In the past Short Sales have been everyone’s nightmare, for the Seller and Listing Agent it was a long process and typically and endless supply of paperwork, negotiating and many times being transferred to a new department or person…just to start all over again.
For the Buyer and Selling Agent it also meant a very long escrow, and in this current market that also means that the market could change making the price drop (and who wants to go back to the lender to negotiate again??) or buyers that run out of patience and simply back out of the deal.
I use the term in the “past” because lenders seem to be realizing that in the long run a short sale could save them time and money. It doesn’t take a rocket scientist to realize in real estate that time is money. The quicker the property is sold…even at a loss for the bank, could save the lender thousands of dollars in missed payments, foreclosure fees and eventual marketing fees (i.e. Commissions, repairs, “cash of keys”, etc.).
I recently acquired a short sale listing whereas Wachovia is the lender of record. In my initial contact with Wachovia they stated that their goal is to have a response on all contracts with 12 business days. That is a huge difference compared to the months and months of waiting time on previous transactions. Only time will tell if what they say is true…but if it is, and I hope it is…that could make the short sale process an option now for distressed homeowners.
Here are some commonly asked questions and answers in regards to Short Sales:
Q. What are my options as a home seller when my property is in or heading toward default?
A. In the event that you have been delinquent in paying your mortgage or anticipate that you will not be able to make payments moving forward, your options will vary based upon several factors or variables that are specific to you and your property. Always remember that each possible resolution will be evaluated on a case-by-case basis by all parties involved. When considering your options, you should take into account:
the amount of equity you have in your property compared to the outstanding loan balance
the additional financial resources you may be able to bring to bear
whether or not you live in a homestead state, and the nature and amount of the homestead exemption
And/or the amount of private mortgage insurance you have.
All of these factors should be taken into account along with many other variables and special conditions.
The most important decision you need to make is to “make a decision.” Typically, when homeowners avoid confronting the serious lifestyle and financial consequences of defaulting on their mortgage, they end up with a significantly more deleterious outcome than they would have, had they taken charge of their own destiny while they could.
Once you decide to take action, we recommend that you contact a lawyer and a CPA qualified to assist with your potential consequences involved in the short sale process. Then you need to enlist the help of a Realtor (R), with experience and knowledge in the short sale process.
Early on in the potential foreclosure process, all homeowners should not only contact an attorney, but also research all potential guidance and assistance available from the government, including the U.S. Department of Housing and Urban Development (HUD). HUD’s Guide to Avoiding Foreclosure may be particularly helpful. HUD’s toll-free telephone number is (800) 569-4287. Not all homeowners, however, can qualify for certain HUD programs. Whatever guidance you seek as a homeowner, we recommend, at a minimum, that you also carefully consider each of the following questions and answers:
Questions What is a better or more likely outcome for me and why?
A short sale or a foreclosure?
A short sale or a repayment plan?
A short sale or a forbearance plan?
A short sale or a loan modification?
In the case of an FHA loan, a short sale or a partial claim?
A short sale or a short sale/assumption agreement?
A short sale or a deed-in-lieu of foreclosure?
A short sale or a bankruptcy?
Answers: Any and all of the above-mentioned options pursued by homeowners should take into account their:
individual present and projected future financial circumstances
short- and long-range lifestyle goals
concerns over credit rating
desire to remain living in their present home
a complete understanding of the impact each available option might have in comparison to all other options being considered
In order to best contextualize or prioritize one’s various opportunities or limitations with all other options, it is advisable that an attorney or other suitable tax counsel be engaged. Such counsel is vital in order to properly weigh all legal, financial, tax and lifestyle implications surrounding each option. Since this brochure principally focuses upon the subject of short sales as just one alternative, it is important to note that short sales usually benefit home sellers because they not only stop mortgage foreclosure, but typically prevent the lender from suing for deficiency. Deficiency refers to the difference between the outstanding loan amount and what the net proceeds are from the sale of the home, or in some cases, simply what the proceeds are that the lender receives from the sale of the home. During their short sale negotiating process, it is vital that homeowners have their attorney ensure that the lender agrees to forego suing for any monies that are written off due to the short sale.
Q. Within the short sale packet presented to the lender, there is a hardship letter that homeowners must provide. How important is this component in causing the lender to approve the short sale?
A. It is absolutely critical that the homeowner be able to document that they do not have the income or necessary assets to continue making payments on their home. Homeowners must be meticulously honest in documenting and presenting their “hardship case” so they do not implicate themselves in mortgage fraud; mortgage fraud results from inconsistencies between what the homeowner is now representing compared to the information provided at the time of the original mortgage application. This is why it is vital to work with a qualified attorney in the area of pre-foreclosure/foreclosure law during this process.
Q. What types of hardships would a lender generally consider conducive to a short sale agreement?
A. In the context of consideration for short sale approval, “hardship” is not defined by law. As such, there is no one definitive definition upon which you can rely. One would, however, anticipate that a lender would expect a hardship to result from the loss of job or salary reduction, divorce or separation, debilitating illness, medical bills, business failure, excessive debt, mortgage payment increase or the recent loss of a close family member, such as a child or spouse. Consult with an individual lender to determine the duration of the hardship, as lenders are unique in this regard.
Q. What are the tax consequences of a short sale?
A. The tax consequences for individual homeowners regarding short sales are different depending upon your financial situation. For that reason, it is critical to consult with a Certified Public Accountant.
Q. What is the Mortgage Forgiveness Debt Relief Act of 2007?
A. Prior to the implementation of this act, the law required taxpayers to include discharges of mortgage indebtedness as income for the calculation of income tax. This Act provides exclusion for discharges of some types of mortgage indebtedness. Check with your tax advisor early on as to whether your transaction will qualify for income tax exclusion.
Q: What effect will each alternative have on my immediate, mid-range, and long-term credit?
A: There is significant confusion regarding the precise and relative proportionality surrounding how various pre-foreclosure/foreclosure and bankruptcy options affect one’s credit score. It is therefore advisable that all property owners first check with their lender(s)’, credit bureaus, future lenders, government agencies, and an attorney in order to best gauge how each prospective resolution may potentially affect their future credit rating.
Credit rating impact should also be evaluated contextually by considering the role of your credit rating regarding future financial and purchasing plans.
Q. How do I know if my property and I may be considered for a short sale?
A. Eligibility for a short sale resolution is determined by your lender’s short sale policy. Your lender will also direct you as to what you must do to comply with their process and procedure. You can either contact your lender directly or authorize an attorney, real estate agent or other representative to contact them on your behalf.
Q. If a lender agrees to the short sale option on my property, can the bank still proceed with a foreclosure?
A. The foreclosure could be considered as a separate and distinct action taking place, even though the lender has agreed to the short sale proposal. This can easily occur when different departments of the same lending institution are seeking different outcomes, or simply because the bank, after agreeing to a proposed short sale outcome, but before signing a contract, believes that foreclosure would represent a more favorable outcome for the lender.
The submission of a short sale package/kit to the lender does not automatically stop a foreclosure action. Once a lender initiates a foreclosure action, the homeowner should consider that the lender will most likely retain this position until the lender has a signed contract in hand, has agreed to the short sale proposal, and has closed on the sale of the property.
At the time the lender agrees to the short sale proposal, the lender may or may not choose to terminate or postpone the foreclosure. A foreclosure may also proceed in the case of subordinate lien holders not having agreed to waive their lien on the property.
Because of the multiple stakeholders involved, and the complex nature of the regulatory environment, qualified, licensed counsel can be critical in taking steps to prevent a lender from not following through with the short sale process, especially in the case of a lender who has the intention of opting for a foreclosure-based resolution.
Q. How would I initiate the short sale process?
A. To initiate the short sale process, contact your lender(s). Typically, the department to contact is your lender’s Loss Mitigation Department.
Either you or your authorized representative needs to ask the lender for a short sale package or kit. Most lenders will make their particular processing forms and procedures pertaining to their required short sale documentation available to homeowners.
Unlike what many people believe, some lenders will also allow you to apply and get approval for a short sale even when the homeowner has never been late or missed a mortgage payment. Please note that lenders will typically only consider a short sale after the borrower has: missed two mortgage payments; has no means to continue paying the mortgage; provided all the necessary financial and hardship documentation to the lender; agrees that they will not derive any proceeds from the sale.
Q. Should I contact a real estate agent?
A. Absolutely. But before selecting a real estate agent to represent you, determine whether or not they are knowledgeable about preforeclosure, foreclosure and bankruptcy options. Your agent should not be giving you advice regarding your personal financial situation.
Any real estate agent who asserts that he or she is prepared to assist you as a homeowner in a potential short sale outcome must also be willing to follow the specific administrative procedures of the particular lender involved. In addition, the real estate agent should also acknowledge that they essentially confine their guidance to determining the property’s value and how to best market the property, versus advising the homeowner on the best preforeclosure/foreclosure resolution.
Q. Should I contact an attorney?
A. Absolutely. We recommend that you contact an attorney with the understanding that the attorney needs to not only be well versed in real estate law and foreclosure law in your particular state or province, but also needs to be a proven negotiator on behalf of their clients. Not all short sales or other pre-foreclosure or foreclosure options are structured alike. Therefore, the role of a highly competent attorney in such matters-one who can skillfully negotiate on your behalf-can make a world of difference.
Q. How would multiple liens on my property impact short sale approval?
A. Each lender must recognize how it is in their best interest to approve a short sale resolution versus a more costly and protracted alternative. Here again, an attorney/lawyer or real estate agent who possesses experiential knowledge in this particular multiple-lien scenario can be instrumental in developing a multi-party resolution strategy satisfactory to all.
Q. Am I responsible to continue to make mortgage payments if I have intentions of applying for a short sale on my property?
A. Unless you have received information to the contrary from the lender in writing, you are responsible to continue to make mortgage payments.
Q. As a homeowner, what incentive do I have to assist in the sale of my property if I am not going to receive any proceeds from the sale?
A. I believe that homeowners first and foremost have an ethical responsibility to expend the necessary effort to support as high a sales price as possible-even though they will not experience a financial gain-when expecting the lender(s) to forgive any and all of the homeowner’s outstanding mortgage debt.
I also believe that the higher the realized sales price, the more likely the lender will be in granting a short sale outcome for the homeowner and possibly either fully or partially waive a deficiency judgment
Q. Does a “Listing Agent” represent me (as the homeowner) or the bank if I have intentions of gaining short sale approval from the lender?
A. the Listing Agent represents you, not the bank.
Q. Is there a real estate commission paid in a short sale and, if so, who pays it?
A. Like all commissions, this has to be negotiated. Typically, the commission is paid from the proceeds of the sale. In the case of short sales, the home seller does not typically pay the commission. This is another incentive for a home seller to pursue a short sale remedy and use a qualified real estate agent.
Q. on average, how long does a short sale process take?
A. The time period will vary based upon circumstances, although the approval process and time to closing, in many/most cases, is longer than that associated with the sale of a property in a non “short sale” situation. But, as I stated earlier the time frame seems to be getting better!
Q. Which process has a more adverse affect on my credit rating: short sale: foreclosure; bankruptcy; or deed-in-lieu of foreclosure?
A. It is critical that homeowners, either personally or through a representative, research their individual situation with the various agencies that determine credit ratings.
Q. When is a bankruptcy preferable to a short sale or to a foreclosure?
A. This multiple choice question can only be answered after exhausting all possible outcomes as they relate to individual circumstances along with the meticulous advice of legal counsel.
Q. On my own, can I prepare a short sale package/kit, and if so, how would I go about doing it?
A. The short answer is yes, you can prepare your own short sale proposal and submit it to your lender. Some lenders may even assist you in the process. Just like preparing your own taxes, however, you might need help in this critical process. Real estate agents experienced in short sales understand that the bank will want to find out what efforts have been made or could be made to market the property for the highest price and best use of the property. In addition, most lenders will require Broker Price Opinions and or Competitive/Comparative Market Analysis to determine benchmark pricing, which could be prepared by your Realtor(R)
Q. Will lenders tell me what I need to have prepared in a short sale, or do they only make this information available to real estate agents and attorneys?
A. While it is advisable to have a real estate agent assume this very time-consuming and administratively complex responsibility, homeowners themselves are recognized by lenders as being capable of dealing with short sale matters themselves. Lenders, however, are very vigilant regarding the information they require pertaining to marketplace pricing and related real estate information, and rely heavily upon the expertise of high-caliber real estate professionals.
Q. In selecting a real estate agent, when the prospects of a short sale are desirable, is it more important to choose a real estate agent who is very competent in overall real estate sales and marketing, and not as knowledgeable in the short sale process, or is it better to select a real estate agent knowledgeable in the short sale process, but very inexperienced or ineffective in real estate sales and marketing?
A. Obviously, home sellers should want a real estate agent who possesses significant expertise in short sales and in real estate sales/marketing. The greatest emphasis, however, should be placed upon selecting a real estate agent who is highly competent in the areas of marketing, merchandising (staging), negotiating, networking and information technology. The lender-required processes and information, although critical, represent more of a service. The aforementioned skills are indispensible in putting forth the best and most credible effort regarding the sale of the property.
Lenders can discern the difference between real estate agents who only represent pre-foreclosure strategic advice and assistance-e.g., the performing of the required administrative tasks-from leading real estate agents who can perform the required administrative tasks and who possess short sale acumen while representing world class real estate marketing-related skills.
Buyers . . .
Before buying a property marketed in a “short sale” context, consider the following:
Q. How much less should I offer on a property once I learn that the real estate agent has “labeled it to fellow agents” as a possible short sale, even though the bank hasn’t yet classified the property in such a fashion?
A. For the same reason that it most likely is not in the best interest of a lender or the ultimate sales price of a property when it is marketed as being “under duress,” it oftentimes is to the significant benefit of the buyer when a property is being labeled as a potential short sale.
Any offer on any property in any marketplace should be made only after the buyer satisfies the need to thoroughly research what properties are selling for, how long properties are taking to sell, which way prices are trending, and to the degree possible, what pressures to sell might be facing the owner(s) of the property in question.
Along with this approach to a proper pricing/offer strategy, it is recommended that the buyer be as aggressive as possible and anticipate an inevitable negotiating process. To that end, if a property is labeled as a potential short sale that might enjoy a stronger negotiating position, that will be reflected in your offer. At the same time, it is unwise to risk a great sales price (especially when one is seeking the lifestyle benefits of a particular home for sale) by pushing too hard and too unrealistically.
It is recommended that when packaging the offer for a property that is being advertised as representing challenging circumstances, that the buyer make his/her case by understanding the position of the lender regarding a short sale outcome versus foreclosure or bankruptcy. The key is to not appear exploitive, but rather to appear as one who is willing to make a prudent decision, even while most others remain on the sidelines.
Q. Do some real estate agents make it a practice of building in preprogrammed or time-interval-based price reductions, and if so, can I assume that the longer I wait, the greater the discount I will enjoy?
A. Some agents do build in strategic price reductions to come at specific intervals. Others simply wait and see if there are any changes in the market to necessitate a price reduction.
Q. As the contract is subject to third-party approval, who is the seller of the property and with whom am I doing business?
A. You and the agent representing you are doing business first with the home seller and marketing agent regarding your offer, but must realize that ultimately the business decision will be made by the lender(s), although the home seller does not have to agree with the lender’s terms for the short sale approval.
Q. Since short sale properties are expected to be purchased in as-is condition, given the lack of financial interest of a home seller regarding the outcome of their property, and considering the potential adverse physical effect that these circumstances have on the value of the property, how late in the negotiating process should my appraisal be in determining market value?
A. Any buyer for any property should be willing to pay for all relevant and necessary inspections and appraisals of the property, and have a pre-closing walk-through contingency as part of the sales agreement.
You should consider making any offer subject to the existing lender’s acceptance to include not only a general home inspection contingency, but also, where applicable, satisfactory inspection reports for lead-based paint, natural hazard disclosure, pest/insect report, underground storage tank, septic/sewer inspection, well water and seller (conditions) disclosures. All of these contingencies should be in addition to the typical mortgage, appraisal and title contingencies.
Q. How should a buyer negotiate with a lender on a short sale property when the lender typically is not subject to property condition disclosures and the seller, given their financial situation, may not be a viable party regarding future recourse?
A. Buyers, especially with certain types of homes (e.g., age and condition), should most definitely include disclosure concerns as they prepare and present their offer to the lender and as an overall part of their overall negotiating strategy.
Q. Please explain what options, other than a short sale, the primary lien holder has with regard to the disposition of this property.
A. The other options include deed in lieu, loan modification, forbearance and foreclosure.
Q. When is a short sale the bank’s better option, with regard to the disposition of the loan on this property?
A. When a lender deems that all other options are either too costly or carry with them a high level of financial uncertainty, the short sale represents closure and finality.
Lenders also often favor short sale resolutions because they are not in the business of, nor do they have expertise regarding, managing or owning properties. Moreover, short sales are typically less expensive for the lender than the foreclosure process.
Q. Where do you see my opportunity to reap a reward in the purchase of a property that is hopeful of a short sale resolution?
A. When your offer represents a quicker, cleaner and clearer financial outcome to the lender than the other options available to them.
Q. Under what circumstances would the bank reject or not consider my offer to purchase a short sale property?
A. The offer will not be accepted when it is considered to be either too low or not in the best interest of the lender. Mortgage preapproval, if possible by the lender, or a full-cash offer can eliminate the lender’s concerns regarding last-minute credit issues. A high loan-to-value ratio will also offer the seller/lender a higher level of comfort, especially if their institution will be the mortgagee for the transaction.
Q. Strategically speaking, what can I do to best ensure the bank’s acceptance of my offer to purchase the property?
A. From the lender’s perspective, the greatest qualities of the short sale resolution are closure and finality. By accepting your offer, even if the price is lower than market value, due to the situation, the lender can close the file and move on. To best ensure a smooth transaction, do not muddy the waters with contingencies and time frames inconsistent with conventional closing times. The lender will likely need to take time to deliberate prior to accepting an offer. Once the offer is accepted, anticipate that the lender will want to close within 30 days. Consider including language in your proposal and contract that provides the lender with the time they need to review the offer and reach a decision. Then include an iron clad means of closing (i.e., paying for the property on your part). When you remove obstacles in any real estate transaction, you pave the way to a smoother closing.
Q. With regard to price, what would you recommend to best ensure that the bank accepts my offer, and at the lowest possible price?
A. By the time you come to realize that a given offer on a given property makes sense for you, either as a personal or as a business investment, you should have completed a significant amount of research. Your research, or the research of your highly skilled and specialized real estate agent, should be able to help you arrive at a point where you have a rationally supportable negotiating range in mind, based upon market conditions, market prices, the investment you’ll be making and the return you are anticipating. We recommend that you consult with your real estate agent on how to best present your pricing rationale within the lender’s context. If you are going to make an offer because it is a good investment in today’s market and your offer is too low, the lender will likely reject the offer so they can gauge your perspective as a prospect.
Q. What is the bank’s decision-making process in the consideration of my offer to purchase, and how long should I expect this to take?
A. The decision-making process varies, based on the institution. Here again, a highly skilled real estate agent experienced in this area can offer specific details regarding the details of the process in your situation.
The lender/bank needs a rationale to justify any write-downs/write-offs. This can often be subject to internal lender protocols, and this can add time to the approval process. The lender will need to rely upon appraisals and broker price opinions that they will most likely order themselves. Both can be developed quickly. Some lenders will have a monthly meeting in which they review proposals. If a short sale package/kit is incomplete, expect it to be rejected or returned to you for clarification or review. This can delay your process up to one month or more.
Lenders will generally need to negotiate to obtain releases from secondary lien holders. Anticipate that the time required for this process and subsequent negotiations have the potential to become protracted.
Anticipate that a “simple” title search should be expected to take approximately three to five days.
Remember, each lender has established their own rules for their short sale process, including what percentage of a debt-to-balance (ratio) payoff they will accept. The lender should also be expected to have internal guidelines for how much commission they will pay for real estate brokerage services and for attorney fees.
Q. What is an REO property?
A. The letters “REO,” stand for real estate owned. These are properties owned by a lender, in most cases a bank, and become classified as REO typically after an unsuccessful foreclosure auction when the title to the property reverts back to the lender. Some banks, given the number of properties they now own, have established their own REO departments. In many cases, leading real estate agents have developed relationships to create opportunities for buyers and investors. Buyers/investors can also contact the REO departments of lending institutions to learn about available properties or visit various bank-created websites, which list their bank-owned or REO properties for sale.
Q. In general, would a buyer benefit more from buying a bank-owned (or REO property) or a short sale property?
A. There is no general rule that can, with any degree of certainty, state which category of real estate buying results in a more favorable outcome for a buyer. It is important, however, that buyers understand that lenders are extremely motivated to sell when they own the property (REO). As a buyer, it is also easier to identify the true condition of an REO as the property should be vacant.
Banks do not want to own properties and have a great incentive to not only sell their properties, but will actually offer credits to buyers, in some cases, if the buyer agrees to fix defects or perform renovations on the property.
Short sales offer many advantages as well as evidenced throughout this information; but again, it is very difficult for anyone to categorically assert that either foreclosures or short sales represent the best opportunity for a buyer.
Q. What is the estimated time between the acceptance of my offer and the closing?
A. There are no norms with which we can guide you. Each jurisdiction has required time frames for notification of the intent to foreclose and for the various steps in the process. As a generality, however, it is not uncommon for a lender to consider a proposal for approximately 60 to 120 days and anticipate closing 30 days after they accept your offer.
Q. Is it worth the wait?
A. In many cases, yes, it is worth the wait, but this depends upon each person(s) circumstances.
Q. What is the benefit of buying a short sale property as opposed to buying a conventional property?
A. For the buyer, it is a better or lower price, resulting from a stronger negotiating position; for the seller/lender, it is the opposite.
Q. How do I learn about the relevant local real estate market during the last year or so, and how can I get predictive data regarding estimates of future prices?
A. Contact a real estate agent and ask them to provide all past and present pricing data, absorption rate data (where available) and all other contextually relevant information they can make available to you.
I hope this information has been helpful to you if you are considering buying a short sale or selling your own property as a short sale. Please remember to talk to your tax consultant if you are considering selling your property under a “short sale”, as there maybe tax implications.
And choosing the right agent makes all the difference…I am never too busy for any of your referrals.