shift tactic 11 distressed properties - listing short...

SHIFT TACTIC 11:

DISTRESSED PROPERTIES:

LISTING SHORT SALES

© 2015 Keller Williams Realty, Inc. SHIFT Tactic 11: Distressed Properties: Listing Short Sales v.3.3

Acknowledgments

The author gratefully acknowledges the assistance of busy agents, leadership, and

KWRI leaders and staff who gave generously of their precious time to provide

insights, data, quotes, and editing time to this project.

Many of the top distressed property specialist agents who participated have literally

invented their businesses while building them. Some practiced in previous distressed

markets. Others were newly arrived agents who have boldly pioneered much of what

is taught here— about how to survive and thrive in unusual times.


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please contact Keller Williams’ legal department.

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Table of Contents

CHAPTER 1: WHAT YOU WILL LEARN .....................................................................................7

Listing Short Sales Objectives .......................................................................................... 8

Getting the Most Out of This Experience ................................................................... 12

CHAPTER 2: DISTRESSED PROPERTY TIMELINE ......................................................................13

Personal Shift—Through the Homeowner’s Eyes ...................................................... 14

The Distressed Property Process—Before and After Foreclosure ........................... 19

Know Your State Laws and Regulations ...................................................................... 20

The Distressed Property Timeline ................................................................................. 21

CHAPTER 3 WHAT IS A SHORT SALE? ..................................................................................31

An Option Before Foreclosure ...................................................................................... 31

What Short Sales Accomplish ........................................................................................ 34

Specific Benefits for Sellers ............................................................................................. 34

Win-Win Solution for Everyone .................................................................................... 36

Short Sales Are Just Plain Different .............................................................................. 38

Your Options for Short Sale Business .......................................................................... 39

CHAPTER 4 CRITERIA FOR A SHORT SALE ..............................................................................41

Lender Criteria: Necessary and Possible ....................................................................... 41

Homeowner Criteria ........................................................................................................ 42

No Short Sale? Pre-foreclosure Alternatives ................................................................ 47

Summary: Positive and Negative Options for Homeowners in Distress ................. 51

CHAPTER 5: MINDSETS: SELLERS, BUYERS, LENDERS, AND AGENTS .........................................59

Mindset Map: Traditional vs. Distressed ...................................................................... 60

CHAPTER 6: THE SHORT SALE PROCESS ...............................................................................69

Overview: Four Phases .................................................................................................... 69

Step 1: Prequalify the Seller ............................................................................................ 73


Step 2: Assemble the Package – Eleven Key Ingredients .......................................... 78

Step 3: Price and List the Home .................................................................................... 86

Step 4: Obtain an Offer .................................................................................................. 90

Step 5: Submit the Package and Offer .......................................................................... 94

Step 6: Follow-up ............................................................................................................. 96

Step 7: Negotiation Phase ............................................................................................... 99

Step 8: Appraisal ........................................................................................................... 105

Step 9: File Approved by Lender ................................................................................. 107

Step 10: Deal Closed ..................................................................................................... 108

CHAPTER 7: LEAD GENERATION .........................................................................................115

Lead Sources and Lead Generation ............................................................................ 115

CHAPTER 8: EVALUATE LISTING SHORT SALES AND YOU ........................................................121

From Aha’s to Achievement ........................................................................................ 129

Short Sale Tool Kit ........................................................................................................ 130

Don’t Forget Your Evaluation!.................................................................................... 131

Chapter 1:

What You Will Learn

This guide is one of three in a series from Keller Williams University (KWU) called

SHIFT Tactic 11: Distressed Properties. The course manuals in the series are:

SHIFT Tactic 11: Distressed Properties: Listing Short Sales

SHIFT Tactic 11: Distressed Properties: Listing REOs

SHIFT Tactic 11: Distressed Properties: Working with Buyers

Series Objectives

The three-guide series titled SHIFT Tactic 11: Distressed Properties is meant to help

you learn how to pursue your real estate business differently—to succeed with buyers

and sellers of distressed properties. These course manuals will show you:

� Skills you will need to excel in this market and how to develop them

� Mindset challenges you will face and how to deal with them

� Resource demands in the distressed property business

� Action steps to take now to propel your business forward

CHAPTER 1: WHAT YOU WILL LEARN


8

Listing Short Sales Objectives

At the conclusion of this guide, Listing Short Sales, you will:

See the Opportunity: Understand the power and scope of the short sale

listing opportunity in distressed properties.

Grasp the Market Background and Distressed Property Timeline: Have a

working understanding of distressed markets, how they came to be, and

how they affect agents and consumers. Be able to effectively consult

about this with homeowners.

Know What Changes to Expect: Learn where to watch for information

on new industry trends and government policies that will change your

market.

Understand Sellers’ Mindset and Motivation: Understand where

consumers are coming from—and the options they have. Be prepared to

consult effectively.

Know Lenders’ and Asset Managers’ Mindset and Motivation:

Understand where the ultimate sellers are coming from—why they do

what they do, and how to work most effectively with them.

Know the Short Sale Process: Know all the steps—from qualifying the

seller and preparing the short sale package to submitting the offer and

package, negotiation, and closing.

Know How to Work Effectively with Buyer Agents: Learn the importance

of educating and creating a winning mindset in cooperation with buyer

agents.

Know How to Improve Offer Acceptance and Close Rates: Learn helpful

tips to ensure that offers are accepted and transactions close.

Recognize Sources of Short Sale Business: Learn how to find and attract

buyers to distressed properties.

Make a Sound Choice: Discover what aspect of the distressed property

business you will focus on—is working with buyers the best option for

you??



9

Distressed property markets, like all markets, are always changing. In distressed

property markets, agents need to be especially watchful of changes.

Watch for this symbol (left) throughout the guides.

It flags an area where you need to monitor change

carefully. Wherever possible, we’ll point you to where you

can get more information on the topic.

Guard your consultant and fiduciary role. Stay on top of

the following:

� Law: Federal, state, and local laws governing

foreclosure and possible solutions for homeowners

facing foreclosure

� Industry Regulations: Your local real estate board and

MLS’s standards for listing, marketing, and closing

distressed property sales

� Market Trends: Be especially watchful for important

turns of events that impact market pricing and sales

volume. For example, are defaults in your market

increasing or decreasing?

� Your Business Mix: Default trends may be especially

important to you if your business is built mainly on

listing and selling short sales, or if you are balancing a

mix of traditional and distressed property business



10

Career Growth Initiative Power Tools:

The tools of the Career Growth Initiative are a synergistic system that fuel the Four

Conversations with evidence.

V i s i o n T o o l s

• Listing Management: A yearly plan for profitability through growth in market share.

• Listings (Monthly): Monthly tracking with adjustments to help you achieve your yearly goal.

• Pipeline (Buyers/Sellers): Identify on a daily basis whether your activities will turn your goals into reality.

Va l u e a n d V a l i d i t y T o o l s

• Agent Trend: Report that tracks your growth in market share and critical

levers in your business to assess performance and opportunities.

• Agent Language of Real Estate (LORE): Provides evidence of your value

by comparing the growth of your business to that of your board, your

subdivision, your Market Center, your Region, etc.

• Local Expert: The story of your expertise to underscore your validity to clients.

T h r i v i n g T oo l s

• GCI: Track your GCI against your expenses to identify your Break-even Day.

Lis t ing

Management

L is t ings

(Month ly)

Pipel ine

(Buyers /Sel le rs) VALUE GCI

Agent

Trend

Agent

LORE

Local

Expert



11

The Wall of Value

When you are able to quantify and communicate the benefits of the value you

deliver, you will create a Wall of Value in your business that attracts listings and

creates closings.

Commun i c a t e Va lu e

Look for ways to share your Wall of Value to grow your business:

• Listing and Pre-Listing Presentations

• Buyer Consultations

• Marketing materials

• Conversations with allied resources

For more, go to the Career Growth Initiative page on KWConnect.com



12

Getting the Most Out of This Experience

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Chapter 2:

Distressed Property Timeline

This chapter is included in all three guides in the SHIFT Tactic 11: Distressed

Properties series. Why? Because these guides are stand-alone, and whichever course

you pick up first, a good basic understanding of what happens to distressed

properties is essential—from the time a homeowner faces a missed payment until the

property is foreclosed and moved to a new owner in some way.

The fundamental process at work that creates distressed inventory is foreclosure.

Foreclosure happens because homeowners—for a wide variety of reasons—stop

paying back their loans, and their lender declares them in default. If they do not find

another option, they lose their home.

Let’s examine all parties and all steps involved in the process, from beginning to end.

You’ll get an appreciation for how distressed properties come to exist—both the

legal side and the personal and emotional side of it. You’ll also see where buyer

interest arises.

To be effective with buyers and listing agents, you must understand the

timeline of distressed properties—from beginning to end—and what

happens with homeowners, lenders, buyers, and agents along the way.

TRUTH

CHAPTER 2: DISTRESSED PROPERTY T IMELINE


14

Personal Shift—Through the Homeowner’s Eyes

Four Primary Causes of Personal Shift

A short sale typically occurs when a homeowner has an event in their lives that

causes a “personal shift.” The primary causes of this personal shift, which lead to

distressed situations, are:

1. Negative Equity from Market Shifts

2. Unemployment

3. Personal Crisis

4. Consumer Overconfidence

In any of these events or situations, foreclosure is a deeply personal experience.



15

1. Negative Equity from Market Shifts

A negative equity situation arises when a homeowner finds the market value of their

property is less than the amount they owe on their mortgage. When a homeowner

purchases with a very high percentage of debt, a relatively small downward shift in

market value can wipe out their equity.

A homeowner with significant equity can borrow against that equity. When

appreciating markets are increasing overall value (and equity), this seems to make

sense. But declining markets reverse the process. Unlike refinancing—a personal

financial decision—downward market movement leaves the homeowner with a sense

of helplessness. Eventually, this feeling can turn to fear if the declining value

situation becomes acute.

This bar chart illustrates how owner equity can disappear. In this illustration, the

down payment was 10 percent and the market shifted down 20 percent. In the

shifted market, the difference between value and debt has become negative equity.



16

Here’s what changed in the chart example:

2. Unemployment Triggers Mortgage Delinquencies

Clearly, significant value declines can create negative equity and negative equity

severely limits whether and how homeowners can sell.

Why do borrowers default? Many have assumed it’s because mortgage payments are

too high. But the Federal Reserve Bank of Atlanta argues that unaffordable loans—

with high mortgage payments relative to income from the time they’re originated—

are “unlikely to be the main reason that borrowers decide to default.” Instead,

unemployment and future home price declines are likely to play a bigger role. Here’s

a summary of their findings.

Before After

Value Arbitrarily set at 100 Market declined 20%; value now 80

Debt

Set at 90—property was

purchased with 10%

cash down

Most mortgages pay interest first and

principal later; debt is virtually the same

in early years

Equity

Value was 100 minus 90

owed leaving 10 in

equity

Turned from positive 10 to negative 10

Market Factor Factor Movement Impact on 90-Day

Delinquency

Unemployment 1 point increase

(i.e., 8% to 9%)

10%–20% more

delinquencies

Debt-to-

Income Ratio 10% increase

7%–11% more

delinquencies

Home Prices 10% decline in home prices 50% greater probability

of default



17

By the way, the U.S. Department of Labor reports the length of people’s unemployed

stretches (measured in weeks) was getting longer. Here’s the picture from 1960 to

2015.

3. Personal Crises

On top of all this financial and economic shifting, personal crises happen. Some are

about health and family; some are triggered by the slowing economy. Common

homeowner crises include the following:

� Unforeseen large medical expenses

� Unplanned job transfers

� Death in the family

� Divorce

� Job loss

All these events bring financial challenges that may force homeowners to become

potential foreclosures in a shifted market.



18

4. Consumer Confidence Plays Both Ways

Much is written about what role confidence, or lack of it, plays in distressed markets

and foreclosures. Here are two views you may hear in the marketplace:

1. Naive Confidence Can Help

Experts seem to agree that there is some level of consumer confidence, or

exuberance, which is the hallmark of recovering and rising markets. Writers in

major news organizations call this mindset “naive confidence”—the

willingness to overlook risks in favor of rewards in markets.

2. Overconfidence Can Hurt

In a shifted market that has become distressed property-focused, opinions

abound about why any or all of the players made the choices they made that

contributed to the result.

Based on his 2006 book titled Generation Me, San Diego State University professor,

Jean Twenge believes homeowners during the last major market shift were over-

confident. “People were very overconfident about what size mortgage they could

afford and the same thing affected the bankers who were giving the loans. Everybody

was overconfident and didn’t anticipate the downside, so when the downside came it

was worse than anyone imagined.”

Now that you have a better understanding from the homeowners’ viewpoint, let’s look at

the complete timeline of events.



19

The Distressed Property Process—Before and

After Foreclosure

Foreclosure is a process that happens over varying timelines, depending on local

laws. Local timeline differences can have a big impact on important distressed sale

details, so you must know your local foreclosure timeline and what governs it.

The process begins with the point where a homeowner first misses a payment—or

knows they are about to do so—and ends after foreclosure, with the sale of bank-

owned properties and the possible transfer of properties to the Federal Deposit

Insurance Corporation (FDIC) when banks fail.

This process is described on a timeline and with definitions that appear on the

following pages. It includes both pre-foreclosure and post-foreclosure events.

Knowing the overall foreclosure process is a great first step. And to do

distressed property business in your community, you must know all the

relevant local laws and rules as well.

TRUTH



20

Know Your State Laws and Regulations

The timeline of the process can be different in some

states, so be sure to know your own state laws and

regulations, and seek answers if you need them.

The foreclosure legal process can be completed in as little

as 90–120 days. In other states, it may extend to as long as

twelve months or more.

The foreclosure process, and state and local laws

governing how it happens, are a full-day class in their own

right. Check around. Chances are local title companies,

your local board, or real estate schools are offering a

foreclosure course.

TIP

Always Seek Local Knowledge

If you decide to take a foreclosure course from a national

vendor, be alert to whether they have modified it to

include steps that are the right ones for your local market.

If they have not, you’ll need to get that information from a

highly reliable local source—your Team Leader, an expert

agent in your Market Center, or a title company are your

best bet.



21

The Distressed Property Timeline

How to Read the Timeline

The timeline chart summarizes the critical details you must learn to be a distressed

property expert. Though this course focuses on Short Sales, this chapter addresses all

steps in the timeline. Make note of how many steps’ terminology or internal timelines

vary, according to local law or regulation of some kind.



22

The description of the timeline establishes three categories for the items that appear:

1. Personal Shift (PS) – Things that involve or impact the homeowner directly.

For example, the homeowner or individual seller faces a challenge such as a job

loss, excessive medical bills, etc., that causes them to be unable to make their

loan payment.

2. Market Shift (MS) – Things relating to the status of the property itself of the

institution that holds the loan. For example, the market changes, home values

decline, lending regulations change, inventory increases, etc.

3. Buyer Interest (BI) – Points of time when buyers become interested in

making a purchase of distressed property. Arises at a number of different

points along the way, indicated by the groups of buyers. When a property first

shows up as a potential distressed property, you alert your buyers about its

availability and then buyer interest occurs.

The items in each category are numbered PS, MS, BI, so you can refer back and forth

to the diagram and the descriptions.



23

1. Personal Shift (PS)

These are things that involve or impact the homeowner personally.

PS-1: Notice of Default

Depending on the lender, and local foreclosure laws, the homeowner will receive a

Notice of Default within 60–90 days after one or more payments are missed. The

notice is a formal letter from the lender advising the homeowner that their loan and

ownership are in jeopardy. Default is what causes lenders to trigger the foreclosure

process—in order to recover their losses, or to get the homeowner quickly back on

track.

When one or more payments are missed, homeowners have the right

and responsibility to contact their lender to explore what can be done to

make the situation right. Lenders often prefer not to foreclose if a better

option can be found.

TRUTH



24

PS-2: Deed in Lieu or Loan Modification

These are the homeowner’s two main options when they are behind on payments.

One course is swift, but risky. The other is slower, but can allow the homeowner to

stay in their home.

� Deed in Lieu – This is very legal—but may also be very risky for the owner in

default. Why? A deed in lieu of foreclosure does not necessarily clear away all

other judgments against a property owner. The former owner may think they

have escaped further demands only to find other parties (not part of the deed

in lieu deal) coming after them for other money they owe. Deed in lieu of

foreclosure agreements usually only happen if the parties can agree the

property being signed over has value equal to the amount of the debt!

� Loan Modification – The U.S. government acted to provide new financial

incentives to lenders in the shifted market that began in 2006 in order to

remake loan terms with distressed homeowners. Some of the early programs

failed because the incentive or terms were inadequate. The government began

helping lenders remake loans in cases where home values were as much as 25

percent under the current loan balance. Watch for how these programs have

changed.

� Short Sale – This is the homeowner’s other option—a good one that will be

covered in the Market Shift and Buyer Interest sections that follow.

PS-3: Intent to Foreclose

The lender follows up with a written notice that they will foreclose by a certain date.



25

PS-4: Foreclosure

A representative of the lender posts a foreclosure notice on the outside of the

property, which states that the lender has taken possession and all inquiries until

further notice must be directed to them.

PS-5: Eviction

If no sale has been arranged, and if the homeowner has not walked away from the

property before foreclosure, they will be forcibly evicted on order of the lender. A

local sheriff or constable typically enforces the eviction.

PS-6: Redemption/Reinstatement

In some states there are provisions for homeowners to escape foreclosure by making

repayment arrangements with the lender to “catch up” on the amount in arrears.

That is called “redemption”. In some states, there is also a reinstatement period that

can actually extend beyond the foreclosure date and even beyond a trustee or

sheriff’s sale, or auction, of the property. In these rare situations, if the homeowner

completes catch-up arrangements, a person who bought the home at auction may

even have to give it back to the owner. The auction winner then gets their money

back.



26

2. Market Shift (MS)

These are things relating to the status of the property itself or of the institution that

holds the loan.

MS-1: Conventional Loan

A mortgage deed is a contract that states the amount due on a loan to buy the

property, the term of the loan, rate of interest charged, and how payments on the

balance are to be made. It also says what will happen if the payments are not made.

Conventional loans come in many different types and sizes—though not as many as

before the major market shift that began in late 2006.

MS-2: FHA or VA Loan

Homeowners can also get mortgage loans from the U.S. government’s Federal

Housing Administration (FHA) or Veterans Administration (VA). The loans often

have different (frequently tighter) requirements about down payments and property

condition than conventional loans.

Another difference: FHA and VA will not approve a short sale unless the

homeowner has actually defaulted. Some conventional lenders will approve a short

sale without a default.

MS-3: Short Sale

A short sale is basically a negotiated settlement between the lender and homeowner

in which the lender agrees to accept a buyer’s offer for less than the homeowner’s

total loan balance.

RESOURCE

Short sales are a major method for selling distressed

property—the subject of an entire guide in this series. It’s

called SHIFT Tactic 11: Distressed Properties: Listing Short

Sales.

MS-4: Trustee Sale

The trustee sale, or sheriff’s sale, is a common vehicle for getting foreclosed

properties sold to buyers—frequently to investors who are regulars at these auctions.

The buyers typically must pay cash for their winning bid, either on the spot or very

shortly afterward. The sales are often referred to as “courthouse steps” sales.



27

MS-5: Prelist Auction

This is another auction format—usually arranged by a lender that holds foreclosed

property. A professional auctioneer is hired and property to be auctioned is listed for

preview on the Internet. Sometimes the preview properties are held open briefly so

interested parties can go inside.

MS-6: Assignment to Asset Manager

If there’s no short sale or auction sale of any kind, the property will remain bank

owned. The bank will typically turn the property over to either its own asset

management arm or a third-party asset manager. Their job is to manage and market

the property—you will sometimes hear the term “M and M Firm” used to describe

them. They may list property directly for sale, yet they typically turn to specialized

REO listing agents to list and sell lender-owned homes.

MS-7: REO Listing with Agent

Listing bank-owned real estate (REO) can be a big business for distressed property

specialist agents, albeit with low profit margins. It is, along with auctions and short

sales, one of the three main ways distressed properties are marketed and sold.

RESOURCE

Listing REO properties is the subject of an entire guide in this

series. It’s called SHIFT Tactic 11: Distressed Properties:

Listing REOs.

MS-8: REO Purchase

This is where you come in as an agent for the buyer. REO properties are listed on

MLS and are sold, usually, with the same standard contract approved by your local

real estate board or MLS—with some very important exceptions and additions.

MS-9: Bank Fails; FDIC Takes Possession

On relatively rare occasions, banks fail. If they are federally chartered, they are taken

over by the chartering authority, under the direction of the FDIC. The FDIC then

seeks real estate brokers to help sell the properties, or it may return to the prelist

auction step and try to sell properties before seeking the help of brokers and agents.



28

Buyer Interest

Buyers have multiple opportunities along the way to learn about and look at

distressed properties for sale. The timeline chart identifies six of these situations:

BI-1: Pre-foreclosure Sales

Buyers can search the Internet and local legal advertising and records to identify

properties that have started down the foreclosure road, but are not yet foreclosed.

BI-2: Short Sales

Buyers will learn of short sales on the MLS in their area, or via national searches of

MLS data. Most MLSs and real estate boards have requirements about agents

identifying short sales as such when they are first listed.

RESOURCE

Short sales, like REOs, have unique features. One of the main things:

Short sale buyers, like the agents themselves, will not know initially

what price the bank or lender’s asset manager may accept for a sale.

There are other complications too. Refer to the companion guide for

more information on short sales, SHIFT Tactic 11: Distressed

Properties: Listing Short Sales.

BI-3: Trustee Sale

This “courthouse steps” auction sale is open to the public. Investors, who seek to

buy property before it gets further in the process, often frequent it. These are cash

sales.

BI-4: Prelist Auction

This is another buyer opportunity. Prelist auctions can be large scale and well-

attended if they are well-promoted by an experienced auction company.

BI-5: REO Listed with an Agent

Like short sales, these listings go on MLS and are typically noted as REO, real estate

owned, bank owned, institutional sales, or some similar designation.



29

BI-6: FDIC Sales

If a bank that owns real estate fails, under its federal charter, the FDIC will assume

control. The FDIC will then either hire a real estate broker and other firms to market

or manage these properties, or it will go back to the prelist step first and try to sell

that way before going the listing route.

How Well Can You Explain the Timeline?

Using the timeline chart as a tool, get with a partner,

and you as the agent explain the timeline clearly to

your partner (who is the buyer). Switch roles and

repeat.

The chart is detailed. How would you simplify or

streamline it for a client? Which points would you

emphasize for an REO client and why?

Critical Step or Point

Selected Reason You Selected It

Your “Headline” for the

Client on This Point



30

Notes

Chapter 3

What Is a Short Sale?

Short sales have been around for years.

For example, the high technology or “dot com boom” of the late 1990s shifted

rapidly into a “dot com bust” just a few years later, in the early 2000s. The economic

shift connected with that business cycle, and the real estate cycle that followed it,

were localized. It was felt mainly in regions where high technology companies had

exploded to life—the Northern California Bay Area, Boston’s Route 128 Loop, the

“Golden Triangle” in North Carolina, and the Central Texas metropolitan areas

around Austin, for example.

Then, years later, beginning in 2006, larger economic issues created much more

widespread market shifts and short sales were very common across the country.

Short sales have been a major part of the real estate market ever since.

An Option Before Foreclosure

A short sale is a proactive settlement between the homeowner in distress and their

lender.

The threat of foreclosure is triggered by default: The homeowner fails to make one

or more payments to the holder of the note, or mortgage loan, on their property.

There are some alternate paths that can unfold when a home loan goes into default.

One of the best options is a short sale.

CHAPTER 3: WHAT IS A SHORT SALE?


32

A Proactive Step

Any time a homeowner recognizes they are about to have trouble making their

mortgage loan payment—or are already missing one or more payments—they have

choices.

Short sales happen most often during the time when a homeowner has been notified

they are in default—and before the property is actually foreclosed on by the lender—

the pre-foreclosure stage of the process.

It’s this way most of the time, but not always—because a homeowner might be able

to apply for a short sale even before they have defaulted. This is relatively rare.

Either way, choosing to be proactive is the homeowner’s best option. A well-

informed real estate agent/consultant plays a vital role in that process.

A Settlement

A short sale is basically a settlement agreement in which the lender buys into a seller’s

proposal that the lender accept less than the full amount due on their note (loan)

when the property is sold. In so doing, the lender is “short” a certain portion of the

total due at closing—thus the term “short sale.”

In reality, a closed short sale may or may not be that simple. A key complication can

arise, for example, if the lender decides afterward to pursue some or all of the

remaining balance on the original loan—by seeking a deficiency judgment against the

seller. We’ll cover this issue a bit later.

A short sale is a contract between the buyer and seller—with at least

one contingency: that the deal is approved by the seller’s lender. The

seller’s lender is approving an agreement to settle for less than the full

amount owed.

TRUTH

CHAPTER 3: WHAT IS A SHORT SALE


33

How Banks Decide

The determination about whether there can be a short sale is up to the seller’s lender.

If a bank thinks they can get more money out of foreclosing on the property than

reselling it, then a short sale might not be in your future. If, however, the bank sees

that a short sale offer is reasonable and you (the seller) are not making money on the

property, then your short sale request will likely be approved.

When customers ask “why a short sale?” the basic answer is that a

short sale is a written negotiated settlement with agreed terms. A

foreclosure is a taking of their property with no terms and no written

settlement.

TRUTH



34

What Short Sales Accomplish

In a shifted marketplace filled with pre-foreclosure and foreclosed properties, short

sales offer a generally more positive outcome for all parties involved. Short sales are

an important part of the distressed property landscape because they provide an

avenue that allows consumers to avoid foreclosure while protecting their ability to be

homeowners again in the future.

Research shows several key positive outcomes that arise for consumers, lenders, and

agents:

1. Consumer Protection – This is a viable option that releases consumers

from homeownership debt. Their home is sold and their lender forgives

most, if not all, of their debt.

2. Lender Liability Avoidance – This is a way for lenders to regain a

substantial amount of what is owed them—without taking the property

on as a bank owned liability.

3. Lender Cost Reduction – The cost of a short sale to the lender is

typically significantly less than the cost of taking the property on as bank

owned.

4. Business-Building Opportunity for Agents – Solving a personal and

financial crisis issue for a homeowner can position the agent who assisted

as a lifetime resource for that homeowner, their family, and their friends.

Specific Benefits for Sellers

In the shift that started late 2006, residential foreclosures dominated the U.S.

economy in unprecedented numbers, the consequences of which are still being felt.

Real estate agents have an opportunity to assist consumers—with good advice and

short sale expertise.

Only a small minority of households that receive a notice of default from

their lender find a way to avoid foreclosure.

TRUTH



35

Eight Reasons to Avoid Foreclosure

This list can become a great flier to use with potential short sale

candidates. See the course tool kit for a sample handout you can use.

1. Foreclosure Follows You – Homeowners will always have to disclose that

they have had a foreclosure on any mortgage application (and many job

applications) that they submit in the future. This can have an adverse affect

on their future mortgage rates. This is a credit item that is asked about

specifically in credit inquiries. There is no seven-year time limit on this item.

2. Credit Score Negative Impact – Credit scores will be lowered by 300-plus

points (per loan). Along with bankruptcy, a foreclosure is one of the most

devastating credit issues you can have in relation to future credit availability.

3. Ineligibility for a Government-Insured Loan – The homeowner will be

ineligible for a government-insured loan for 5-7 years (only two years in a

short sale). A foreclosure is the one credit report item that is almost

impossible to have repaired.

4. Possibility of Deficiency Judgment – Your lender can seek a deficiency

judgment against you and collect any amount they do not recuperate at the

bank sale.

5. Negative on Employment Credit Checks – Many employers run credit checks

on prospective employees. Foreclosure is one of the top items that will put a

potential new hire in jeopardy.

6. Potentially Damaging on Current Employment – Many current employers run

credit checks. A foreclosure can put a current position in jeopardy.

7. Negative on Security Clearances – Security clearances and government

positions—including but not limited to military and law enforcement—can be

jeopardized by a foreclosure. Revocation of security clearance can result in

job reassignment or loss.

8. Lower Tax Liability than Foreclosure – The tax liability in a foreclosure may

be much higher than in a properly negotiated short sale, since canceled debt

will be higher in a foreclosure.



36

Win-Win Solution for Everyone

.

When completed with a high level of integrity and client service, a short sale is a win-

win for all parties involved. Short sales are a valid alternate solution to foreclosures

that can reduce price pressure.

Here’s how each party benefits in a short sale—homeowner, buyer, lender, and agent.

Relief for Homeowners

The seller will be able to walk away from the growing stress of impending foreclosure

and loss of their property to a public auction. The seller won’t have foreclosure on

his credit report, though he will still take a hit for any missed mortgage payments and

possibly for the short sale itself. Foreclosure is an automatic substantial hit to a credit

rating and stays on the report for 7-10 years. A a short sale’s impact on credit scores

may be less, depending on how the lender reports it.

Note that the credit score impact of a short sale is constantly under

review by credit rating agencies and may change.

Bargain for Buyers

Buyers almost always end up owning a property they wanted—at a significantly

discounted price, compared to what they might otherwise have paid for a comparable

property.

This means, even in a downshifted market, the buyer’s chances of seeing an early

positive return on their investment is improved.

Lenders’ Liability Reduced

Lenders see the benefits of a short sale in financial terms. It is expensive for lenders to foreclose on a home.

A short sale can be a win-win for everyone—the homeowner facing

foreclosure, the buyer, the lender, and the agent

TRUTH



37

These costs include the following items:

� Legal fees

� Possible eviction costs

� Taxes

� Insurance

� Maintenance

� Neighborhood association dues

� Selling costs

If the lender does foreclose on a home, that property (now an REO) shows up as a liability on their balance sheets. Their business is loaning, not owning.

Agent Client for Life Potential Is High

Agents who specialize in short sales can grow their businesses. While doing so, they can enjoy the satisfaction of knowing that they have helped people in crisis. Develop your skills in this niche and you can be a prime target for referrals from associates who are unfamiliar with short sales. Additionally, if you save a client from foreclosure, you are likely going to be their top-of-mind agent for life.

A Business-Building Opportunity

It just makes common sense. If you have the skill and tenacity to win a short sale approval, and get an offer accepted and closed for a distressed client, there’s a good chance you will be remembered by them and referred by them. You’ve basically accomplished a rescue mission, and lifesavers tend to become friends for life.

Each foreclosure costs lenders approximately $50,000.

TRUTH



38

Short Sales Are Just Plain Different

Like REOs, these transactions are significantly different from traditional sales. Here’s a summary of the key points of difference.

Phase Traditional Short Sale REO HUD

Defaulting or defaulted loan

Conventional, FHA, or VA

Conventional, FHA, or VA

Conventional FHA

Pricing responsibility

Listing agent, CMA, and seller

BPO or appraisal contracted by bank; listing agent CMA

Bank sets value, based on listing agent BPO or an appraisal. BPOs updated

HUD

Marketing Listing agent Listing agent Bank direct marketing and/or listing agent. Marketing reports updated

HUD or a HUD management and marketing (M&M) vendor

Contracting MLS contract MLS contract with bank addendum

MLS contract with bank addendum, or bank contract only

HUD contract

Offers By MLS contract By MLS contract; sometimes by bank contract

By MLS contract; sometimes by bank contract

By online closed bidding

Financing required

24–48 hours before closing



7–10 days before closing

Acceptance Seller Seller and bank Bank HUD

Closing Date certain. Title/escrow company choice negotiated by parties

Date may be postponed. Listing agent’s or bank’s title company

Date usually certain. Bank’s title company

Date certain. HUD’s title company



39

Your Options for Short Sale Business

Handling short sales, especially in volume, can be lucrative and satisfying. But it’s not a business for everyone. Fortunately, there’s more than one way to be involved. Whether you choose to know enough to steer prospects you meet to the experts, or become an expert yourself, is your call. Your choices are: 1. End-to-End Short Sale Listing Agent – Handling the short sale business end

to end. 2. Processor/Negotiator – Handling the tough negotiating phase with lenders

and other lienholders, and bringing the deal to closing. 3. Referral Only – Focusing on prospecting for leads, qualifying distressed

sellers for short sale, preparing a document package and offer—then turning the rest over to a processor/negotiator to complete the transaction.

1. End-to-End Short Sale Listing Agent

This means doing the business from “soup to nuts”—all of it. It means you are prospecting for the leads, prequalifying the promising ones, and then taking the deal all the way through the process, from assembling and submitting the application package and offer through negotiation and closing.

Most agents who decide to go full bore and do end-to-end short sales are driven by

a desire to truly help distressed sellers. They have done their homework and

believe no one is better qualified to represent sellers in lender negotiations than

they are.

TRUTH



40

2. Negotiator/Processor

Some agents and their teams become proficient at the hard work and detail of pushing a contract and all the associated paperwork through the lender’s representatives to a successful closing. Because this is arguably the hardest part of the business, requiring great attention to detail and persistence, some agents would rather have someone else do it—for a fee. There are short sale negotiators and servicing companies of all sizes. Some are local and focus just on assisting agents in their Market Center, while some generate business from a much larger local or regional agent network. Still others operate nationwide. Many charge a flat fee for their service. Others want a percentage of the commission.

Choosing a Negotiation/Servicing Vendor

If you’re getting involved in short sales and have decided you don’t want to handle the complexities of negotiating with the lender, or lenders, what do you do?

Agents network among one another continually about real estate vendors of all kinds, and short sale processors are no exception.

For due diligence verification, focus on::

� Fees

� Close rate

� Agent referrals

� Verify specific properties they’ve closed

3. Referral Only

Another option is to refer your short sale leads to short sale specialists, and let them do the work while you move on to other business—or generate still more profitable leads. This is every bit as viable an option in distressed property as it is in more traditional real estate markets.

Short sale negotiating and processing can be a great service. Some agents develop

short sale servicing staffs so they can do their own and third-party business. Some

have become “negotiators” for other agents as a full-time pursuit.

TRUTH

Chapter 4

Criteria for a Short Sale

Remember: A short sale is a negotiated settlement, and the lender is in charge. In a

short sale, a lender is basically forgiving a substantial part of the homeowner’s

original mortgage loan and accepting, instead, the proceeds of a sale that will return

less than the amount owed.

Lender Criteria: Necessary and Possible

Here’s what necessary and possible mean, from the lender’s point of view:

Necessary – Because there is convincing evidence the owner cannot make their

mortgage loan payments.

Possible – Because the lender sees evidence that the home will sell for what he/she

considers a reasonable percentage of market value.

In a successful short sale, prequalifying the seller and their circumstances is

paramount—and must happen before anything else.

Before there can be a short sale, the lender must be persuaded that it is both

necessary and possible.

TRUTH

A short sale’s selling price is all about the lender’s bottom line: meeting their net

proceeds requirements for that property, which is a percentage of the current

market value.

TRUTH

CHAPTER 4: CRITERIA FOR A SHORT SALE


42

Homeowner Criteria

These criteria relate to the homeowner’s situation, but they are evaluated through the

eyes of both the agent and the lender.

The seller must sign the contract for a short sale to be approved, but the final

approving authority is the lender. Both the lender and the agent want to see several

things—to feel assured a short sale can happen:

1. The Homeowner’s Personal Involvement

2. Documented Hardship

3. Loan in Default

4. Upside Down on Loan-to-Value

1. The Homeowner’s Personal Involvement

Homeowners in these circumstances are as angry and upset as anyone stricken by

some kind of personal financial disaster. They never considered that home values

would decline as much as they did in their area. They feel cheated, but—unless they

are willing to wait for a recovery—they are “stuck” in an unfavorable position. If

they are going to sell, it will have to be a short sale.

The homeowner must be willing to cooperate with the agent, lender, and buyer.

The homeowner will have to turn over private documents and be willing to wait for

answers from the lender, while making no monetary gains on the sale of the

property.

TRUTH



43

Send Them a “Disqualification” Package

Consider sending potential short sellers to your website, where they can read what a

short sale is about—including a FAQ section that describes, among other things,

what they are going to need to do to make it happen. A seller who will take the time

and initiative to complete all the information the written package requests is a seller

worth working with. Most top short sale specialists have postings on their websites,

or on blogs linked to their websites.

You can help a homeowner feel more comfortable with the short sale process by

discussing their options with them. Consider using the following script in

appointments with potential short sale clients.

SCRIPT:

Here’s what your situation is: You’re facing a foreclosure. Do you want

to go through the foreclosure and be buried in the property and buried

from a credit standpoint for years, and years, and years to come? Or

would you rather find a way to work though that? Here are your

options…



44

2. Documented Hardship

The best way to win a lender’s support for a short sale is to demonstrate hardship. It

may be due to uncovered medical bills, death of a working spouse, divorce, or even a

job transfer with tough terms.

Hardship must be explained in writing—through a hardship letter—and with a well-

documented financial statement.

The letter and statement also must be supported with key financial documents, which

only the seller can provide.

3. Loan in Default

The homeowner is already behind in payments. Different states and different lenders

create varying timelines, but the principle is that a homeowner seriously in default

generally has a much better chance of having a short sale proposal accepted than a

homeowner who is not in default.

Every rule has exceptions, and this one certainly does. Many agents shared stories of

owners not in default who managed to get a short sale approved and completed. It

happens. BUT it is not common.

In a short sale, a homeowner’s financial statement must be accompanied by

documentation showing income and expenses that are out of balance. This evidence

supports that the homeowner simply can no longer afford the home on a monthly

basis.

Another symptom of “unaffordable” is that the seller is in no position to bring

money to the closing table to close the gap between market value and what they owe!

TIP

FHA Requires Default

A key exception of this kind happens with FHA loans. When

the homeowner has an FHA loan, an application for short sale

may be accepted by the lender, but the homeowner must be

in default before an accepted offer can be approved.



45

4. Upside Down on Loan-to-Value

A common occurrence is the homeowner who finds themselves “upside down” or

“underwater”—owing more than their home is worth in the current market.

Whether the homeowner had equity originally, and how much, may NOT be a factor

if a local market turns down severely.

Upside-Down Example

A homeowner may borrow against equity in their home. When appreciating

markets are creating more equity, this seems to make sense. But declining

markets reverse the process, and the reversal can happen fast.

Unlike refinancing—a personal financial decision—downward market

movement leaves the homeowner with a sense of helplessness. Eventually,

this helpless feeling can turn to fear if the declining value situation becomes

acute.

In the shifted market, the difference between value and debt has become

negative equity.

A fast market transition results in a dramatic change in the homeowner’s position,

from a seemingly comfortable amount of equity to low equity, no equity, or worst of

all, negative equity.

A negative equity situation arises when a homeowner finds the market value of their

property is less than the amount they owe on their mortgage.



46

Personal Crises

On top of all this financial and economic shifting, personal crises happen, as always.

Some are random and personal; some are triggered by the slowing economy.

Common homeowner crises include:

� Job loss

� Unplanned job transfers

� Death in the family

� Divorce

� Unforeseen large medical expenses

All these events bring financial challenges that may force homeowners to become

sellers. In a downshifting market, an owner who needs to sell is facing trouble that

may force a short sale or a foreclosure.

Unemployment

Clearly, significant value declines can create negative equity, which severely limits

whether and how homeowners can sell. But why are borrowers defaulting in record

numbers?

According to some Federal Reserve reports, a 1-percentage-point increase in the

unemployment rate boosts the chance of a ninety-day delinquency by 10%–20%, and

a 10-percentage-point fall in house prices raises the probability of a default by more

than half. A 10-percentage-point jump in the debt-to-income ratio, meanwhile,

increases the chance of a ninety-day delinquency by 7%–11%.



47

No Short Sale? Pre-foreclosure Alternatives

There are several sets of reasons why a short sale may not be the best option for a

homeowner—or may not be an option at all:

Personal reasons

Legal reasons

Extreme negative equity—homeowner walks away

Some homeowners, for whatever reason, simply have not thought through all their

options and the consequences of the critical decision they face: to sell their home

short, allow it to be foreclosed, or to do everything possible to keep it.

If the homeowner has begun the process of bankruptcy, has private mortgage

insurance (PMI), or if the foreclosure date is upon you, you may not be able to

complete a short sale, even if the homeowner meets the other qualification criteria.

1. No, for Personal Reasons

Some homeowners in distressed situations are not motivated to pursue the solutions

available to them. Their distress may have devastated them emotionally and

financially to the point where they simply want to be foreclosed, or walk away.

Agents’ Ethical and Fiduciary Responsibility

Agents have an absolute ethical and fiduciary duty to advise homeowners whose

properties are distressed. These potential sellers have other options which include

doing whatever they can to keep their home. The question is do they want to?

As a practical matter, the best solution for those who want to keep their home is to

try for a mortgage modification with their lender.

TRUTH



48

The distressed property crisis in North America that started in late 2006 resulted in

plenty of people and firms offering to help consumers modify their mortgage loans.

Some of these resources were credible and professional, others were not. A “buyer

beware” situation was created.

In any shifted market, your job includes counseling homeowners about their options:

� They may be able to keep their property.

� They should carefully examine the credentials and track record of anyone

offering to help them do so.

� They must be aware that they can approach their lender themselves to

request a loan workout or modification.

If the homeowner goes down this road, they may not be successful. In that case their

property is likely still a candidate for a short sale. In the process of applying for a

modification, they have probably created most of the documentation their lender will

need to approve a short sale.

2. No, for Legal Reasons

There are also legal and process reasons why a property may not be a short sale:

Bankruptcy

If the homeowner has filed for bankruptcy, the bankruptcy court or trustee must

approve their entering into a listing agreement. Additionally, in some states, the

homeowner is protected from foreclosure by bankruptcy laws. Keep in mind that

bankruptcy is a legal issue. Unless you are also a lawyer, you should not dispense legal

advice.

Private Mortgage Insurance (PMI)

PMI insures the lender against the homeowner defaulting on their loan. The lender

considers short sales only when it makes business sense for them. If their potential

loss from a foreclosure exceeds the insured amount, the lender may be willing to do a

short sale. If they feel their loss is covered by insurance, they won’t be interested.



49

Foreclosure Date Imminent

In some cases, lenders will forestall foreclosure if the short sale process has been

initiated. If the public auction date is less than two weeks off, you can contact the

lender to explore other options, or to initiate the short sale process.

3. Extreme Negative Equity—Homeowners May Walk Away

Agents and lenders say many homeowners, unfortunately, feel they must just walk

away from their property—especially when they feel they have no hope of rescue.

There can be two main reasons why they do it:

1. Hopelessness, based on lack of information—they simply do not know

their options, so they can’t explore them and simply give up.

2. A deliberate economic calculation—in severely declining markets, some

homeowners sense, or calculate, that their home’s value has simply fallen too

far. The time it will take to dig their way out and regain positive equity—even

with a rescue—is not worth it to them. They calculate they can take a few

years to rebuild their position, perhaps gather a down payment, and then buy

a comparable home again—for less.

Northwestern University and University of Chicago business schools have studied

the phenomenon of calculated “walking away.” Their 2009 study, Moral and Social

Constraints to Strategic Default on Mortgages, says in part, “Most of the solutions by the

Bush and Obama administrations have tried to address the problem of mortgage

payments that are too large. The authors argue that the growing problem of negative

equity (nearly one-in-five households have mortgages that exceed the value of their

homes) may require some rethinking in addressing the foreclosure crisis.”

If the lender will not postpone the foreclosure, you should keep in mind that you

may not have enough time to complete a short sale. The other side of the coin is

that, if persuaded by you, the lender can usually postpone the foreclosure process

immediately.

TRUTH



50

Here’s an illustration of the math a homeowner who walks away might be using. It

uses a dramatic, but not unusual, rapid market decline assumption:

Homeowner Math: Why They Walk Away

Value at Original

Purchase $200,000

Current Value (40%

market decline) $120,000

Time to Regain

Original Value at 4%

Annual Appreciation

(historic average*)

After 14 years

$208,000

Even with foreclosure, they

may be able to buy again in 5–

7 years.

Cost to Purchase a

Competitive Home

after 7 Years*

$161,000 ($158,000

plus assumed 2%

closing costs)

The 7 years may also have

provided time for the

consumer to save for a larger

down payment than they

originally had.



51

Summary: Positive and Negative Options for

Homeowners in Distress

Agents risk losing valuable time, and expected income, if they don’t understand the

alternatives to a short sale. Proceeding with a seller, thinking a short sale will happen,

and being hit with a different outcome is heartbreaking—and avoidable if you know

the rules.

The alternatives are both positive and negative. Here’s a breakdown:

Positive Paths

Homeowners have some options that can bring relief. Most of them, however, can’t

happen unless the homeowner is able to tap into a new source of funds to get them

out of their position with the lender. The most promising positive alternative is

mortgage modification. Details on modifications are below. Here are the options:

Forbearance

Forbearance is an agreement to postpone or reschedule payments in a way that

allows the homeowner to catch up. A mortgage modification is a form of

forbearance on the lender’s part.

Right of Redemption

A standard feature of the foreclosure process is the right of redemption. It means

that, in the unlikely circumstance that the seller can come up with the full amount in

arrears and bring the loan current (including any penalties due), the homeowner can

keep their home.

Reinstatement Period

In some states, even after a home is taken by the lender and sold at a foreclosure

auction, the homeowner may have a limited time during which they can pay the full

amount due and reclaim the home from the party that purchased the home at

auction. In these circumstances, the purchaser at auction gets a refund.



52

Mortgage Modification

After a screening interview, and some paperwork, a lender may agree to a “workout”

solution that has the potential to make the individual’s loan more affordable.

There are two types of loan modification:

1. Rate and Term Change

2. Modification of the Current Note

Loan terms may be remade by the lender. The challenge in these programs was the

inclusion of added fees and rates that didn’t really give the borrower a significant

advantage. But now, government programs provide cash incentives to lenders to

modify loans on more friendly terms.

Negative Paths

There are a number of negative consequences if a short sale is not workable. Most of

these involve a possible “escape” from foreclosure that comes with continued

liabilities attached and/or a missed opportunity to come away in better shape.

Deed in Lieu of Foreclosure

This is an option that some homeowners take, out of despair or because they don’t

know their other choices—including a short sale. Instead of waiting for foreclosure,

property owners may just give the deed back to the lender and walk away. Deed in

Lieu of Foreclosure is not a right of owners. The lender must agree to it. If they do,

there will be no short sale. The property becomes bank owned, and the lender may

auction it or hire an REO listing agent to get it sold for them.

A Deed in Lieu agreement does not protect the homeowner from subsequent

judgments levied against them by the lender.

Deficiency Judgment

If a property is sold for less than the amount owed on the property—either in a short

sale or in an auction—the lender may decide to pursue a deficiency judgment: a court

order requiring the borrower to pay the amount that was not collected in the sale.

Deficiency judgment power may be “negotiated away” in a short sale, but making

sure that happens is a key protection an agent should seek for their short sale client.



53

In the past, lenders have tended to dismiss their right to a

deficiency judgment in approving a short sale. In the last major

market shift, agents reported increasing reluctance on the part of

the lenders to waive their right to pursue a deficiency judgment

later. And, in another indication of the trend, the FDIC required

buyers of their destressed properties to pledge in writing that

their purchase was an “arm’s length transaction.”

TIP

Get Protection for Your Client in the Lender’s Approval Letter

The bank should release their lien and settle on the account. If they

do not agree to consider a complete settlement, then the lender will

typically:

1. Offer to agree to a promissory note for the balance, or some

smaller amount. Often this amount may be as little as 5% -

10% of the total short sale.

2. State that they retain the right to collect the balance of the

note after closing. Try to avoid this. Negotiate the best

possible terms for your seller!

Be aware of your state laws. Some states limit deficiency judgments in short sales

by law. Other states specifically permit them.

TRUTH



54

The Price of Indecision

Sometimes sellers may want to change direction: initially applying for a short sale and

then switching gears and deciding to go for a mortgage modification to try to keep

their home. Sometimes the opposite can happen. Either way the consequences can

be negative. This kind of switching can put the lender off—and make either

resolution more difficult.

TIP

While applying for a loan modification, the client has to prove that they

CAN afford to keep the house, and when applying for a short sale, the

client must prove that they CANNOT afford to keep the home. This can

muddy up a file and create a scenario where the client does not qualify

for either the short sale or the loan mod (that’s the worst-case scenario.)

In almost every case, when a client applies for a loan modification the

short sale process is immediately terminated by the lender. The loss

mitigators are looking for any excuse to get the file off their desk, and

this gives them the perfect opportunity. If the client's application for a

loan modification is denied, and the client decides to move forward with

a short sale, the entire short sale package will have to be resubmitted.

The resubmitted file may be subject to scrutiny by the lender. They will

see that the client has gone back and forth between bank departments,

and they may perceive this as an attempt to ‘stall’ the lender’s collection

activity.



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Forgiven Debt and 1099s

Before 2007, when a loan was forgiven, the forgiven amount could have been

considered taxable income by the Internal Revenue Service (IRS). The lender may

have sent the seller a 1099 or the IRS could have deemed it the seller’s responsibility

to report the income.

During the major national market shift that began at the end of 2006, President Bush

signed into law the Mortgage Debt Relief Act of 2007 which generally allowed

taxpayers to exclude income from the discharge of debt on their principal residence.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in

connection with a short sale or foreclosure, qualified for the relief. Through 2014, the

IRS did not treat as income forgiven debt that was part of a short sale.

Be forewarned that tax laws do change. Stay abreast of changes

to the codes that affect agents by keeping an eye on real estate

news services, like Inman News.

Do not overpromise solutions to your sellers and remember that unless you are a tax

accountant, you should not give your sellers any advice about their taxes.

Your Role in Homeowner Choices: Adviser and Fiduciary

The prospect of qualifying for a short sale comes with a complex array of

possibilities. Sellers are most often feeling helpless, frustrated, and embarrassed. They

are almost always hurting financially—or worse.

You can see why, in distressed markets, your role as an adviser and fiduciary toward

the seller becomes larger than ever. The already high stakes of sales in normal

markets are compounded by the emotionally and financially distressed condition of

consumers facing foreclosure.

Your best chance of representing distressed property owners comes when you can

explain what is happening to them and why.

TRUTH



56

Do the Right Thing: Build Future Business

Know your buyer’s wishes and needs, and understand a seller’s options. When

emotions, costs, and demands are running high, you have a great opportunity to

bring reason and a solution to your clients.

When you do, you are more likely than ever to win a client for life—whether it’s a

short seller whose property your client bought, or an investor who found a great deal

through you.

No one forgets a helping hand—or a great deal.

Help Protect Against Fraud

You have another role: helping protect consumers from fraud. The price opportunity

and marketing around distressed property creates opportunities for deception. The

market is filled with people and firms selling expertise to help fearful, stressed

homeowners.

The key is to know the law—both federal and in your state and locality—that

protects consumers from deceptive practices. It should be a key ingredient in the

expertise you offer to distressed property clients.

Consumer rights advocates and lenders also are quick to remind people that they

have the right to contact their own lender and explore new loan terms directly with

the company who made the loan in the first place.



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Know the Rights of Tenants

As a distressed property expert, you need to be aware of the burgeoning issue of

foreclosures’ impact on the rights of tenants who occupy property under a valid

lease.

Many tenants are in the dark about the defaulting or foreclosed status of the property

they’re leasing—until a constable or sheriff comes knocking at their door with an

eviction notice!

Issue: Arm’s Length Transaction

Distressed markets mean low, low prices—and low prices can bring a special set of

temptations for buyers, investors, and agents.

Although, as in many areas, different lenders have different attitudes, a good rule of

thumb for ethical practice—and successful closings—is “no insider transactions.”

Transactions should be done at “arm’s length.” HUD defines arm’s length this way,

addressing the seller:

“The buyer cannot be a member of your family, a business associate, or other

favored party. No hidden terms or special understandings can exist between you, the

buyer, appraiser, sales agent, or mortgagee.”

Issue: Streamlining Short Sales

This is a critical area for all agents to monitor. Short sales make up a

clear minority of distressed property sales—but, other than mortgage

loan modification, agents agree they represent the best alternative for

most homeowners in distress who are unable to make their payments.



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You Are Their Adviser and Fiduciary

Imagine you were consulting with a homeowner who is

“upside down” on their loan-to-value of their home – or in

some financial difficulty that has made it impossible to make

their payments.

How would you counsel them? List positive paths and negative

ones and a reason why they are listed as such

Most Positive

Options Option

Reason Why

Positive or Negative

More Negative

Options Option

Reason Why

Positive or Negative

Chapter 5:

Mindsets: Sellers, Buyers,

Lenders, and Agents

Short sales involve distressed property, a business that might come with a warning

label saying: “This is not the traditional real estate business you probably learned!”

How is it different? In many ways—ranging from the processes and priorities agents

must learn to follow to the mindsets of all the players involved.

Understand these mindsets fully and you will have taken a big step toward success in

short sales.

Let’s explore the differences in mindset …

CHAPTER 5: MINDSETS


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Mindset Map: Traditional vs. Distressed

Look first at the overall picture, then at the short sale listing world in detail. Here’s a

summary of some of the top points of difference between traditional and distressed

markets, from a mindset perspective:

Mindset Map: Traditional Markets vs. Distressed Markets

Traditional

(Buyer or Seller) Market Distressed Property Market

Consumers

in General

Generally eager and positive

about buying or selling

Stressed about the “whether to” and “how

to” presented by the market on the sale

side—and feeling urgency to buy at great

prices on the buyer side

Sellers Seeking return on investment

and equity to power their next

home purchase

Institutions and consumers seeking either

whatever they can get, or an escape from

crisis

Buyers Consumers seeking the right

home at a reasonable price

Consumers seeking the very best possible

deal, or a steal

Lenders Generally open to making loans

and into creating products and

policies to encourage borrowing

Lending criteria dramatically tightened; loans

hard to get. They have also taken on role of

sellers of distressed property—either before

foreclosure (short sale) or after (REO).

Agents Eager to jump in; generally able to

master transaction basics

Often poorly informed about transaction

basics; often not well-qualified to coach their

clients—or unaware of the need to

Transaction

Processes

Taught widely, in real estate

schools and by brokers. Generally

consistent and use standard board

or MLS documents. Timelines

generally consistent.

Only recently being taught. More complex,

with varying timelines and requirements.

Lenders in charge of transaction process.

Special documents required by lenders and

agents to protect themselves and clients.

CHAPTER 5: MINDSETS


61

Take a look at each of these viewpoints and mindsets in more detail on the following

pages—as they apply specifically to short sales. Then zero in on the short sale

transaction process itself:

Sellers

Lenders

Listing Agents

Buyer Agents and Buyers

Sellers

A Tough Place to Be

Short sales is a distressed property business, and the name fits the sellers in this

category “to a T.” Short sellers are usually experiencing a lot of distress, and

discomfort—usually long before you ever contact them.

They have typically missed mortgage payments—maybe for months. They often have

financial distress that means they’re also being pursued by a host of debt collectors—

for credit card debt and other loans.

Many of them are in the situation they’re in because of a personal or family crisis—

death, divorce, job loss, unwanted job transfers, and more.

Short sale agents must recognize that their sellers are in a place in life that’s marked

by embarrassment, fear, and anger at their circumstances—and anger at others who

they may feel are responsible.

One of the best ways to push through and motivate sellers to act on a short sale is to

focus on the specific benefits to them in choosing the short sale option.

Avoiding a Negative

The first benefit most people think of, once they understand the short sale idea, is to

avoid negatives—foreclosure, and the embarrassment and practical difficulty of

losing their home.

But smart short sale agents have learned that there’s much more to working with

distressed short sales candidates than avoidance.

CHAPTER 5: MINDSETS


62

Why Choose a Short Sale?

One of the attractions of short sale over foreclosure is that a short sale mitigates or

reduces the impact on the seller’s future ability to buy another home.

Credit scores, time frame to buy, and buying terms can all be favorably impacted by

selling short, rather than being foreclosed.

RESOURCE A copy of this table that you can use as a handout is in the course

tool kit. It’s called “Why Choose a Short Sale?”.

Foreclosure Short Sale

Credit Score

Damage (based on

agent reports)

250 points or

more

150 points or less (NOTE: credit

monitoring agencies may change

policy on score modification)

Mark Against Your

Financial Record

Permanent

record at county

courthouse

Drops off credit scoring system after

7 years

Time to Qualify to

Buy Again (FNMA)

5–7 years 2 years

Down Payment on

Future Purchase

(FNMA)

10% or greater;

maybe 20%

Less than 10%

CHAPTER 5: MINDSETS


63

Lenders

Overwhelming Volume of Files

Most agents who do a lot of short sales can testify that they’ve seen the workloads of

clerical people they deal with in banks growing at a frightening rate.

The impact of this file burden ripples through the business:

1. Overlooked Files: Short sale files submitted by agents can be overlooked

altogether—particularly if the agent doesn’t know how to properly submit

them, and how to follow up effectively.

2. Errors: Processing people for the lenders can make more mistakes, or may

make poorly considered decisions and reject an application for short sale—just

so they can pass it on to foreclosure and not have to deal with it.

3. Slow Turnaround: Slow response times on pending short sales,

understandable with the workload facing loss litigators, frustrate and anger all

the other parties—buyers who want to close, sellers who want out from under

their problems, and agents who want to be paid for their time and effort.

Wrestling with Agent Errors: Who’s Responsible?

Agents like to complain that lenders are the ones primarily responsible for short sales

not being completed at a better rate.

Lenders say the truth is that poor documentation, ignorance of the process, and

agents’ failure to educate their buyers and sellers are the main obstacles in short sales.

While lenders clearly have issues in common when considering a short sale, it’s

extremely important to understand the differences in how short sales are

processed from one lender to the next.

TRUTH

CHAPTER 5: MINDSETS


64

Listing Agents

If you are a listing agent for short sales—even if you are only handling the front end

of the deal—most agree you need certain key qualities:

1. Psychologist and grief counselor for a financially distressed

homeowner

2. Advocate for the overwhelmed seller; urging, encouraging, and helping

them see their way, legally, out of a pending foreclosure

3. Master of patience and persistence, seeing short sales to a successful

conclusion with negotiating skills, clear communication, and a certain

willingness to wait—when there is no other choice

4. Organized and systems based, to keep differing lender policies and

procedures—and a substantial amount of paperwork—in good working

order

5. Willing to do whatever it takes to persist and see the deal through

1. Psychologist and Grief Counselor

Most sellers you will deal with are experiencing acute pain—emotional and financial.

This is personal. It’s impacting their home and family. Many are angry. They see part

of their “dream” slipping away and fear the long road back to financial health and

stability. Some think they were duped by their lender, or agent.

It’s a rough mix of emotions and realities. You will find yourself confronting most of

them as you qualify and work with these potential sellers.

2. Advocate

The flip side is that you have an opportunity to be an advocate for these sellers.

Unless they have given up completely—in which case it’s unlikely you’ll work with

them—they need an expert and an ally.

Many do not understand the act of foreclosure and the short sale process. They may

have heard there is a way out, but they know little or nothing about it. They have

rights in the process, but don’t know what they are. You can help, and they will

appreciate it in most cases.

CHAPTER 5: MINDSETS


65

3. Master of Patience and Persistence

The short sale process is almost always lengthy, and often frustrating—for both the

seller and buyer ... and for you. You need to be a persistent type, and also a person

who accepts that, sometimes, you just have to wait for the “wheels to turn” in the

process.

Insiders say part of the challenge in short sales is that staffs assigned to “loss

mitigation” actually often come from the lender’s collection department. They are

often more trained to collect the largest possible amount of money—even at the risk

of shortsightedness.

4. Organized and Systems Based

Success in short sales comes with the ability, taught in The Millionaire Real Estate Agent,

to boost your profitability by leveraging people and systems.

Because short sales are almost always slower to close than traditional transactions

(sometimes a lot slower), you need to fill your pipeline with enough volume to keep

closings flowing over time.

To do that, and to handle the considerable paperwork and relationship

communication with loss mitigators and others, you must be able to build and use

great systems. Being digitally organized is important.

5. Whatever It Takes!

Most top agents agree that success in short sales takes plenty of motivation and

determination. Their battle cry is, “Whatever it takes!”

Some agents describe the spirit and mindset great short sale listing agents need. As

persistent optimism. There are so many foreclosures and so many more pending, that

succeeding in short sales sometimes feels a little like being the kid walking on the

beach throwing starfish back into the sea. But it will feel good, every time it happens.

CHAPTER 5: MINDSETS


66

Buyer Agents and Buyers

The associated guide SHIFT Tactic 11: Distressed Properties: Working with Buyers deals

with this in more depth, but basically buyer agents in the distressed property arena

are often “on the hot seat.” Buyers are out there in growing numbers, but agents who

find them often aren’t clear about how to really help them buy.

It’s not unusual for listing agents in both short sale and REO situations to blame

buyer agents for being unprepared, not knowing what to expect, and not counseling

buyers appropriately. It’s clear there are some basic requirements for the buyer agent

in distressed property situations:

Teach Buyers and Their Agents the Process

The rules are different. In short sales, for example:

1. Lender is in charge – The lender makes most of the transaction rules and

timetables—no one else does!

2. Lender’s bottom line is unknown, at first – Offers are often submitted with

no idea what the seller/lender’s bottom line is for that deal. What do they

really want? They may not even know until your offer and the seller short sale

package are being looked at—and followed up with a Broker’s Price Opinion

(BPO) by another agent hired by the lender, or by an appraiser.

3. There’s little if any negotiation – Offers are rarely, if ever, negotiable. Your

client’s offer will either be accepted or rejected, and you’ll never know the

reason why.

All good buyer agents know that having good communication with their buyers is the

key to a great buyer business. In short sales there is an even higher priority on doing

this.

Why?—because the rules are different, and less buyer friendly, than in traditional real

estate.

CHAPTER 5: MINDSETS


67

The best listing agents make a big and visible effort to put the short sale “rules of the

road” out there for all to see.

Offer Tips on Your Website to Make It Easier

Tips should cover things buyer agents must discuss with their clients, including:

Earnest money—some agents require earnest money from all short sale buyers

Value of a home warranty purchase—property condition can be an issue when

it’s an “as is” purchase.

Close of escrow process—it can be frustratingly long, with a relatively quick close

at the end.

Covering HOA fees—HOA fees are typically in arrears and buyers need to be sure

this issue is covered in the closing.

Like other top agents, go so far as to give buyer agents exact language to be put

on specific lines of the standard contract form used in your state.

Also supply the downloadable standard Short Sale Addendum required in your state.

CHAPTER 5: MINDSETS


68

Make Your Own Short Sale Mindset Map

Using the table below, jot down mindset features that

distinguish each of the short sale players. Use key words.

Where are they coming from?

If you’re working with a partner, take turns reciting your

answers in your own words—coach one another; check each

other’s knowledge.

You are in the role of listing agent for this course. Talk

about how the other players’ mindsets impact what you

do.

Player What Do They Need? What Do They Fear?

Homeowner

Lender

Listing Agent

Buyer

Buyers Agent

Chapter 6:

The Short Sale Process

Overview: Four Phases

This broad framework contains 10 steps that should be locked in your practice as the

“must do” items for every short sale transaction. Exceptions are rare. In some cases,

being unable to complete the early steps is a “red flag” that this property is not likely

to be a short sale.

There are four key phases, and after a quick review, we’ll dive into more detail on

each of them:

1. Prequalifying

2. Gathering and Submitting the Short Sale Package

3. Negotiating with the Lender(s)

4. Closing the Transaction

The process described on the following pages assumes the homeowner has a

conventional loan. Later, differences that apply to FHA and VA loans will be

covered.

CHAPTER 6: THE SHORT SALE PROCESS


70

1. Prequalifying

This is the essence of the short sale listing business, according to every top agent.

Inexperienced agents can waste tons of time trying to sort things out with

homeowners who, for one reason or another, will not qualify for a short sale, or will

never get the deal done.

It sounds cynical, but the truth is short sales are a business for sellers who need it,

want it, and have problems that make it clear to the lender that selling short is a

legitimate and very possible option.

2. Gathering and Submitting the Package

Short sales are document-filled deals. This is primarily because, in addition to all the

normal contract documents needed to convey property in your state and MLS area,

you must pull together all the documents you’re going to be sending to the lender—

along with the offer—to apply for the lender’s short sale approval.

3. Negotiating

This is where the rubber meets the road on your commission. You are not

negotiating with the buyer through the buyer’s agent—you are negotiating with all

the lienholders. There may be a second lienholder, or even a third. There may be

additional obligations charged against the property. Each must be dealt with

separately.

In negotiation, you are also working out the details described in the HUD-1

document—at closing, who will pay what closing costs; who will be paid how much

and for what services. This includes your commission!

4. Closing the Transaction

Closings in short sales tend to be more unpredictable than in traditional real estate

sales. For instance, since your seller’s lender is in charge of the process, they and only

they decide when they’re ready to close. Working with an expert short sale title

company helps, but that company was selected by the lender, not by you. Closing

dates change. Last-minute delays are not unusual. Agents and their clients must

remain patient.



71

TIP

Which Phases Will You Work On?

Remember the earlier section, “Your Options for Doing

Short Sale Business?”

If you choose to be short sale initiative agent and provide

end-to-end service, you’ll be involved in all four phases.

If you choose to hire the services of a negotiator or

processor firm to handle the details of the deal to closing,

you will be involved mainly in phases 1 and 2.

Agent Goals in the Short Sale Process

There are a number of versions of this basic process flow, but they are remarkably

similar. Mastering the entire short sale process is the essence of becoming a

successful short sale originating agent. Short sales are a complex process.

Your goals are to:

� Get Smart – Know all the steps and how to implement them.

� Simplify – Simplify the paperwork and processing as much as you

possibly can.

� Standardize – Standardize as many of your work processes and

communications as possible, bearing in mind unique differences in lender

or asset managers’ requirements.

� Stand Out – Top agents understand that success in short sales comes

from professional presentation and demonstrated savvy. Make your short

sale package paperwork neat, clean, and as good-looking as you can. You

are what you appear to be.



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Details: Ten Steps to a Short Sale

TEN STEPS TO A SHORT SALE

Step 1 Prequalify the Seller

Step 2 Assemble the Package

Step 3 List the Home

Step 4 Obtain an Offer

Step 5 Submit the Package and Offer

Step 6 Follow Up

Step 7 Negotiation Phase/Loss Mitigator Assigned

Step 8 Appraisal

Step 9 File Approved

Step 10 Deal Closes



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Step 1: Prequalify the Seller

This was covered earlier in this course because prequalification is so vitally important

to success in short sales.

The Interview Technique

Top agents are insistent that an essential step within prequalification is putting the

seller through an initial interview. Since most agents say they have learned that

visiting with sellers personally is not a good use of their time, they put the onus on

the seller to lay out the details of their situation in an interview style questionnaire. It

takes the place of a personal interview.

Top short sale agents advocates going through a well-defined interview process—

preferably on paper—that sorts out two things:

� Facts of the situation – The facts of the sellers’ personal and financial

situation

� Homeowner motivation – Whether they are motivated enough to see

the process through

As with prospective buyers and sellers in other markets, motivation says a lot about

whether you’ll get to a successful closing with them.

Without a qualified seller, the short sale process cannot go forward.

TRUTH



74

Here are the components of the recommended interview process:

Short Sale Interview Elements

Details of their loan Mortgage company; amount due; copy of last

statement; copies of any foreclosure notices or

documents

Essential facts of

their hardship

Status of any divorce, medical issues, job loss, etc.

Past home

marketing

information

Prior listing; how long; at what price; previous MLS

number

Motivation Is the property occupied; what will the owner do after

they sell

HOA If there is one, any contact information, fees, and fees

due

Personal and

Contact Information

Including the last four digits of their Social Security

number, and their loan number (for identification

purposes with the lender).



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Use a Questionnaire

Have a questionnaire in your tool kit. Model it on the interview outlined on the

previous page. If you don’t do an interview, ask the seller to return the completed

questionnaire to you as soon as possible, for your review.

How promptly a seller responds with a completed questionnaire—and how detailed

and well-documented their answers are—is an early indication of their motivation.

Motivation in short sales means a lot, as it does in other transactions. In short sales,

most agents say it means even more. A motivated seller will do everything they can to

provide documents and details (including sensitive personal information) that you’ll

use to persuade the lender that a short sale is warranted—and will work!

A sample Homeowner Questionnaire is included in the course

tool kit

Scripts

Learn and use some simple scripts that show your positive, helpful mindset to the

seller right off the top:

SCRIPT:

We’re partners in this process. I want to help you but it’s going to take

effort and participation from you If you are committed to get this sale

done, I can help you.

This process takes time, the faster we get all the facts together, the faster

I can start helping you and the sooner you can be out from under this

problem.



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What Lenders Will Accept as Hardship

Any of the following circumstances—or a combination of them—may constitute a

legitimate hardship in the eyes of a lender:

1. Job relocation 2. Death of a family member

3. Unemployment 4. Business failure

5. Significant income loss 6. Damage to property

7. Divorce 8. Incarceration

9. Separation 10. Military service

11. Excessive medical bills 12. Adjustment in mortgage

payment or unforeseen increase

in living expenses 13. Death of spouse

Most mortgage companies or lenders require the hardship letter pursuant to a short

sale. In the hardship letter, it is important to present the facts clearly, and above all

else, be honest. The hardship letter must be able to prove the situation that caused

you to fall behind on your payments, and the excuse for falling behind must be

legitimate and provable. A hardship is defined real and the mortgage company

believes the loan is likely to become delinquent.

Be Aware of Signs of “No Deal”

Top agents say you’ll learn to detect trouble early on, if you know what to watch for.

Reluctance to provide information, or a slow response or no response without

prompting from you, is a sure sign that things are probably not going to work out

with that homeowner.

TRUTH



77

Short sales are like any real estate business. In the beginning, you may take risks with

reluctant sellers because you are eager to get going. But the truth is, top agents say

they’ve learned you’re better off moving on to the next seller rather than spending

time trying to urge cooperation that’s just not there.

TIP

Make Them Come to You

Many top short sale agents’ mantra is, “Make them come to you with

their documentation.” You are doing business in volume, hopefully and

you don’t have time to be driving around town collecting documents

from people. Tell them to bring everything to a single appointment. You’ll

find out fast who’s motivated!

Be Aware of Short Sale Candidates Not in Default

Yes, people who have not defaulted can get a short sale approved. The issue is, are

they about to default, or extremely likely to do so soon because of their financial

situation?

Make no mistake about it; lenders will always give first priority to the homeowners

most deeply in default. But other short sales can succeed. It’s all about the numbers.



78

Step 2: Assemble the Package – Eleven Key

Ingredients

Here’s a rundown of what you must pull together, with the seller’s help, to assemble

an effective short sale package—one that will get the lender’s attention. Lenders want

to know that the proposed short sale is doable and as bulletproof as possible for

them.

It’s called “assemble” the package—not “submit.” The package described below

constitutes your seller’s application for approval of a short sale.

Whether a short sale happens will only be determined when an offer is submitted—

along with the assembled package or application.

Below are the elements of the short sale package. They’ll be discussed in more depth

in the discussion of the transaction itself. The elements of the package are:

1. Hardship Letter

2. Listing Agreement

3. Letter of Authorization

4. Financial Statement

5. Recent Bank Statements and Tax Returns

6. Fully Executed Purchase Contract

7. Listing Agent’s Short Sale Disclosure

8. Buyer Preapproval Letter

9. Preliminary HUD-1

10. Your CMA

11. Fax Cover Sheet

The following pages describe the package contents item-by-item.



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1. Hardship Letter

If prequalifying the seller is the top priority that makes the rest of the deal work, the

seller’s hardship letter is a similar lynchpin to the success of the entire short sale

document package you will submit to the lender—with the first offer you receive.

The hardship letter must be clear, brief, and persuasive.

The short sale is not about what assets the seller may have—it is all about their

current hardship. Hardship is the only real reason why a bank should consider

agreeing to the terms of a short sale.

A sample Hardship Letter is in the course tool kit.

Format of the Letter

Set up the hardship letter almost like a memorandum from the seller to the lender

and you. The date, owner’s name, property address, and their loan number and last four

digits of their Social Security number (for identification purposes) should be clearly in

evidence, right at the top.

Content of the Letter

Brief and to the point—that’s the bottom line. Just a few sentences and a crisp, clean

style are necessary.



80

2. Listing Agreement

The signed listing agreement or standard listing contract form for your MLS and

board must be included. There are a couple of important tips to note here that will be

covered later.

3. Letter of Authorization

Lenders must have the seller’s signed authorization to work with you as their agent.

Without one you won’t be able to get a loan payoff verified, or do any other

communicating about their loan and situation.

The letter of authorization should be kept very short—identifying the seller, their

loan number and the last four digits of their Social Security number—for

identification purposes.

A sample Letter of Authorization is in the course tool kit.

TIP

You Can Submit the Letter of Authorization Early

The letter of authorization is the one part of the short sale

package that can be submitted early – before the rest of

the documentation and an offer.

4. Financial Statement

A financial statement from the seller is essential. It is the main numerical evidence of

the seller’s assets, liabilities, and budget situation. Lenders may provide their own

financial statement for you to use—but you should have one of your own that’s a

proven winner. If you don’t have one, get one from a successful agent.



81

A sample Financial Statement is in the course tool kit.

5. Recent Bank Statements and Tax Returns

Sellers must provide their most recent bank statement. Most lenders will accept either

a copy of a printed bank statement or a printout of the seller’s online banking

statement. Two years of federal income tax returns are usually also required.

6. Fully Executed Purchase Contract

In a short sale, an offer, or fully executed purchase contract, is submitted along with

the rest of the “short sale package” of documents. In the vast majority of cases,

without an offer the lender won’t even consider the seller’s application for a short

sale. It’s all about the specifics—and that includes price. In short sales, initially,

knowing what price will get an agreement from the lender is a bit of a shell game.

You know it’s there, but neither you nor the buyer can see it. The lender will take the

package and offer and then start their cost benefit analysis of the sale.

TIP

Submitting an Offer Not Fully Executed

Some agents have good results submitting offer to the

lender without the seller’s approving intiials and signature.

This is a way of communicating to the lender that you are

looking for their reaction to a price that may not be

accepted. This method of exploring where the lender

stands on the price works only when you have an

established relationship with the staff (loss mitigators) of a

particular lender. If they know you from past successful

deals and trust your expertise, you may learn where they

stand faster this way.

7. Listing Agent’s Short Sale Disclosure—Signed by Buyer and Buyer Agent

Several top short sale agents described or provided examples of a form they use that

discloses the local “rules of the road” for short sale process and paperwork. This



82

helps minimize potential confusion and disappointment that could endanger the deal

for all involved.

This is a disclosure they’ve developed on their own to help bring as much clarity as

possible to the process. The content of this disclosure will vary, of course, depending

on your market and any rules of your board or MLS—and lender requirements.

Basically the disclosure should address items including:

1. Time to Close

2. Commissions Typically Paid to Both Sides

3. Standard Required Contract Disclaimers (like “sold as is” and “subject to

lender approval”)

4. How Closing Costs Will Be Handled

A sample Agent’s Short Sale Disclosure is in the course tool kit.

8. Buyer Preapproval Letter

Here’s another absolutely essential document. The buyer’s offer must be

accompanied by evidence that they can buy—a lender preapproval. Additionally, they

should include documentation of any cash they plan to put in the deal (proof of

funds).

Top agents have learned to be rigorous and unforgiving about this one. Short sales

tend to be complex and time consuming enough without risking the deal with a less

than fully qualified buyer.



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9. Preliminary HUD-1

The HUD-1 settlement statement—in preliminary form—should always be

submitted to show the lender what the return to them at closing will look like. Have

it prepared for you by your title company.

The lender is totally focused on their net from the deal—and the estimated HUD-1

will show them their bottom line. Will the short sale produce the dollars they need to

justify the advantage of not going to auction or bank-owned status (most likely the

latter)? The HUD-1 will provide the input the lender needs to make their decision.

TIP

Estimate Settlement Amounts for ALL Lienholders

The HUD-1 prepared by your title company must include

estimated settlement amounts for all lienholders –

including second and third lienholders – whatever number

there are. These additional lienholders will usually agree to

settle – often somewhere in a range of 5 – 10 percent of

the original debt owed to them. This is not always the

case. Some second lienholders can be difficult. .

TIP

HUD-1 and Commission Rates

The HUD-1 provides smart short sale agents with opportunities as well

to designate fees that may provide negotiating room on commissions.

Some agents add a processing fee at Line 1306. Still other agents set

their commission higher at the outset in order to have negotiating room

when talks begin.

Principle number one with the HUD – 1 is that the number on Line 803 on the seller side

must be zero. REMEMBER! One of the key premises of a short sale is that the seller

cannot afford to bring any funds to closing.

TRUTH



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10. Your CMA

Be extraordinarily thorough, and remember you do not know what the bank

considers “the right price.” But you must price at a level that will attract offers. The

lender will do their own assessment—using an appraiser or a BPO vendor company

or agent. You must be prepared to defend your CMA against the bank’s BPO or

appraisal numbers that might be different.

TIP

Use Tax Records and Other Sources

Use the MLS as you ordinarily would, but also use tax

records. Make sure you are not missing any deals that

might be relevant. Remember CMA accuracy and

credibility is paramount for you, and not everything sells

through MLS.

TIP

Schedule Price Reductions and Document Them to the

Lender

In short sales, as in shifted market generally, many top

agents are advocates for setting an aggressive price

reduction schedule with their sellers up front. The strategy

when you keep reducing price – and that history is

documented – the written evidence becomes a very

effective tool for showing the lender why they should

accept the offer you have submitted.

Discuss commissions up front with the lender. Some lenders have a policy

protecting commissions on all short sales involving their loans. Some agents

choose not to do business with lenders who try last minute bullying tactics to

reduce commissions.

TRUTH



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11. Fax Cover Sheet

This is the last item on our list but its importance cannot be overstated. There’ll be

more about that shortly, as well as how to ensure the necessary clarity, under Step 5:

Submit the Package and Offer.

A sample fax cover sheet is included in the course tool kit.

What Documentation and Other Paperwork Must Be

Included in the Short Sale Package?

List the ingredients in the short sale package. It helps to begin

with the items you will need to collect from the homeowner and

forms you will provide for completion.

As a short sale expert, you’ll absolutely need to know this list, or

your package will likely be ignored or rejected by the lender.

Work with a partner. Switch roles and repeat the process.

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________



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Step 3: Price and List the Home

When you input the prospective short sale listings in MLS, there are some rules you

need to watch for and tips to follow.

TIP

Don’t List Prematurely – Be Prepared

Use the MLS as you ordinarily would, but also use tax

records. Make sure you are not missing any deals that

might be relevant. Remember CMA accuracy and

credibility is paramount for you, and not everything sells

through MLS. FHA sellers must be accepted into FHA’s

short sale program before you can correctly list their

property as a short sale.

HUD’s process is straightforward and involves the use of

specialized forms to apply, to be approved for the

program, and to close.

FHA does not require an offer to accept a seller and their

property into the short sale program.

Follow MLS Rules

Short sale properties are listed like any other property—with some key exceptions.

It’s important to describe the listing as a short sale—within the bounds of any rules

set by either the MLS, or the lender, about how they want the property described.

Be sure you are clear it is a short sale “pending lender approval.” Also, be sure to

indicate commissions are variable, to be split fifty-fifty. Finally, let all comers know

that the property will be sold “as is.” The bank will set the price and there will be no

negotiation. Inspections are for buyer information only—not to negotiate repairs.

This is a short sale. The seller has no money to bring to closing, by definition. And

the lender is already selling short. They will typically not accept any other costs.



87

Provide Instructions for Agents

Include on the MLS listing as much information as rules and space allow—telling the

buyer agents exactly how to proceed with any offer.

Supplement the MLS information with a posting on your website(s), letting buyer

agents know specifically what they’ll be expected to do and what the process will

look like.

Do a Great CMA—Be the Expert

Top short sale listing agents strongly recommend that although the lender will hire

someone to do a price opinion (BPO—usually done by an agent for hire) or an

appraisal, you should always submit your own CMA.

You will do that CMA on the property just the way you normally would. But the final

pricing considerations are different.

TIP

Lender Standards for Net Return Vary Among Lenders

In listing the property, part of the homework you may

want to complete is commonly known as “short sale

math.” The effectiveness of this tool depends upon your

understanding of what lenders operating in your market

will generally accept as a settlement of conventional

mortgage loans.

FHA and VA have their own guidelines on settlements.

FHA, for example, has a tiered system starting at 88

percent of market value and going down to 84 percent.

VA’s standard has been 88 percent.

What lenders accept as a settlement on conventional loans

is definitely a market-by-market call. Research shows the

range can start as high as 90 percent of value and go down

to 70 percent of value. The average is around 85 percent.



88

Lender Net and “Short Sale Math”

To be effective in pricing, some agents and short sale negotiation vendors feel it

makes sense to calculate the consequences of a given selling price on the needs of all

parties—particularly the lender and you!

If you think it can be helpful to consider your proposed list price based on what the

lender may accept as their bottom line, here is what you need to consider and a short

example to illustrate how the calculation works.

You are basically working backward from some solid assumptions—including the

price the lender is likely to accept—to factor in all the fees and costs the sale price

must cover.

Listing a short sale property at a price that it both CMA tested and also has a great

chance of meeting the lender’s net requirements is a bit secret to short sales

success.

TRUTH



89

Here are the steps:

1. First, Assemble the Critical Numbers in the Short Sale

� Initial list price to bank

� Initial list price to MLS (may or may not be the same)

� Net proceeds required by lender

� Bottom line amount that will cover bank’s net, plus commissions and

seller closing costs (industry estimates work here—85 percent of value is

standard for conventional loans, for example)

2. Next, Go Through the Calculation Steps

� Establish net dollars to bank—there are different lender thresholds for

net (FHA, VA, Conventional)

� Factor in commissions and closing costs

� Factor in any other fees or costs

� Leave room for negotiation

Math Example

Use ”gross up” calculations, working backward from lender minimum net

($170,000).

If this were a typical conventional lender’s deal, their expectation standard

would be to receive about 85 percent of value in a short sale. So, the

established value (by appraisal or BPO) would be $200,000, creating a

minimum net of $170,000.

$170,000 ÷ .92 (8% comm. & closing costs) = $184,800

$184,800 + $3,000 taxes past due = $187,800

$187,800 ÷ .97 (3% negotiation buffer) = $193,600

$193,600 is the minimum selling price to cover costs.

Consider the comps.

Then, set the list price and get to work.

3. Other Factors to Consider

� Sellers must disclose other assets to lender, like 401(k), IRA, etc.

� There can be tax consequences for sellers in a short sale.

� Federal law waives some taxes in mortgage debt forgiveness, so always

counsel your seller to contact a tax attorney or the IRS for details.



90

Step 4: Obtain an Offer

Speak to the buyers’ agent first about their offer. Find out how much they know

about the short sale process. Despite your best attempts to educate them, they may

not have read anything you posted for their education and benefit about the offer

process. You may be able to help them make corrections that will prevent the lender from ignoring

or rejecting the offer.

Let Investors Help

If you have a good network of investors who work with you from time to time, you

can get their help to create a short sale breakthrough. One of the big challenges in

short sales is learning the lender’s bottom line. Here’s one approach some agents use:

Initiate the conversation with the lenders by asking one of your

investor customers to make an offer. “If it’s a great deal, they’ll

buy it.” This started the process immediately and allowed the

agent to learn what the lender wanted. “If we find another

buyer, we know what they need to offer.”

Be aware that lenders know agents may use investors to test the lender bottom line.

Proceed with caution. Your investor must be ready to perform if the lender approves

the package. If they don’t, your credibility with the lender is at risk.

With the vast majority of lenders, it is only after an offer is received that you submit

the seller’s package which you built – along with that offer. You are applying for

short sale approval based on a specific offer.

TRUTH

How do

you enlist

investors in

the short

sale

process?



91

Multiple Offer Strategy

Short sales can be a confusing process for everyone involved. An example would be

when an offer has been submitted to the bank and another offer, or offers, come in.

What do you do? You’re in a challenging spot. You probably do not know whether

the original offer you received and submitted has been approved, or even considered.

You are eager to help your seller—and get paid.

In a short sale situation, what is the best advice for listing agents?

The consensus of top agents:

1. One contract at a time: Do not submit more than one offer to the lender at

a time.

2. Take backup offers: Do hold other offers in reserve, as backups, just as you

would in a traditional sale. The first deal may fail, and you’ll be ready to keep

the seller’s hopes alive by immediately showing the lender another offer.

Most top agents say under no circumstances should second or third offers be

submitted to the lender when one offer is already in their hands. It will only cause

confusion and delay.

TRUTH



92

This is just another area where short sales are different from traditional sales. Here’s

a summary of the rationale, in typical multiple offer scenarios:

Multiple Offer Strategy Comparison

Situation Traditional View Short Sale View

Approval In traditional real estate,

a bidding war can be

great for your seller. You

should encourage it.

This is not traditional real estate in that

both your seller and their lender must

approve a contract for a sale to happen.

There are no bidding wars.

A Low First

Offer

You advise your seller

that it’s well below your

CMA, and they’ll want to

counter that offer

aggressively.

The lender has calculated the net bottom

line needed for their business. If the offer

is too low, the lender will just ignore it—

or return it to the listing agent—and pass

the property to the REO department.

A Second

Offer

That’s

Better

You can’t ethically

override the first offer

until your seller accepts

or rejects the first offer.

Your board may have a

formal multiple offer

procedure, with

accompanying

paperwork.

You need to advise the

buyer agent(s) of the

situation and encourage

“highest and best”

offers.

You know the lender will be happy with

this offer, if they receive it.

Make it a backup. Be sure the buyer agent

knows why, and what your plan is.

The lender’s process to react to offers

takes time.

Once they reject the low first offer,

immediately contact the loss mitigator

and submit the new, better offer—with

the original homeowner documentation

package.



93

RESOURCE

There’s much more information on multiple offers and other

distressed property offer-and-negotiation issues in the module

SHIFT Tactic 11: Distressed Properties: Working with

Buyers.

One Approach to Offers: Submit the Lowest First

Some things in short sales are counterintuitive. Normally, as a listing agent, you’d

want to show your seller the very best possible offer from a buyer. Here, it can be

different.

TIP

Some top agents like to get the bank looking at the lowest offer they

have. Why? For one thing, buyers tend to become impatient and walk

away from deals. “You don’t want to come back to the lender with a

lower offer the next time around. That way, if the first one fails for

whatever reason, I can at least come back with a better offer than the

one they just saw.”

Another reason for the lowest offer first strategy? Imagine that your

market is declining and you submit the highest offer—and it is approved

for short sale at that price. If the buyer walks away due to impatience,

you may be stuck at an approved price the lender will no longer do. That

would mean taking time to start over—just what you didn’t want.

The other side of the coin: this lowest offer strategy’s success may depend on whether it fits your

market. How fast is your market declining? The market may dictate how big the gaps

are between the offers you have. If the lowest offer is a true lowball, submitting it can

well be a waste of everyone’s time. It will likely be rejected.

Require Nonrefundable Earnest Money

Let the buyer agent know the earnest money (a modest amount) will be held for at

least sixty days. It helps get “buyer skin in the game”—an incentive to wait—while

their offer and the seller’s short sale package are being considered by the lender.



94

Step 5: Submit the Package and Offer

Submitting a short sale offer is substantially different from what you would do in a

traditional real estate deal. For starters, you are submitting the offer—along with the

entire short sale documentation package you previously assembled with the seller’s

help.

Submit a Complete File

The most important point is the most obvious—and most neglected—according to

top agents. One top agent encountered an interesting scenario while visiting a loss

mitigator friend in the mitigator’s office.

“I walked in and saw this huge mound of files on her desk; there must have been 500

of them,” she says. “I was astonished. I asked if she was working on all of them. ‘Oh

no,’ the mitigator said. The files were all incomplete. The 50 in another pile were the

ones she was working on.”

TIP

Packages Go to All Lienholders

Although it will be up to the first lienholder to

communicate with any secondary lienholders about the

settlement, you must be sure to submit complete short

sale packages to the second lienholder and any other

lienholders.

Remember: Lenders have difference policies and practices, and the lender is the

one who decides what a complete profile is. Be sure you know what they require –

exactly. Then provide it.

TRUTH



95

Important:Important:Important:Important: Bold Cover Sheet and TOC

Always put a very clear and bold typeface cover sheet on the package when sending

it. Write “Urgent: Short Sale Proposal” in big, bold letters across the top. Also

consider putting all the critical seller information on the cover sheet, and their loan

number in large type, plus your own contact information.

Other agents follow this idea with another: Put a table of contents on the cover

sheet. Show the loss mitigator exactly where they can find everything they need

without digging through the stack!

Share History of Pricing That Brought the Offer

In brief, a great marketing and pricing strategy for short sale listings is like one

advocated in the book SHIFT. Convince your seller to agree to regular periodic price

reductions. Track the results of any interest and showings after those reductions—

create a paper trail for the lender that proves why the offer you are sending them is

set at the right price!

A Source of Delays: Investors Make Decisions, Not Loan Servicers

The investor who actually holds the note with the seller is the ultimate decision

maker when you are dealing with a servicing company. This adds a layer of

complexity. It’s rare to be able to communicate with underlying investors. The asset

manager is their agent, but without the final power to decide the short sale price.

TIP

Create an Evidence Trail: Record the Sending Fax Number

When submitting a package, having a record for the lender

of the fax number you sent from is a great way to help the

lender find the package you’ve faxed to them.

Packages “go missing” a lot. Be ready to resend them and

help the lender locate them.



96

Step 6: Follow-up

Short sale processing is all about follow-up. You must always ask questions and be

clear about the rules.

What Is Your Procedure from Here?

It’s recommend that you ask this question—no matter what, even if you have

recently done business with this lender. Banks are re-staffing and reorganizing to

handle the volume of short sales and foreclosures. You can’t assume anything, even if

you think you know their process.

The First Thirty Days

This is the time period when the lender does their homework on the economics of

the proposed deal. Does this deal make sense by their standards? Nothing will

happen on the deal during this time. You want to be sure they are looking at your file.

During this initial period, top agents recommend calling every 2–3 days—until it is

confirmed that the file has been assigned to a loss mitigator. Then you can slow

down a little and call once a week consistently.

Never assume anything – except that if you don’t ask the question, you won’t get

the answer. Ask question from day one and don’t stop.

TRUTH



97

TIP

What the Lender Considers Once They Have the Package

Remember! The lender is trying to determine whether the

short sale at a given price is a better deal for them than

foreclosing and going through auction—and probable

marketing, maintenance, and sale as a bank owned

property, or REO.

Banks have standard financial spreadsheet calculations that

they run each proposed deal through to make their

evaluation. Whatever time it takes for that particular

lender to assign someone to run the process and

communicate the results is the time you will wait for any

response.

A Communication Routine

It’s about routine and relationships. Most agents say the key is to find a happy

medium between calling too often and not enough. The consensus: a couple times a

week seems smart. Here are the all-important questions you need to ask up front to

get started on the right foot:

1. Who do I need to talk to?

2. What is the number I should always call?

3. What are the best days and times to call?

4. Do you have any special policies or procedures about file follow-up that I

need to know?

Keep the Buyer Interested!

The best thing you can do as time passes is to give regular feedback to the buyer

agent about your contacts with the lender—even if, as is often the case, there is little

or nothing to report.

Short sales are notorious for buyers losing patience and walking away from the deal

prematurely. Keeping the buyer is the big deal in this business. You’ve got to stay on

top of communication with them. In reality, there isn’t much you can do beyond

that, except be as efficient and organized as possible with the lender.



98

Remember: Be Sure the Foreclosure Has Been Postponed

Lenders can stop a foreclosure very quickly, but you can’t assume just because they

have your package—or even later when they approve it—that the foreclosure won’t

suddenly “pop up” and spoil everything!

Know the scheduled foreclosure date. If it is happening sooner than you might

expect a lender response, be proactive. Get a postponement to allow your sale to

happen.

Foreclosure is not a process that is stopped, except when a sale closes. A

postponed foreclosure is usually put off just thirty days. Stop on top of this

postponed date and don’t let it get in the way.

TRUTH



99

Step 7: Negotiation Phase

When the lender assigns a loss mitigator to the file, you have an official point of

contact to talk with about details of the process—including negotiation of price and

financial terms for the HUD-1.

The bank begins processing the offer and package through their system to assess the

financial impact of the proposed deal for them.

If they agree that a short sale makes sense financially, the bank will also order another

agent, an appraiser, or a BPO servicing company to do an appraisal or BPO for

them.

Negotiation: What You Must Do

The negotiation stage is where “the rubber meets the road” in short sales. Along with

prequalifying the seller, it’s one of the lynchpins of a successful deal. And success in

negotiation, as in prequalification, begins and ends with a positive and understanding

mindset.

The people you are working with at the bank are working hard. They get tired and

frustrated just like you do. Be nice to them, or you may find your file at the bottom

of the stack. Why ever take that chance?

If the lender hasn’t already revealed their criteria for a sale informally, they will do so in the negotiations.

Mindset is the first consideration in successful short sale negotiation, Remember,

the lender holds the cards. The lender’s loss mitigator should sense you are their

partner, not an adversary. You are seeking a win-win closing.

TRUTH



100

Approach All Lienholders Promptly

If you are working with more than one loan, begin negotiating with both the first and

second (or even third) lenders at the same time. If one of the lenders agrees to your

proposal, rush a copy of the acceptance letter over to the other lender right away. It

will speed your negotiations with that lender. Often the lender on the second loan

will accept pennies on the dollar. It is not uncommon for the second lender to take

as little as $1,000 for a $15,000–$20,000 loan. If the lender on the second loan agrees,

it will add weight to your proposal with the first lender, even if that lender had

appeared to be immoveable.

First Lienholder—In the Driver’s Seat

The mortgage lender is the first lienholder, and they are trying to recover as much of

their default loss as possible in a short sale. When it’s time to discuss qualifying the

short sale and setting details of pricing and fees, you’ll be talking with their

representative: the loss mitigator. But there may be other parties involved: additional

lienholders.

Remember: it’s the primary lienholder that drives the process. Their claim against the

property is the largest. They have been the primary communicator with the

homeowner regarding homeowner default and the likely pending foreclosure.

TIP

Negotiation: Put Lien Demands in Writing

Some top agents strongly recommend having first

lienholders put in writing the amount they will offer

second lienholders. Send the letter to the lienholder, and

be prepared to ask to speak to a supervisor if the problem

persists.

In your negotiations, ask the lender to report the short sale to the credit bureau as

“paid as agree.” You want the lender to report it as settlement in full, with full

release of the lien.

TRUTH



101

Second and Third Lienholders—Smaller Players Can Block Deals

Dealing with the claims of secondary lienholders is, potentially, one of the more

complicated parts of completing some short sales. Here are ground rules:

Secondary lienholders have filed their lien normally, because they have exhausted

other means to collect what the homeowner owes them.

“Most lienholders understand exactly what they’re doing by filing a lien,” according

to the popular Complete Idiot’s Guide to Buying Foreclosures, Second Edition. “They take the

step because they are unable to collect a debt. They realize there’s a good chance they

may never see the money.”

This is a key reality. It means that second lienholders often settle their claims in a

short sale for a small percentage of the total due. It’s quite normal for a second

lienholder to accept a settlement of as little as 5–10 percent or the amount due,

according to top short sale agents.

Watch Out for HOA Liens

HOA past-due amounts can be a real snag in settlement. HOAs know they will be

paid by the first lienholder if the property is foreclosed, so they’re tough to negotiate

with. HOAs won’t hesitate to slap a lien on a property if the homeowner is

unresponsive about a past-due amount. Be sure you find out about any past-due

amounts in your initial due diligence. If there’s money owed, your first option should

be to strongly encourage the seller to come up with it somehow, and pay the full

balance. It will simplify the sale and keep things moving in the right direction.

REMEMBER: Junior lienholders will not be paid if the property forecloses instead of

selling short.

TRUTH



102

TIP

Account for All Lien Settlement Amounts on HUD-1

Be sure to enter values for proposed settlements to all

lienholders on the preliminary HUD-1 you’re including in

your short sale package.

Choosing to Outsource Negotiation: Pros and Cons

Negotiating a short sale can be a time-consuming process. It can also be a confusing

process if you don’t know all the steps and principals involved. This reality has led to

a boom in the number of “short sale service and negotiation” companies around the

nation. Some are small and local, others are large and national.

In order to maintain focus on their businesses, some top agents leverage help in the

negotiations. Some choose the third–party route because of local or state rules.

Watch this aspect of the short sale industry carefully. New service providers

are coming online all the time. More real estate professionals and

businesspeople are now understanding the issues that have blocked and

slowed short sales, and they’re looking for better solutions.

Successful short sale agents have different views about whether they will take on

short sale negotiations with more than two lenders or lienholders. Some say it’s

just too hard and time consuming. They refer to business. This is an individual

agent’s business decision.

TRUTH



103

Here’s a summary of pros and cons regarding outsourcing negotiations:

Negotiation Outsourcing Pros and Cons

Do It Yourself Outsource

Pros Control the process Leverage your personal time for

lead generation

Stay close to the players Capacity for more deals in your

transaction pipeline

Be able to report “why” and

“what’s happening” to seller

and buyer agent in detail

Control staffing costs

Teams with highest close rates

in KWU research handled

negotiation in-house—and

sometimes provided that service

to others

Cons Becoming overwhelmed with

details

Watch for large up-front fees

Frustration with process impacts

your mindset

Negotiators are distant from you,

your market, and the parties to

the deal

Added cost of staffing up to

delegate negotiation in your

team

Most close rates reported to be

only slightly better than national

average for all short sales—

which is low

Challenge of teaching

negotiation skills to others



104

TIP

IRS and Other Tax Liens

If the property is foreclosed by the IRS, for example, their

dollar claim comes ahead of ALL others.

Sometimes IRS tax liens can be removed from a home by

submitting a Partial Release of Lien request to the IRS.

Why may that be effective? It’s because IRS liens are placed

against all of a person’s property—not just their home.

Be sure to ask sellers about any tax liens—IRS or

otherwise—up front. Don’t be surprised when a tax lien

pops up in the closing statement because you didn’t do all

your homework!

Also, a good title company partner can often help detect

tax liens with a thorough title review.

Final Thought on Negotiation: Remember Who’s in Charge

Sometimes when agents are negotiating with the bank, they get frustrated. Everyone

wants things to move faster. It’s human nature to get angry and upset. It’s important

to shift your mind to this picture. Suppose you had taken out a personal loan from

your branch bank. You made a number of payments and suddenly you couldn’t pay.

So you went to the bank to ask them to forgive as much of the loan as possible.

What do you suppose your plan would be? Would you come in with all guns blazing?

Or would you come in with your hat in your hand, hoping for their understanding

and help? If you really wanted their help, there’s only one right choice. Keep this

analogy in mind when you begin to lose your patience.



105

Step 8: Appraisal

As in traditional sales, in short sales it all eventually comes down to the price. What

will the lender accept as a sale price that sufficiently mitigates their loss on the

defaulting loan?

Meet the Appraiser or BPO Agent

What the person who’s hired by the bank to make a price determination says in their

report is critical to you. Agents say it’s amazing how many agents just let this step

happen without getting involved in any way.

The best agents understand that, using care and diplomacy, they have a chance to

influence the decision. Be sure to ask when the appraisal is being done. If you’ve worked on

your relationship with them from the start, they’ll probably tell you.

Make arrangements to be at the property for the appointment (see Tip! on the next

page). Share your CMA with the appraiser or agent. Let them know how eager your

seller is to sell. Share the hardship letter with them.

TIP

Be the Point of Contact for Access

Agents don’t all agree about this point, but many will

actually remove the lockbox from the property once they

know the appraisal is ordered. They want to be certain the

appraiser or BPO agent must meet them at the property

to gain access.

The idea is, when you meet the appraiser to bring a copy

of your CMA and any other relevant information, offer it

as a professional courtesy.

The critical factor in price agreement is any gap between your CMA and the

appraisal or BPO doe for the lender.

TRUTH



106

Other agents don’t necessarily meet appraisers at the property, but they do call them

ahead of time to share information, or they fax the appropriate documents to the

appraiser or BPO agent.

Get to know the BPO agents and appraisers working in your market. Being on their

best side can pay off for your sellers and you. New guidelines for appraisers are designed to

limit contact, so be sensitive to that—but also be persistent.

TIP

Appraisals and BPOs Can Be Appealed

It is possible to appeal a lender’s appraisal that comes in

out of synch with your CMA. Some agents develop their

own appeal document. This helps things move swiftly if you

learn that the estimate of value (appraisal or BPO) done

for the lender is significantly different from your own

CMA.



107

Step 9: File Approved by Lender

Only the lender can approve the file. If they do, that means you and your buyer are

moving toward closing. This agreement comes in the form of an approval letter from

the lender.

Watch Approval Letters for Deficiency Judgment Language

Just because a lender agrees to short sale terms does not mean they’ve given up their

right to pursue the selling homeowner for more money later! That claim is called a

deficiency judgment.

Many agents report lenders have not pursued deficiency

judgments in the vast majority of short sales. But more

recently, lenders seem to be strengthening the disclaimer in

their approval letter that reserves their right to a deficiency

judgment later.

Part of your job is to get the most ironclad commitment from

the lender that you can—to protect your client.

Here are a few more important things to check for on approval::

To Do Done

Closing Date: Check the closing date. Is there enough

time to get funding and close?

Liens: Be sure all liens are settled.

Commissions: Check commissions for last-minute

reductions.

Costs: Know what costs the lender is and is not

paying—no last-minute surprises.



108

Step 10: Deal Closed

Top agents report one of the last-minute developments you may encounter—if you

are doing your own negotiating—is an effort by the lender to renegotiate your fees

and commission. Although Fannie Mae and other large lenders are now adopting

policies to bar these reductions, they still happen.

The HUD-1 presents an opportunity to counter any lender tendencies to try to

negotiate your commission. There are sometimes last-minute negotiations on the

terms of the HUD-1, once the lender realizes what their actual net proceeds from the

sale will be.

TIP

Avoid Last-minute Fee Negotiation Disappointments

Adding a negotiating fee or servicing fee to the HUD-1 is a

technique top agents use to increase the chances they’ll

get paid what they should.

Wait and Hurry Up!

Finally your hard work and patience pay off and you are ready to close the deal,

saving your customer from foreclosure! Here are some key points about the closing

(some have already been mentioned):

1. Thirty-Day Window – Typically, the deal must close within thirty days of

the lender’s acceptance. As such, the buyer has to be ready with cash or

funding.

2. Seller Need Not Attend – The seller does not have to attend the closing.?

3. Seller Brings No Money – Remember that the seller most likely is not in a

position to bring cash to the closing. If you had the seller and buyer sign a

short sale disclosure, everybody should understand that the seller is not

going to be able to pay any of the buyer’s closing costs.

4. All Liens Are Satisfied – Your preparation in step 1 of the process should

help you to ensure there are no additional liens on the house.



109

Alert the closing company up front that this deal is a short sale, and offer to answer

any questions they have. Some closing companies may be unfamiliar with short sales.

If you have any input at all (it’s unlikely), be sure the title or title/escrow company

has plenty of short sale experience.

What If the Lender Rejects the Deal

The lender may reject the offer and package and not tell you why. If the lender does

not accept your proposal, request a reason in writing.

There are five common reasons for a lender to reject a proposal:

1. Dollar Net Not Met – It may not meet the lender’s criteria. Perhaps the

lender was not going to net a required percentage of the BPO.

2. Too Little Time – Perhaps your time frame did not allow enough time for

the lender’s internal processes, and they weren’t able to evaluate the

proposal.

3. Missing Information – Information that the lender wanted may have been

missing from the proposal.

4. Internal Transfers – The proposal could have been submitted to someone

who, at one time, was the decision maker in Loss Mitigation. That person

may have been transferred to another position.

5. New Lender – The loan could have been sold.



110

TIP

It’s Not Over Till It’s Over—Dispute and Appeal!

Your negotiations are not over if the proposal is not accepted. You could

still close this deal! You might just have to compile additional market or

other information and resubmit it.

Your challenge is to get the loss mitigator to reveal why the deal was

turned down. How far apart is the offer from the number the lender will

accept? Are there other concerns not related to price?

If you believe the lender’s BPO is out of line on the high side, submit a

formal appeal letter along with your CMA and any other proof your

valuation is correct.

What If the Buyer Walks Away?

There are many instances of buyers walking away from short sale offers, frustrated by

the delay in getting a response. Even when the buyer walks, the lender may ultimately

approve the deal.

When that happens get the listing back in MLS and indicate that it is a lender

preapproved short sale at whatever the offering price was. That’s sure to attract more

offers.



111

Top Agents’ High Close Rates Set Them Apart

One of the biggest negatives in the marketplace surrounding short sales is that they

are “difficult to close.” While there is definitely truth to this, research uncovers two

other important realities:

1.Responsiveness is improving – Generally, lenders’ responsiveness, and

their interest in completing more short sales, seems to be growing. And

new federal guidelines might eventually spur lenders with a set of

recommended timelines.

2.Strong, repeatable agent processes work – Top short sale specialist agents

and negotiators who have refined and honed their processes and

paperwork—and truly know the business inside and out—are having

excellent closing success rates.

The faster and more efficiently you make the short sale process work, the more

time you save – and the more money you can make.

TRUTH



112

FHA and VA Process Differences

Conventional mortgage loans dominate the marketplace, but you will encounter both

FHA and VA mortgage loans when working with distressed sellers.

FHA and VA guidelines for the process are similar, but not identical. Top agents say

if you know and follow the FHA guidelines, you will be in good shape on the VA

process.

Here are some things that are important to know about FHA guidelines.

Background

FHA started establishing the current program for handling short sales back in the

mid-1990s. In 2000, the FHA turned over the negotiating process on short sale

proposals and offers to lenders, instead of handling them in-house.

In VA loan situations, however, you will likely still negotiate the final settlement

directly with a Veterans Affairs representative.

“Standard of Practice”

The Federal Housing Administration (FHA) short sales are governed by a booklet

issued to all participating lenders called the “Standard of Practice.” Get a copy and

read it. If you absorb most of what you read, top agents say, you’ll know as much or

more about what to do as the lender’s loss mitigator you’ll be working with.

“The beauty of FHA short sale deals is that everything is written down in the

process—in one place. All deals use standard forms and the net settlement guidelines

are published. Read the rules, know them, and play by them exactly. Your deal should

sail through—given the offer is right.

Here are some key rules of the road governing FHA deals:

Non-owner Occupant

To qualify for a short sale in an FHA mortgage loan situation, the seller must occupy

the property as their primary residence.

Subordinate Liens

The FHA will only pay a total of $2,500 in subordinate lien settlements—period.



113

Allowable Closing Costs

The FHA places a strict limit on closing costs it will pay—limited to “reasonable and

customary” items like title policy, agent commissions, etc. The FHA will not pay any

buyer closing costs, and it will not permit the purchase price to be raised to offset

additional costs.

Standard Forms

There are three standard forms you’ll see and use in every FHA short sale. They are:

1. HUD 90038 – Application to Participate – You and your client complete,

sign and submit it to apply for approval in the program.

2. HUD 90045 – Approval to Participate – This is the formal “go or no go”

reply you will receive from the FHA. Without it, the deal cannot proceed.

3. HUD 90051 – Sales Contract Review – This document will come back to

you from the FHA, once they’ve reviewed all documents and the offer.

TIP

Consulting Session No Longer Required

For many years, the FHA required the seller to go through a consultation

with an FHA adviser before a short sale would be approved. That

requirement was dropped, although many lenders still aren’t aware of

the change.

Other Features of the FHA’s Program

There are additional provisions you need to be aware of, which are listed below. But

remember, what’s presented here is not a detailed and comprehensive view. For that,

you must read and digest the “Standards of Practice” document from the FHA.

Homeowner Incentive

The FHA offers a cash incentive to homeowners, paid at closing. So, unlike

conventional short sales, the FHA seller can actually walk away from closing with a

little money in their pocket. These incentives are tiered down, starting at $1,000,

depending on the time required to get to closing.



114

Last Two Years’ Tax Returns

Unlike most conventional loan situations, short sale applicants in FHA situations

must submit their last two years’ federal income tax returns as part of their document

package and application.

Default Rule

The FHA will look at short sale proposals from homeowners who have not yet

defaulted on a payment. But the FHA will not approve and close a short sale unless

one or more payments have been missed.

Do You Know the Ten Steps to a Short Sale?

Knowing the process flow of a short sale is essential—for

consulting with homeowners as well as with buyer agents and for

organizing your own work processes.

Recite the ten steps covered in this chapter. See how many

you can recall before you check back in the material.

Knowing all these steps is a must—regardless of how you

choose to do the business.

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

Chapter 7: Lead Generation

Lead Sources and Lead Generation

Lead sources for short sales are everywhere. But, before you can take advantage of

them, you must acquire the knowledge and start building the expertise that allows

you to rewrite your USP (Unique Selling Proposition) to include—or even to focus

on—short sales.

Once you’ve crafted the messages that position you as an expert who is ready, willing

and very able to help owners in distressed situations, here are some of the targets you

can aim those messages at.

Other Agents

If you want to be a successful short sale agent, top agents agree your primary

marketing target is likely to be other agents; people who are good lead generators will

encounter short sale opportunities. They may not want them! That’s where you can

step in—but you need to market to other agents so they know you are ready, able,

and willing (as SHIFT says) to step in and help the right thing happen.

Your Database

Just as in traditional business, marketing to your database with a consistent 33 Touch

Program will generate business and referrals. In some markets, many of those leads

are short sale leads, or short sale candidates—but you have to get the message out in

your touch program and in your marketing that you have the expertise distressed

property owners need to escape their real estate troubles.

Remember, your database is comprised not just of past clients and “Mets.” It also

includes people you do business with on a regular basis—in your real estate business

or your personal business.

CHAPTER 7: LEAD GENERATION


116

Flier Idea: Key Questions

Every short sale agent prospecting their database, or other lead segments, should

have a simple, bold flier called “Are You Dealing with a Real Estate Problem?”—to

send electronically or to hand out at open houses—that asks these questions:

1. Are you facing a negative life issue (death in the family, divorce, or

unwanted job transfer) that’s threatening your ability to keep your home?

2. Have you missed one or more mortgage payments?

3. Is your home worth less than the amount you owe on your mortgage?

Connecting these questions with your contact information—and getting it in front of

as many people as possible—can get short sale leads flowing to you.

Your Current Clients

Don’t miss the obvious—we all do it! Talk with your current clients. Whether or not

they are short sale prospects, these days the odds are they know someone facing a

loan modification or potential short sale situation.

Your Own Listing Appointments

In your listing appointments, you may find sellers who are in pre-foreclosure and are

potential short sale customers. Dick Dillingham, KWU Master Faculty, politely asks

his appointments, “Are you current on all your mortgage loans?” to open this

conversation. Be prepared for anxiety with any “no” answers. Remember that the

financially distressed homeowner is stressed. Be reassuring. If you know of any other

houses in the neighborhood that sold in pre-foreclosure, mention it.

Short sale leads are everywhere. You need to market your expertise, explain what

you know that can help homeowners with mortgage payment problems.

TRUTH



117

Farming

If you farm a neighborhood, or neighborhoods, be sure your marketing message

includes language that grabs the attention of short sale candidates.

“Having trouble making payments?”

“Has a crisis put your home in jeopardy?”

“Facing foreclosure? I can help!”

Short, powerful, and pointed messages like these are used by top short sale

agents to help surface people facing financial crises—likely short sellers.

Some regional owners share costs of buying lead databases from lender sources.

But farming is a great way to get short sale leads. You need to put out messages

that reach people who are at least sixty days late with their mortgage payments.

Expired Listings

People trying to sell who can’t sell come off the market at the end of their listing

for multiple reasons. One of them is unwillingness to face the lower price that

will make a sale happen. Often today, that lower price is a short sale price.

Approaching expired listings is a solid short sale lead generator—particularly in

neighborhoods where research tells you prices were recently over-inflated. Those

owners may have seen their equity vanish with declining property values.

Expired Short Sale Listings

Short sale listings can expire before any short sale approval has come from the

lender. If you win a listing opportunity with an expired property, be sure to find

out what was submitted to the bank and when it was submitted.

First, try to get a copy of what was submitted by the previous agent. If that fails,

have the seller sign a Letter of Authorization and get it to the lender quickly. You

need to find out:

1. Where the process stood with the lender at expiration

2. What is missing from the documentation package (frequently

something is missing)

Bottom line: If you want this expired listing, be prepared to submit an entirely

new package.

Sharing your

agent-branded

KW App?

1. Get the Keller

Williams Real

Estate app

from Apple

App Store or

Google Play

Store.

2. In the app, use

“Agent

Search” to find

and select your

name.

3. Toggle “Make

this my agent”

button to

“Yes”

4. Use “Share

App” to share

with your

contacts!

Find More on

KWConnect.com



118

FSBOs

What’s true of the owners’ expired listings is also often true of owners selling without

an agent. Their reasoning: The margin between what they owe and what they hope to

sell for is so small they fear having to pay a real estate commission. This is a strong

indicator that their property may well be a candidate for a short sale.

Notice of Default Lists

Notices of Default are recorded with the county clerk at the county recorder’s office.

You can search these records for free.

Some top agents knock on potential customers’ doors as soon

as they receive a Notice of Default. By being there early, you

can provide them with more help than if you wait, because

every day counts. There are some states where the whole

foreclosure process can happen in a matter a weeks. By getting

there early, you can do the best possible job to assist these

distressed sellers.

Public Notices of Auction

You can look for Public Notices of Auction at the county recorder’s office as well.

Alternately, you can search your local newspapers for this information, or one of the

many online services that aggregate this information, like www.foreclosure.com. Be

aware that your time to work a short sale may be foreshortened if you find a

customer through a Public Notice of Auction. Unless the lender stops the

foreclosure process, your deadline for completing the short sale will be the public

auction date.

Delinquent Property Tax Lists

Local government tax offices—usually at the county level—keep updated lists of

property owners whose real estate taxes are delinquent. It’s no guarantee, but unpaid

property taxes can be a sign of a property owner in financial distress—a possible

short sale. After the local required period of delinquency, these properties are

typically taken and sold by the government in a tax sale.

How can

you use

county

recordings

of default

notices?



119

Title Companies

Many title companies collect foreclosure notice data and make it available to agents

as part of their marketing for agent relationships.

Media Marketing and Promotion

In addition, of course it makes sense to get your short sale expert message in front of

consumers in all the many other ways you may already be marketing your business,

including:

1. Online Marketing

2. Social Networking

3. Print Advertising

4. TV and Radio Advertising

Relationship Marketing

As in the examples above, marketing you would normally be doing in your business

can be turned into an effective tool to attract short sale leads. If short sales are the

opportunity you are focused on, you may want to redirect some of your marketing

time and cost toward very logical targets, including:

1. Lenders – A good lender relationship built through traditional business may

lead to tips on possible short sale business.

2. Divorce and Bankruptcy Attorneys – Any legal expert likely to be working

with people in times of personal and financial distress probably knows people

who would benefit from a short sale of their primary residence, or even other

properties.

3. Homeowner Seminars – Just as you can appeal to buyers and sellers

generally, or first-time home buyers, similarly you can appeal to people in

financial distress, or people very concerned about dropping home prices.

Seminars offering advice and solutions, well-marketed, may bring you quickly

into contact with people needing short sale help.



120

Do You Have More Lead Generation Ideas for Short

Sales?

Take a few minutes with a partner to talk through the sources

offered here. Can you think of others not mentioned?

Switch roles and repeat. List your additional ideas below:

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

___________________________________________

It can’t be emphasized enough, top agents in distressed markets are great

communicators. They have learned to step up their expertise and then share it –

by educating sellers, buyers, and buyer agents.

TRUTH

Chapter 8: Evaluate Listing Short

Sales and You

The course materials end here, but the most important step for you remains to be

done.

In the very first section of this guide, this goal was stated:

“To help you evaluate the business opportunities that

distressed real estate markets represent.”

Hopefully you’ve been doing the exercises along the way and a picture has been

forming for you—and a decision.

Do you plan to actively pursue short sales as the focus of your business, or are you

planning to add short sales to your skill set for the long term, as part of a mix with

your traditional real estate business?

If you are focusing on short sales, which business path within short sales is for you?

Wrap-up: Is There a Fit? What Is It?

You’ve learned that a lot of success in short sales starts with your mindset and your

understanding of the mindsets of the other players—distressed homeowners,

pressured and overburdened financial institutions, plus uncertain and sometimes

uninformed buyers and buyer agents.

These realities create critical personal and business demands for a short sale agent.

This final chapter is dedicated to helping you evaluate yourself against these

demands.

CHAPTER 8: EVALUATE LISTING


122

Personal Demands

A big part of the success equation for doing well in short sales is about your own

mindset and the personal qualities you bring to the business.

� Do you think you have the patience, persistence, and organizational

skills to succeed in short sales?

� Do you think you have enough of these qualities to succeed, provided you

can leverage the help of a person or persons who’ll bring the missing

ingredients you need to succeed?

� Are you systems oriented?

� Are you learning based? Do you believe you can learn and develop in

the areas you know you’ll need to succeed in short sales?

Business Demands

The other side of the short sale success equation is the business side. It’s clear that—

if you want to commit to this business—you need a strategy:

� Will you be what the guide calls an originating agent: one who handles

short sales from prospecting all the way through the process to closing?

� Will you be a referring agent: one who knows how to find and prequalify

distressed homeowners, and then turn their information over to a short

sale expert who will see the deal through and pay you a referral fee?

� Will you decide you have the personal skills and business resources to be a

short sale negotiation and processing expert: one who helps other

agents get short sale prospects accepted by lenders and offers on their

property accepted and closed?

CHAPTER 8: EVAULATE LISTING


123

TIP

Multiple Businesses under One Roof?

There are multiple possibilities. Research uncovered

several important facts about how agents do, or do not,

combine businesses in declining and distressed markets.

Concentrate on short sales: The majority of top short sale

agents seem to concentrate almost entirely on short sales.

They won’t turn traditional business with “equity sellers”

aside, but most of their time is focused on building their

short sale pipeline.

Short sales with a separate negotiation unit that serves

other agents: Some top short sale agents have successfully

turned their negotiation skills into a separate short sale

negotiation business that they run alongside their own

end-to-end short sale practice. They leverage their

negotiating skills and resources to generate additional

income.

REOs and Short Sales: Some agents do both REOs and

short sales. This is pretty common, but becomes less of a

reality when one or the other of these business lines really

takes off and becomes a volume business for them.

Distressed and traditional units side by side: A few agents

make a purposeful effort to create distressed property and

traditional business units side by side. They believe it keeps

them in the game for a return to more balanced markets.

These Choices are yours. Evaluate them. Get some coaching or mentoring to do

that. Make a choice, and take action to bring it to life.

TRUTH



124

Exercise: Three Short Sale Paths

The exercise that follows focuses on your three main paths within short sales: end-to-

end short sales, referral only, and negotiation/processing specialist.

1. Read through the personal and business requirements for each carefully.

2. Mark your preferred path.

3. Cite actions needed to pursue that path and time block them.



125

Three Options in Short Sales: Which Is for You?

Option 1

End-to-End Short Sales

Personal Requirements

Master patience, persistence, and empathy for homeowners’ financial and

personal distress.

Prepare to manage the negotiation side—doing most of that work yourself in

the beginning.

Extremely focused and organized. Committed to relationship building with a

range of lender reps.

Learn the variations in how deals are done.

Be an excellent communicator.

Commit to staying up to speed with the industry—and to educating others

about it.

Ready, able, and willing to be very, very busy.

Business Requirements

Short sale market savvy

Homeowner qualification skills

Short sale package-building skills

Time-blocking and business-planning skills

Career Vision the assistance you’ll need to handle volume that will make the

business profitable at the level you want

Marketing skills—ability to target short sale prospects



126

Option 2

Referral Only


Prospecting and qualifying skills to find suitable short sale candidates—making

your referrals a sought-after source for short sale agents



Marketing skills—ability to target short sale prospects

Homeowner short sale qualification skills

Transaction processing side of your business remains as is—assuming there is

enough traditional business for the profitability you want

Referral—a low-cost option



127

Option 3

Negotiator/Servicer



Extremely focused and organized

Committed to relationship building with range of lender reps and dealing with differences

in how short sales are completed

Solid negotiator

Ready, able, and willing to be very, very busy


Systems and management oriented—prepared to handle volume with tools, people

Business planning skills

Short sale package-building skills

Marketing skills, especially in larger agent community



128

Which Option Best Suits You?

What Actions Do You Need to Take?

CHAPTER 8: EVALUATE LISTING 129

From Aha’s to Achievement

AHA’s

What are your Aha’s?

BEHAVIORS

What behaviors do you intend to change?

TOOLS

What tools will you use?

ACCOUNTABILITY

What does accountability for this look like?

ACHIEVEMENT

What will you achieve?



130

Short Sale Tool Kit

The course tool kit contains short sale documents you can use as models to create

your own working forms. It also contains a few items formatted as handouts you can

use for prospecting and marketing.

These are sample documents and are labeled that way. They are not to be

used as is. You should customize or complete your own versions with input

from your Team Leader, and local title and escrow experts.

Short Sale Package Documents

Short Sale/Pre-foreclosure Procedures and Guidelines (Short Sale Disclosure)

Personal Financial Statement

Financial Hardship Letter

Authorization to Discuss Account

Short Sale Package Checklist

Fax Cover Sheet

Marketing Documents

Handout: Why Choose a Short Sale?

Handout: Ten Reasons to Avoid Foreclosure

FAQ for Homeowners

FAQ for Buyer Agents

Miscellaneous Documents

Short Sale Process and Seller Expectations (long and short versions)

Master Referral Agreement for Third-Party Short Sale Negotiations



131

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