Pre-Approved Short Sales, What It Means

February 8, 2012 By Jon Griffith Leave a Comment

Short sale approval letters are settlement agreements written by the home owner’s lender setting forth terms and conditions that the seller must meet through the sale of their home.

Most have an expiration date requiring that the settlement agreed upon be paid by that date. Although it’s of little consequence, in my opinion (as it’s a debt settlement between the seller and seller’s lender), they also stipulate the name of the buyer on the agreement.

This would naturally mean that any settlement agreement would be invalid if the buyer stipulated were to cancel the transaction. However, since the most important factor to the investor who owns the note is the net payoff, an approval tips their hand to the dollar amount they’re willing to accept, regardless of the buyer.

Sometimes a lender will be pro-active about the prospect of a short sale, and will “pre-approve” a sale amount and terms that will be acceptable to a future buyer.

So, a pre-approved short sale is one of the following:

It’s a property that has previously had an offer that met the investor’s payoff requirements but has lost its buyer-OR-
It’s a property that has been given a pre-approved price without an offer.

A house is only worth what someone will pay for it. Period. If the investor has pre-approved a short sale that has not yet had an offer, it’s likely they’re unrealistic about the asking price, so the 2nd example above is less likely to be a success, but still possible.

On the other hand, if the property has already been approved based upon a contract that was previously submitted from a qualified buyer, then the terms of that deal can be used to attract a new buyer.

Buyers who find short sales opportunities in the middle of this scenario are often pleased to find that it takes a fraction of the time to acquire a new settlement agreement from the lender.

Filed Under: Short Sales Tagged With: agreement, buyer, property, short sale

Who Pays the Commission on a Short Sale

February 1, 2012 By Jon Griffith Leave a Comment

A common question. I’ll do my best to answer it for you.

When a real estate transaction closes, there is a document created called a HUD-1 Settlement Statement. The HUD-1 is a spreadsheet of sorts that outlines the flow of money for the two parties involved in the transaction.

Who are the two parties? The buyer and the seller. On the HUD-1 there’s a buyer column and a seller column. The buyer comes to the table with money for the purchase. Costs are calculated for each party, and the bottom of the HUD-1 will show two important numbers: 1) Cash to/from buyer, and 2) Cash to/from seller.

You’ll notice we haven’t mentioned any aspect of the short sale yet. The reason for that is because the lender involved in the short sale, in other words, the investor who holds the note on your mortgage, is not a party to the real estate transaction.

They are a party to the settlement arrangement with their client, the SELLER. What? Yep, that’s right. The agreement between the seller and the seller’s lender is an independent settlement arrangement designed to make the agreement between the buyer and the seller work.

Huh?

I know. It’s a bit confusing. When there’s a lender who is owed money on a home that a seller is selling, at closing, some of the money that the buyer is bringing to the table goes to pay off the loan against the house. If the value of the home is more than the amount owed (the home has equity), then the seller will most likely receive what’s left over after paying the lender and paying closing costs. However, if the value of the home is less than the amount the seller owes, then the seller won’t receive anything. Moreover, the seller’s lender probably won’t receive full payment on the balance of the remaining loan. The only two solutions to remedy this is for the seller to contribute cash to bridge the deficiency gap at closing, or ask the lender to take less than is owed.

In other words, a Short Sale.

If the lender isn’t getting fully paid, then who pays the closing costs? Bingo. That’s the original question, isn’t it? Who pays the commission on a short sale? On the HUD-1, the line that shows how much the lender is getting at closing is calculated after all associated costs are subtracted from the sales price.

If a home is closing at $100,000 and $150,000 is owed, there are closing costs. We negotiate with the bank to take $100,000 minus closing costs.

The basic answer to the question is: The Seller pays the commission, but because there’s no money left over after paying off the lender, the lender backs off enough to allow the buyer’s new funding to pass through to the seller, thereby satisfying all fees.

Who’s eating the cost? The investor is ultimately eating the closing costs.

Filed Under: Short Sales Tagged With: short sale, short sale approval, value

Short Sale Cash Contributions at Closing

January 13, 2012 By Jon Griffith Leave a Comment

On many short sales, there’s a point at which the bank will tell us that the seller is required to come to the table with cash or a promise to sign a note for a certain amount of money.

In a specific example, a home owner has been told that they are on the verge of an approval, but until they either pay $3,500.00 cash or promise to repay $7,000 in cash over 120 months (that’s 10 years,) the approval will not be issued.

What’s Presented

The bank will typically represent that the mortgage insurance company who holds a policy on the note is asking Wells Fargo to ensure they get a cash contribution before they’ll pay the claim on the loss from the short sale. They’ll say that it’s their request.

What’s Really Happening

Sometimes the MI company does request cash, but remember, the bank is in the business of getting your money in their pocket, and they’re not beyond using the ruse of a mortgage insurance company request to ensure you pay them so they recover more of their losses. So more than likely, the MI company has has NOTHING to do with the request.

The bank is telling the seller that the mortgage company needs a cash contribution, but the mortgage insurance company never told the bank that they needed it. This is a tactic that negotiators use which I contest is converted to incentives paid to negotiators for bringing in more money for the bank. The bank is still going to file their claim with the mortgage insurer to recover a vast majority of the losses, but the insurer will be none the wiser that they’ve just squeezed the seller for even more.

How I Handle This

I call their bluff.

As a “private investigator” for short sale approvals (that’s basically what we are,) I hunt down the truth. A simple friendly phone call to the mortgage insurance company will easily reveal whether or not the bank or servicer is telling the truth. When we learn that there was never a request, it means we have more information than they’d like, and that’s how one wins negotiations. The person with the most information wins, every time. (It’s also assumed that that person has walk-away power.)

What if they actually did make the request? That’s okay too, because that can also be negotiated away directly with the mortgage insurance company provided the details can be “worked out” as they call it. If the seller has no money, and no room in their budget for a promissory note payment (in our example $7,000 ÷ 120 months = $58.33 per month) then there can be no contribution.

Now, in light of the situation, $58.33 per month is a small price to pay for the mess that we’re cleaning up, but it’s absolutely unnecessary, and likely to be defaulted on. The notes are usually proposed at 0% interest, and $58.33 per month to a behemoth of a bank is less than peanuts. It’s not even peanut dust.

So, if it comes down to blows, and the MI company absolutely won’t budge, then a payment might be wise just to make the problem go away. You can see that we do everything we can to make sure that this is never the case.

Filed Under: Short Sales Tagged With: Closing, money, mortgage, note

Short Sale Basics Part Five: The Gap and Closing the Gap

December 28, 2011 By Jon Griffith Leave a Comment

(This is the final article of a 5 part series entitled Short Sale Basics)

The Gap

If the net payoff on a given HUD-1 for the sale of a home does not meet the standards set by the investor as a percentage of the BPO (Broker Price Opinion) then there will be a gap. For example, if the $100,000 offer yields a payment to the lender of $90,000 after all costs are calculated -AND- the lender is willing to accept no less than 88% of the BPO -AND- the BPO is reported to the lender at a value of $110,000 then $90K suddenly becomes 81.8% of the BPO (90 divided by 110.) The bank will not approve the deal unless it’s 88%. This is a general estimate and close to what many banks accept. If 88% is the magic number, then it means we need to bring the bank $96,800. We’re $6,800 short.

Closing the Gap

(Often confused with the concept of counter offers in a short sale, and not always a step in every short sale process.)

There are many ways to close this gap. One way is to continue to negotiate with the bank to prove the buyer’s offer is more realistic than the BPO report claims to be. This is done through a BPO dispute. It doesn’t work every time, and sometimes there’s not enough time before the house goes to auction to achieve this goal. In some cases the market has changed enough from the time the offer was submitted to the time the bank evaluated the BPO that the buyer’s offer no longer stands up.

Another way to close this gap is to have the buyer raise their price. This is a sensitive direction to go considering the buyer may simply walk away if they hear any talk of raising the price.

Yet another way to do this is to adjust the HUD-1, legally, to be as accurate as possible. You see, it’s common to submit a HUD-1 with padded costs to the seller in order to have wiggle room to negotiate once you reach the stage of closing the gap.

Commission reduction is an option, but it’s the last option because we work very hard to obtain approvals for our clients and since the seller is typically not coming out of pocket at all because they’re in the middle of a financial hardship, we aim for a full commission as allowed by the bank once they approve a lower net payoff.

One last option is to have the seller come to the table to close the gap. This is tough to do, but often can save a house from foreclosure. This is more common when we see people strategically defaulting on their homes as they intentionally quit paying their mortgage and begin stockpiling the payments. If this is you, my advice would be to set that money aside and consider it not available to you and to be used solely in aiding the process of short selling. After all, the two major concerns for a seller are whether or not the lender will be able to pursue them for the difference between what the sale pays the bank and what they owe, and whether or not their tax situation will yield a tax liability for the deficiency. The two simple questions are, 1) will I have to pay taxes, and can they sue me? These can only be answered by the corresponding experts in those two fields…a real estate C.P.A. and a real estate attorney.

In Closing, the bank’s perceived market value of your property compared to the net payoff as a result of the sale will determine whether or not money needs to come to the table to get the deal done, and often times the bank is wrong, which is still mind-boggling, as the process of foreclosure will cost them far more than closing the gap.

Filed Under: Real Estate Basics, Short Sales Tagged With: BPO, buyer, Closing, Short Sale Basics

Short Sale Basics Part Four: The BPO

December 24, 2011 By Jon Griffith Leave a Comment

(This is part 4 of 5 of the short series entitled Short Sale Basics)

The BPO

The BPO is that 3rd party opinion of value. It can make or break the deal because banks look at this number as the letter of the law when it comes to your home’s value during a short sale negotiation. When that opinion of value is reported back to the bank, they compare that value with the net payoff as shown on the HUD-1. They don’t compare it to the sale price. Remember, the net payoff is the number that matters. If the net payoff is within a certain percentage of the BPO value, the bank will submit the offer to the investor for approval. Most cases, if a file gets to this point, it will be approved. The reason this is true is because most cases are Fannie Mae or Freddie Mac owned loans and they have already set standards that your servicer follows.

Filed Under: Real Estate Basics, Short Sales Tagged With: approval, BPO, payoff, percentage

Short Sale Basics Part Three: The Net Payoff

December 20, 2011 By Jon Griffith Leave a Comment

(This is part 3 of 5 of the short series entitled Short Sale Basics)

The Net Payoff

Let’s assume that the house you’re about to sell receives an offer of $100,000 and you owe $200,000. I can’t stress this enough. For the purposes of obtaining an approval from the lender, the deficiency DOES NOT MATTER. The bank, nor anyone else for that matter, in terms of selling the home does not care how much more is owed.

What they DO care about is what the home is worth, based largely on a 3rd party opinion of value, compared to the Net Payoff. The net is the amount of money the bank will recover once all closing costs are subtracted from the sales price agreed upon by the buyer and the seller.

In our example, the sales price bring $100,000 to the table. Some of that goes to the brokers for their services, the title and escrow company (in Arizona they are combined,) perhaps an attorney or negotiator, the city or county for taxes, a 2nd mortgage, and perhaps other entities that have an interest in the property. A house cannot transfer title if it is cloudy.

All records of where money goes in a real estate transaction are required by law to be reported on a HUD-1 Estimate. This provides full disclosure to everyone involved in the transaction and is required by law.

Normally at the bottom of a HUD-1, there is a line that reads, “Cash to/from Seller” that has a positive number in it. In other words, money left over after selling the house. In a short sale this line needs to read ZERO, as all funds have been allocated already, with a majority of them going to the investor who holds the note on your house.

Filed Under: Real Estate Basics, Short Sales Tagged With: approval, money, short sale, Short Sale Basics

Short Sale Basics Part Two: The Offer

December 16, 2011 By Jon Griffith Leave a Comment

(This is part 2 of 5 of the short series entitled Short Sale Basics)

The Offer

When a house goes on the market and someone makes an offer, if that offer is less than the seller owes on their mortgage, then you have a problem. You have a short sale. You are going to need to ask your bank if they will accept an amount “short” of what you owe them. There is a very methodical way to go about this process as a result of miles and miles of red tape surrounding the processing of the transaction that is different for each and every lender, and each and every investor holding a note or notes on your house. That is why you hire someone who is experienced. Not every real estate agent knows how to do short sales the right way.

The bank does not determine what an acceptable sales price is. Period. The buyer and the seller determine the sales price. The important resulting number is the net payoff to your lender after all costs have been calculated.

Filed Under: Real Estate Basics, Short Sales Tagged With: house, note, payoff, Short Sale Basics

Short Sale Basics Part One: Market Value

December 13, 2011 By Jon Griffith Leave a Comment

(This is part 1 of 5 of the short series entitled Short Sale Basics)

At its core, a short sale is a standard real estate transaction. A house is listed for sale at a price comparable to the surrounding market activity, including sold properties, competing properties for sale, and properties under contract. A buyer makes an offer based on their personal assessment of the surrounding market. Until that offer is accepted by the seller and subsequently closed, a market value is subjective.

Market Value

The market moves. It’s alive. It changes from moment to moment. Our culture, driven by consumerism, is so tied to the idea that a product’s price is set in stone that the value of an item really does remain in the hands of the company or person selling it. That’s why I so often hear people who call me off of my signs ask me “what a house is selling for.”

This is simply not true.

Price is determined by so many combinations of factors that no single entity is responsible for the asking price and you as the consumer don’t have to pay what someone asks just because they put a sticker on it. Every product we buy and sell, including a home, is negotiable, and the value of a traded good is only worth what it was last paid for at the moment the transaction took place. Only moments later, all of the dynamics that led to a certain price being paid for a good or service change and the process of valuation begins all over again. That is why products that are traded more than once never have the same “most recent” price.

Market value is subjective.

Filed Under: Real Estate Basics, Short Sales Tagged With: home, market, Market Value, Short Sale Basics