short sale approval

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

The Short Sale Counter Offer

October 14, 2011 By Jon Griffith Leave a Comment

You may want to read this article before continuing so you have some context for the information here.

Since the buyer and seller are in the drivers seat concerning the terms of a real estate purchase contract, and the bank is simply a 3rd party, the information that comes from the bank to the seller is privileged information that the buyer is not entitled to know.

The information from the bank that the short sale addendum to the purchase contract implies that the buyer is entitled to know is a simple “yes” or “no” regarding short sale agreement. If the seller and seller’s lender come to an agreement, the seller notifies the buyer. If the seller and seller’s lender do not come to an agreement, the seller can do one of two things: a) notify the buyer in writing that they will not come to an agreement, effectively canceling the contract, or b) continue to negotiate with their lender.

Aside from proving that the seller diligently pursued the approval to the best of their ability, the seller does not have to disclose the details of the negotiations. The seller will disclose the final terms of the contract through the HUD-1. They may also provide the buyer with the actual agreement letter from the lender, but they don’t have to. All they need to do is notify in writing that an agreement was made.

One of the pieces of information that the seller and seller’s lender often deal with is what everyone has been calling a “Counter Offer.” In Arizona, the counter offer is a document that is used prior to ratification of the purchase contract and is between the seller and the buyer. One the contract is fully executed, only an agreement between the seller and the buyer can alter the contract price, and this is accomplished through a standard Addendum.

The lender may look at the seller’s proposal based on the contract and ask the seller to bring more to the table. This is what many agents are calling a counter offer, but they’re failing to explain that it is a counter offer to the seller, not a counter offer to the buyer. Therefore, if the listing agent in a short sale conveys to the buyer’s agent that the bank has “countered” the offer, then they are inherently confusing the purity of the short sale process and they’re putting their seller’s short sale success at risk. When buyers of short sales have come to an agreement on price, it’s the listing agent’s responsibility along with the seller to work hard to get the net payoff as a result of that contract to fulfill the lender’s loss tolerance.

The banks have most people believing that the sales price of the home is the important number, but we know better. The net payoff to the lender is the important number, and if we can meet that while remaining completely compliant with the law, then the purchase price is irrelevant.

When your lender wants more than the offer, convey that to the buyer as a last resort, but do your best to negotiate with the seller’s lender before scaring the buyer off.

Filed Under: Short Sales Tagged With: counter offer, short sale approval

What’s That Status Mean?

April 20, 2011 By Jon Griffith Leave a Comment

Not every property that is “on the market” for sale in Arizona is listed in the Arizona MLS. There may be reasons for holding onto what we call “pocket listings” but for the most part, when we list your home for sale, it’s done so where the widest variety of professionals have access to the information, namely, the Arizona Regional Multiple Listing Service (ARMLS).

When a property is initially listed, it shows up on the MLS as “Active.” If the data is syndicated, then it will also show up on most popular web searches such as Zillow, ListHub, and Realtor.com to name a few.

There are 4 categories of Active that we use in the Arizona MLS to denote specific situations. Unfortunately, most public web searches do not distinguish between those types of active properties, and thus, your searches may reveal properties for which there are special conditions that ultimately mean that it’s time to move on to the next property.

Recently, I have been receiving a few inquiries every week regarding properties that appear active on a public search, but are actually already under contract. For example, listings that require short sale approval remain active until there is a contract, at which point the listing will typically become Active with a contingency. On the Arizona MLS, that property reflects a status of AWC-I (Active with contingency, seller’s written instructions.)

In other words, this property is under contract already. Best bet? Move on to the next one and keep your eye out for a status change in the future. In some cases, the seller of that property may take a backup contract, and in other cases, the contract may completely fall out and be returned to Active status.

Making Sure You Have the Right Info

One of the best ways to ensure you have the right information about properties that you’re searching for is to utilize a property search that ties directly into the Arizona MLS, providing you with up to the second, accurate information rather than 24-hour delayed information.

Give it a try today. It’s free.

Filed Under: Buying A Home Tagged With: contract, information, property, short sale approval

The Basic Short Sale Process

October 1, 2009 By Jon Griffith 5 Comments

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.

Filed Under: Short Sales Tagged With: agreement, Closing, due diligence, letter of agreement, RECORD, short sale, short sale approval

Beating the BPO on a Short Sale

August 26, 2009 By Jon Griffith 1 Comment

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.

Filed Under: Short Sales Tagged With: appraiser, BPO, broker price opinion, CMA, Lender, short sale, short sale approval

What Exactly is a Short Sale?

July 22, 2009 By Jon Griffith 4 Comments

I was shocked to search my own website for the term “What is a short sale” only to find no results. How could that be? I’ve written a bunch of stuff on short sales. Well, I’m solving that little problem right now with yet another basic post on the definition of a short sale.

What Exactly is a Short Sale?

A short sale is something that your REALTOR helps you accomplish to avoid foreclosure. A short sale is when you sell your home for less than you owe. That’s it. That’s as simple as it gets.

What Qualifies Me For a Short Sale?

There is one qualification. That’s all…just one qualification. The offer on your home must be less than the amount you owe on it.

What About My Income?

It doesn’t matter what your income is. The short sale is part of a simple transaction which moves ownership from one party to the next. It’s the sale of a home that’s worth less than you owe. That’s all. People in many different situations go through this process.

People who can’t afford their mortgage payments do Short Sales.
People who are tired of paying twice as much per month as their neighbors do Short Sales.
People who are being relocated do Short Sales.
People who have a death in the family, divorce, or for some other reason must sell their house do Short Sales.

The ONLY Qualifier is that you owe more than you can get for the home. That’s all.

Know that there are no guarantees that your lender will forgive the deficiency on your mortgage if you attempt to sell your home for less than you owe, as there are also no guarantees that the lender won’t come after you for the difference and win a judgment against you. Consult your real estate attorney for more information about how loan deficiencies can affect your finances and your tax implications.

Filed Under: Short Sales Tagged With: foreclosure, judgment, short sale, short sale approval

We Don’t Own the Data

November 25, 2008 By Jon Griffith Leave a Comment

Arizona Regional Multiple Listing Service made a recent change to their policies and their data. There were, on the records, about 4750 active listings that had been entered with a checked field. That field was labeled Lender/Corp Approval which was thought by many to be the best option when entering a short sale into the system. Seems logical to me.

Short Sale

If a property is being listed at an asking price less than what the owner owes on the mortgage, the bank needs to approve any future offers prior to closing escrow.

Now, there is a field that is designed specifically for Short Sale Approvals, and the field that was previously Lender/Corp Approval has been changed to Relo/Corp Approval for corporate relocations. This is a good thing.

I’m not a big fan of calling a listing a short sale unless the bank has pre-approved a sale price that is short of what is owed on the note. After all, a sale is a sale, and a listing is a listing, and if it’s being sold for less and the bank hasn’t approved, it should be property marked and stated that short sale approval is required.

Potential Problem

Regarding the recent change, there are probably going to be some problems with the unexpected data modifications. ARMLS has opted to sweep the records to change all listings that weren’t Relocation/Corporate Approval Required so that they weren’t using that field. They updated the listings to show the Short Sale Approval Required field to be marked. In some cases where this is incorrect, you’ll need to ask your Realtor if they have checked into this. Of course, if they’re on top of things, they’ll be calling you to explain what has happened . This outlines another internet issue that we all have to face, and that’s that the data we enter into ARMLS isn’t our data, so they can do whatever they want with it. Granted, an uprising would be few and far between, albeit possible, but I don’t think that ARMLS is going to do anything to hurt their relationships with the techy geeky data guys like myself. I’m fine with positive changes that have slightly adverse short term effects. Bring’em on.