Short Sales-The ICG Solution

What to look for in a short sale offer

As one of Illinois largest short sale negotiators, I have the opportunity to work on hundreds of short sales.  Over the last 12 months, we have averaged an approval rate of 97%.  So, are we closing 9 out of ten short sales?  Not even close.  What’s the problem?  Inept agents top the list, and the number one trouble spot is improperly executed short sale purchase contracts.  Now, I could go on and on about how poorly trained and indifferent many agents are, but I’ll spare you at this time.  In this article, I will outline the common mistakes that I see with short sale purchase contracts, and give my solutions on creating a solid contract.

Common Mistakes

• Seller hasn’t signed offer

• Closing date to soon

• Seller Concessions

• No Short Sale addendum

Let’s examine these mistakes one by one and offer some solutions:

Seller hasn’t signed offer:

Honestly, this blows my mind.  I have heard all kinds of excuses such as “I don’t want to have to collect earnest money” (What?!?) “I want to continue to market the property,” “It doesn’t matter until the lender accepts.”

Seriously.  Why would you not want to lock up a contract by not accepting earnest money and having a seller accept an offer?  First of all, the lender will require the offer to be signed-that’s just common sense.  Second, if your seller doesn’t execute the contract, you have no contract! Buyers can and will walk from the deal at any time!  Why tie up a property, put the extra 110% into getting lender approval, then have a buyer bail because they bought something else, got tired of waiting, etc.  Same thing with earnest money.  The purpose of earnest is to show buyer commitment!  The issues we have with buyers pulling out of contracts is because they are not, and were never committed to the contract.  Why waste yours and your seller’s time?  You don’t think that a deal falling apart because you failed a basic tenant of fiduciary responsibility to the seller (making sure contracts are properly executed) can open you to consumer liability?  Think again.  And thinking that the lender needs to approve?  What’s that have to do with your seller properly executing their contract?  Nothing.  The lender is not the seller!  I remember one deal that we worked long and hard to get an approval (The contract hadn’t expired) I called the listing agent with the good news, a written lender approval.  She informed me after calling the buyer’s agent that the buyer had offered on another property.  I quickly called the buyer’s agent and he simply told me that I could go pound sand because we never had a binding contract, because the seller had never accepted.  Guess what, he was right.

Closing date too soon

If I see a purchase contract on a short sale with a closing date any less than 60 days, I immediately reject the contract.  Why even bother.  Now, we are really good at short sales, and we have closed several in less than 30 days, but 60 and preferably 90 days are more realistic.  By agreeing to short closing dates, you are giving the buyer an “out.”  If I am a listing agent, I always make sure the contract reads “Closing less than 30 days after lender acceptance.”  This is important on two levels.  First, this locks the buyer in to whatever time it takes to get an approval, and sends a message that the buyers should expect a long wait.  Second, the reason why I demand the less than 30 days after lender acceptance is because most lenders will only issue an approval good for 30 days.  These can be extended, but it is not guaranteed and some lenders are charging extension fees.  A good number of deals die because the buyers wait until the seller gets a lender approval to start their mortgage application process.  BIG MISTAKE!  Many buyer’s agents and attorney advise their buyers to wait, but this is a deal killer because in today’s lending market, it will take longer than 30 days, on average, to get a clear to close.  If our approval is good for 30 days, and it takes 45 days to close, and the lender charges a $600 per diem to extend, and the buyers refuse to pay…see where this is going?  Now, I understand that buyers may be reluctant to pay for an inspection or appraisal before lender acceptance, but they absolutely should have their mortgage in processing with the lender.  The goal is to get a conditional loan approval.  Not a “Pre Approval.”  A conditional loan approval means that the buyers entire loan application has been underwritten and is approved subject to…(conditions, such as appraisal) In other words, once we get a short sale approval, all the buyer has to do is order an appraisal and they should be ready to close in 10 days tops.  Make sense?  Making sure that this is done will greatly up your short sale closing percentage.

Seller Concessions

I am all for them.  If I can sweeten the deal for a buyer, great!  There are limits though.  3% is about the maximum you can get.  On FHA/VA short sales, HUD has reduced this to 1%, only if the buyer is using a government loan to finance the purchase.  Whenever I get a contract that has a seller concession, I immediately call the buyer’s agent and ask if the buyers need the seller concession to close.  If the answer is yes, immediately reject the contract because while we can ask for a seller concession, we cannot guarantee one.

Short Sale Addendums

Many MLS and Realtor Boards have developed short sale riders, but I go beyond this and employ a Short Sale Purchase Contract Addendum.  I retained a highly regarded attorney to craft this addendum, and it’s purpose is twofold:  One, to bluntly and repetitively disclose to the buyer of what to expect when purchasing a short sale property, and two, to commit the buyer to the possibility that they may need to bring cash to the table to cover any seller closing costs that the lender may not cover.  Screeech!  I see a lot of agents gasping at the very thought!  Asking buyers for money!  It can’t be done!  Please…  The sad and sorry truth about short sales is that while lenders are starting to approve these transactions faster and more regularly, they are cutting corners.  More and more lenders are not allowing:

• Attorneys fees

• Third party negotiator fees

• Tax proration’s over 100%

• Survey

• Water Bills

• HOA Liens

• Tax redemptions

• Second liens over 1% of balance

• Whatever else the lender does not feel like paying

Quite simply, if a buyer does not want to commit to the possibility that they may have to cover something like this, then they have no business offering on a short sale!  Period.  Full stop.  End of story.  Why would you waste your sellers and your time jumping through hoops only to have a buyer walk because the lender won’t pay survey and water and the seller is short $700?  As an agent, you should be educating buyers that short sales are AS IS, WHERE IS, the seller is not paying for ANYTHING, the short sale can take a long time, the end closing price may bear little or no relation to the listing price or offer, there may be lender counter offers, etc. ECT, ECT!  Seriously, it’s OK to tell a buyer that maybe this property isn’t for them in the beginning, and finding another buyer rather than accepting an offer where the buyers will never close.  The reward for the seller for putting up with all of this is a GREAT DEAL!  We ask that the buyers agree to pay up to 2% of the purchase price for sellers costs not covered by the lender.  If they do not agree, we simply reject their offer.  Period, because if you do not get this commitment and the sellers end up being $1,200 short at close, who is going to pay it?  The seller?  Good luck they are probably broke.  The agent ends up giving away their commission, and then I read the sob stories on Activerain complaining about the horrors of short sales and the bad banks.  It’s not the banks fault, IT’S YOUR FAULT.  So do something about it and properly prepare your buyer for the rigors of buying a short sale.  Speaking of second liens, the number one deal killer on short sales are second liens.  Look at this scenario and tell me if it sounds familiar:

First Lien is WAMU for 400K.  Second Lien is NatCity for 50K.  WAMU’s policy is not even to look at your short sale unless you have a written approval from the second.  NatCity has default insurance on all of their second lien products.  This means that their insurance will reimburse them 10% of the balance in the event of a default.  If the balance is 50K, then NatCity will demand a minimum of 5K to release the lien.  Guess what, send this to WAMU and you will find that WAMU’s guidelines prohibit allowing a second to receive any more than 3K.  Whoops.  You are now 2K short, so you go back to NatCity and try to reason with them, “NatCity, if the property goes to foreclosure, the second lien gets nothing…”  Wrong.  They have insurance, remember.  They could give a flying you know what if it goes to foreclosure or not, because either way they are getting their 10%.  NatCity tells you to go pound sand, so you go back to WAMU and cry to your negotiator that NatCity is mean and demands their 5K.  Do you know what your WAMU negotiator will do?  Roll her eyes and close the file because she knows that she is dealing with an amateur and that this file will never close.

Now you’re saying, “Thanks Joe, you are causing me great pain right now, what is your solution?”  I’ll tell you-get your addendum signed, because if you did, you simply  inform the buyer that “you have great news!  The short sale is approved.  Please bring an extra 2K to the closing and we are all done.”  If they signed the addendum, they won’t have a freak out because you disclosed to them early that this was a possibility, and by committing to it, they will be OK with it.  If you have no addendum, you either give up your commission, or you have yet another short sale horror story.  Here is a sample of my addendum.  It is copyrighted, and legally effective only in Illinois.  Any Illinois agents that want to use it must contact me.  I urge those of you in other states to work with an experienced real estate attorney and craft your own.

The term "short sale" has been tossed around the media a lot lately, and many homeowners are confused as to what it means, and whether it can apply to them.  As a former lending executive and Licensed Realtor who is a short sale expert, my goal is to educate homeowners so that they may make the right selling decision for whatever their personal financial situation is.  Many people make the mistake of believing that short sales are a real estate issue, but this is not true.  Short sales are a banking issue. We will first explore how the lending industry collapsed, and then we will examine how this affects the homeowner attempting to sell their property in this environment. 

How did we end up in this mess?

There are several factors at work here, and no one single entity or organization can be blamed.  A combination of speculative values, reckless lending, and inflated appraisals all contributed to this unprecedented situation.  Underlying all of this was the assumption that everyone should be able to get a mortgage, the belief that property values would continue their double digit rise, and the fact that there was no accountability-Because the lenders did not lend their own money.  For the last ten years, lenders figured out that instead of using their own cash assets to lend on mortgages, it was more profitable to borrow money from other institutions, mark it up, and sell it to consumers.  Once you signed the note, it was immediately sold to an investor, who then sold it to another investor, who sold it to a fancy Wall Street firm, who packaged it up into a huge pool of mortgages.  These pools were then sold as Mortgage Backed Securities (MBS's) and then sold to the public.  Who bought these MBS's?  Big institutions, such as pension funds, insurance Companies, foreign and municipal governments, etc.  Why did they buy them?  Well, for one thing, property values were rising at an unprecedented rate, and the rates of returns on these MBS's were staggering.  Also, those fancy Wall Street firms didn't accurately disclose the risk on these MBS's.  The conservative loan pools like Fannie Mae, were rated AAA, while riskier pools that contained "Alt-A" and Sub Prime, were rated lower.  The higher the risk, the higher the return.  Unfortunately, many of the so called AAA pools actually contained lower graded loans, so the risks were never properly disclosed.  The "Alt-A" and Sub-Prime loans were truly scary.  Mortgage originators tried to outdo one another with unsustainable but highly marketable loan programs, such as no income or credit qualifications, no appraisal reviews, etc.  These lenders were making so much spread lending funds that weren't theirs that risk aversion went straight out the window.  After the "Refinance Boom" of 2000-2005, fueled by historically low rates, trillions of dollars worth of MBS's were bought and sold across the world markets while the Fed looked the other way.  With the housing and lending boom single handedly shoring up the economy, then Fed Chairman Alan Greenspan was loath to derail the money train, so he continued his policy of artificially low interbank lending rates, further fueling the fire.

The Bubble Bursts

A perfect storm of rising defaults fueled by resetting of adjustable rate mortgages, falling property values that prevented borrowers from refinancing out of risky loans, and a contracting of mortgage credit markets combined to burst the mortgage/housing bubble in late 2006.  Virtually overnight, investors were no longer willing to buy MBS's from Wall Street, who then cut off the cash to lenders. Since lenders were relying on these funds to lend instead of their own cash, they in turn stopped funding loans.  The first to go were the Sub Prime and "Alt-A" lenders, who had no actual assets and relied entirely on investors to fund loans.  Without money to lend, these multi-billion dollar funding machines went out of business literally overnight.  The collapse of these "Pass Through" lenders such a New Century and Argent, started a media blitz that proclaimed that the sky was falling on the mortgage markets.  This caused investors to start re examining the MBS's that they had already bought, and they discovered, to their horror, that they were exposed to a lot more risk than they realized.  These larger lenders then disclosed this information, and the panic that this revelation set off caused these bigger banks to fail.  These failures in turn worked like a reverse domino effect, and roared up the money ladder like an avalanche to bury the big Wall Street brokerage houses that had bought and sold the MBS's.  When it was disclosed just how much risk these big investment banks were on the hook for, they too, either failed, were absorbed for pennies on the dollar by other banks, or were forced out of business by the Fed.  This is what happened to Lehman Brothers, Indymac, and Countrywide.  Ultimately, those left holding the bag-the pension funds, local, state, and foreign governments, and insurance companies are finding their balance sheets battered by these defaults, and more failures are expected.

What does this mean for the average homeowner?

The extremely tight credit market, which dictates who can get a mortgage, coupled with falling or "correcting" property values make it a perilous sellers market.  I say "correcting" market because throughout much of the US, property values were artificially high, fueled by rampant speculation.  Areas such as Chicago, which generally enjoys a stable, if modest appreciation rates of 5-8% annually, were seeing vales appreciate at double that.  Truly speculative markets such as south Florida, California, and Nevada were seeing appreciation rates approach 50%.  This, of course, was completely out of line with reality.  As this correcting market realization set in, homeowners began discovering that if they needed to sell, chances were good that they owed more than what their properties are worth - Enter the Short Sale.

What is a short sale?

Simply put, a short sale is when a homeowner is attempting to sell in a negative equity situation.  In other words - you owe more than your house is worth.  We all know that the real estate market values have come down over the last few years, and sellers with high mortgage balances can be left "upside down."  If you need to sell in this situation, you will be faced with asking the lender to accept a "short payoff," which means that the lender accepts a payoff that is less than the mortgage balance owed.  Depending on your hardship, and the severity of the loss, the lender may or may not elect to retain collection rights-This means that some lenders just let you go, and others will try to collect the amount of loss, called a "deficiency balance."  When you apply for a short sale with your lender, you will be asked to disclose your current income and assets.  The lender will review these, along with your mortgage balance and current property value to determine if you qualify for a short sale.  The lender may reserve the right to retain collection rights if you show significant income or assets.  This can be offset by offering the lender a promissory note for some or all of the deficiency.  A promissory note can also be used to avoid credit damage if the seller is not currently delinquent.  Final approval by the lenders' investor or insurance company may be required.

Steps to a Short Sale

The following steps are a condensed version of how to complete a typical short sale.

Step One is determining if you are eligible for a short sale.  There are some misconceptions about who qualifies, and the answer is simply, anyone that can demonstrate any kind of "hardship."  Hardships can include sickness, loss or reduction of income, divorce, upward adjusting payments, or simply a need to sell.  The common denominator is a lack of equity to pay selling costs and the full mortgage balance due to depressed property value.  The seller may or may not be currently delinquent on their mortgage, and the much mentioned "fact" that a seller must be delinquent to be granted a short sale is simply not true.

Step Two is compiling a complete and detailed short sale package.  Documents needed will be current pay stubs (or unemployment/alternative income) documentation, recent bank statements, a personal financial statements, and tax returns.  Your submission must be complete, because lender loss mitigation teams are overwhelmed with files, and they will simply throw your file away or put it at the bottom of their ever growing stack if all documentation is not submitted.  Loss Mitigators frequently have caseloads of 500 or more active files at any given time.  A purchase contract from a buyer is included in your submission if you have one, but contrary to popular belief, it is not necessary to start the short sale process.  Most critical is the process of determining the lenders actual net proceeds and many factors are considered in this calculation.  Remember, you never negotiate the purchase contract price, you negotiate the net to lender value. This is where the amateurs separate from the pros.  Mess this up and you will be short at close, and your buyer will be forced to pay extra or walk away.  This is also where real estate agents end up with little or no commissions if these calculations are not carefully done.

Step Three is valuation.  Once your file is received by the lender, they will order a broker price opinion (BPO) or an appraisal.  A BPO is where a local real estate agent will look at the subject property and comparable sales to come up with an opinion of market value.  The problem with this is that the lenders pay agents only $20-$50 for these reports, so how thorough of a job do you think these agents do?  If you answered "not at all," you would be correct.  Agents sometimes will not even physically inspect the property, instead relying on MLS or zillow.com (Please...) for their values.  Not surprisingly, lender BPO's usually have no basis in reality.  Worse yet are when lenders have appraisers value a property, because let's not forget that inaccurate and ridiculous appraisals helped lenders make these bad loans in the first place.  I use advanced techniques to control the lenders BPO process to ensure realistic values placed on the subject property by the lender.

Step Four is negotiation.  Once the lender has valued your property, they will usually counter offer your offer with an amount usually equal to their BPO value.  Many agents assume that this is the lenders bottom line, but I know that there is still a lot of room for negotiation if needed.  The key here is getting to talk with an actual negotiator at the lender, and without the proper contacts or experience, most agents and attorneys end up spinning their wheels trying to negotiate with some underling with no decision making ability.  Once the negotiator is satisfied, they may need to send it for investor/insurer approval if the lender sold the loan on the secondary market.  This adds extra time to the deal, and more negotiation may be necessary to receive a short payoff.  Once a short payoff is received, review it carefully because the lenders sometimes try to sneak in additional terms or fees that weren't agreed to.  Fight any payoff discrepancies until the outcome is satisfactory to you.

Step Five is the closing. Once a short payoff is received, it must be submitted to your attorney or Title Company and they will set up a closing.  The close should no different than any other closing, except for the lender will need to review and approve of final closing documents before the payoff is accepted.  If this is not done properly, the lender will reject the funds and the deal will collapse.  Once this step is complete you will receive a release of lien and your sale will be complete.

Conclusion

It is extremely important to have a seasoned short sale negotiator assisting you in this process.  The vast majority of real estate agents and attorneys do not have the experience to properly negotiate short sales, and this is too important of a process to leave to someone who is learning as they go.  This is not the time to give Cousin Larry his first real estate listing.  Thoroughly interview your real estate agent and attorney to determine if they are qualified to handle your short sale.  The first question to ask is if they are Illinois HB 4611 compliant.  If the answer is a blank stare, find someone else to work with.  HB 4611 is an Illinois law designed to protect homeowners from foreclosure rescue scams and it forbids anyone doing short sales or loan modifications from taking any money from you up front, as well as requiring certain legal contracts and disclosures to be signed.  In closing, a short sale is an extremely complex and demanding transaction, so chose your negotiator wisely.  Many other states have adopted similar legislation-check with your staes regulatory boards for more information.  This is serious stuff, and your License is not worth you "winging" a short sale.

To Contact me for more information, please visit my website at www.icgshortsales.com or e-mail me at joe@icgshortsales.com  Joseph C. Alfe is a licensed Realtor and professional short sale trainer, and is always happy to answer your questions.

Short Sales - Stopping the Sherriff's Sale/Court Auction

Attempting a short sale when a Sherriff's sale or auction is imminent is usually not a good idea, especially if the sale date is less than two weeks away.  This can be a stressful and difficult process, and should not be attempted unless you have a legitimate, qualified offer.  If you believe that you have such an offer, what follows is a step by step narration of an actual deal where I stopped a scheduled sale to allow time to get the deal approved and closed.  Remember, the goal here is to stop the sale, not necessarily to get your offer approved.  All we are doing here is buying time.

Example

Lila* is an agent who came to me with a deal recently.  She had attempted to have a nationally known 3^rd party negotiation company facilitate a short sale for her, and had sent them this file in May.  Do to inaction or incompetence by this company, a short sale was never completed, and a Sherriff's sale was scheduled for September 8.  Lila contacted me on August 28 and asked for my help.  She had a new offer and wanted to know if I could get it approved.  I told her that at this time, getting the file approved was not the issue-stopping the sale was.   Here is how I accomplished this task:

The Offer

Lila's new offer was for $550,000, with a 10% down payment and a $5,000 earnest money deposit.  The total mortgage owed was a little under $700,000.  American Home is the foreclosing (1^st lien) lender.  There had previously, back in June, been a cash offer for $560,000, which was denied (supposedly) since the negotiation company was tasked with submitting this offer, we do not know for sure how or if the offer was submitted properly.  Anyways, whether or not a past offer was accepted or denied is not relevant, because lenders will accept less as time goes on, so the lower offer did not concern me.  I insisted on talking to the buyer's agent, and I explained that the buyer was going to have to provide me with proof of funds for the down payment, as well as a bank commitment letter.  The commitment letter must be on bank letterhead, not issued by a mortgage broker. This is important, because it shows the shorting lender that the buyer is qualified and ready to close.  I also suggested that the offer, on paper, be lowered to $535,000, to provide negotiation room.  What I am doing here is setting up the bank for future negotiation, and I may even save the buyer some money in the process. Once that was complete, I turned my attention to the seller.  Here is what my Net to lender Worksheet looked like:

Notice that the net to the foreclosing lender (1^st lien), American Home, is $475,500.  This is in sharp contrast to the offer price of $535,000.  The net amount is the only number that matters to the lender.  Too many agents get caught up in negotiating the offer price with the lender, and forget about the net.  Consequently, not paying attention to the net is also the quickest way to not get paid on a deal.  Also notice that I pay no attention to the 2^nd lien holder.  They do not need to be contacted at this time because it was American Home, not GMAC that has foreclosed and scheduled the sale.  The 2^nd lien is just along for the ride at this point and we will deal with them later, while we are in a power position.

The Seller

I had Lila present the seller with my contract and Authorization and also had the seller sign the offer.  It is important to make sure that the seller is still cooperative, and is willing to go through with a sale.  This time can be extremely stressful to a seller, and it is important that they are willing to complete the process.  Once this is confirmed, I move to contacting the lender.

The Lender

Since it was obvious that the previous negotiator had mis managed the deal, I basically had to start over.  Now, I know what you are thinking, "How can you condense the entire short sale process into a time space of less than a week?"  Well, I take a cue from Nike and "just do it."  It is critically important to note that if you are going to be successful at short sale negotiations at this level, that you change your mindset to become one with the following concepts:  "Adapt, improvise, and overcome," "Where there is a will, there is a way," and "Never give up."  I'm serious.  You have to be a problem solver.  Expect roadblocks to the thrown in your path.  Expect doors to be slammed in your face.  Expect to hear the words "no, I'm sorry that cannot be done..."  Do not believe it, and do not accept it.  Find a way to make it happen!

Here is how I made it work:  I first called the common "loan workout department 800 number."  I spent two days just getting my authorization accepted.  I tried to use the last companies authorization, but was told that so much time had elapsed since their last contact, that the file was closed.  I calmly and gently explained to the customer service rep that I was "retained" by the seller to get this new offer accepted.  I use the word "retained" because it sounds important and urgent.  I further explained that the sale was scheduled for the following week, and I really needed to speak with a supervisor.  I was told that, of course since I had no authorization on file, that this was not possible.  So, the question to ask is " Please give me the fax number, or better yet, the e-mail where I can send in my authorization.  I was given this number and I told my helpful rep that I would send it in right away.  Don't forget to ask how long it will take to show up in the system - in this case, 24 hours.  I again asked for a supervisor, because, "since the sale was imminent, and we all want to avoid a foreclosure," so I could also fax my authorization directly to the supervisor.  I was denied.  What to do?  Why, politely thank the rep, hang up, and fax my auth to the number I was given.  Done?  Not a chance.  I repeated this scenario 3 times over the next hour until I got to a sympathetic rep, and was transferred to a supervisor.  When you get a gem like this, always ask for the full name, direct contact number, and e-mail of whomever you are being transferred to, "just in case you get disconnected."  I got 2 out of 3. After I was transferred to the supervisor, I retold my tale of woe.  Since, of course, the supervisor could not pull up my authorization, (because I had just faxed it in - three times...) I asked if I could get her direct fax, to make sure she got it.  Success!  I faxed in the authorization and was told to call back tomorrow.  After two days of this (never give up!) I finally reached another supervisor, told her my tale of woe, and bingo, she was able to pull up my authorization.  Now I shifted to the heart of the matter: stopping the sale.  I explained that this short sale was in the works for months, and that we had a new, legitimate, qualified offer.  These words are important, so say them again.  Legitimate, qualified offer.  This gets their attention.  Explain that you know that the sale if days away, and offer to send, direct to the supervisor, your offer, proof of funds, HUD-1, and net sheet.  I got her direct fax, and sent them in.  Day three.  I call in to reach the same supervisor, she's not in.  I call back, get another rep, tell the story, insist that I have already sent HUD, Net, Offer, etc, and that I alreadt have spoken to a supervisor.  I was sent to a negotiator who promptly told me that "there was nothing he could do, that it was too late..."  Bullshiot, I keep going, call again, get through to another rep, tell the story, get to another supervisor, tell the story, and told again, "I'm sorry, it's too late.."  I do not accept this.  I call again, and again, AND AGAIN.  Sense a pattern?  Finally, I get to another sympathetic ear, who transfers me to another supervisor, whom I once again tell my tale of woe too.  She looks up in the system that the HUD and Net, and offer were received, and asks about my offer.  I tell her, quite simply, that we can avoid this foreclosure, which nobody wants, by accepting this legitimate and qualified offer...she counters that the net of $475,00 is way too low, that their BPO is over $600,000.... Ok, stop right there.  I explain that "this property has been listed for over 300 days, and that all of the offers are in the 550K range, and that is a pretty strong indication that the market is speaking clearly, and that you and I both know that 600K is not realistic."  I also mention that hey, "we work on commission, so if we could sell for more, then, by golly we would, but this is what we have to work with..."  I finally decide that it's time to drop some bombs here so I tell her, "You know, I think I might be able to get my buyer up a bit, but the sale is tomorrow, so if I can get you to suspend the sale, and give me enough time to work with you and my buyers, I believe we can make a deal here."  She responds with, "if you are saying that your buyer is flexible, then perhaps we can work something out..."  As Emeril is wont to say, BAM!  I ask her again to please, suspend the sale so we can allow my legitimate, qualified buyers time to amend their offer, and oh, by the way, what is the number that you can make this work at...we can get this off all our books..."  She responds by announcing that she is suspending the sale to review the numbers and order a new appraisal.  TOUCHDOWN! 

It matters not that we did not officially get an approval at this point.  We can work on that later.  The important thing is that there is a later.  We have accomplished our goal and stopped the sale, and believe me, if a lender stops a sale to review the offer, the deal will get done sooner or later.  The real lesson here is do not give up!  Do not allow roadblocks and nay sayers to stand in your way.  Find a way to make it happen!

*This is an actual deal, so the names have been changed

Part 4

Submitting the Package

The Process

This is actually a very simple process, yet many people start themselves on the road to failure here by not doing this right.  Our main goal here is to get the package to the right place in the least amount of time.  We need to get past "gatekeepers" and the ubiquitous, supremely frustrating automated black hole that so many lenders employ.

Get to the right people

Start with the "800" number or customer service number that is easily found on lender correspondence or the mortgage statement.  Make sure that you have your file in front of you, and that you have all of the important information handy, as we previously discussed in Part 3.  This is important because no matter which lender you call, they will always ask for the loan number and last four digits of the Social Security number so they can locate the file in their system.  Once found, they will ask to whom they are speaking.  Now is the time to identify yourself in the following way:  "This is Joseph Alfe from ICG, I am a third party on this file, I need to talk to loss mitigation regarding a short sale, who do I talk to?"  The operator will most likely notice that you are not authorized on the account, so when they do, simply tell them, "I understand that I am not authorized, but I have a signed authorization and I need to know where to send it, please give me the fax number."  Also ask for the name of the department, their direct phone number, and whether or not the entire package needs to be faxed or just the authorization.  Some lenders have a separate fax for authorizations.  It is important to point out that attitude is everything.  You must understand that the people that you are talking to are the lowest rung on the customer service ladder.  They make just over minimum wage, and they deal with a lot of crap from inexperienced or rude short sale investors, upset homeowners, and long hours, so a little bit of kindness and sunny attitude can go a long ways to opening doors for you.  Once you send the package/authorization in, you now simply wait until it is updated into the system and assigned to a negotiator.  This takes anywhere from 24 hours to 10 days, depending on the lender, and no amount of belly aching can make it go any faster. 

Working with Loss Mitigation

When dealing with lenders, it is important to be aware that there are several layers that your file must pass through before it ends up on a decision maker's desk.  These layers usually consist of "Customer Service," "Data Entry," and finally "Loss Mitigation."  (These departments are also called "Home Retention," "Loan Workout," and other names.)  When we first make contact to a lender, it is usually through the generic "800" customer service line printed on the lenders statements and website.  This is a catch-all, gatekeeper operation.  While you may sit on hold, or be directed into an automated black hole, there is usually a prompt for a live representative-select this option.  Always have your file in front of you, and your seller's vital info at the ready as described in the previous chapter.  To review, this information consists of: Name, property address, loan number, and social security number. With this call, the goal is to:

•1.      Determine what department handles short sales

•2.      Where do we fax our package/authorization to?

Here's an important tip: No matter how long you waited on the phone, Be Positive, Be Nice!

It is important to remember that at this level, you will most likely be talking to a former mortgage underwriter or processor.  When a major lender closes their doors, experienced talent is not wasted, and usually underwriters, data entry clerks, processors, and such are hired back into the business by the surviving lenders. They now underwrite loan modification and short sale packages, and due to the overwhelming volume, many loss Mitigators have hundreds of files that they are working on at any given time.  Because underwriters are very "guideline" oriented, if it cannot be "checked off their list," they will consider the file incomplete and send it to the bottom of their pile, or worse, into the trash.  This is why it is so important to have a complete file.

The Layers and Submission Steps

We have now made contact with the Loss Mitigation dept., through the customer service dept.  Obviously, try to get a direct phone and fax number and save these for your records.  Here are the steps that must be taken to navigate through the layers of the loss mitigation maze:

Day One

•1.      Call customer service, get appropriate department names and phone/fax numbers

•2.      Send authorization and package by fax or e-mail

•3.      Follow up to verify if authorization/package is received

•4.      Inquire of Policies regarding commissions to realtors allowed, how their system works, time frames, etc.

24 Hours/10 Business Days

Once the submissions has been faxed, you will need to allow time for it to wind its way through data entry into the lenders system, be reviewed by a processor, and be assigned a negotiator.  Very little will happen in the mean time, and there is nothing we can do about it.  I usually tell realtors to allow up to 10 days for this to happen, so don't expect to get any updates.  All we can do is to follow up and inquire of the status.  Once we are told that the file has been assigned to a negotiator, get that person's name, direct phone and fax number, and e-mail.  This will be the numbers you will work with from now on.

Working with Negotiators

Once the file is assigned a negotiator, we can be assured that you are finally talking to the right person.  This negotiator has decision making capability (up to a point) and is the person that you will be working with to close this file, so treat them accordingly.  Once you get their name and contact number, give them a call to introduce yourself.  Be polite, positive, and assure them that you know what you are doing, and that you look forward to working with them to get this closed.  Ask if they have seen the file, and ask them what they think of it, and what we need to do to get this done.  They will usually tell you.  More than likely, the first thing they will want to do will be to order an appraisal or BPO.  If there is no offer yet, now is the time for you to describe the property, describe the comps, and tell them why you have priced the property the way you did.  If there is an offer, then again, justify your price, and ask what can be done to make this go smoothly.  Negotiators will work with you, and it can be a good experience if you are polite, professional, and positive.  I like to lighten the atmosphere and joke around, as in all sales, read the other person and act accordingly.  As long as your negotiator and you can communicate clearly, and you show them that you are a professional and will not waste their time, I think that you will find that most negotiators are willing to work with you.

The Lenders - Positive and Negative

Short sales are a case by case basis, and can vary widely in result, even with the same lender.  Since most lenders have many negotiators, one deal with a certain lender can go smooth, the next can be a nightmare.  That being said, lenders are starting to form policys that affect their short sale deals, and knowing them can save you a lot of time.  Here are some examples of policies that stand out, both positive and negative:

•1.      IndyMac - Requires a $300 up front fee (for appraisal) before a short sale can be considered.

•2.      Ocwen - Will no longer do short sales at all.  Ocwen is a servicer, and therefore does not have the authority to discount files for their investors.

•3.      Astoria - Will allow Agents only 4% commission

•4.      GMAC - Will allow Agents up to 5%, 6% if there is a third party negotiator.

•5.      HUD (FHA) - Mortgage must be 90 days delinquent to be considered for a short sale.

As a general rule, any short sale with a less than 20% deficiency will usually be accepted without too much work.  Those with larger losses may take longer, and involve lender counter offers.  Remember, just because you get a "No," doesn't mean that you give up - Keep at it!

Do you allow lenders to dictate what percentage of commissions that you recieve on a short sale, and if you do, why?  Is it not a slippery slope to accept shorter and shorter commissions? What legal right do the banks have to interfere with your contracts? (buyer/seller)

This is getting ridiculous!

Working with the sellers and other parties

The Short Sale Presentation

Ok, so now you have a client in need that is willing to cooperate, so now what?  You are going to have to explain to them, in simple terms, just what a short sale is, how it works, and how it may affect them.  This is extremely important.  We are here to help people out of difficult and stressful situations, so it helps to be sympathetic and mindful of the seller's problems and feelings.  Start by laying out the fact that the sad and sorry truth about this market is that you can realistically only list their property at real market value, which happens to be below what they owe.  Now is not the time to admonish them on buying at the top of the market, or watching too much "Flip this house" on TV.  Have some empathy to their situation.  Tell them that "it is what it is," and that you may have a solution.  The easiest way to explain to a seller what a short sale is simply:

"Mr. and Mrs. Seller, I have looked at the comparables, and unfortunately at this time, the only other 1 bed/1bath condos that are partially rehabbed are selling in the low 300's...And I know that you owe the bank $350,000, so this is what I can do.  We need to list the property at slightly below market value to attract a quick offer.  I believe that this listing number is $300,000.  What we are going to do is ask the bank for what is called a short sale.  This means we get their permission to sell the property at a loss, and release you of the liability. The lender may or may not penalize you in some way, but what is important now is to avoid a foreclosure.  I am an expert at this, and I have a great support team and we will do everything we can to get you out from under this property, OK?  I will need to have you fill out an application and give me some documents to get started. This process may take awhile, so it's important that we start now.  You will be under no obligation to sell at a short sale amount, but we will need to get started on the approval process right away.  Do I have your commitment of cooperation on this?  Do you have any questions?"

Of course they will have questions, and we will cover those later, but that's it in a nutshell.  Do not make it too complicated.  Tell them what you need from them to get started, and then start the application process and documentation gathering right away. 

Determining if a deal is Viable

These are the questions you need to ask to determine if this deal is worth taking.  It is no fun to find out down the road that there is no way in hell that this deal will be approved or close.  Taking this ten minute step can save you months of frustration, so, you need to ask:

•1.       What is the current mortgage balance off all mortgages?  Get statements, and find out any   second or third liens-homeowners won't always tell you about them. They may be embarrassed to admit that they have taken money on top of money...smoke them out!

•2.       Are there any other possible liens attached to title?  Mechanics liens, personal guarantees, loan shark markers...whatever.  Smoke them out.  These liens popping up in the 11^th hour will kill a deal deader than dead-quickly! Sometimes you just need to pull title to find them.

•3.       Will the seller be cooperative?  There will be paperwork, there will be documents to collect, if they aren't on board right away, you will spin your wheels.  If they aren't sure, ask them to talk with an attorney or a trusted friend or family member.  Make yourself available to them to answer questions.  We are here to help people, and we have nothing to hide.  Tell them that unless they commit to the process and time is of the essence, that you regret that you will not be able to help them.  You are either 100% working to sell their house and complete the short sale with their cooperation or you won't do anything.  Period.

Remember, the goal of the short sale is usually to prevent a foreclosure, so it is important to educate yourself as to what actually happens when a borrower goes delinquent on their mortgage. 

The Foreclosure Timeline

In order to prevent foreclosure, you must first learn what the foreclosure process entails.  This is a typical foreclosure timeline.  Some lenders, however, will move to foreclose in as little as 90 days, so remember, Time is NOT on your side!  Also remember, each state has different guidelines.

Day 1

Mortgage payment due, borrower misses it.

Day 16-30

Late charge of 5% assessed on payment.  Mortgage servicer starts attempting to make contact demanding payment. Reports to credit bureau on day 30.

Day 45-60

Lender send out "Demand" or "Breach" letter to borrower pointing out that mortgage terms have been violated.  30 and 60 day late reported on credit, severely impacting credit rating.  Borrower given 30 days to resolve delinquency.  Many lenders initiate foreclosure on day 90.

Day 60-90

Lender refers loan to an attorney to initiate foreclosure proceedings.

Depending on the state, the lender or servicer may record a formal notice of foreclosure, or "Notice of D Default."   Or simply, the NOD. The lender may post this notice at the courthouse or in the local newspaper, and will commence filing the appropriate court actions.  This is when the foreclosure becomes public knowledge and all the investors start circling the property like vultures.  The homeowners stress level usually goes ballistic about now.  This is when you will receive a lot of calls - when the homeowner realizes that they can't recover, that they need to sell and get out.

Day 90+

House sold at courthouse or Sheriffs sale or auction.  Wide time range due to differing state requirements.  After the sale, some lenders grant borrowers a "Redemption" period, where if you pay all back payments, fees, taxes, and foreclosure expenses, the lender may allow you to re buy the property.  Most lenders, however, force the borrower out immediately after the sale or foreclosure is complete.  In Illinois, where the laws are heavily in favor of homeowners, the lenders will usually not file a foreclosure in the courts for several months after the 90 mark.  One the homeowner is summoned to appear, they must go to court and answer to the judge.  Now, I don't give legal advice, but usually, a judge just wants to see that something is being done to remedy the foreclosure.  If you show the judge that you are trying to sell the property, and hand him the listing or purchase contract, he will usually stop the proceeding and give an adequate amount of time to complete the sale.  If the homeowner doesn't show up, a judgment of foreclosure is entered, and the official clock starts ticking.  After a judgment, Illinois usually takes 4 to 9 months before the property goes to sale.  The earlier you get involved in the process, the less credit damage the seller incurs, and the greater the chance for success.

Ok....I am new to ActiveRain, but I am not new to the industry.  Just in the last few hours of surfing, it is plain to me that the vast, VAST majority of folks here, both Investors and Agents, have ABSOLUTELY NO CLUE about the facts surrounding short sales.  Let me elucidate on some of what I have seen and try to set the record straight...

You can't do a short sale with no delinquency!

Says who? Why not?  When submitting a short sale, it is so much more than gathering paperwork and faxing it in. It is your job to show the bank why they should accept this loss.  You do that by supporting your argument.  If there is a real hardship (loss of job, illness, death) or a forced move (relocation, divorce, etc.) then...what is the bank going to say?  If you have to sell, and you owe more than what the house is worth-taa daa, you qualify for a short sale.  In fact I tell people to keep making those payments if they can because....

A short sale wrecks your credit for sure!

Eh? Why? Of course, if there are late pays, NOD, etc. already, well then, you're out of luck.  If you are current, and have good credit, then do what it takes to keep it that way.  When a bank agrees to a release, they do it two ways, with or without predudice.  Without predudice means they simply release you.  Gone.  By By. The bank will either report mortgage "paid" or "Settled less than full balance."  Paid means you are off the hook, settled for less than full balance will damage your credit, but not to the extent as delinquencies or forbearance, etc.  If the bank elects to persue collection activities for the deficiency, that could result in a judgment-definately bad for your sweet baby credit.  In this case, offer the bank a promissory note for all or some of the balance.  I have negotiated 0% over 10 years on a fraction of the balance and had a bank accept.  make sure you get the release in writing so you can show it to Equifax if the bank still reports you as short.

The bank will send you a 1099 if you do a short sale!

Well, this was true, until the The Mortgage Forgiveness Debt Relief Act of 2007 http://www.whitehouse.gov/news/releases/2007/12/20071220-6.html

In plain English, a lender cannot send you a 1099 on an owner occupied property.  Even when they did, it was easy to get around, so take that you tax hounds!

A short sale will take months and months!

yeah.  If you do not know what you are doing.  I guess this is why agents love me.  I usually can get a bank acceptance in 45 days or less, depending on the situation.  Oh, and me and my pal the Geico Gecko stayed at a Holiday in Express last night too.

Joe, you absolutely can't submit a short sale without a purchase offer!

Come again?  I almost always submit with out an offer.  Why?  because, why wait?  I want to make contact with the bank to get two questions answered to make sure I don't waste mine or my agents time: 1) How do my numbers look? and 2) what commissions do you allow.  Wait Joe, you said "how do my numbers look," but you have no offer!  Wait, what?  Lemme 'splain you this Lucy, I put a number on the HUD and NET, and all the paperwork.  What is this number that I speak of?  Why, current market value, of course! How do I get this?  Well, I do my own BPO.  I get SOLD comps in the area, LESS THAN 6 MONTHS OLD.  I take pictures and notate any deficiencies on the property, I do a market analysis of average market times, selling prices, etc. I keep it simple, with primary colors and glitter and stickers to appeal to the winners at the bank, and I submit it with my package. In short, I justify my agents list price.  Imagine that!  I don't care what the agent thinks the property "should" be worth, I don't care what it "was" worth (yeah right), and I certainly am not listening to what the seller "knows" it to be worth.  By taking this approach, 9 times out of 10 the lender starts the short sale and by the time we get an offer, I am 75% of the way done.  That means your buyers don't wait 6 months for an acceptance!  How effective is this?  An agent that had a listing over 100 days at 245K (mortgage owed amount) came to me for help.  It took a week to get the seller to sign my paperwork and get me documents, another week to get it submitted and land on someones desk. Since we did an honest market analysis, and I was convinced the bank would in fact work with us, I had the agent lower the price to 199K.  Guess what, we have 4 offers in one weeks time!

Oh, by the way...What on God's green earth are agents thinking when they send me offers with SELLERS CONCESSIONS? I mean, the seller has no money to pay the mortgage, and no equity! Do you think they are going to kick in the 6%?  Do you think the lender will?  If I send that in, they will be talking about that one around the water cooler for at least a week.  Who pays it then, you?  You can, out of your commissions...I'm just sayin...DON'T DO IT!

Update...A few have posted of having success with seller concessions of up to 3%, so, I will say that you can try for it, but don't expect it.  The majority of the lenders will not allow it, but by golly, what does it hurt to try? It all depends on the amount of loss though.  I wouldn't bother on a deal where you are trying to cram a 150K loss down a lenders throat.

People, have any other Short Sale Myths you want busted?  Send them on over and I will do my best to answer them.  I do not know everything, but I have a good network, so if you stump me, I will find the answer and report back to the troops.

Go sell something now :)

In this series, I we will discuss some short sale basics - what is a short sale, what is the foreclosure process, and how to identify a possible short sale listing, and the "wrong" way to approach this scenario.

Part One - So you have a short sale, now what?

What is a Short Sale?

Simply put, a short sale is when a lender decides to accept a payoff that is less than what is owed to them on the mortgage.  A lender might choose this option if they believe that the property may go into foreclosure due to seller hardship.  A lender cannot make someone pay the mortgage, and a foreclosure will end up costing a lender far more money in the long run, so it's up to you to convince the bank to accept this option. There is an old saying - The first loss is the cheapest, and it is certainly true in this case.

Other options to avoid foreclosure are:

•1.       Deed in Lieu - This option involves the seller calling the bank and saying "I'm done, here are the keys..."  The bank may or may not even accept this option, and they will require paperwork to be filled out, and procedures to be followed...

•2.       Forbearance - This one's my favorite.  This little gem means that if you are behind $5,000 in interest, the lender will give the borrower a payment plan to pay back the delinquency.  On top of their regular mortgage payment.  So, if our seller is struggling to make the payment, and the bank tells them to add $500 extra to it to satisfy the forbearance-what makes them think they can pay that?  I think it's a scam by the lenders to suck as much money from the homeowner as they can before they foreclose.  I have had clients who have told me that they have cleaned out their 401K's to pay a forbearance, only to be threatened with foreclosure again down the road.  Oh, and they will have to fill out paperwork, there are procedures...

•3.       Bankruptcy - I am not attorney, and I will not give out legal advice, and neither should you, but bankruptcy may not protect their home.  In fact, it may guarantee that they will lose it.  Again, the lender will want paperwork...see a pattern?  The paperwork is the same, whether it is for a short sale, a deed, or forbearance...

 Identifying the Short Sale

We all know that the market is tough right now.  Maybe your listings aren't down, but the listing prices are still above what the market will bear.  Now in walks a seller, and they tell you that they need to sell.  They may be in pre-foreclosure.  They might have some other distress, at this point, it doesn't matter.  You do your market analysis, and figure that based on comps, that you can realistically list the property for $300,000.  By realistically, I mean REAL MARKET VALUE.  Not, What the seller wants to sell for, not what you think it "should" be worth, I'm talking about what will it take to list and sell this property, in this market, right now, this minute, and attract a real offer.  The seller then looks at you and says "But I owe the bank $350,000!"  Congratulations!  You now have a short sale!

The "Wrong Way"

Now, before I get into what you should do next, let me illustrate what usually happens in this scenario:

This is what your competition usually does...The agent lists the property at loan value, ie; way above real market value.  The agent shows the property, gets an offer, THEN goes to the lender and asks "Will you accept this offer?  Please?"

This is the backwards way to do it.  I mean, why would you waste all the time and effort to list and market the property, without having a clue of what the lender will accept.  Worse off, after spending months of agonizing frustration going in circles with the lender, let's say that by some stroke of luck you succeed in getting a bank approval.  Assuming your buyer hasn't abandoned the offer by now, you get to the closing table and find out that after all this work, the lender wants to pay you 1% commission, or maybe even nothing.  Sound familiar?  I'm sure you've heard agent horror stories, and they are all true -If you do not understand the short sale concept.  There is a better way, and it's called the ICG method.

Next in the series: Determining if a deal is viable, and the general foreclosure timeline.