Definition of a short sale
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Definition of a Short Sale. Gwen Petersen Principle Broker Prudential Real Estate Professionals. Short Sale Definition.

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Definition of a Short Sale

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Definition of a short sale

Definition of a Short Sale

Gwen Petersen

Principle Broker

Prudential Real Estate Professionals


Short sale definition

Short Sale Definition

  • A short sale is when the value of the mortgage is greater than the value of the property and the lender and/or investor agrees to accept a payoff less than the remaining balance of the note.

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Foreclosure definition

Foreclosure Definition

  • Process of the bank taking back ownership of a house due to the homeowner’s inability to pay their loan. The property is now an REO or bank-owned property.

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Overview of short sales

Overview of Short Sales

  • Are you representing the buyer or seller?

    • Your role is different, depending upon the party you are representing.

  • Understanding the loans currently recorded against the property.

  • Conventional loan

    • First loan only?

      • Note secured by a trust deed or a mortgage?

      • Is there mortgage insurance?

      • Is the lender that originated the loan holding the loan in their portfolio or are they “servicing” the loan?

      • Who is the investor that currently owns “the loan”?

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Overview of short sales1

Overview of Short Sales

  • Conventional loan with “second”.

    • Are both loans secured by a trust deed or is the “second” a mortgage or credit line?

    • What was the original LTV? 80/20 = 100% or refinance @ 125%?

  • FHA loan

    • Will HUD accept a short sale?

    • How does that affect a short sale?

  • Federal VA loan

  • Rural Housing Loan, ODVA, etc, etc, etc, the list goes on.

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Opportunity

Opportunity

  • A Short Sale is a win-win.

    • It’s a win for the bank because, as an agent, you are helping them along their sales process and helping them recapture as much of this non-performing loan as possible.

    • It’s a win for the seller because they’re potentially going to be forgiven for a portion of the money they owe and are mitigating the affect of their credit.

    • It is a win for buyers because they can obtain a property that is priced right.

    • It’s a win for the agent because the ability to proceed with short sales creates new opportunity: more listing and more value to your repertoire.

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Opportunity1

Opportunity

A Short Sale is a win-win.

  • Stopping foreclosure before it happens is, in fact, helping the economy and the real estate market

  • According to “Collateral Damage: The Municipal Impact of Today’s Mortgage Foreclosure Boom: by William C. Apgar and Mark Duda, just one foreclosure can result in as much as an average of 8 to 10 percent reductions in property value and home equity in a neighborhood.

  • In an already down market, any loss in home value is detrimental to everyone involved.

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Opportunity2

Opportunity

  • A Short Sale is a win-win.

    • It damages the seller’s credit less.

    • A foreclosure can drop a homeowner’s credit score by 300 points or more.

    • A short sale will affect a homeowner’s credit score by 80 to 100 points on average.

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What goes in a short sale package

What goes in a Short Sale Package

  • If you represent the seller:

    • Authorization to Negotiate ( It must be dated and include the last four digits of the seller’s Social Security Number, date of birth, their signature, the full account number and the property address)

    • Signed Sales Contract (clearly stating subject to third party approval)

    • Buyer prequalification letter or proof of funds if cash offer

    • Broker Price Opinions

    • Preliminary Title Report

    • Preliminary HUD-1

    • Signed and dated Hardship Letter

    • Two months of bank statements (W2, 1099, 2 years tax returns, etc.)

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What goes on in a short sale package

What goes on in a Short Sale Package

  • If you represent the seller:

    • Signed and dated Financial Worksheet listing all monthly expenses

    • Photographs of the home (interior and exterior)

    • Repair Estimates

    • Newest Comps

    • Local Market Trends

    • Local Headlines

    • Other documents related to current market value (lispendens listings, sale listings, etc.)

    • Local Market Statistics

    • There may other documentation required depending on the Bank, the Investor, the Mortgage Insurance Company

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Opportunity3

Opportunity

  • The very first step in creating a short sale package takes place when you meet the homeowner and ask the question “how much do you owe on your home?” the answer is more than the current value of the home.

  • By definition, any homeowner that is two months late on their mortgage payment and can also demonstrate the inability to pay their mortgage would be considered a short sale candidate. Contrary to what most agents believe, a short sale can still take place during the foreclosure process.

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Reasons for short sale in eligibility

Reasons for Short Sale in-eligibility

  • The foreclosure has already taken place and the home is up for auction

  • The homeowner files for bankruptcy

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Is home value less than what is owed

Is Home Value less than what is Owed?

  • Ways to determine if this is the case:

    • List the property for what is owed (you want to show you tried to get the lender all its money).

    • Document the number of people who were showed the home.

    • Show them the marketing you have done including the web site report. Once this is tried and failed, reduce the price of the home to a more realistic number that will attract buyers.

    • Have a broker’s open house and obtain broker opinion sheets from as many brokers as possible.

    • The price on a contract from a ready, willing and able buyer is a demonstration of current market value.

    • HUD-1 showing all costs and the seller netting zero.

    • Financial documentation from the seller (hardship letter). There should be no savings accounts, and if there is money in a savings account, supply a budget sheet. The budget sheet includes all the personal finances including what it costs for gas, car insurance, dry cleaning, food, and any expenses the incur throughout the month.

    • Label the photos you submit. “crack in wall”, broken window. If you can get several estimates for any repairs needed, that is ideal.

    • Only current comps, things that closed that week, that day, etc.

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Important considerations

Important Considerations

  • The hardship letter from the seller should be very explanative, honest and detailed. However the reasoning must be an occurrence that was involuntary; such situations include:

    • A loss of a job or family member

    • Illness or other unforeseen circumstances.

    • Laziness or irresponsibility is not an excuse for defaulting on a loan.

  • Your package is so important; the outcome of your short sale rides on it. Your short sale package should be submitted to the bank by overnight envelope, fax and email. Be sure you have current contact information for the right person to contact at the bank. It could be a “loss mitigation team”, legal department, liquidation team, etc.

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What goes in a short sale package1

What goes in a Short Sale Package

  • If you represent the buyer:

    • Submit with your offer an authorization letter for the seller’s signature so you can talk directly with the bank and supply them with information about your buyer and maintain the buyer’s privacy.

    • Preapproval letter indicating any conditions of approval.

    • Signed sales contract clearing indicating subject to third party approval.

    • Broker Price Opinion

    • Buyer’s financial information (2 months bank statements, W2, 1099, 2 years tax return, employment verification including probability of continued employment, long term debt, anything that will help substantiate the buyer’s ability to close the transaction)

    • Repair estimates

    • Newest Comps

    • Local Market Trends

    • Local headlines 

    • Local market statistics

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A frank discussion is required

A Frank Discussion is Required

  • Have a very frank discussion with your buyers, be sure they understand the process and have a tolerance for the procedure. They need to know that it is very likely to be a minimum of 37 business days before they have an answer on their offer and it may be several months and they may still not purchase this particular property. Do they want to make an offer or move on to a property that is not a short sale?

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Why does it take so long

Why Does it Take so Long?

  • Most loans are only serviced by the bank, they have been sold to investors.

  • First they are assigned to the bank’s Negotiator

  • Negotiator does the initial review (incomplete packages will slow down the process).

  • Bank obtains property evaluation up to and including an appraisal.

  • If applicable it is submitted to Mortgage Insurer.

  • Submitted to Investor for approval (Remember this may be an insurance company, a retirement fund, a PERS fund or any number of sources, some of them are International depending on how the loan was packaged and who bought the paper.

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Other items to consider

Other Items to Consider

  • Stimulus package includes provision effective January 2008 for forgiveness of loan amount on PRIMARY RESIDENCE to not be Federally taxed. Please note: This is for the original acquisition loan only (have client check with their CPA for tax advice)

  • Even though there is not a provision for a deficiency judgment with a note secured by a Trust Deed, in some cases, investors and/or PMI companies are requiring sellers to sign an unsecured note for some or all of the difference between the amount realized from the property sale and the amount due. A seller is giving up substantial rights by signing a “reaffirmation agreement.”

  • It is important to negotiate with the Lender on the way the event will be reported on the Seller’s Credit Report.

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Other items to consider1

Other Items to Consider

  • How is the State of Oregon treating the amount of loan forgiven? Taxable? Non taxable?

  • Especially in the cases of second liens the seller must demonstrate that they do not have assets that can be attached for the amount owed or the lender may release the security for the lien and sue on the note resulting in a judgment that can attach to other assets or future earnings.

  • Know what the lender’s potential monthly holding costs are, including loss of interest earned. The number can be important in negotiating on behalf of your client or in protecting your fee.

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Finding potential clients

Finding Potential Clients

  • Now that you have some knowledge about short sales, how do you find potential clients:

    • The first place to start in search of short sales leads is a Lis Pendens list or Notice of Default list.

    • Once a bank files a motion against a homeowner for not paying their mortgage, it becomes public record.

    • You can sign up for a subscription, purchase the list or you can go to your County Clerk’s office to pull the information.

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Working with the list

Working with the List

  • When working with this list there are a few ways to contact the homeowners without offending them. An effective system is a letter campaign.

    • The first letter should be very vague and inform the homeowner of the general market conditions.

    • By explaining what is going on in the market, and how this is a common occurrence (defaulted mortgages), they will feel more comfortable as they realize they are not alone in this situation.

    • As always, include your contact information in the letter and state that if they need more information, they can email or call you.

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Working with the list1

Working with the List

  • Another approach to our first letter to homeowners in default is to include a brochure that explains the mortgage crisis.

  • Be careful not to pinpoint the homeowner you are mailing.

  • Your goal is to stir some emotions from them so they realize they are not alone and there is a resource they can call for help, which is you.

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Other sources for potential clients

Other Sources for Potential Clients

  • Attorneys can be a great source for referrals. With the work load that short sales require, some attorneys do not want to deal with it.

  • You can contact just about any type of attorney who specializes in bankruptcy, divorce, real estate, etc.

  • The best way to receive leads from these professionals is to build a rapport with them.

  • You can target attorneys by sending out direct mail pieces of letters with information about what you do and how you can help them.

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In conclusion

In Conclusion

  • Obviously this is a huge topic and I hope we have given you enough information to be helpful.

  • If you have any specific questions, please submit them and we will try to obtain answers for you.

  • My email: [email protected]

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