by Attorney Nyles L. Courchesne
There is a lot of talk these days about short sales. Many people looking to make a move find that they cannot afford to sell their homes at current market values. Following is an overview of the short sale process directed primarily toward Realtors and anyone using their services in a short sale.
SHORT SALES DEFINED
Short sales are sales in which the total amount owed by a Seller (including adjustments and costs of transfer) that is greater than the price for which a property may be sold. Typically a Seller who finds herself in the position of selling for less than what is owed will attempt to negotiate with the creditor who is owed the most upon sale - this creditor is usually the Seller’s lender (i.e., the mortgage). Seller will attempt to lower the payoff amount necessary to pay the lender in full in order to allow the sale to go through. Although it is the cumulative effect of all of the liens, costs and transfer fees that make a sale "short", we are usually talking about larger numbers when referring to a particular transaction as a "short sale" and therefore it is the negotiations between Seller and Seller’s Lender that are at the crux of short sales.
It is the negotiation between the Seller and the Seller’s Lender that is the focus of this article with particular attention paid to the interaction between the Seller, Realtor and the Real Estate Attorney. Although Short Sale Transactions have become easier in some respects, short sales are still time consuming, resource hogging, stressful transactions that can be a real gamble for the real estate professional who accepts the challenge of listing a short sale property. It is only through preparation and good communication that these transactions can reach happy results for all parties involved.
WHY IS THE SELLER LISTING THEIR PROPERTY WHEN THEY WILL BE SHORT?
Many times the Seller is unsure of whether or not their sale will be a "short sale". All that they know is that they must sell immediately. There are entire categories of Sellers who need to sell quickly for a variety of reasons, for example: to relocate for a job, marriage, school, death of a spouse, or other family obligations. These Sellers simply must sell now regardless of the short- fall. Therefore, it is critical that the realtor takes the time to review all of the Seller’s obligations and costs that will effect the sale of the Seller’s real estate when listing the property. This evaluation is something that a realtor would likely perform under normal circumstances. When working with Sellers in these categories, your calculations may point toward a shortage of funds. It is then important to take great care when the numbers are "close", to properly determine whether or not the sale will be short.
In the majority of cases, however, it is the Seller’s inability to pay their current mortgage obligations and Seller’s lender’s foreclosure efforts that bring the Seller’s "short sale" listing to the realtor. Sellers may have already run through some of the alternatives discussed below before seeking assistance as a Realtor to list the short sale property. Time may be a critical factor in listing the property, selling the property and negotiating with the Seller’s Lender before an auction date. This is why a quick and thorough evaluation of the Seller’s debts and costs of closing is necessary and why preparation for and knowledge of the negotiation process with Seller’s Lender are important.
Under some circumstances a short sale will not be of any help to the Seller. As successive layers of liens of all types are placed on the real estate by creditors, the likelihood of settling with all of the creditors in a timely fashion diminishes. If a Seller has not paid their mortgage, it is very likely that they have not paid their credit cards either. . . Depending on what the Seller’s financial picture looks like, the other options listed below may be more appropriate. It is a good idea to talk with a real estate attorney about all of the Seller’s options once you have gathered all of the Seller’s financial information.
OPTIONS OF SELLER WHO HAS FALLEN BEHIND IN MORTGAGE PAYMENTS
1. Do nothing: Bank forecloses, new owner or bank evicts borrowers. Bank files suit to collect deficiency (amount between what is owed and what the property sells for at auction.)
2. Deed in lieu of foreclosure: Deed property to bank and Seller is forgiven any amount owed that is over the value of the property. Seller must immediately vacate the property. This option has a negative effect on credit, but not as negative as the bankruptcy option below.
3. Refinance: This is sometimes impossible due to the fact that all of the equity has already been taken out of the property in previous refinance or home equity transactions and / or the value of the Seller’s home has fallen.
4. Bankruptcy: This option may be useful if there is equity in the home to slow down the foreclosure action. If there is really no equity then the a subsequent sale will still be a short sale and bankruptcy may not be a viable way to stop the foreclosure. Bankruptcy also can have a devastating effect on a borrower’s credit.
5. Short Sale: Short sale allows property to be sold, all taxes and all utilities and other debts associated with the property to be paid. The effect of a short sale on Seller’s credit is not as negative on Seller’s credit as deed in lieu of foreclosure or the bankruptcy options above. The short sale may have a tax consequence.
4. Bankruptcy: This option may be useful if there is equity in the home to slow down the foreclosure action. If there is really no equity then the a subsequent sale will still be a short sale and bankruptcy may not be a viable way to stop the foreclosure. Bankruptcy also can have a devastating effect on a borrower’s credit.
5. Short Sale: Short sale allows property to be sold, all taxes and all utilities and other debts associated with the property to be paid. The effect of a short sale on Seller’s credit is not as negative on Seller’s credit as deed in lieu of foreclosure or the bankruptcy options above. The short sale may have a tax consequence.
SHORT SALES NOW AND THEN
Historically short sales have been difficult propositions for the real estate professional and generally have been viewed as transactions to be avoided. Beyond the unpleasantness of being involved with a sale that will produce no proceeds for your client, there is also no money to help the transaction move forward, i.e., any repair credits or other Seller concessions cannot be offered in order to keep a transaction together. These transactions are generally difficult and a gamble as far as getting approval from the lender. In the past, lenders often looked to the other real estate professionals to take a cut in their fees and commissions in order to make the short sale transaction happen.
Recently the market has shifted and many lenders have restructured their loss- mitigation departments to handle larger volume of requests for "short sales". This has increased the flexibility that lenders have in settling the short sale negotiations, has made them faster in many cases and less demanding of the processionals involved.
One of the lessons that lenders have learned in this market over the past two years is that they can sell the property for what the market will bare before the foreclosure through a short sale or they can go through the expense of the foreclosure, legal fees, auctioneer fees, the expense of maintaining the property if the lender buys at its own auction, and the expense of listing the property with a realtor, only to find months later that the market has further declined and that the short sale opportunity prior to the foreclosure would have netted far more than the final sale.
THE BASIC STEPS OF A SHORT SALE
1. Setting sale price at market rate - You must determine the fair price to sell the home and be prepared to defend this price. Helpful if you have the listing for a long period of time and can show other properties selling for listed price.
2. Gather information for Lender’s "Short Sale Package" use checklist
3. Get offer to purchase signed by all parties (use an addendum for offer and contract) have any short sale contract reviewed by an attorney or title company assisting you with the short sale
4. Provide attorney with all gathered information from checklist so that attorney can apply for the short sale package
5. Attorney prepares short sale package for Lender with assistance of Realtor. It is extremely important that the realtor is available to show the property to Lender’s agent who is producing the Broker’s Price Opinion
6. Lender sends agent to produce a "Broker’s Price Opinion"
7. Short sale is approved through a certain date
8. Negotiations can continue as situation changes through sale date (examples to follow)
NOTE: The short sale approval phase of the "short sale" process can take anywhere from six to eight+ weeks. It is extremely important to determine where your Seller is in relation to the collections efforts of the Seller’s Lender. You need to know and verify in writing whether you client has missed one payment or if the auction is scheduled for next week in order to advise the Seller to take the correct next action.
WORKING WITH DEBTORS
Many times people who are in debt lose track of all of the bills that they owe, many of which effect the proceeds of the sale of their property. It is important that the Realtor is aware of the mortgages on the property, along with any other liens. In addition to mortgages and liens that are on record at the registry of deeds, the Realtor should be aware that taxes and municipal services such as water and sewer, and in some cities and towns, gas and electric are charges against the real estate that may be seriously delinquent.
Often times debtors are emotionally devastated over the prospect of losing their home. Many times they do not even know how long they have until their property will be auctioned or what their debts are that effect the property. They need someone to take control of the situation. If you do not take control, you may find that you waste a great deal of effort and energy.
To make the point about wasting time, I would just like to relate a quick story: In July of 2007 I was working with a Buyer who was purchasing a two family in Springfield, Massachusetts. My client had signed contracts, paid for her inspections and an appraisal on the property and was in the midst of negotiations over some repair issues. The Sellers were not budging on a couple of repair issues and I was working with her to help reach some compromise as we extended the inspection dates on the contract. My client happened to work at the water department in the City of Springfield and she was aware of adjustment issues that sometimes take place regarding municipal liens on properties. In the midst of the negotiations over repairs she had checked the title and called to ask why a deed had recently been recorded. As it turned out, the property had been sold at auction in May! The Sellers did not know that they no longer owned their home. Imagine the frustration if you had listed that property, shown that property, finally got the property under contract, frantically trying to keep the deal alive during inspection negotiations, only to find that your Seller does not own the property! How could this happen? It is simple: Debtors lose control of their bills, they get depressed, they do not open their mail, they really need your help. . . .
Attached is an intake sheet showing what you as the Realtor can help gather in order to get a jump on what you will need to complete the short sale what you need to gather:
NOTE: There are three reasons that the Realtor will want to gather complete and accurate material as shown in the checklist, prior to listing the property:
1. To evaluate the likely success of a short sale.
2. To prepare the Lender’s short sale package
3. To provide the Broker performing the Broker’s Price Opinion with all of the information that they need to fairly value the property (agree with your sale price!)
GET AN ATTORNEY INVOLVED
Work with the attorney as early as possible - even prior to listing the property. Most real estate attorneys will take the time to go on line with you over the phone and run down the property to help you assess the value of the mortgages and any other liens on the property. A real estate attorney will also assist in reviewing the current tax status of the property. More importantly, a real estate attorney can begin to gather the required information for the short sale, beginning with a "short sale package" from the lender.
Attached are a couple of short sale package agendas that we have received over the past year. Note that they can be as brief as one page or they can be ten pages long!
The real estate attorney should also help with the purchase and sale agreement and answer any questions regarding special language that should be contained in a short sale purchase and sale agreement. On occasion the usual language regarding Seller's representation must be changes as this is a short sale and there is an expectancy of a shortage of funds. Many contracts contain provisions where Seller certifies that there is no expected short fall. Attached is some language used in Massachusetts contracts that you may want to use:
Just a general note on the short sale package: What we are trying to do is to provide the most information possible to the lender that will convince the lender that our deal should be accepted. This is where a complete package with additional repair and picture information helps to make the case for the short sale. The short sale application usually requires the following:
· Authorization to Release Information (homeowner’s permission for the bank to speak to you)
· Purchase and Sale Agreement
· Hardship letter (showing why the homeowner can’t make the mortgage payments)
· Financial statement (showing the assets, liabilities, incomes & expenses) includes taxes, pay-stubs, bank statements
· Estimated HUD1 or Net sheet (showing the bank what they will get at the time of sale)
MAKE A GOOD DEAL
It may seem obvious, but as always, the transaction will fail if the Buyer and Seller do not agree on all of the terms. One of the unusual terms that are part and parcel of a short sale is the extended closing date. The Buyer must be willing to accept a closing date at least six weeks away from the date the contract is signed.
The Buyer must also be willing to accept the property with limited concessions. There may not be time for extended inspection generated requests for repairs or closing cost credits. While it may be possible to allow a credit for a major repair or closing costs, these items can make it difficult for the Lender to accept. . . anything that effects the bottom line to the Lender will be treated as though you devalued the offer made to the Lender. The Lender is paying for these costs, not the Seller.
There are investors who attempt to buy property through short sale listings. There are investors who will place more than one offer on different properties while only intending to purchase one. It is very important to avoid such Buyers.
The bottom line is that you need to have GREAT Buyers. Large deposits and firm commitments to this extended process are very important. At the same time, you need to have the ability to look for backup offers in case you have a Buyer back out under the contingencies in the contract. Buyers with weak credit that cause you to re-list the property in week four of this process, because their mortgage commitment falls through, can cost you the sale.
THE BROKER’S PRICE OPINION
Once the Lender has received the short sale application, the next phase of the approval process is the Lender’s independent verification of the value of the home based upon its condition and market conditions in the neighborhood in which the subject property is located. This is usually accomplished through the Lender or an agent of the Lender contacting a licensed real estate broker’s office requesting a "broker’s price opinion". This is the critical phase of the entire transaction. If the Broker’s price opinion values the property higher than you have sold the property, the Lender may deny the short sale application, believing that the property would yield a higher payoff at auction.
The key to successfully navigating this phase of the transaction is to control the broker’s price opinion. The fate of the Short Sale is in the hands of another Realtor.
There is a human factor to these Broker’s Price Opinions that cuts both ways. The relatively low pay that a Realtor receives for producing a BPO ($75.00 - $90.00) relatively complicated report on your property cuts in favor of a quick look at the property by the other Realtor. There is only so much time that a Realtor is going to put into a BPO for $75.00! The fact that you will have gathered all of the material that the other Realtor needs (comps, repair reports, information about the neighborhood) cuts in favor of the other Realtor using your information or at least checking their work against yours and hopefully agreeing with the value that you based the sale on.
The successful short sale Realtor controls the BPO. Beginning with the initial letter to the Lender it is important that the Listing agent makes it clear that she alone should be contacted for the house to be shown to anyone for the BPO or appraisal of the home. It is my practice to provide all of the listing agent’s contact information to the Lender, indicating that only the Listing agent is available to allow access to the home. When the Realtor is called, she should immediately assist the Realtor conducting the BPO by emailing or faxing all of the information that she has gathered for the short sale package. The Realtor should bring a copy of the short sale package and any other information that the Realtor has in order to influence the BPO. The key is to make the other Realtor’s job easy by providing all of the research to her. It does not hurt to quickly run through the hardship issues of your seller either and how badly they need this short sale to go through. Tell them why you set the sale price at the price that you sold the property and why you think it is fair given all of the circumstances and the data that you have gathered. No one is going to argue with you too long for $75.00!
If you are unable to make contact prior to the showing of the property, be sure to bring the following with you and provide them to the Realtor conducting the inspection:
- Photographs of the home, highlighting any imperfections inside and outside
- repair list
- any quotes for repairs
- inspection reports
- taxes and utilities owed
WHEN THE SHORT SALE APPLICATION / OFFER IS REJECTED:
Work with the attorney if the short sale is rejected. We need to find out why. If the BPO shows a higher value that is not justified then we need to request that a second opinion be rendered and again submit all information showing why the valuation should be lower. Ask for information - what comps did the agent use? Are they valid? Did they take into consideration the repairs?
You might consider paying for a second BPO ($75). If first was a drive-by - insist on meeting the agent at the property with your package and try again. Another option is paying for an actual appraisal. If your client is willing to pay and you firmly believe that your pricing is correct and the Lender holds out a glimmer of hope that it would be helpful. . . you may want to have your Seller pay for an appraisal. Many Lenders will listen to what you have to say and they will reconcile the second BPO’s and / or appraisal against the information that they have already received.
WHAT IF YOU GET AN APPROVAL BUT YOU ARE STILL SHORT?
Ask again. As it turns out, asking is mostly free. The only time that you can ask the wrong question in my experience is in Court. That’s another story. With short sales, you sometimes have to go back to the well a second time if a lien arises that was not previously on record or if the Seller suddenly reveals that they have no where to go an they need first and last month’s rent. - This actually happened to me and I was able to get another $1800.00 from a Lender so long as it was paid directly to the new landlord! The Lender will have made their decisions as to what the lowest price they would accept in a short sale negotiation based upon the BPO and other factors and your second or third short sale offer of settlement may be well within the Lender’s guidelines. . . so ask away!
FINAL NOTES:
These are better times to be involved with short sale transactions. The banks need your services and are willing to allow the real estate professionals involved in these transactions to earn full commissions and increased legal fees! Just remember the following key concepts and your short sale should go smoothly:
1. Do your homework - verify status of foreclosure and evaluate total debts effecting equity
2. Get the attorney involved early to assist with number 1 listed above
3. Be prepared for the day you have a signed contract so that you can quickly submit a complete short sale package
4. Control the Broker’s price opinion by meeting with the Realtor face to face and providing the Realtor with all of your information on the property.
5. Fight for your position if necessary (2nd BPO, Appraisal)
6. Never be afraid to ask for more!
Nyles L. Courchesne, Esq.
101 State Street
Suite 301
Springfield, MA 01103
Phone:413 734-1002
Fax: 734-0029
On the web: mailto:www.nlc@pcalaw.net
Email: nlc@pcalaw.net
For more information, copies of attachments referenced, but not included in this post, please call or email above.
Copyright 2008 Nyles L. Courchesne all rights reserved
