Short Sales

The Lender Does Not Pay For Anything in a Short Sale

This is one of those misunderstood technicalities that I face every time I work with a potential short sale candidate.  The common mis-understanding has been that when a home is sold short of what is owed, the lender or lien-holder pays the associated costs of closing the transaction such as broker commissions, seller’s closing costs, HOA dues and transfer fees, 2nd lien-holders, etc.

This is actually not true.  The lender is not a party to the purchase contract.  They are an authority whose decision the contract is contingent upon.  A lender’s role is to approve of a lesser payoff than the amount owed.  When the lender takes less, they make room for the seller to pay the fees associated with closing the transaction.  Those fees come from the buyer’s purchasing power, and the 1st lien holder is basically saying, “we’ll allow the funds coming from the buyer to be credited to the seller in order that the seller may cover the associated costs of closing the sale.”

To have a successful short sale with a home owner who has no money to bring to the table, the lender must reduce their payoff enough to allow the difference between the purchase price and the net payoff to the lender to add up to the seller’s closing costs.

It may appear that the lender is paying the costs because they are accepting less than what is owed, but this isn’t actually the case.

On paper, on the HUD-1 closing statement, there is no mention of the lender paying for anything.  The HUD is a document outlining what the buyer pays for and what the seller pays for.

For instance, if the sale price of a home has been negotiated between the buyer and the seller to be $200,000.00, but there is a balance due on the 1st lien-holder’s note of $250,000.00, and there are commissions, closing costs, HOA dues, and taxes to be paid, the lender is going to have to accept less than $200,000.00 by exactly the amount of the closing costs.

Add together the closing costs and the net payoff to the 1st, and you should reach your sales price.  The lenders do not pay for anything in a short sale.

The Basic Short Sale Process

Handling a Short Sale for a client is a very complicated and detailed process, but at its core, there are only a few basic steps involved.  The real success of the Short Sale is attributed to the experience level of the agent representing the seller.  If they don’t know what they’re doing, it’s likely you won’t have a very smooth transaction.  In fact, if they are attempting to short sale your home without experience, then they are doing you a disservice, as its our fiduciary as Realtors to represent your best interests, which cannot happen without proper experience.

Short Sales Process at its Basics

Listing:  The first step is to list the property for sale. Traditional marketing does not typically apply to short sale properties because we’re pricing it to sell as quickly as possible.  The seller doesn’t make any  money, and they don’t approve the sale, so essentially, the seller really isn’t the seller.  The bank is ultimately in charge.

Offer:  A qualified buyer presents an offer. Just like any other sale of any other property, ensuring the buyer is adequately qualified to actually purchase the home is just as important on a short sale as a normal sale.

Execution:  The seller signs the contract. Provided the offer is within reasonable fair market value of the comparable sales in the neighborhood, when the offer is presented, the seller will sign it and it will be considered executed or “accepted,” but not “approved.”

Submit to Lender(s): Along with all of the required documentation, the offer and all associated listing paperwork, addenda, financial statement, etc., is submitted by your Realtor to the lender(s) on the property and the approval process begins.

Receive Letter of Agreement: When the lender approves of the sale, meaning they’re taking what they can get from the deal, they provide a letter of agreement which the seller reviews and approves or disapproves of.  If the seller agrees to their terms, the normal closing time line begins.

Due Diligence:  It’s now time for the buyer to conduct their inspections and obtain their funding.  If everything checks out okay, and the property appraises for at least the contract purchase price, then the buyer moves on to the next step.

Signing:  Woo hoo! This is where the buyer signs their final paperwork.  Title will then record the property transfer with the county recorder and the new buyer will take ownership of the property.

That’s it. Those are the basic steps of a short sale.  From start to finish, this entire process is completely dependent upon how cooperative each party to the transaction is, and no two short sales are the same.  This entire process can take a few weeks, to more than 8 months.  So, as a buyer or a seller, be prepared to wait.

The Truth About Loan Modification

When applying for a loan modification, be prepared to disclose your entire financial life to whomever is negotiating your modification.  If you try to do it, you will fail, unless you are persistent, or insane.  Some attorneys require $3000 up front retainers to even begin negotiating with the bank.  There is no guarantee that it will work.

How Can I Qualify?

More than 60% of you do not qualify because a simple modification of your loan will not bring your financial position in line with the bank’s requirements.  So what are those requirements?  The lenders are simply looking at your finances to determine if your mortgage payment exceeds roughly 31% of your net take-home pay.  This is an estimate, and every case is different, but it’s typical.

That means that if you have bad spending habits, or you’re paying bills that should be considered secondary to your mortgage before you pay your mortgage, your lender will call you out on it during the loan modification process.  You may need to prioritize your spending.

So, regardless of your monthly mortgage payment, if it’s less than 31% of your net take-home pay, you will probably be denied.  So don’t waste your time.

Loan modification typically results in a lowered interest rate, 10 years of additional payments on your home, payment deferral, or some other manipulation that will usually not help you anyway.

The real problem is that you owe money on a house that will not recover its value in enough time for you to break even on the future appreciation of your house, and therefore, you’re stuck in that house.  If it comes time to move, you’re still stuck in a situation where you may have to do a Short Sale to sell the home.

The real truth about loan modification is that it’s possible, but it pacifies the homeowner long enough for the bank to continue to make money off of your financial hardship.  Think about it.  The bank wants you to be enslaved to their madness for as long as possible.  At the same time, the banks are out of money and are going bankrupt, so your best option at this point in time may be to do a Short Sale.

Beating the BPO on a Short Sale

The BPO is the Broker Price Opinion.  It’s an opinion of the value of a home by a licensed real estate agent, not by a certified appraiser.  Before any home goes on the market, your real estate agent will conduct a Market Analysis of your home, neighborhood and neighboring sub-divisions.  He or she will recommend a price range.  You, the “seller” will determine the final asking price.  The home will then be listed for sale and the marketing will begin.

Short Sales are similar, but since the seller will not be receiving any of the proceeds of the sale, and the lender will be paying the commission on the sale, there is no reason for the seller to be concerned with the initial price of the home, and subsequent price reductions, provided his or her agent can show that the initial price is not off base and is in fact in line with fair market value.

Investors want as much as they can get out of the home, but for the sake of time, to avoid foreclosure, they will typically take less than fair market value.  The difference in cost to the investor (the one who purchased the loan) between a foreclosure and a short sale is in the tens of thousands of dollar.  It is typically better for the investor to take a discount off of fair market value than it is to let the home go into foreclosure.

When an offer is received on a short sale property, it is submitted to the lender along with all of the seller’s required documentation, which is similar, but not exactly the same for each lender.  As soon as the lender catches wind of a pending sale, they will order an independent internal BPO from an authorized broker.

The Problem

BPO agents don’t make very much money on each property they assess.  They also aren’t always familiar with the market where the subject property sits.  This can typically lead to a very inaccurate and lazy BPO reports.  When this happens, the investor will usually formulate a bottom line net proceeds dollar amount that they will be required to be paid at closing that’s too high.

If everyone does their job correctly, the listing agent, the buyer’s agent, and the BPO agent should all find a reasonably close comparison in price.  When this happens, the lender will usually approve the sale.

When we learn of a bad BPO, in other words, if the bank expects more than is reasonable for the market, we typically have to head out on our own to do an exhaustive analysis of the market area to illustrate the error.  By doing so, the lender will typically order a 2nd BPO.

It is assumed, however, that the listing agent did his job well and came up with the right price from the get go.  Not always possible in this changing market.

Beating a BPO takes time and tedious number crunching, but it can be done.  I recently showed the loan servicing company on one of my listings that they were severely off base on their price opinion and as a result, because I know the market in that area, and they don’t because they are in a different state, they approved the sale.

Don’t take the lender’s BPO as the final authority.  Your realtor should be the expert in the market area.  That’s why you hired them.   Although, the term expert is used quite loosely, he or she really should be in touch with what’s going on.

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