mortgage, it is likely that owner has not kept up with property repairs. Real estate practitioners are encouraged do a thorough investigation the home and document any damages or items that may be in need of repair. The short-sale package, to be discussed later, needs to contain written estimates from contractors on the significant repairs. It is suggested that you begin to compile contractor repair estimates when first listing the property. Sufficient Time to Accomplish a Short Sale Although there is no definitive timeline for processing a short sale there are factors that could influence whether you and the seller have sufficient time to accomplish the sale. The element of time is impacted by several key issues, including, but not limited to: Lender protocol State foreclosure laws Whether a foreclosure date has been set For example, in the FHA Preforeclosure Program, a seller would have a minimum four months to get a contract for sale after they had been accepted into the program. HAFA requires that the lender give the seller at least 90 days, up to one year depending on market conditions, to sell the property. Sellers Willingness to Do Their Part One of the critical elements in doing a successful short sale is the homeowner s willingness to submit to the lender all required information and documents. Although we will be covering the short-sale package in depth in Chapter 4, a quick look at the Short-Sale Checklist in the Appendix shows the extent of the information the seller will be required to submit. Be aware that any explanation to the lender of the seller s financial status that differs from what they put on their original loan application to get the mortgage could become a problem for the seller. If this may be the 27

28 Short Sales and Foreclosures: What Real Estate Professionals Need to Know case, the seller needs to consult an attorney before proceeding with the listing. Getting this information prior to listing the property shows the seller s willingness to cooperate and do their part. However, most of the information gathered at the time of listing the property may have to be re-done at the time of contract since the lenders will require the most recent information. In many states, gathering this type of confidential information about someone who may not yet be your client would most likely create an implied agency relationship. Requiring that sellers provide adequate information to indicate they are willing to do their part prior to taking the listing and then giving them a deadline by which any remaining documentation must be furnished to you is a way to accomplish the timeliness of marketing the property while at the same time ensuring you have a cooperative seller client. Real estate professionals are encouraged to consult with their broker/counsel before obtaining a homeowner s financial information in advance of entering into a listing agreement. Note: If the seller has funds available, the lender may ask the seller contribute in some way to offset the lender s loss in the short sale. PRICING SHORT-SALE LISTINGS Getting It Right Fair market value is the price a buyer will pay and a seller will accept for a property under reasonable and ordinary conditions. This definition assumes that neither the buyer nor seller is related to one another (arm s length transaction) and neither is under any pressure to complete the transaction. When under pressure, such as the need to immediately relocate, either the buyer or seller may entertain a price that differs substantially from what would be considered otherwise. Factors that come into play when arriving at fair market value include the status of the local real estate market and the location, age, and current condition of the property. Because these factors change, fair market value for a given property is not static. Real estate professionals help clients determine fair market value by doing a CMA. Once completed, the CMA gives sellers a value range of 28

29 2. Counseling Sellers where their property should sell, based on the variables of the marketplace. One of the listing agent s primary goals is to price the property so the seller receives an offer from a qualified buyer with a realistic chance of closing. Some agents advertise short sales at unbelievably low prices with the hope that a buyer will be enticed to submit an offer. Other agents set the list price too high to attract an offer. Still others list the property at what the seller needs rather than what the property is worth. The proper price should be the low end of fair market value. Determining If the Property Is Priced Correctly Utilizing the Reverse Prospect Match function available in most MLS's will help to determine if the property has been priced to sell. The steps would be: 1. Submit the listing at the low end of the fair market value. 2. Determine how many buyer prospects received the notice that the property was available. 3. Make a copy of the information from the MLS. 4. If no showings in a reasonable length of time (determined by market conditions) the property is priced too high. 5. Reduce the price and repeat the process until there are showings. 6. Retain the printouts of each step for submission with the CMA portion of the short-sale package (covered in Chapter 4). Importance of Proper Pricing The key to proper pricing is to attract the buyer who sees the value of the property at list price and negotiates accordingly. If the property is not priced low enough for the buyer to be willing to wait out the short-sale process, there will likely be no offers. However, submitting an offer for lender approval that is so low that there is little, if any, chance of approval is a waste of everyone's time and effort. The seller often does not have time enough prior to a foreclosure sale to waste, nor does the buyer want to be tied up in a contract for months with little hope of approval. The real estate professional s duty is to do what is in the best interest of his or her client, and a contract that has little chance of closing is not in either client's best interest. 29

30 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Keeping It Right Listing it at the right price initially is not the end of the listing agent s responsibility. It is important that the listing agent keep the seller informed of market conditions throughout the length of the listing. Market conditions will change and it is important that the listing agent remain informed as to the current market conditions and communicate this to the seller. Again, utilizing the prospecting function available in most MLSs will also help sellers by keeping them automatically informed of new listings or changes in current listings that could affect their pricing. You may want to consider discussing automatic price reductions with the seller at the time of listing. For example, if there is no offer in a specific time frame there will be a built in mechanism in the listing agreement for a price reduction. COMMISSION CONCERNS As in all real estate transactions, the commissions a brokerage company charges and the amount of compensation a listing office chooses to offer cooperating brokers is a business decision made by each firm, independent of each other. Fannie Mae and Freddie Mac, however, have commission guidelines for their lenders and servicers that do need clarification, which will be the focus of our discussion. Although sellers are responsible for the compensation that has been agreed to in the listing agreement, lenders that approve short sales are not legally responsible for payment of any commission. Consequently, it is difficult for listing agents to be 100% assured of the compensation they will receive as the result of closing a short-sale transaction. If your MLS requires that listing brokers disclose a short sale or potential short sale in the MLS, the listing broker may also choose to explain to other MLS participants how any reduction in the gross commission, required by the lender as a condition of approving the sale will be apportioned between listing and cooperating participants. 2 Note: The seller's permission is required prior to disclosure in the MLS of the potential short sale regardless of your MLS requirement for disclosure. 2 National Association of REALTORS Short Sales Work Group. The Short Sales Work Flow: What the Listing Agent Should Know to Successfully Negotiate a Short Sale. Spring Available at: 30

31 2. Counseling Sellers MLS Rules and Regulations Section 5, Compensation Specified on Each Listing (note: included here is the information from Section 5 that pertains to short sales ONLY. For the entire text of the MLS Policy Manual, please see the entire MLS Rules and Regulations at a8a7/e07046b11ddb03d e40066e315?OpenDocument Note 2: Multiple listing services, at their discretion, may adopt rules and procedures enabling listing brokers to communicate to potential cooperating brokers that gross commissions established in listing contracts are subject to court approval, and that compensation payable to cooperating brokers may be reduced if the gross commission established in the listing contract is reduced by a court. In such instances, the fact that the gross commission is subject to court approval and either the potential reduction in compensation payable to cooperating brokers or the method by which the potential reduction in compensation will be calculated must be clearly communicated to potential cooperating brokers prior to the time they produce an offer that ultimately results in a successful transaction. (Amended 5/08) Note 3: Multiple listing services must give participants the ability to disclose to other participants any potential for a short sale. As used in MLS rules, short sales are defined as a transaction where title transfers, where the sales price is insufficient to pay the total of all liens and costs of sale, and where the seller does not bring sufficient liquid assets to the closing to cure all deficiencies. Multiple listing services may, as a matter of local discretion, require participants to disclose short sales when participants know a transaction is a potential short sale. In any instance where a participant discloses a potential short sale, they may, as a matter of local discretion, be permitted to communicate to other participants how any reduction in the gross commission established in the listing contract required by the lender as a condition of approving the sale will be apportioned between the listing and cooperating participants. All confidential disclosures and confidential information related to short sales, if allowed by local rules, must be communicated through dedicated fields or confidential remarks available only to participants and subscribers. (Amended 5/09) 31

32 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Not all lenders are adjusting the compensation the seller agreed to pay, however. In February 2009, Fannie Mae instructed its servicers not to negotiate commissions for short sales below the amount specified in the listing agreement (if the listing compensation is 6% or less) and Freddie Mac followed with their directive in August Similarly, both the HUD PreForeclosure Sales Program and HAFA program have compensation guidelines in them. Fannie Mae Freddie Mac FHA Effective March 1, 2009, closing of pre-foreclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to a level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6 percent of the sales price of the property in aggregate. Servicers are reminded that they must continue to obtain any approvals that may be required by interested third parties in connection with pre-foreclosure sales. On August 20, 2009, Freddie Mac confirmed in writing that its servicers are not allowed to renegotiate short sales commissions. According to the policy, as a condition of the servicer s acceptance of a short sale offer, servicers cannot renegotiate the sales commission below the amount agreed to by the real estate broker and the seller/borrower. However, if the negotiated commission exceeds 6 percent, servicers are required to limit it to 6 percent. This Freddie policy is consistent with Fannie Mae s policy. The FHA Preforeclosure Sales Program allows a Mortgagor in default to sell his or her home and use the sales proceeds to satisfy the mortgage debt, even if the proceeds are less than the amount owed. (Ref: Mortgagee Letters and ) HUD allows all reasonable cost of the sale including up to 6% sales commission, local/state transfer tax stamp and other customary closing cost. HAFA The guidance states that a servicer may not require a reduction in the real estate commission below the amount stated in the SSA, up to 6%. However, if the servicer has retained a vendor to assist the listing broker, the vendor must be paid a specified amount from the commission. 32

33 2. Counseling Sellers TAKING THE LISTING Initial Paperwork Sellers should sign both a listing agreement and a short-sales disclosure form, or listing agreement addendum if one is available from either your association or your broker. Sellers should be instructed to complete an authorization to release financial information (see Figure 2.6 for a sample form). The lender will not provide any information on the seller s mortgage without the seller s written permission. Real estate professionals should consult with the seller s attorney to determine who will request financial information from the lender. Sellers are required to complete the federal lead-based paint disclosure on residential properties built prior to All required state disclosures would also apply to the short-sale transaction. 33

34 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Figure 2.6: Sample Authorization to Release Financial Information Date: Loan #: Lien Holder Lien Holder SS# (full or last four digits determined by lender) SS# Property Address Seller consents that Lien Holder and its representatives may supply and communicate any loan, financial or other information of Seller, confidential or otherwise, with any of the following involved in the transaction and their representatives: Seller s Attorney or Representative (names) Seller s Broker and Agent (names) Lien Holder Signature Lien Holder Signature Contact with Lender(s) The appropriate department of all lien holders should be contacted as soon as possible after taking the listing. They may be called any of the following: Loss Mitigation Work-Out Asset Recovery Loan Modification Loan Reinstatement In some smaller banks, the appropriate department may even be called the Foreclosure Department. Generally, the department responsible for sending the mortgage default notices is not the department to contact to approve a short sale. Typically, a negotiator is assigned and he or she will be the decision maker on a short sale. 34

35 2. Counseling Sellers In many cases, the seller will have previously contacted their lender and will have paperwork ready for the listing agent to fill out along with directions for where to send the listing agreement and any other forms that may be required. Questions for the Lender When should the seller submit their short-sale application now or with the short-sale package? Will the lender begin the short-sale process by pre-approving the seller for a short sale now or when the real estate agent has a contract? It is most likely the lender will say at the time of contract but each lender handles this differently. What is the anticipated timeline for short-sale approval? For junior lien holders: Is there a formula for calculating what is required to release their lien? Remember, each lender has its own protocol. Even if you ve successfully closed a short-sale transaction with this lender in the past, the lender s procedures may have changed. Real estate professionals are encouraged to seek answers for all of the above questions for each short-sale transaction. Note: The HAFA and FHA programs require that the process be started at the time of listing. See the overview of these programs beginning on page 37. Attorney Fees A consistent message in this course is that homeowners in distress need to engage the services of qualified finance, tax, and legal professionals. Homeowners who are in mortgage default or facing foreclosure may argue that they cannot afford to pay them. Real estate professionals should note: Attorneys who work with distressed owners may take into consideration the owners current financial realities and allow for ways to navigate the process with little or perhaps no attorney fees upfront. 35

36 Short Sales and Foreclosures: What Real Estate Professionals Need to Know In most cases, lenders expect that reasonable attorney fees will be a part of the cost to close the short sale. Questions sellers should ask an attorney prior to hiring might include: - How many short sales have you done? - How many of the short sales handled were successful? - What is your fee? - Do you charge billable hours or flat fee? - What will I owe you if my short sale is not successful? Frequently Asked Questions (FAQs) All of the following questions are finance, tax, and legal issues that are outside the scope of the license law for real estate practitioners. Agents are encouraged to instruct sellers to write down all their questions and make sure sellers ask them of their attorney and/or financial and tax advisor. Is it better for the seller to declare bankruptcy than pursue a short sale? Should the seller stop making mortgage payments? Will the seller need to use his or her 401k to cure a deficiency at closing? SHORT SALES AND SERVICER GUIDELINES FOR FEDERAL PROGRAMS A number of federal programs have been developed to streamline the short-sales process. The following pages offer detailed servicer guidelines for: FHA PreForeclosure Sales Program Home Affordable Foreclosure Alternatives (HAFA) HAFA for Fannie Mae Loans 36

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46 Short Sales and Foreclosures: What Real Estate Professionals Need to Know 46 Source: Reprinted with permission of Fannie Mae. Copyright 2010 Fannie Mae. Note: Because Fannie Mae updates these documents as necessary, students are strongly encouraged to consult Fannie Mae s Web site to determine if updates have been made. The Web site to visit is:

47 2. Counseling Sellers Figure 2.7: Agent Short-Sale Checklist Will the seller follow through with attorney recommendations? Will the seller complete their portion of the short-sale package? Will the seller keep you informed of lender communications? Does the seller have an actual hardship? Does the seller have assets? If so, is the seller willing to use them if required by the lender? Is the seller current with homeowners association fees? If not, is the seller able to become and remain current? Is there sufficient time to complete the short sale? Does the seller understand how long the short sale may take? Is the seller motivated to get out of their situation? Will the seller allow you to discuss lien situation with buyer s representatives? Will the property be listed for an adequate amount of time? Has the seller agreed to a for sale sign? Has the seller agreed to a key box? Will the property be easy to show? Is the seller willing to do what is required so that the property shows well? Will the seller agree to price the property realistically? Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Any No answers to the above questions? If there are, seriously consider not taking this listing. 47

48 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Figure 2.8: Seller Short-Sale Disclosure 1. Authorization to Disclose Seller authorizes Broker to market the Property as a short sale or possible pre-foreclosure property in the MLS and other advertising media, to contact representatives and employees of the lien holder(s) to discuss the terms and status of Seller s loan(s) and facilitate a short sale, and to share such information with prospective buyers and their agents. 2. Disclaimer Seller may not receive any net proceeds without lender approval at closing and may owe additional monies at closing and/or thereafter. Seller further acknowledges that forgiveness of debt by lien holder(s) may result in taxable income to Seller. Because a short sale may result in special tax consequences, seller is advised to consult with a professional tax and/or financial advisor regarding the tax and other financial implications of entering into a short sale transaction. Seller further acknowledges a short sale may negatively impact Seller s credit rating. Seller acknowledges that broker has advised seller that alternatives to a short sale may be available, including but not limited to a lender workout, refinancing, filing bankruptcy, the payment of any shortage by seller in cash from any source, negotiating a deed in lieu of foreclosure, or allowing a foreclosure to proceed. Involvement in a short sale may not preclude foreclosure proceedings. Absent separate agreement, a lien holder is not bound to accept less than the amount owed to it by Seller. Seller acknowledges that Broker makes no guarantees regarding the ability to secure either a short sale or the outcome of any negotiations with a lien holder. 3. Information and Cooperation. Seller agrees to provide Broker and lien holder(s) any information necessary to negotiate a short sale upon request (including, but not limited to): - Authorization letter(s) - Financial statements, pay stubs, w2s - Bills/expense statements - Tax returns - Assets and liabilities - Hardship letter Seller will obtain competent legal counsel within three (3) business days. Seller Seller 48

49 3. Counseling Buyers 3. Counseling Buyers In this chapter: > Not all buyers ideal for short sales > Questions to ask listing agents > Writing the short-sale offer > Contract acceptance > Common results of short sales NOT ALL BUYERS IDEAL FOR SHORT SALES Considering the exponential growth in short sales and the potential for bargain deals, many buyers today are interested in purchasing short-sale properties. Not all buyers are good short-sale candidates. Accordingly, buyer s representatives should seek answers to the following in the initial needs assessment: Are the buyers in a position where they can wait for the lender s approval? Do the buyers have a home to sell before they can purchase the short sale? Will the buyers follow through on your feedback regarding, among other things, market value and contract contingencies? Do the buyers understand that the lender will be making the final call on price and terms? How willing are the buyers to consult an attorney regarding home inspections, earnest money, and the contingency period for thirdparty approval? Is the buyer willing to enter into an exclusive buyer representation agreement and be responsible for compensation, should it not be paid by the seller s side? The worksheet and checklist in Figures 3.1 and 3.2 can be used in addition to any standard buyer qualification worksheet currently used. 49

50 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Figure 3.1: Additional Buyer Counseling Issues (to be used in addition to a buyer qualification worksheet) 1. Do you have a time frame within which you need to purchase or within which you need to move? 2. Will you need to sell your home to buy a new one? Yes No 3. Have you spoken with a lender (if you will need a loan)? Yes No With what lender have you spoken? Are you preapproved for a loan? Yes No How much? Do you have a written loan commitment? Yes No What type of loan? Have you locked in an interest rate? Yes No 4. Would you consider purchasing a property that is a short sale? Yes No Foreclosure (at auction)? Yes No REO (bank owned)? Yes No Short sales will likely result in delays in the purchase process. You will need your financing in place so that you can be ready to close quickly once the sale is approved. These properties will likely be sold as-is. (In other words, neither distressed sellers nor bank owners are likely to agree to make any repairs to the property). It is recommended that you have a home inspection by a licensed home inspector before consummating any purchase transaction. 5. Buyer representation agreement Exclusive agreement signed Non-exclusive agreement signed Other Yes No Yes No Yes No 6. Do you have an attorney with whom you work? Yes No If yes, what is his/her name? Contact Information: Buyer acknowledges review of the above items. Buyer Date Buyer Date 50

51 3. Counseling Buyers Figure 3.2: Buyer Short-Sale Checklist Is the buyer pre-approved? Yes No Is the buyer a cash buyer and willing to submit proof of funds? Yes No Is the buyer willing to make reasonable offer? Does the buyer have realistic expectations of the time-frame? Can the buyer be flexible on their closing date? Will the buyer lock in their interest rate thru to closing? Yes No Yes No Yes No Yes No Is the buyer willing to spend money on the following to make this happen? Mortgage application Inspections Attorney fees Yes No Yes No Yes No Any No answers to the above questions? If there are, seriously consider not taking this buyer as a client. 51

52 Short Sales and Foreclosures: What Real Estate Professionals Need to Know QUESTIONS TO ASK LISTING AGENTS Buyer s representatives are encouraged, if possible, to prequalify the listing agent on the short-sale property before writing an offer. It is important to frame these questions properly. In addition, you do not want to sound condescending or disrespectful. Questions should be articulated in a spirit of cooperation. See Figure 3.3 for sample dialogue. Figure 3.3: Sample Questions to Ask Listing Agents 1. Is the short-sale package ready for submission to the lender? 2. How many liens are on the property? 3. If more than one lien, what are they? 4. What is the plan to satisfy all the lien holders? Source: REALTOR Magazine Online. Short Sales: Finding Income in a Tough Market Webinar. Available at: WRITING THE SHORT-SALE OFFER It is the buyer representative s duty to educate the buyer on the elements of a good contract. Writing an offer on a short-sale property is not a typical transaction. The buyer s representative needs to be aware of what makes a good short-sale offer that has a reasonable chance of being accepted by the seller and approved by the lender. Length of Time for Lender Approval and Closing A short-sale transaction may take anywhere from 30 days or less or up to 6 months or longer for lender approval. The addendum to the contract that makes the contract subject to lender s approval should stipulate how long the buyer will wait If the time allowed for lender approval is unrealistic, it will weaken the buyer s offer. The seller s property would be tied up in a contract that does not have a reasonable chance of closing. On the other hand, the value of the property may decline during the wait for lender approval. The buyer s representative must consistently update the CMA for the buyer. 52

53 3. Counseling Buyers Earnest Money As with any real estate contract, the earnest money on a short sale is due according to the terms of the written agreement. Earnest money should be deposited as required by state license law based on the date the contract was signed by the buyer and seller not based on when the contract is approved by the lender. If the buyer does not want the earnest money deposited before the lender has approved the contract, the buyer s representative should note that on the contract. It is important to know your state laws on earnest money or deposits. Some state laws stipulate that there cannot be a valid contract without earnest money. This would, obviously, affect how the offer was written. Listing brokers should be wary of accepting personal checks for earnest money too close to the closing date. Many lenders do not allow more than ten days to two weeks for closing after they have approved the short sale. If the check does not clear, there could be problems. Without sufficient earnest money, a buyer may not hesitate to walk away from the transaction. The greater the amount of the earnest money, the greater the chance of the buyer being committed to the contract. Home Inspection If the contract calls for the home inspection to be done in five business days after the contract has been executed, the five days would start from the time of signing by the buyer and seller not from the time of lender approval. The buyer would have little success negotiating any costs or repairs if the home inspection was completed after lender s approval. The lender s approval is based on a definite dollar amount to be realized at the closing and they generally do not allow for further negotiations. Most often, a short sale will be an as-is transaction, and the seller doesn t have the money to make the repairs and the lender is unwilling to make repairs. That stated, the buyer still has the right to know what as-is means and withdraw the offer or reduce the offer based on the home inspection. 53

54 Short Sales and Foreclosures: What Real Estate Professionals Need to Know The listing agent needs to protect the seller. Allowing a buyer to wait until after the lender s approval to do the home inspection, thereby giving the buyer the ability to walk away that late in the transaction, may force the seller into a foreclosure sale because the seller would not have enough time to find another buyer. Although the approval process takes quite some time, once approved, the closing date stipulated in the approval letter may not allow the buyer sufficient time to complete a property inspection. Skill Builder Tip: Home Inspections Recommend that clients have appropriate property inspections performed. If buyers refuse, request that they acknowledge in writing that you recommended the inspection and they declined to do so. In addition, send an confirming the buyer s wishes regarding the inspection. Mortgage Application The buyer must submit the mortgage application according to the contract as well. There is often a quick turnaround between lender approval of the short sale and the lender s required closing date. The buyer must be ready, willing, and able to meet the specified closing date without asking for more time to get their financing in place. Low Interest Rate in the Offer Most short-sale transactions will not close within the typical time span of 30 to 60 days. The buyer s interest rate lock-in may expire during that time. If there is a low interest rate in the contract and the interest rate goes up and never comes back down to what the contract stipulates, the buyer may be able to walk away from the transaction with no recourse on the part of the seller. The seller s property has been under contract for sometimes months only to have the buyer not be required to close. Again, this would weaken the offer since it would not have a reasonable chance of closing. 54

55 3. Counseling Buyers Price An exceptionally low offer runs the risk of not being approved by the lender and may put the seller in imminent danger of foreclosure. From the buyer s perspective, if the lender is not going to approve the contract and the buyer has waited months he or she may have missed out on other properties that would have been suitable and available. Even if the contract is approved by the lender, in most states, the lender may require the seller to pay back the deficiency. Remember, it is the duty of both the seller and buyer agent s to protect and promote the interest of their clients. Both agents have a duty to negotiate the best price and terms for their buyer or seller prior to the contract being submitted to the lender for approval. Win-Win When the buyer is willing to tender an offer that has a reasonable chance of closing, which would include: Offering the seller a fair price Tendering earnest money with the offer Completing all inspections and applying for the mortgage after acceptance by seller not after lender approval Allowing for possible rise in the interest rate It would not be unreasonable for the buyer to ask that the seller no longer ontinue to show the property and take subsequent offers. It would not be unreasonable for the buyer to ask that the seller no longer continue to show the property and take subsequent offers. If the seller agrees to no subsequent offers, the appropriate language would be needed in the sales contract addendum. The listing agent would need to get the seller s written direction to suspend his obligation to submit all offers. The NAR Code of Ethics requires that all offers must be presented to the seller all the way to closing. However, it does not require that all offers be presented to the lender. 55

56 Short Sales and Foreclosures: What Real Estate Professionals Need to Know NAR CODE OF ETHICS Standard of Practice 1-6 REALTORS shall submit offers and counter-offers objectively and as quickly as possible. (Adopted 1/93, Amended 1/95) Standard of Practice 1-7 When acting as listing brokers, REALTORS shall continue to submit to the seller/landlord all offers and counter-offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. REALTORS shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord. REALTORS shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre-existing purchase contract or lease. (Amended 1/93) CONTRACT ACCEPTANCE The short-sale contract is signed by the buyer and the seller not by the lender. The lender only approves the contract. The approval by the lender is an additional contingency, like a home inspection, mortgage approval, etc., and should be treated as you would treat any other contingency. Note: Either party could back out without penalty if the offer is not signed. There is no contract until it is signed by the buyer and the seller. The fact that the seller accepts the contract contingent on bank approval does not guarantee bank approval and therefore does not guarantee the buyer will actually be able to purchase the property. 56

57 3. Counseling Buyers Subsequent Offers If the agreement between the buyer and the seller allows the seller the opportunity to continue to market their property, the listing agent must submit all offers to the seller until closing whether or not they are better than the first. Any subsequent contracts accepted by the seller must be made subject to release of prior contract. MLS rules and the Code of Ethics require that the listing agent disclose the existence of an accepted contract, including those with unresolved contingencies, to any broker seeking cooperation. NAR CODE OF ETHICS Standard of Practice 3-6 REALTORS shall disclose the existence of accepted offers, including offers with unresolved contingencies, to any broker seeking cooperation. (Adopted 5/86, Amended 1/04) If the lender is adhering to the FHA Preforeclosure or HAFA program, there should be no foreclosure moving forward during the short-sale approval time. However, if the seller is close to foreclosure and the lender is not following the guidelines, the second contract could nullify any progress made on the first and put the entire approval process back to square one. The listing agent should attempt to determine the lender s protocol on subsequent offers. Some will do this at the time of initial contact with the Loss Mitigation Department, most experienced practitioners suggest waiting until the short-sale package, covered in Chapter 4, is submitted to the lender. COMMON RESULTS OF SHORT SALES From a lender s perspective, there are many ways short-sale transactions may close: Release the lien; require seller to carry remaining debt on a payment plan Release the lien; require seller to liquidate other assets to pay some or all of the balance Release the lien; forgive the remaining indebtedness 57

58 Short Sales and Foreclosures: What Real Estate Professionals Need to Know 4. Components of an Effective Short-Sale Package In this chapter: > Purpose of the short-sale package > Contents of a short-sale package > Follow up > Why short sales fail PURPOSE OF THE SHORT-SALE PACKAGE The purpose of the short-sale package is to show the lender: That the seller has a valid hardship that prohibits them from keeping the property The market value of the property That the buyer is qualified The transaction has a reasonable chance of closing The submission of the short-sale package is determined by lender protocol. The components will generally not change only the timing of when each piece is submitted. For example, if the lender is going to pre-approve the seller for the short sale prior to getting a contract, much of the seller's information will be submitted at the time of taking the listing. If, however, the lender indicates that they will do nothing until a contract is received then all of the package will be submitted with the contract. If this is a HAFA-eligible loan, there will be additional paperwork for both the seller and the listing broker throughout the process. The lender will provide the necessary forms and documents, however, the entire program, including standardized forms, can be accessed at The lender may want it faxed, ed or delivered via hard copy. The listing agent should make a copy of the entire package prior to delivery and follow up to ensure it was received. 58

59 4. Components of an Effective Short-Sale Package Note: There can be multiple loans and you will need to repeat this process for each lien holder. If there is more than one lien holder, they will generally want payoff information from each other. In terms of the amount of paperwork required by short sales, one expert notes: It takes more documentation to get out of their mortgage than it took them to get it in the first place. Prior to sending the short-sale package to the lender(s) each page should have > Page number > Client s last name > Loan number Creating labels with the information is an efficient way to accomplish this. CONTENTS OF A SHORT-SALE PACKAGE Proposal Letter The proposal letter (see Figure 4.1 for a sample) should be clear and concise giving the needed information to the bank. It should not be more than one page. It should include an overview of the homeowners situation, what they owe on the property, and what the property is worth. The proposal letter should also identify the amount of the needed repairs and what the offer to the bank is. You should either list the contents of the package in your proposal letter or create a contents page to facilitate review of the file. 59

60 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Figure 4.1: Sample Proposal Letter TO: ATTN: FROM: RE: The Loss Mitigation Department of ABC Lenders Janice Johnson, Loss Mitigation Specialist Alice Agent Short Sale Proposal for 123 Main Street, Anytown, USA Dear Ms. Johnson, We have a signed real estate purchase contract with your borrower Daniel and Sandy Smith, the owners of 123 Main Street, Anytown, USA. The Smiths have agreed to sell their property to Lee and Sandra Jones for a purchase price of $375,000. The current loan balance for loan # is $450,000. The Smiths are five payments behind in the amount of $9,000. Since their real estate taxes were not escrowed, the current taxes in the amount of $8,000 are also due. Daniel has lost his job as a manager of a large home improvement company and Sandy is a stay-at-home mom with their four children. Please review the enclosed information. Our market analysis of the property and overview of the market as well as the situation of the seller indicate that it is in the best interest of both you as the lender and the Smiths to accept this buyer s offer. We look forward to doing business with you. Sincerely, Alice Agent Short-Sale Payoff Application This application is provided by the lender. The seller should complete the application; the real estate professional should include it as part of the short-sale package. Although the payoff application may have previously been submitted, based on lender request, it is a good idea to include it in the package as well. It also must have the most current information in it which may necessitate the seller filling out a new form even if one had previously been submitted. 60

61 4. Components of an Effective Short-Sale Package Authorization to Release Information Although submitted previously, the short-sale package is often going to a different department and including a copy of the authorization to release information form would expedite the process. Seller s Hardship Letter The goal of the hardship letter is to have the seller explain their situation to the bank. The hardship letter should communicate three key points: 1. I m sorry 2. Here are my circumstances (such as job loss, medical issues, divorce, health issues, damage to the property not covered by insurance, etc.). 3. I have exhausted all of my options and the only next step is letting the property go to foreclosure. See Figure 4.2 for a sample hardship letter. As with the proposal letter, the hardship letter should be kept to one page. It should be clear, concise, easy to read and verifiable. 61

62 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Figure 4.2: Sample Seller s Hardship Letter To Whom It May Concern: This is a very difficult thing to write. I have always been able to pay my debts in the past and am truly sorry that I cannot do so now. I lost my job as a manager for a large home improvement company. I have been unemployed for six months. I have been receiving unemployment benefits. However, my unemployment check replaces about one quarter of my previous income. My wife is a stay-at-home mom responsible for our four children. We have both been looking for employment. We have exhausted our savings. Our credit cards are maxed out and we are in the process of filing for divorce. We can no longer afford to make the $1,800 monthly mortgage payment on our home. We are currently five months behind and see no way to make up the $9,000 in back payments. Our real estate taxes are also due and we have no way to pay those either. We have agreed to sell our property for $375,000. It has been on the market for over 60 days and this is the only offer we have received. We want to avoid a foreclosure sale that will further damage our credit. We respectfully request that you consider this offer and work with our agent to negotiate a short-sale transaction. We have exhausted all of our options and the only next step is letting the property go to foreclosure. Sincerely, Daniel and Sandy Smith 62

63 4. Components of an Effective Short-Sale Package Seller s Financial Information An owners financial statement can be constructed very simply with a list of assets and liabilities. Assets Real estate Stocks, bonds, mutual funds Bank accounts Personal property Retirement accounts Liabilities Real estate loan(s) Personal loans Credit card debt IRS liens Judgments Lawsuits Lenders will want the amount of all the monthly expenses in addition to the assets and liabilities. These would include: Credit card bills Utility bills Car payments Insurance costs Food and clothing Medical bills Child support Tuition expenses 63

64 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Supporting Financial Information These items are typically the same required by a borrower when applying for a loan. The lender will let you know how far back (2 months, 3 months, 12 months) the seller needs to go in supplying this information. Pay stubs. Pay stubs allow the lender to see if the monthly takehome pay would cover the loan payments plus all the other monthly expenses. If the owner is unemployed, there will be no pay stubs to include. W-2s and/or signed tax returns. The lender is trying to get a complete picture of the owner s financial situation. Is the income going up? Is the income going down? Will the borrower be able to make payments if the lender agrees to a repayment program? IRS Form A Request for Copy of Tax Return may be required by the lender. Bank statements and credit reports. Again, the lender wants to be sure the borrower is truly unable to make the payments and these support that. The bank will order a credit report on the borrower but if they have one available attaching it is a benefit. Note: Any explanation of the seller s financial status that differs from what they put on their original loan application to get the mortgage could become a problem for the seller. If the lender sees an unexplained difference between what was stated on the application to get the loan and what is now being used to get out of the loan it could raise the question of loan fraud. If the seller is concerned or has questions they should consult with their attorney. Supporting Hardship Information In order to provide the lender with a complete picture of the seller s hardship, it can help to provide additional documents: HOA liens Medical bills Disability statements Unemployment benefits or status Divorce decree 64

65 4. Components of an Effective Short-Sale Package Medical hardships and unemployment, to a certain extent, are easy for a lender to understand and they will agree to a short sale in just about every medical hardship situation. The seller should not try to fake medical hardship. The lender will verify this information. Comparative Market Analysis The real estate professional should create a comparative market analysis (CMA) using the most current comparable sales. Highlight such data as: Average time on market cumulative market time is critical Number of short sales and REO listings in the area Price trends Recent economic data Absorption rate The absorption rate is the mathematical formula used to establish the relationship between supply and demand in a given market. Used in conjunction with other pricing variables, the absorption rate helps to gauge the time it is likely to take to bring about a sale. The absorption rate is arrived at by dividing the total number of available properties by the total number of properties sold in the previous month. The resulting number represents the number of months it would take, market conditions being fairly the same, to sell the entire inventory. When doing the market absorption portion of a CMA for a lender/bank on a short sale, the bank/lender may ask for a one-month base, a threemonth base and then a six-month base for comparison which will indicate pricing trends in a given market. The bank is not a local pricing expert and needs to understand where value and pricing is headed in order to make the appropriate decision on a short sale contract. The lender will order one or two broker price opinions (BPOs) after they receive the short-sale submission package. Real estate professionals should not mislead the lender as to the fair market value. If the CMA is too far below the BPOs, the lender may view the entire short-sale package in a negative light. 65

66 Short Sales and Foreclosures: What Real Estate Professionals Need to Know The BPO, acronym for broker price opinion, is a tool used by lenders and mortgage companies to estimate the price of properties in situations where they believe the expense and delay of an appraisal is not necessary. Real estate brokers are given an order to do a BPO by the lender. The broker completes either a drive-by BPO or an internal BPO (getting into the property) in most cases. It is suggested that you take digital photos of the interior of the property and include them as well. Many of the BPOs are drive-bys and no consideration has been given to interior condition. How Is a BPO Different from an Appraisal? Real estate customers and clients may be asked how a BPO is different from an appraisal. According to Pamela Kincade, a licensed real broker and appraiser in Nevada: > A BPO performed by a real estate licensee is an opinion of the price a property will bring > An appraisal performed by a licensed appraiser is an opinion of market value For further discussion of BPOs and the role and responsibilities of real estate professionals, visit and listen to NAR s Legal Affairs Podcast, Episode 18 Broker Price Opinions (BPOs). Marketing History Lenders should be presented with a complete history of showings, feedback, price reductions and advertising in short, all the marketing efforts made to provide the lender with a contract. Real estate professionals need to show lenders that they ve done a thorough job of attempting to get the best price possible. For a sample of a market activity report, see Figure 4.3. Any MLS printouts from the pricing steps outlined in Chapter 2 should be included as well. The importance of the CMA and marketing history cannot be over emphasized. The Loss Mitigation Department is most likely in another state and the negotiator will not necessarily understand what is happening in your market. The listing agent s CMA and marketing history are more thorough than a BPO and should include MLS print-outs of all property in the area as well as pictures of comparables and on-market properties that are in competition with the subject property. 66

67 4. Components of an Effective Short-Sale Package Figure 4.3: Sample Market Activity Report Source: Reprinted with permission of Kathy Mehringer, CRB, SFR, 67

68 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Repair Estimate for the Property If you didn t request repair estimates at the time of pricing the short-sale listing, now is the time to do so. Providing the lender with a detailed repair estimate from a reputable (licensed) contractor will assist greatly in getting the short sale accepted. The lender doesn t want to own property and especially not property that needs a complete overhaul. Some lenders have been known to make some repairs. However, they would much rather sell as is and have the buyer make the needed repairs. Two offers netting the lender the same bottom line one where the buyer will do their own repairs (buying as is ) and one where the lender is asked to do them usually result in the as is buyer being successful. Contract and the HUD-1 The real estate professional should provide the lender with: A copy of the purchase contract The buyer s pre-approval letter A notarized statement that the buyer is not related to the current homeowner It is critical that the HUD-1 reflect all costs the lender will incur. The following may be areas of concern: Tax prorations Seller concessions Accurate broker compensation Unpaid municipal expenses Transfer stamps (if required) Third-party negotiator fees 68

69 4. Components of an Effective Short-Sale Package Real estate professionals are encouraged to attach a cover sheet to the contract that outlines the terms of the contract. See Figure 4.4 for a sample cover letter. Figure 4.4: Contract Cover Letter Borrower Name: Buyer: Daniel and Sandy Smith Lee and Sandra Jones The following terms for the sale of 123 Mainstreet, Anytown, USA, your loan # are as follows: Sales price $375,000 Time for Lender Approval Allowing 120 days Attorney Review Satisfied and waived Home Inspection Satisfied and waived Earnest Money $4,000 deposited (date) Mortgage Application Completed (date) Buyer Approval ` Attached Other Contingencies None FOLLOW-UP After the package has been submitted, it is important to verify initially that it was received and there is nothing more needed to approve the short sale. Verification that the loss mitigation department has or will communicate with the foreclosure department to try to ensure the foreclosure process is stopped during the short-sale negotiations. You should coordinate with the seller s attorney to determine who will be making these follow-up calls. At some lending institutions, loss mitigation staff do not answer their phones. You will get a voic message that says the staff person will return all calls within 48 hours. If you do not receive a call back in that time frame, call again. The negotiator may request that all correspondence be via . 69

70 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Lender Approval Letters When lenders approve a short sale, they will notify the seller in writing. The seller and his or her finance, tax, and legal professionals should review the approval letter closely both for the terms disclosed and for items not mentioned. The approval letter should also be reviewed for any items requiring lender clarification. In sample lender approval letter #1, note: The bank is releasing security interest only (mortgage) No mention of releasing the promissory note Needs clarification to determine if the seller has to pay the deficiency Note the date of the approval and date of closing Date: July 1, 2009 Dear Borrower: Actual Sample Lender Approval Letter #1 Bank A agrees to release its security interests in the above collateral upon receipt of $1,000 in certified funds. This amount is for the release of Bank A s security interest only. Please contact your tax advisor regarding any tax ramifications from this transaction. Bank A requires that we approve a final settlement statement prior to closing that shows a balance to be paid to Bank A of no less than $473,285, which will show a real estate commission of no more than $28,397 which is to be included in closing costs not to exceed $52, Closing shall take place no later than July 10,

71 4. Components of an Effective Short-Sale Package Date: January 20, 2009 Dear Borrower: Actual Sample Lender Approval Letter #2 This letter will serve as Bank C s demand for payment and advises you that Bank C and its investors and/or insurers have agreed to accept a short payoff involving the above-referenced property (the Short Sale transaction). This demand should be used by the closing agent as our formal demand statement. No additional statement will be issued. This approval is exclusive to the offer by the buyer referenced in this letter. The conditions of the approval are as follows: In sample lender approval letter #2, note: The lender is forgiving the deficiency on this Also note the approval date and closing date Termite issue 1. Closing must take place no later than February 5, 2009 or this approval is VOID. 2. The approved buyers are Bob and Carol Smith and the sales price for the property is $260, Another buyer cannot be substituted without Bank C s prior written approval. 4. Proceeds to Bank C to be no less than $230, Total closing costs, including real estate commission, not to exceed $29, This figure includes $1,000 for second lien and $3,000 for third lien. 6. Termite reports and repairs not to exceed $ Real estate commission not to exceed $13, This property is being sold in AS IS condition. No repairs will be paid for out of the proceeds unless specifically stated otherwise. 9. The sellers will not receive any proceeds from this short sale transaction. If there are any remaining escrow funds or refunds they will not be returned to the seller, they will be sent to Bank C to offset the loss. 10. Bank C or its investors will not pursue a deficiency judgment if the short sale closes on the referenced loan. If the short sale does not close, then the referenced loan secured by the Note and Security Instrument shall remain in full force and effect and we will pursue all remedies under the Note and Security Instrument. 71

72 Short Sales and Foreclosures: What Real Estate Professionals Need to Know WHY SHORT SALES FAIL Problem: Incomplete Short-Sale Package This is one of the most common reasons why short sales fail. If the package is not complete, many of the lenders will not call and tell you what is missing. They will simply set the package aside and it will be handled when they have the time to start making such calls. Other lenders will attempt to communicate with you on the missing pieces but that alone slows down the process. And still others will terminate the file without ever informing you. Solution: Submit a complete short-sale package Problem: Package Not Submitted Properly Every lender has different procedures for how they want the package submitted. You must follow those instructions. If they ask for it to be faxed you fax it. If they want it scanned and ed you scan and e- mail. If they want two copies sent you send two copies. This is not your decision, it is the lender s. Solution: Submit the package as directed Problem: Offer Too Low Each lender has its own formula for what price they will accept on a short sale. There are no hard and fast guidelines on what the lender will approve. This is why the buyer s representative should have done a thorough CMA for the buyer prior to writing the offer and why the listing agent should have counseled their sellers to counter any offers to establish the best price and terms possible prior to accepting it. Solution for buyer s representatives: Do an accurate CMA and counsel your buyer on making an acceptable offer Solution for listing agents: Have sellers negotiate the best contract they can prior to acceptance and submission to the lender 72

73 4. Components of an Effective Short-Sale Package Problem: Buyer Not Strong Enough A pre-approved buyer has a much better chance of getting their contract approved by the lender than one who is only pre-qualified. A cash buyer will need to submit proof of funds. The lender wants to see a contract that has a strong chance of closing. Solution: Submit thorough buyer qualification information and a strong contract with as few contingencies as possible. From the lender s point of view a contract that stipulates that the buyer will be doing his mortgage application, home inspection, etc., after lender approval has less of a chance of closing than one where the buyer has already taken the appropriate steps. Problem: Lender Took Too Long and Buyer Backed Out Although length of lender approval is not tracked for all mortgage servicers in the U.S., anecdotal feedback from real estate practitioners is that many short sales fail because the buyer simply got tired of waiting. Solution for buyer s representative: Counsel the buyer on the frustration of time delays. Solutions for listing agents: Recommend the seller negotiate sufficient earnest money to keep the buyer from backing out as well as negotiate a realistic time frame for the buyer to wait for lender approval in the contract. Keep the lines of communication open between listing agent and buyer s representative and then, in turn, keeping the buyer in the loop of communication. Problem: Inaccurate BPOs As discussed previously, if the BPOs and/or appraisal of the property was inaccurate and the lender has a distorted picture of what the fair market value of the property is, this could influence the lender s approval. Solution: If the contract is not approved, ask the negotiator how the BPOs compared to your CMA and see if there is a problem that 73

74 Short Sales and Foreclosures: What Real Estate Professionals Need to Know can be resolved. Be certain to have interior photos that further support the buyer s contract terms. Problem: Doesn t Meet Lender Criteria or Investor Will Not Approve Many of the loans we are attempting to do a short sale on have been securitized and sold to investors. The securitization agreement the lender has with the investor often gives specific parameters of how much the lender can discount the loan in a short-sale situation. Solution: Submitting a thorough CMA can show what the value of the property, but this is where logic sometimes fails and it becomes a because they said so situation. You might ask the negotiator how the BPOs compared to your CMA and see if there is a problem that can be resolved. Note: A securitization is a financial transaction in which assets are pooled and securities representing interests in the pool are issued. During the early and mid-2000s, there was a huge demand for mortgage-backed securities and many of the current loans were packaged and sold to investors. Problem: Junior Lien Holder Says No Solution: The listing agent needs to assess the plan for repayment of debt to the junior lien holders prior to acceptance of an offer. This area of negotiations is a major battlefield at the present time and if you know the holder of the junior lien and you can ascertain what they are willing to accept to release their lien, then resolving this prior to seller acceptance of contract is best. Solution: The payment of what the junior lien holder wants to release the lien does not always have to come from the primary lien holder. Once it is determined how much the lien holder wants, the payment can be made by the seller (if funds are available) or the buyer or both. 74

75 5. Foreclosed and Real Estate Owned Properties 5. Foreclosed and Real Estate Owned (REO) Properties In this chapter: > When all alternatives are exhausted: foreclosure > A closer look at foreclosure sales > Redemption > When the property fails to sell at the foreclosure sale: REO WHEN ALL ALTERNATIVES ARE EXHAUSTED: FORECLOSURE When refinancing, a loan modification or a short sale doesn t work, the distressed homeowner is left with only one option: foreclosure, which results in a forced sale of the property and eviction of the homeowner. How the proceedings will take place and the length of time to complete the proceedings are guided by individual state foreclosure laws, e.g., judicial foreclosure, non-judicial foreclosure. Non-Judicial If the instrument is a deed of trust, a non-judicial foreclosure is typically used to execute the foreclosure proceedings. Non-judicial foreclosures generally take less time to complete than judicial foreclosures. This is because the borrower pre-authorizes the sale of the home in the loan document, which orders foreclosure upon default. Judicial If the instrument is a mortgage, a judicial foreclosure or courtordered action is typically used to execute the foreclosure proceedings. In a judicial foreclosure, the lender obtains the right to foreclose by filing and winning a lawsuit. 75

76 Short Sales and Foreclosures: What Real Estate Professionals Need to Know To help you visualize the differences between these types of foreclosure proceedings, see Figure 5.1. Figure 5.1: Foreclosure Process for Deed of Trust vs. Mortgage 76

77 5. Foreclosed and Real Estate Owned Properties For an understanding of key terms referenced in Figure 5.1, please review the following: NOD (notice of default) This is an official notice from the lender to the borrower that the borrower has defaulted on the mortgage. The NOD formally begins the foreclosure process. The NOD also outlines the reinstatement period. Reinstatement period The time stipulated in the NOD in which the borrower may reinstate the loan making required payments and bringing one s account into good standing. Notice of sale If, after receiving the notice of default, the borrower does not or is unable to reinstate the loan, a notice of sale is recorded. The notice of sale explains when and where the foreclosure sale will be held. Foreclosure sale A foreclosure sale entails sale of a property, commonly through an auction in order to satisfy an unpaid obligation. Depending upon state laws, this is either under the authority of the court (judicial) and in others it is done through a trustee sale (non-judicial). Redemption period Typically the time after the foreclosure sale that allows the owner the ability to redeem the property. In many states, redemption requires that the owner pay the sales price, interest, and other costs. o o This period varies widely from state to state and is defined differently from state to state. Some states allow no redemption period, others allow up to a year or longer. Some only allow the right of redemption if the property is taken by the bank, but not if it is purchased by another party. Some states allow the borrower to redeem the property by paying only the missed payments along with any accrued late charges and penalties; however, many states require the borrower to pay the loan balance in full. State Specific Issue: What's Your State Requirement? 77

78 Short Sales and Foreclosures: What Real Estate Professionals Need to Know A CLOSER LOOK AT FORECLOSURE SALES Whether they are called sheriff sales, trustee sales, sheriff's auction or foreclosure sales, the end result is the forced sale of the property. The sales are usually listed among the legal/judicial notices in the local newspaper. Some municipalities have lists to which you can subscribe. Still others post the upcoming properties to be sold/auctioned on their website. The scheduled sale of a particular property is published for a specific number of weeks prior to the sheriff s auction/sale, depending on state law. Even though the auction/sale of a specific property may be advertised and scheduled, often properties are not actually auctioned that day because the property owner has either sold it or reached an agreement with the lender (workout option or short sale) that takes the property off the auction block. Foreclosure sales/auctions pose unique considerations for real estate buyers: The opportunity to conduct property inspections can be negligible or extremely limited. Real estate professionals should not expect to schedule a property inspection before the foreclosure/sheriff s sale. Potential buyers usually have limited or no access to properties offered at a foreclosure sale because they are often still occupied by the owners or tenants. After completion of the sale and approval by the courts, if required by state law, it may be necessary for the buyer to initiate legal action to evict the occupants. Buyers are responsible for paying any outstanding liens. The possibility exists that the buyer may not receive clear title. For example, if a special warranty deed is issued, clear title is not guaranteed. Buyers should not be making improvements to the property in states that have the right of redemption until the redemption period has been satisfied. 78

79 5. Foreclosed and Real Estate Owned Properties Skill Builder Tip: Getting to Know Foreclosure Sales Buyers may want to attend a foreclosure sale and attempt to purchase a property. If you are going to accompany your buyer to the auction, you both should attend at least two or three auctions in advance to observe the protocol. In addition, buyer s representatives should consider recommending that buyers have a limited lien search done prior to the foreclosure sale. Attending practice sales also gives you and your buyer an opportunity to understand the nuances of auctions. For example, in many bidding situations the person your buyer will be bidding against is a representative of the lender who is attempting to raise the bid price. Note: Most buyer s representatives who accompany buyer clients to foreclosure sales should do so only with a written buyer representation agreement. Your agreement should include appropriate disclosures and by approved by your broker. Foreclosure Sale Reality Check: Why the Lender Gets the House The minimum bid the lender will consider at auction is, typically, more than what a buyer is willing to pay. Just the mortgage alone is often more than the property is worth, and when you consider the extra costs incurred by the lender as well as delinquent property taxes, legal fees, etc., the property may not be a bargain. In an area of declining property values, savvy investor buyers will not pay what is owed since that would be more than the market value of the property. Additionally, most investor buyers who attend these sales are looking for a bargain. Consequently, the property goes to the lender. 79

80 Short Sales and Foreclosures: What Real Estate Professionals Need to Know The pool of well-financed investors has diminished in many markets. These issues, plus those mentioned previously, are why, in most cases, the foreclosure or sheriff s sale does not bring viable buyers for the property and the lender takes the property back. WHEN THE PROPERTY FAILS TO SELL AT AUCTION: REO When foreclosed properties don t attract bidders at the auction or trustee sale, the property is considered real estate owned (REO). Lenders are motivated to recover the current balance of the asset and minimize the future loss. The asset manager is the person assigned to oversee the REO property from the listing through sale to close. Some lenders handle asset management in-house; others will outsource this responsibility. Asset managers will work with the listing broker once the property has been assigned. All communication about the listing will go through the asset manager who may handle 200 to 300 listings at a time and oversee a multi-state territory. Listing REO Properties Prior to agreeing to list REO properties, it is important that you know what you are agreeing to. For example, listing agents should verify what the listing agreement requires from the agent and the broker. Listing agents also should verify whether errors and omissions (E & O) insurance covers for these activities since they may be considered property management functions, not real estate functions. Activities include, but are not limited to: Completing an occupancy check If occupied, the agent will need to identify if the property is owner or tenant occupied. If tenant occupied, the agent will need to know the names of the tenants and how much rent is paid (lease or month to month). Obtain proof of tenancy (e.g., a utility bill) If owner occupied, the agent may be responsible for offering the owner cash for keys - compensation for vacating the premises. Completing a trash out or hiring cleaning professionals 80

81 5. Foreclosed and Real Estate Owned Properties Taking photos of the property to verify condition in the event of vandalism Hiring and paying service providers such as: o well and septic inspections o re-keying of the property o winterization o snow removal o lawn care o utility disconnection and reconnection Completing BPOs every days Completing monthly market reports for the asset manager and bank Finding and Showing REO Properties Finding REO properties for buyer clients may not be as easy as it seems. Although all multiple-listing services (MLSs) now have a category for short sales or at least a way that they can be disclosed, many do not have a category or any requirement to disclose a bank-owned property. You may need to search the Remarks section for keywords that would indicate that the property is bank owned. Such keywords may include bank owned, lender owned, corporate owned foreclosure, and REO. Safety Issues Issues of safety cannot be overlooked when showing vacant properties. Many of these properties have no electricity and showing them at night, and sometimes even during the day, can be hazardous. Real estate professionals should always take a flashlight with them and be mindful at all times of the potential for less than admirable condition of the premises. In all cases, buyer s representatives should know who their buyers are prior to showing and should not meet buyers at the property for the first time. 81

82 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Skill Builder Tip: Don t Allow the Client Unsupervised Access Code of Ethics: Article 3: Standard of Practice 3.9 REALTORS shall not provide access to listed property on terms other than those established by the owner or the listing broker. A serious error made by many agents is to give a buyer client the access code or lock combination to enter these properties without the licensee being present. In many states this would also be considered a violation of license law and/or MLS rules. WRITING OFFERS ON REO PROPERTIES The lender s internal costs to foreclose can be significant, considering items such as accrued interest, legal fees, condo fees/assessments, property taxes, water/sewer and the like. Costs accumulate and as the lender continues to incur costs over time, it improves the buyer s negotiating position. REO transactions are investment driven; therefore, there are no emotional ties to the properties other than asset managers achieving their monthly goals. The buyer s representative must be able to counsel the buyer on procedures and keep the end result in mind. Typically, the initial offer is written on the contract form customarily used by the buyer s representative. The chances of the buyer s offer being accepted are greater when: The buyer makes an offer based upon market value. The buyer has been pre-approved for financing and includes this information from the buyer s lender with the contract. The buyer asks for a quick closing date. The buyer agrees upfront to an as-is transaction. Most lenders will not give seller concessions. The buyer does not have any home sale or home close contingencies. 82

83 5. Foreclosed and Real Estate Owned Properties Many times the REO seller will want the buyer to be pre-approved prior to accepting the buyer s offer. In many cases, the REO seller will want to pre-qualify the buyer themselves to ensure they truly are qualified. REO sellers may or may not want to compete for the new buyer financing. Buying in as-is condition does NOT eliminate the right to an inspection period. Be certain your buyer asks for a home inspection in their offer and has a licensed inspector do a thorough inspection of the property. It is highly recommended that the buyer also have a mold inspection done on any REO property. Many of them have had the utilities disconnected and mold has become an increasing concern. It is a good idea for the buyer s representative to take photos for the buyer at the time of purchase contract as a precaution in the event the property is not in the same condition at time of closing. NEGOTIATING THE REO CONTRACT When a buyer s offer is made, the listing agent submits the buyer s offer to the asset manager. The asset manager, not the listing agent, makes the decision on how the offers are handled. Even though the offer may have been accepted by the asset manager, it is common for the acceptance to be subject to approval from an authority higher than the asset manager. Real estate professionals should also note that there is no binding contract until the seller (bank) and the buyer have signed and initialed the contract and all riders and addendums. In the time (sometimes weeks) it takes for the bank to get the signed contract back to the buyer s representative, there may be additional offers which must be presented to the seller. The bank s protocol will dictate whether they entertain subsequent offers. Even though they have not signed the addendum and could theoretically accept another offer, some banks do not allow the listing agent to submit subsequent offers. 83

84 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Others may decide to accept one of those subsequent offers and reject the original offer. When the lender disables the electronic submission function on a listing and you are unable to present subsequent offers, if possible, get something in writing from the bank/asset manager directing you to no longer submit offers. If not possible, doing a print screen of what shows on your computer and transmitting that to the buyer agent would show that you have attempted to comply with the requirement of submitting all offers up to closing. Counteroffers and Addenda A counteroffer is handled through an addendum, which is sent to the listing agent from the asset manager, who forwards it to the buyer representative via fax or . It is imperative that the buyer understands fully the contents of the addendum and it is advisable that the buyer seeks legal counsel. Frequent addendum issues include: Altering the inspection period Modifying the seller warranties Changing the financing provisions Imposing monetary penalties for buyer s failure to close Containing mold and other environmental disclaimers Limiting the seller s liability It is recommended that the buyer representative NOT attempt to interpret for their buyer any clauses in the addendum. It is the buyer s attorney who should be assisting the buyer in the analysis of the addendum. Limited Property Disclosures There may be limited property disclosures when it comes to REO properties. In some states, sellers of REO properties have no duty to provide a written disclosure form; however, both the seller and the listing agent would be required to disclose material defects of which they have knowledge. On the other hand, federal lead-based paint disclosure laws do apply to REO transactions. 84

85 5. Foreclosed and Real Estate Owned Properties Even though REO properties are generally bought as-is, a home inspection offers some protection for the buyer. If a seller agrees to make concessions to the buyer for repairs, make sure they are included in the contract. Final Walkthrough It might be best for the walkthrough to occur a few days prior to the closing, if possible, to ensure there is time to work out any issues that may arise. Even though the buyer knows he or she is buying the property as is, the walkthrough assures the same as is condition as when the offer was presented. The listing agent usually has photos of the property condition at the time it was listed to ensure the buyer does not request unneeded repairs at closing. Closing Dates and Per Diems The buyer s representative should explain to the buyer that the closing date must be adhered to because, if not, it could cost the buyer extra dollars above and beyond the contract purchase price. Most REO sellers charge a daily penalty for every day the buyer is late in meeting the contract closing date. This fee is charged regardless of who caused the delay on the buyer s side of the transaction, whether it is the buyer who is slow to deliver documents or the buyer s lender who has no sense of urgency or a combination of both. 85

86 Short Sales and Foreclosures: What Real Estate Professionals Need to Know Appendix > Office of the Comptroller of the Currency (OCC) Consumer Advisory on Modification and Rescue Scams > Arizona Department of Real Estate Short Sale Seller Advisory > Credit Missteps How Their Affect on FICO Scores Vary > Homeowners Can Rebuild Credit after Foreclosure or Short Sale > Sample Sales Contract Short-Sales Addendum > Short-Sale Package Checklist > Customizable Seller and Buyer Short Sale Brochures from NAR > Finding Distressed Property Opportunities 86

87 Appendix OCC CONSUMER ADVISORY ON MODIFICATION AND RESCUE SCAMS 87

88 Short Sales and Foreclosures: What Real Estate Professionals Need to Know 88

89 Appendix 89

90 Short Sales and Foreclosures: What Real Estate Professionals Need to Know 90

91 Appendix ARIZONA DEPARTMENT OF REAL ESTATE SHORT SALE SELLER ADVISORY 91

92 Short Sales and Foreclosures: What Real Estate Professionals Need to Know 92

93 Appendix 93

94 Short Sales and Foreclosures: What Real Estate Professionals Need to Know 94