short sales and foreclosures - home | rebacrebac.net/teach/foreclosure/2009/october/short sales...

.+F

Short Sales and Foreclosures: What Real Estate Professionals Need to Know

Instructor and Student Manual

A program by the Real Estate Buyer’s Agent Council, Inc.

of the National Association of REALTORS®


2

Copyright © 2009 by the Real Estate Buyer’s Agent Council Note: The Real Estate Buyer’s Agent Council (REBAC) and National Association of REALTORS® (NAR), its faculty, agents and employees are not engaged in rendering legal, accounting, financial, tax, or other professional services through these course materials. If legal advice or other expert assistance is required, the student should seek competent professional advice. Real Estate Buyer’s Agent Council 430 North Michigan Avenue Chicago, Illinois 60611 800‐648‐6224 312‐329‐8632 (fax) [email protected] www.REBAC.net

Introduction

1

Table of Contents Introduction…………………………………………………………………………….. 2 Chapter 1: Homeowners in Jeopardy……………………………………….. 6 Chapter 2: Options for Distressed Homeowners ……………………..13 Chapter 3: Anatomy of a Short Sale……………………………………….. 21 Chapter 4: The Short‐Sale Package………………………………………… 42 Chapter 5: Foreclosed and Real Estate Owned (REO) Properties ……………………………………………… …………………………….. 57 Chapter 6: Finding Distressed Property Opportunities…………… 67


2

Introduction

ACKNOWLEDGMENTS The Real Estate Buyer’s Agent Council (REBAC) expresses gratitude and appreciation to the following individuals for their subject matter and industry expertise, input and feedback, and commitment to providing the best education for today’s real estate professionals: • Edward A. Bugos, ABR® • Lynn Madison, ABR®, ABRM, GRI, SRES® • Lori Cox, ABR®, GRI, SRES®, e‐PRO, CRB, CRS, GREEN

ABOUT THIS COURSE Welcome to “Short Sales and Foreclosures: What Real Estate Professionals Need to Know” from REBAC. Although short sales and foreclosures are not new trends in real estate brokerage, current economic conditions, rising rates of unemployment, and depressed home values in many markets point to continued increases in mortgage defaults, short sales, and sales of foreclosed and REO properties. Consider the following: • According to a national delinquency survey from the Mortgage Bankers

Association (MBA), the percentage of mortgage defaults and loans in foreclosure for the first quarter of 2009 was 12.07 percent, the highest ever recorded in the history of the MBA survey.1

• Realty Trac, a firm that monitors foreclosure activity, reported that more than 1.9 million foreclosure filings were recorded in the first six months of 2009.2

• A National Association of REALTORS® (NAR) member survey shows that short sales and foreclosed properties accounted for a third of existing‐home sales in July 2009.3

However, for today’s real estate professionals, short sales and foreclosures represent a number of challenges, including, but not limited to: 1 Mortgage Bankers Association. National Delinquency Survey: Q109. Data as of March 31, 2009. Washington, DC: Mortgage Bankers Association; 2009. 2 Realty Trac. 1.9 Million Foreclosure Filings Reported on More Than 1.5 U.S. Properties in the First Half of 2009. Available at: www.realtytrac.com/ContentManagement/PressRelease.aspx?ItemID=6802. 3 National Association of REALTORS® Research Division. REALTORS® Confidence Index, July 2009. Washington, DC: National Association of REALTORS®; 2009.

Slide I‐1 Slide I‐2 Slide I‐3

Introduction

3

• For short sales: - Long timelines - Substantial documentation - Multiple approvals

• For property in or out of foreclosure: - Disrepair of properties - Not enough inventory in some markets

This course was specifically designed to show how the real estate practitioner can serve as a resource for sellers and buyers in the brokerage of distressed properties. Real estate professionals play an invaluable role in helping homeowners and home buyers navigate these transactions and, as a result, real estate professionals can help contribute to the real estate recovery in their markets.

WHAT YOU WILL LEARN The content of today’s class is divided into six chapters with the following goals: Chapter 1: Homeowners in Jeopardy > Define the term foreclosure > Discuss how foreclosure impacts the distressed homeowner,

neighbors, and surrounding community > Understand the steps in the process of foreclosure > Explain the roles of the real estate professional in helping distressed

homeowners Chapter 2: Options for Distressed Homeowners > Examine the options available to distressed homeowners, including

refinancing, selling and bringing cash to closing, lender workout, short sale, deed in lieu of foreclosure, foreclosure, and doing nothing and walking away

Chapter 3: Anatomy of Short Sale > Understand how to qualify sellers > Answer frequently asked questions > Discuss listing agents’ commission concerns relative to short sales > Explain how to counsel buyer clients who want to pursue a short sale

Slide I‐4 Slides I‐5 – I‐10


4

Chapter 4: The Short‐Sale Package > Identify the components of an effective short‐sale package > Understand why short sales fail Chapter 5: Foreclosed and Real Estate Owned (REO) Properties > Differentiate judicial foreclosure from nonjudicial foreclosure > Understand the process of sheriffs’ sales > Explain the steps in listing REO properties > Understand how to counsel buyers who wish to pursue REO

properties > Identify the negotiation and contract issues for REO properties Chapter 6: Finding Distressed Property Opportunities > Discuss how to attract buyers of distressed properties > Explain how to find short‐sale listings > Understand the considerations in listing REO properties

NAR’S SHORT SALES AND FORECLOSURE RESOURCE (SFR) CERTIFICATION Today’s class is qualifying education for the Short Sales and Foreclosure Resource (SFR) certification from the NAR, the only distressed property certification for real estate professionals recognized and endorsed by the NAR:

Slide I‐11

Introduction

5

Steps for earning this certification are outlined below.

Figure I.1: How to Earn SFR Certification

Please note: • The final exam consists of 30 multiple‐choice questions. The passing

score is 80 percent. • The Webinars are available for free at www.RealtorSFR.org. • You can download the application from www.RealtorSFR.org. • Annual dues are not required to maintain this certification.

Benefits Achieving SFR certification offers a number of benefits: • Electronic toolkit with practical forms and worksheets • Free Webinars that you can download anytime, anywhere • Access to SFR logo and marketing materials • Differentiation as an SFR at www.Realtor.com and at

www.Realtor.org • Online networking with your peers In addition, this course is an approved elective for the Accredited Buyer’s Representative (ABR®) designation, the benchmark of excellence in buyer representation. To learn about this designation, visit www.REBAC.net.

Slide I‐12 Slide I‐13 Slide I‐14 Slide I‐15


6

1. Homeowners in Jeopardy In this chapter: • Foreclosure defined • The face(s) of foreclosure • A look at terminology and process • The real estate professional’s role in helping distressed homeowners

FORECLOSURE DEFINED Ask consumers what they think of when they hear the term foreclosure, they may respond in a number of ways: • Real estate–hungry banks stripping properties from owners • Property owners’ belongings moved onto the street • Gutted or abandoned properties • Homes being sold on the courthouse steps Buyer clients may express interest in purchasing “a foreclosure” with the hopes of “scoring” a property for cents on the dollar. The realities? • Few lending institutions want homes on their balance sheets. • Foreclosure is not a type of property. • Put simply, foreclosure is a legal process by which a defaulted

borrower is deprived of his or her interest in the mortgaged property.

THE FACE(S) OF FORECLOSURE And the financial profile of borrowers who experience foreclosure is changing. While foreclosure rates are historically higher for subprime mortgages than for traditional mortgage products, rates of mortgage default are increasing among the most credit‐worthy individuals: prime borrowers. As charted in Figure 1.1, the percent of prime loans that were seriously delinquent—loans 90 days or more past due or in the process of foreclosure—increased more than threefold from the end of 2006 to the end of 2008.

Slide 1‐1 Slide 1‐2 Slide 1‐3 Exam Question 1 Slide 1‐4

1. Homeowners in Jeopardy

7

Figure 1.1: 90+ Days Delinquent Rates for Subprime and Prime Loans, 2000‐2008

Source: Mortgage Bankers Association. National Delinquency Surveys: Q100‐Q408. Washington, DC: Mortgage Bankers Association.

Foreclosure—Wave or Tsunami? Foreclosures are often expressed in popular media as occurring in “waves,” e.g., the foreclosure wave due to the reset of option adjustable‐rate mortgage (ARM) interest rates, the foreclosure wave due to increases in unemployment. While it may be adequate to describe the number of foreclosures as waves, the individuals who have experienced foreclosure first‐hand might describe a foreclosure more in terms of a tsunami. In some situations, owners may be forcibly evicted from their homes. Abandoned properties may be boarded up, gutted, or vandalized. Foreclosure also has a lasting ripple effect on neighboring home owners by applying downward pressure on property values. For a review of the consequences of foreclosure, see Figure 1.2.

Slide 1‐5


8

Figure 1.2: The Consequences of Foreclosure

The Effects of Foreclosure on

Distressed Homeowners:

Neighboring Homeowners:

Surrounding Community:

• Loss of home

• Loss of equity

• Damage to credit:

- Lowers credit score by 200 points or more

- Remains on credit history for seven years

• Declining home values

• Loss of equity

• Increased possibility for vandalism and theft

• Declining home values

• Reduced taxpayer base

• Increased possibility for vandalism and theft

A LOOK AT TERMINOLOGY AND PROCESS Earlier in this chapter we defined the term foreclosure. There are, however, many related words and acronyms—e.g., pre‐foreclosure, NOD, and REO—that are sometimes used incorrectly. What do these mean exactly and how do they relate to the process of foreclosure? Let’s review:

• Pre‐foreclosure—The period beginning with initial mortgage default up to when the distressed property is sold. The length of what is considered pre‐foreclosure varies, depending on state laws.

• NOD—Short for notice of default (NOD), this is an official notice from the lender that the borrower has defaulted on the mortgage. The NOD formally begins the foreclosure process. The NOD also outlines the reinstatement period.

• Reinstatement period—The time stipulated in the NOD in which the borrower may reinstate the loan—making required payments and bringing one’s account into good standing.

• Short sale—A situation in which the seller (1) owes more money on the loan than the sale of the property will likely produce on the market and

Slide 1‐6 Exam Question 4 Exam Question 19 Slides 1‐7 to 1‐12 Exam Question 2


9

(2) is unable or unwilling to bring money to closing. The seller may or may not be in pre‐foreclosure.

• Notice of sale—If, after receiving the notice of default, the borrower does not or is unable to reinstate the loan, a notice of sale is recorded. The notice of sale explains when and where the foreclosure sale will be held.

• Foreclosure sale—Also known as the sheriff’s auction, sheriff’s sale, or trustee’s sale, this is when the property is auctioned for sale to the highest bidder.

• Redemption period—The time that gives a distressed owner has the right to redeem real estate after the foreclosure sale. Redemption typically requires that the owner pay the sales price, interest, and other costs. Note: not all states provide for redemption periods.

• REO—Acronym for real estate owned, REO is the status of the property when the foreclosure sale is not successful and when ownership of the property is transferred involuntarily to the lender.

While the specific steps of foreclosure proceedings vary by state, loan instrument used, as well as by lender, many real estate professionals may find it helpful to visualize the foreclosure process. See Figure 1.3.

Exam Question 17 Exam Question 5 Slide 1‐13


10

Figure 1.3: The Process of Foreclosure

Reasons for Foreclosure The underlying reasons for foreclosure filings are numerous: • Job loss • Business failure • Payment increase or mortgage adjustment • Divorce or death of a spouse • Illness • Relocation • Reduced income • Mortgage fraud • Predatory lending For most owners, mortgage default and foreclosure proceedings represent unchartered, nerve‐wracking territory.

Slide 1‐14 Exam Question 28


11

Foreclosure Can Happen Quickly… or Not Depending on state laws as well as the loan instrument used (trust deed vs. mortgage), foreclosure proceedings can occur quickly, as in Georgia where the process period is a little more than 30 days. In other states, like New York, foreclosure proceedings can take more than 400 days.

Skill Builder Tip 1: Web Sites to Visit

To determine the length of foreclosure proceedings in your state, please visit: > www.foreclosurelaws.org > www.realtytrac.com

THE REAL ESTATE PROFESSIONAL’S ROLE IN HELPING DISTRESSED HOMEOWNERS Homeowners at risk of default or who have defaulted on their mortgage may turn to their real estate agent for guidance. And in these emotional situations, real estate practitioners may be tempted to do everything they can to help owners save their homes. However, in doing so, real estate agents may place themselves, their real estate licenses, and professional livelihoods at risk. When faced with a distressed owner situation, what should real estate professionals do and say? What should they not do and say? As a guiding principle in this course as well as in NAR’s Short Sales and Foreclosure Resource (SFR) certification, real estate professionals should serve as a resource for their clients.

• Do:

Assist owners in understanding options they should consider Recommend—in writing!—that clients seek advice from qualified finance, tax, and legal professionals

Suggest that sellers seek foreclosure avoidance counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD); visit the HUD Foreclosure Web page for more information: www.hud.gov/foreclosure (Figure 1.4)

Slide 1‐15 Exam Question 7 Slide 1‐16 Slides 1‐17 – 1‐18 Exam Question 3


12

Figure 1.4: www.hud.gov/foreclosure

• Don’t:

X Overstate your knowledge or experience in handling distressed property transactions

X Advise on finance, tax, or legal consequences of selling or purchasing short sales and/or foreclosed or REO properties

X Make significant changes to approved forms or interpret legal clauses of contracts and addenda

As a reminder, NAR Code of Ethics Article 13 states:

REALTORS® shall not engage in activities that constitute the unauthorized practice of law and shall recommend that legal counsel be obtained when the interest of any party to the transaction requires it.

At all times, real estate professionals must act within the scope of their agency agreement.


2. Options for Distressed Homeowners

13


In this chapter: • Refinance • Sell and bring cash to closing • Lender workout • Short sale • Deed in lieu of foreclosure • Foreclosure • Do nothing and walk away Although homeowners who are at risk of default or who have defaulted on their mortgage may believe that foreclosure is their only solution to mounting mortgage problems, there are options available to them.

REFINANCE Homeowners who are current with their mortgage payments may be able to take advantage of today’s mortgage rates and keep their homes by refinancing to a 30‐ or 15‐year fixed‐rate loan via Home Affordable Refinance, a component of the Making Home Affordable initiative launched in early 2009. For an overview of eligibility criteria, see Figure 2.1.

Figure 2.1: Eligibility Criteria Overview for Home Affordable Refinance

Home Owner occupied

Is a one‐ to four‐unit home

Existing Mortgage

Owned or backed by Fannie Mae or Freddie Mac

Loan‐to‐value (LTV) ratio is above 80% but not more than 125%

Borrower Current on existing mortgage payments

Has enough income to support new mortgage payments

Slide 2‐1 Exam Question 10 Slides 2‐2 – 2‐3


14

For more information, visit the Making Home Affordable Web site: www.MakingHomeAffordable.gov (Figure 2.2).

Figure 2.2: www.MakingHomeAffordable.gov

SELL AND BRING CASH TO CLOSING Although many homeowners today may not have the necessary cash to cure deficiencies at closing, they may have to liquidate assets, e.g., U.S. Treasury bonds, individual retirement accounts (IRAs), to do so. By curing deficiencies at closing, homeowners can avoid the credit damage that a short sale or foreclosure can cause. However, homeowners are strongly encouraged to consult with their finance and tax professionals before bringing liquid assets to closing.

LENDER WORKOUT Lenders often will work with distressed homeowners to help them keep their homes by reducing or rolling back interest rates, forgiving back payments, adding them to the loan amount, or possibly recasting the entire loan and wrapping all fees into a fixed‐rate mortgage. (See Figure 2.3 for further details of workout options.)

Slide 2‐4 Slide 2‐5 Slide 2‐6


15

Skill Builder Tip 2: Free Resources

As part of NAR’s “Right Tools, Right Now” initiative, consumer brochures like the one that is excerpted in Figure 2.3 are available to members for free or at cost. Visit www.Realtor.org/RightTools for more information.

www.Realtor.org/RightTools

Figure 2.3: Mortgage Loan Workout Options

• Forbearance. Lenders may let you make a partial payment, or skip payments, if you have a reasonable plan to catch up. Tell your lender if you expect a tax refund, a bonus, or a new job.

• Reinstatement. Reinstatement refers to making a payment that covers all your late payments, usually at the end of a forbearance period.

• Repayment Plan. If you can’t afford reinstatement, but can start making payments to catch up, the lender may let you pay an additional amount each month until you are caught up.

• Loan Modification. Your lender may agree to amend your mortgage to help you avoid foreclosure. The options include:

o Adding all the missed payments to the loan amount and increasing the monthly payment to cover the larger loan.

o Giving you more years to pay off the loan, lowering the interest rate, and/or forgiving part of the loan, to lower your monthly payment.

o Switching from an adjustable‐rate mortgage to a fixed rate mortgage, so you aren’t exposed to increases in your monthly payment.

o Requiring amounts for taxes and insurance to be included with your monthly mortgage payment so you avoid big bills in addition to your mortgage.

• Sign Over the Property to the Lender in Exchange for Debt Forgiveness. This can hurt your credit, but is better than having a foreclosure in your credit history.

Source: Reprinted with permission from the National Association of REALTORS® and the Center for Responsible Lending. Are You Having Problems Paying Your Mortgage? Learn How to Avoid Foreclosure and Keep Your Home. Available at: www.Realtor.org.


16

For many lenders, loan modification is a suitable workout option since lender losses on foreclosures can run high. According to HOPE NOW, a coalition of mortgage servicers and investors, loan modification as a percentage of workout options has more than doubled from Q1 2007 to Q1 2009. See Figure 2.4

Figure 2.4: Loan Modifications as a Percentage of Workout Options: Q1 2007–Q1 2009

Source: HOPE NOW National Data July07 to March09. Available at: www.hopenow.com/industry_data.html. Homeowners struggling to stay current with mortgage payments who experience a change in income or other financial hardships may seek loan modification via Home Affordable Modification, a component of the Making Home Affordable Program. Home Affordable Modification is a voluntary program with participation from major mortgage servicers. Eligibility criteria are outlined in Figure 2.5.

I‐NOTE: If you have Internet access, CONSIDER playing the video, “Getting the Help You Need,” from www.makinghomeaffordable.gov/audio_video.html

Slide 2‐7


17

Figure 2.5: Eligibility Criteria Overview for Home Affordable Modification

Home Owner occupied

One‐ to four‐unit property

Existing Mortgage Unpaid principal balance that is equal to or less than $729,750 for one‐unit properties (higher limits are available for two‐ , three‐ , and four‐unit properties)

Originated on or before January 1, 2009

Payments exceed 31% of borrower’s gross monthly income

Borrower Experiences a change in income or other financial hardship

At risk of imminent default or in default

For qualified borrowers, mortgage servicers determine how much of an interest rate deduction will be required to bring the borrower’s mortgage payment to less than 31% of gross monthly income. They next evaluate whether modifying the loan is less costly than not modifying the loan. Qualified borrowers are put on a three‐month trial period with the modified interest level and mortgage payment. If the borrower is successful in making payments, the participating mortgage servicer executes an agreement that lowers the interest rate to a fixed rate for five years and caps the interest at a low rate for the remaining life of the loan. For more information, visit www.MakingHomeAffordable.gov.

Note: Lender workouts are not transactions where real estate professionals may act as agents on behalf of their clients. In most states, lender workouts are not considered real estate transactions. Therefore, real estate professionals who try to broker lender workouts could be considered practicing law without a license.

Slide 2‐8 Slide 2‐9


18

SHORT SALE A short sale is a situation in which the seller (1) owes more money on the loan (and any other liens on the property) than the sale of the property will likely produce on the market and (2) is unable or unwilling to bring money to closing. In a short sale, the lender has not yet foreclosed on the property, which provides a window of opportunity for the owner to sell the property in order to at least partially satisfy the amount owed to the lender.

Skill Builder Tip 3: More Free Resources

The Library and Government Affairs Departments of National Association of REALTORS® (NAR) have developed free resources to help members stay up‐to‐date on short sales. At the following Web sites you can find timely articles, links, and guides: > www.Realtor.org/realtors/basics_short_sales > www.Realtor.org/library

Why Short Sales Are Preferable to Foreclosure Short sales are considered preferable to foreclosures because short sales (1) lessen the impact a foreclosure can have on the surrounding community and (2) won’t damage the distressed owner’s credit as much as a foreclosure (Figure 2.6). For example, if the borrower is still current with other payments, a short sale may lower the borrower’s credit score by as little as 50 points.

Free

Slide 2‐10 Slide 2‐11 Exam Question 6


19

Figure 2.6: Comparing Impact of Short Sale and Foreclosure to Homeowner’s Credit

Short Sale Foreclosure

• How short sale is reported will

affect credit score • After short sale, lender can

report as: 1. Paid in full – paid as agreed 2. Paid – settled 3. Paid – unrated • If the owner is current with

other payments, a short sale may only lower score by 50 points

• Can lower credit score by 200

points or more • Foreclosure remains a public

record and on credit history for 7 years

In May 2009, the Obama Administration announced Foreclosure Alternatives, another program of the Making Home Affordable initiative. For borrowers who meet eligibility criteria for Home Affordable Modification (Figure 2.5), but don’t qualify for a modification or don’t complete the modification process, Foreclosure Alternatives may be considered. Under this program, borrowers and mortgage servicers are provided incentives and documentation is standardized to help facilitate short sales or deeds in lieu of foreclosure if short sales are not successful. Incentives are: • $1,000 for servicers for successful short sale or deed in lieu of

foreclosure • $1,500 for borrowers/homeowners to help with relocation expenses • Up to $1,000 toward cost of paying junior lien holders to release liens Features of this program include, but are not limited to: • Depending on market conditions, 90 days up to one year to market and

sell the property • No foreclosures may occur during the marketing period specified in the

Short Sale Agreement.

Slide 2‐12 Slide 2‐13 Slide 2‐14 Slide 2‐15


20

• Mortgage servicers cannot charge fees to borrowers for participating in Foreclosure Alternatives.

• Mortgage servicers cannot negotiate lower commission after an offer has been received.

DEED IN LIEU OF FORECLOSURE A deed in lieu of foreclosure occurs when the borrower agrees to trade the property to the lender in exchange for the cancellation of the note. This foreclosure alternative is more likely to work in states where there is a long foreclosure timeline. The lender will be able to get the property much sooner than going through the foreclosure process, which lessens the probability of the property being in disrepair as well as eliminates the lenders costs to foreclose. Market conditions as well as state‐specific laws will influence whether and how a lender accepts a deed in lieu of foreclosure. Typically, lenders are less willing to consider a deed in lieu of foreclosure in declining markets. However, in appreciating markets, lenders may accept properties in lieu of foreclosure.

FORECLOSURE If the homeowner is only weeks away from the foreclosure sale taking place, the homeowner may not be able to pursue any of the previous options, including a short sale. If contacted by the homeowner at a late date, recommend that the homeowner contact the lender immediately, and see if there is any way to explore foreclosure alternatives. Also, in some situations, foreclosure may even be in the best interest of distressed homeowners, although doing so will wreak the most damage to their credit. If the lender will not explore foreclosure alternatives, real estate professionals should instruct their clients and customers to contact their attorneys for advice.

DO NOTHING OR WALK AWAY If homeowners are simply unhappy that the value of the property is less than what they paid or owe, they need to contact an attorney for advice. Walking away from the loan or asking the lender to proceed with a short sale simply because the value went down may not be a viable option and if it is, there will often be additional financial consequences.


3. Anatomy of a Short Sale

21

3. Anatomy of a Short Sale In this chapter: • Qualifying sellers • Pricing short‐sale listings • Frequently asked questions (FAQs) • Listing agents’ commission concerns • Counseling buyers • Finding short‐sale listings for buyer clients

QUALIFYING SELLERS If a short sale is judged to be a distressed homeowner’s best option, the real estate professional must be exacting and thorough in qualifying the homeowner for a short sale. Not every owner is a short‐sale candidate and, unfortunately, not every owner can be saved from foreclosure. In the qualifying process, the real estate professional should confirm, among other items: • Whether or not the homeowner has a valid hardship • Whether or not there is sufficient time to accomplish a short sale • That the homeowner will contract or has already contracted with

appropriate finance, tax, and legal professionals • The amount that is owed on the property • Whether or not the homeowner has liens in addition to the

mortgage, e.g., tax liens, homeowner association (HOA) liens • The condition of the property • That the homeowner will be cooperative in completing the short‐sale

documentation and in maintaining the property for showings

Defining Hardship Many panicked homeowners seeking a short‐sale solution may be unclear on what constitutes a valid hardship—and event or events that change a homeowner’s ability to keep current in mortgage payments. Loss of equity, for example, is not considered a hardship. However, lending institutions may entertain short sales for homeowners who have experienced any of the following: • Job loss • Business failure

Slide 3‐1 Slide 3‐2 Slide 3‐3 Slide 3‐4 Exam Question 18


22

• Illness and medical costs • Divorce or death of a spouse • Natural disasters

Sufficient Time to Accomplish a Short Sale As explained in Chapter 1, pre‐foreclosure is the period beginning with initial mortgage default up to when the distressed property is sold. Pre‐foreclosure is also the time within which a short sale can be accomplished. To determine how much time you have to accomplish a short sale: 1. Confirm the approximate foreclosure timeline in your state 2. Subtract the number of months that the homeowner has missed

payments If there are less than two months to list, market, and sell the home, many real estate professionals may consider not taking the listing.

Contracting with Finance, Tax, and Legal Professionals A consistent message in this course is that homeowners in distress need to engage the services of qualified finance, tax, and legal professionals. Homeowners who are in mortgage default or facing foreclosure may argue that they cannot afford to pay them. Real estate professionals should note: • Attorneys who work with distressed owners may take into

consideration the owners’ current financial realities and allow for ways to navigate the process with little or perhaps no attorney fees upfront.

• Consider the U.S. Foreclosure Network (USFN) as a possible source for locating attorneys who specialize in bankruptcy and foreclosure: www.usfn.org.

The expertise of these professionals is essential. For example, a qualified foreclosure attorney can help the seller determine whether the loan is recourse or non‐recourse, which can have significant repercussions for the seller: • In a recourse loan, the borrower retains personal liability for any

deficiency after a short sale or foreclosure. The lender reserves their

Slide 3‐5 Slides 3‐6 – 3‐7


23

right to pursue the personal assets of the borrower by obtaining a court ordered deficiency judgment.

• In a non‐recourse loan, the lender is limited to whatever funds are available from its security interest in the property itself and cannot force the borrower to repay any deficiency.

A foreclosure attorney can also advise on recourse debt laws, which are state specific.

Determining What Is Owed Distressed owners may be reluctant to volunteer any information about their financial position. It is critical that you have an accurate assessment of what their equity position is or isn’t. To facilitate this, consider using the pre‐listing worksheet and seller short‐sale checklist in Figures 3.1 and 3.2, respectively. Note that real estate professionals are encouraged to verify liens by: • Accessing any sources that can help you determine any liens or

encumbrances on the property. This might be done through your MLS system if it is connected to a database that has this information. Alternatively, you may have a title company do a preliminary title search (lien search).

• If there is a homeowners’ association, verify that the seller is current with all association dues.

Confirming Property Condition If the homeowner has experienced difficulty keeping current with the mortgage, it is likely that owner has not kept up with property repairs. Real estate practitioners are encouraged to inspect the home and document any damages or items needing repair. Contractors should be consulted for specific repair estimates.



24

Figure 3.1: Pre‐Listing Worksheet

Seller’s name Address of property Date of preparation Estimated closing date 1. Do you have a mortgage on the property? Yes No More than one? Yes No

• First mortgage $ Lender

Type: FHA VA FNMA Other

• Second mortgage $ Lender

• Other

2. Are you current on all loan payments? Yes No

• If no, how many payments are in arrears?

3. What is the situation that caused you to miss or will cause you to miss your payments?

4. Have you spoken with anyone at the lender/lien holder’s office? Yes No

• Whom? What department?

• What was discussed?

5. Are your real estate taxes escrowed? Yes No If not, are they current? Yes No 6. Is there any legal action pending related to this property of which you are aware? Yes No

Pending foreclosure: when filed?

Bankruptcy: when filed?

7. Are there any other liens that could affect the sale? Yes No

Homeowners’ association (HOA) liens

IRS tax liens

Mechanics’ liens

8. Attorney information: Name Contact Information

I (we) affirm that the above information is true and accurate to the best of our knowledge.

Seller Date Seller Date

Source: Reprinted with permission of Lynn Madison, Lynn Madison Seminars, and Lori Cox, Life Successes, Inc.

Copyright Lynn Madison and Lori Cox.


25

Figure 3.2: Seller Short‐Sale Checklist

Will the seller follow through with attorney recommendations? Yes No Will the seller complete their portion of the short‐sale package? Yes No Will the seller keep you informed of lender communications? Yes No Does the seller have an actual hardship? Yes No Does the seller have assets? Yes No

If so, is the seller willing to use them if required by the lender? Yes No Is the seller current with homeowners’ association fees? Yes No

If not, is the seller able to become and remain current? Yes No Does the seller have realistic expectations of the current market? Yes No Does the seller understand how long the short sale may take? Yes No Is the seller motivated to get out of their situation? Yes No Will the seller allow you to discuss lien situation with buyer’s representatives? Yes No Will the property be listed for an adequate amount of time? Yes No Has the seller agreed to a for sale sign? Yes No Has the seller agreed to a key box? Yes No Will the property be easy to show? Yes No Is the seller willing to do what is required so that the property shows well? Yes No Will the seller agree to price the property realistically? Yes No

Any “No” answers to the above questions? If there are, seriously consider not taking this listing.


26

PRICING SHORT‐SALE LISTINGS One of the listing agent’s primary goals is to price the property so the seller receives an offer from a qualified buyer with a realistic chance of closing. Some agents advertise short sales at unbelievably low prices in the hope that a buyer will be enticed to submit an offer. Other agents set the list price too high to attract an offer or too low for the bank to accept. Still others list the property at what the seller needs rather than what the property is worth.

The proper price should be the low end of fair market value. And although there is no standard formula for what a lender will accept on a short sale, Freddie Mac has stated that their target sales price on a short sale is 88% of the broker price opinion (BPO).4 In the FHA Preforeclosure Sale Program, the guidelines are similar depending on market time and other factors. Information on the FHA program can be found at www.hud.gov/offices/hsg/sfh/nsc/faqpfs.cfm.

Estimating Net Equity With any short sale or possible short sale, real estate professionals must carefully estimate the seller’s net equity because once the listing is placed in the MLS and an offer of compensation is made to cooperating brokers, the listing broker could be held responsible for paying that compensation even if the seller doesn’t pay the listing broker. A sample worksheet for estimating the seller’s net equity is provided in Figure 3.3.

4 Freddie Mac. “Introduction to Short Sales.” Available at www.realtor.org/government_affairs/foreclosure_prevention/foreclosure.

Slide 3‐10 Exam Question 30 Slide 3‐11


27

Figure 3.3: Sample Calculation Worksheet for Estimating Seller’s Equity

Estimated sales price (or offering price) $ Mortgage balance – primary loan $

Junior liens/equity loans $

Prepayment penalty $

Title expense $

Attorney fees $

Transfer taxes – state/county $

Transfer taxes – local $

Survey $

Marketing fee $

Assessments $

FHA/VA fees $

Seller concessions $

Tax prorations $

Other $

Other $ Total estimated expenses LESS $ Estimated net equity to seller ‐ OR ‐ $ Estimated funds needed to close $ Note: This is not a closing statement. This is intended to give the seller an estimate of what their expenses could

be in a typical real estate transaction. The broker and designated agent cannot be responsible for

miscalculations resulting from changes in fees, differences in mortgage balances or escrow balances, changes in

taxes or any other item that may affect the accuracy of this estimate. This is an estimate and all figures should

be reconfirmed with your attorney and possibly your lender.

Source: Reprinted with permission of Lynn Madison, Lynn Madison Seminars, and Lori Cox, Life Successes, Inc. Copyright Lynn Madison and Lori Cox.


28

FREQUENTLY ASKED QUESTIONS

1. Is there any initial paperwork owners need to complete? > Sellers should be instructed to complete an authorization to release

financial information (see Figure 3.4 for a sample form). The lender will not provide any information on the seller’s mortgage without the seller’s written permission.

> Real estate professionals should consult with the seller’s attorney to determine who will request financial information from the lender.

Figure 3.4: Sample Authorization to Release Financial Information

Date: Loan #: Lien Holder Property Address Seller consents that Lien Holder and its representatives may supply and communicate any loan, financial or other information of Seller, confidential or otherwise, with any of the following involved in the transaction and their representatives: Seller’s Attorney or Representative (names) Seller’s Broker and Agent (names) Seller Note: The authorization to release information is merely the beginning of required paperwork for short‐sale transactions. In the next chapter, we will look at components required for the short‐sale package.

Slide 3‐12


29

2. Who should sellers contact regarding a short sale? > The appropriate department may be called any of the following:

- “Loss Mitigation” - “Work‐Out” - “Asset Recovery” - “Loan Modification” - “Loan Reinstatement” - In some instances, the appropriate department may even be

called the “Foreclosure Department.” > Generally, the department responsible for sending the mortgage

default notices is not the department to contact to approve a short sale. Typically, a negotiator is assigned and he or she will be the decision maker on a short sale.

Skill Builder Tip 4: Finding Decision Maker for Junior Liens

If there are first and second mortgages or a home equity line of credit (HELOC), sellers may need to speak with more than one lender to obtain short‐sale approval. In some instances, the primary lien holder will contact the other lien holders. In other situations, the real estate professional or seller’s attorney will contact the junior lien holders. The primary lien holder should be consulted on specific protocol.

3. When should real estate professionals contact the lender? > As soon as possible after taking the listing > Finding the correct decision maker may take time. Real estate agents

are encouraged to be patient, but persistent in locating this party. 4. What should be asked of the lender? > When should the seller submit their short‐sale application—now or

with the short‐sale package? > Will the lender begin the short‐sale process by pre‐approving the

seller for a short sale now or when the real estate agent has a contract?

Slide 3‐13

Slide 3‐14 Slides 3‐15 – 3‐16


30

- It is most likely the lender will say “at the time of contract” but each lender handles this differently. Note: The FHA program requires that the process be started at the time of listing.

> What is the anticipated timeline for short‐sale approval? > For junior lien holders: Is there a formula for calculating what is

required to release their lien? Remember, each lender has its own protocol. Even if you’ve successfully closed a short‐sale transaction with this lender in the past, the lender’s procedures may have changed. Real estate professionals are encouraged to seek answers for all of the above questions for each short‐sale transaction. 5. What must be disclosed? > State/federal disclosures are required. > No confidential information should be disclosed without written

permission of the seller. Real estate professionals should have written authorization to disclose the short sale. This authorization may be in the form of an addendum or as part of the listing agreement.

> All rules and regulations of your local MLS need to be followed. You will need to check with your local MLS to determine if, when, how, and where you disclose the fact that the seller is involved in a potential short‐sale situation.

> All requirements for reporting accepted contracts to the MLS must be followed as well.

Skill Builder Tip 5: Sample Short Sale Contract Language

To access sample contract language for short sales, visit the Web site below and click the link for “NAR Short Sales Process Guide”: www.realtor.org/realtors/basics_short_sales

Slide 3‐17


31

6. Will the seller have to pay income tax on any forgiven debt? > Prior to the Mortgage Debt Relief and Emergency Economic

Stabilization Act of 2008 being put into effect, money forgiven by a lender in a short sale was considered taxable income. In many circumstances, the new law no longer requires taxpayers to pay federal income tax on the forgiven debt, provided the property is their principal residence only.

> Taxpayers may exclude debt forgiven on their principal residence if the loan balance was less than $2 million. The limit is $1 million for a married person filing a separate return.

> The law applies to debt forgiven in 2007, 2008, and 2009, and the Economic Stabilization Act of 2008 has extended this forgiveness through 2012. It includes debt reduced through mortgage restructuring, refinancing, home equity lines of credit, short sales as well as mortgage debt forgiven in connection with foreclosures. As a reminder, this is debt that was used to buy, build, or improve a principal residence ONLY.

Although real estate professionals should be knowledgeable of the Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008, professionals should not counsel clients or provide finance, legal, or tax advice. Agents are encouraged to explain to clients that there has been a change in the laws for debt forgiveness and that clients should consult with their tax advisor.

7. Miscellaneous Questions • Is it better for the seller to declare bankruptcy than pursue a short

sale? • Should the seller stop making mortgage payments? • Will the seller need to use his or her 401k to cure a deficiency at

closing?

> All of these are finance, tax, and legal issues that are outside the scope for real estate practitioners. Agents are encouraged to instruct sellers to write down all their questions and make sure sellers ask them of their attorney or tax advisor.



32

LISTING AGENTS’ COMMISSION CONCERNS Although sellers are responsible for the compensation that was agreed to in the listing agreement, lenders that approve short sales are not legally responsible for payment of any commission. Consequently, it is difficult for listing agents to be 100% confident of the compensation they will receive as the result of closing a short‐sale transaction. If your multiple‐listing service (MLS) requires that listing agents disclose a short sale or potential short sale in the MLS, the listing agent should also explain to other participants how any reduction in the gross commission required by the lender as a condition of approving the sale will be apportioned between listing and cooperating participants. 5 Not all lenders are adjusting the compensation the seller agreed to pay, however. Fannie Mae instructed its servicers not to negotiate commissions for short sales below the amount specified in the listing agreement (if the listing compensation is 6% or less). See Fannie Mae Bulletin 09‐03 below.

Announcement 09‐03 February 24, 2009

No Negotiation of Pre‐foreclosure Sales Commission

Effective March 1, 2009, closing of pre‐foreclosure sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to a level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6 percent of the sales price of the property in aggregate. Servicers are reminded that they must continue to obtain any approvals that may be required by interested third parties in connection with pre‐foreclosure sales.

Freddie Mac reports orally that it has the same policy, and has agreed to issue written servicer guidance as well.

5 National Association of REALTORS® Short Sales Work Group. The Short Sales Work Flow: What the Listing Agent Should Know to Successfully Negotiate a Short Sale. Spring 2009. Available at: www.Realtor.org/realtors/basics_short_sales.



33

COUNSELING BUYERS Considering the exponential growth in short sales and the potential for “bargain deals,” many buyers today, including individuals with little to no home‐buying experience, are interested in purchasing short‐sale properties. Ideal buyer candidates for short sales are those who: • Have few to no contingencies • Do not have to sell their current home before purchasing a short‐sale

property • Are patient and have the time to wait out the months of delay • Have resources to repair and rehab the property, if needed Accordingly, buyer’s representatives should seek answers to the following in the initial needs assessment: • Are the buyers in a position where they can wait for the lender’s

approval? • Do the buyers have a home to sell before they can purchase the short

sale? • Will the buyers follow through on your feedback regarding, among

other things, market value and contract contingencies? • Do the buyers understand that the lender will be making the final call

on price and terms? • Are the buyers interested in “flipping” the property? If yes, additional

due diligence will need to be performed. • How willing are the buyers to consult an attorney regarding home

inspections, earnest money, and the contingency period for third‐party approval?

• Is the buyer willing to enter into an exclusive buyer representation agreement and be responsible for compensation, should it not be paid by the seller’s side?

The worksheet and checklist in Figures 3.5 and 3.6 can be used in addition to any standard buyer qualification worksheet currently used.



34

Figure 3.5: Additional Buyer Counseling Issues

(To be used in addition to a buyer qualification worksheet) 1. Do you have a time frame within which you need to purchase or within which you

need to move? 2. Will you need to sell your home to buy a new one? Yes No 3. Have you spoken with a lender (if you will need a loan)? Yes No

• With what lender have you spoken? • Are you preapproved for a loan? Yes No How much? • Do you have a written loan commitment? Yes No • What type of loan? • Have you locked in an interest rate? Yes No

4. Would you consider purchasing a property that is a short sale? Yes No Foreclosure (at auction)? Yes No REO (bank owned)? Yes No

• Short sales will likely result in delays in the purchase process. • You will need your financing in place so that you can be ready to close

quickly once the sale is approved. • These properties will likely be sold as‐is. (In other words, neither distressed

sellers nor bank owners are likely to agree to make any repairs to the property). It is recommended that you have a home inspection by a licensed home inspector before consummating any purchase transaction.

5. Buyer representation agreement

• Exclusive agreement signed Yes No • Non‐exclusive agreement signed Yes No • Other Yes No

6. Do you have an attorney with whom you work? Yes No If yes, what is his/her name?

Contact Information:

Buyer acknowledges review of the above items. Buyer Date Buyer Date


35

Figure 3.6: Buyer Short‐Sale Checklist

Is the buyer pre‐approved? Yes No Is the buyer a cash buyer and willing to submit proof of funds? Yes No Is the buyer willing to make reasonable offer? Yes No Does the buyer have realistic expectations of the time‐frame? Yes No Can the buyer be flexible on their closing date? Yes No Will the buyer lock in their interest rate thru to closing? Yes No Is the buyer willing to spend money on the following to make this happen? • Mortgage application Yes No • Inspections Yes No • Attorney fees Yes No

Any “No” answers to the above questions? If there are, seriously consider not taking this buyer as a client.


36

FREQUENTLY ASKED QUESTIONS

1. How long will this take and what if the buyer changes his or her mind? > A short‐sale transaction may take anywhere from 30 days or less or

up to 6 months or longer for lender approval. > The value of the property may decline during the wait for lender

approval. The buyer’s representative must consistently update the comparative market analysis (CMA) for the buyer as well as keep the buyer informed of other properties that may fit his or her needs.

> The addendum to the contract that makes the contract “subject to lender’s approval” should stipulate how long the buyer will wait.

> If the buyer wants to terminate a contract that had no timeframe stipulated, he or she should consult with his or her attorney prior to doing so.

> If the buyer chooses to purchase another home during this time, he or she will need to do it “subject to release of prior contract.”

2. What about the earnest money? > As with any real estate contract, the earnest money on a short sale is

due according to the terms of the written agreement. > Earnest money should be deposited as required by state license law

based on the date the contract was signed by the buyer and seller—not based on when the contract is approved by the lender.

> If the buyer does not want the earnest money deposited before the lender has approved the contract, the buyer’s representative should note that on the contract.

> Listing brokers should be wary of accepting personal checks for earnest money too close to the closing date. Many lenders do not allow more than ten days to two weeks for closing after they have approved the short sale. If the check does not clear, there could be problems.


37

3. When should the home inspection and mortgage application be completed? For home inspection: > As per contract. If the contract calls for the home inspection to be

done in five business days after the contract has been executed, the five days would start from the time of signing by the buyer and seller—not from the time of lender approval.

> The buyer would not be able to negotiate any costs or repairs if the home inspection was completed after lender’s approval. The lender’s approval is based on a definite dollar amount to be realized at the closing and they do not allow for further negotiations.

> Most often, a short sale will be an as‐is transaction, and the seller doesn’t have the money to make the repairs nor will the lender make repairs. That said, the buyer still has the right to know what “as‐is” means and withdraw the offer or reduce the offer based on the home inspection.

> The listing agent needs to protect the seller. Allowing a buyer to wait until after the lender’s approval to do the home inspection thereby giving the buyer the ability to walk away that late in the transaction may force the seller into a foreclosure sale because the seller would not have enough time to find another buyer.

> Although the approval process takes quite some time, typically lender’s approval will provide only days, sometimes as few as five, for buyers to close, which does not give most buyers sufficient time to order a property inspection.

For mortgage application: > The buyer must submit the mortgage application in a short time

frame as well. There is often a quick turnaround between lender approval of the short sale and the lender’s required closing date. The buyer must be ready, willing, and able to meet the specified closing date without asking for more time to get their financing in place.

Slide 3‐25


38

Skill Builder Tip 6: Home Inspections

Recommend that clients have appropriate property inspections performed. If buyers refuse, request that they acknowledge in writing that you recommended the inspection and they declined to do so.

In addition, send an e‐mail confirming the buyer’s wishes regarding the inspection.

FINDING SHORT‐SALE LISTINGS FOR BUYER CLIENTS • The status of many available short‐sale properties may show in the

MLS as active however contingent. These are properties that are contingent on lender approval and may hold opportunities for your buyer clients.

• When a buyer’s representative has a buyer who wishes to see potential short‐sale properties, “contingent” properties should be included in available properties to show.

• If the buyer chooses not to see properties that had an accepted contract, this is the buyer’s choice, not yours. Subsequent offers may have an equal chance of being approved by the lender if the lender has not provided the listing agent/broker a written approval of the contract.

• Note: Lenders will consider a short sale and the lender may or may not approve the short sale. A frequent mistake is to assume that when a listing is marked as a short sale that it has been “pre‐approved” by the lender. Some listings state that the lender has “pre‐approved the short sale” and that may, or may not, be the case. Buyer’s representatives need to ask listing agents specifically what is meant by “pre‐approved.”

Questions to Ask Listing Agents Buyer’s representatives are encouraged to prequalify the listing agent on the short‐sale property before writing an offer. It is important to frame these questions properly. You should not be assuming listing agents are not doing their job. In addition, you do not want to sound condescending

Slide3‐26 Slide 3‐27


39

or disrespectful. Questions should be articulated in a spirit of cooperation. See Figure 3.7 for sample dialogue.

NEGOTIATING THE SHORT‐SALE CONTRACT

Contract Acceptance The short‐sale contract is signed by the buyer and the seller—not the lender. The lender only approves the contract. And the approval by the lender is an additional contingency, like a home inspection, mortgage approval, etc., and should be treated as you would treat any other contingency. Note: > There is no contract until it is signed by the seller and the buyer.

Either party could back out of the contract without recourse if it is not signed.

> The fact that a seller accepts the offer contingent on bank approval does not guarantee bank approval and therefore does not guarantee the buyer will actually be able to purchase the property.

Figure 3.7: Sample Questions Buyer’s Representatives Should Ask Listing Agents

“My buyer client has done a lot of research regarding short sales and because of this the buyer is holding me responsible for not only finding the right home but also closing on the short sale. May I ask you a few questions?” 1. “Is the short‐sale package ready for submission to the lender?” 2. “How many liens are on the property?” 3. “If more than one lien, what are they?” 4. “What is the plan to satisfy all the lien holders?” Source: REALTOR® Magazine Online. “Short Sales: Finding Income in a Tough Market” Webinar. Available at: www.realtor.org/RMOHome/webinars.

Note: In the next chapter we will define all of the components of an effective short‐sale package.

Slide 3‐28 Exam Question 9 Exam Question 23


40

Subsequent Offers The listing agent must submit all subsequent offers to the seller all the way to closing – whether or not the subsequent offers are “better” than the first. Any subsequent offers accepted by the seller must be made “subject to release of prior contract.” The lender will give direction to the seller as to whether they want other offers submitted. If the lender is adhering to the Foreclosure Alternatives Program as outlined in Chapter 1, there should be no foreclosure moving forward during the short‐sale approval time. However, if the seller is close to foreclosure and the lender is not following the guidelines, the second contract could nullify any progress made on the first and put the entire approval process back to “square one.” The listing agent should attempt to determine the lender’s protocol on subsequent offers. On the other hand, if the subsequent offer/contract is for more money than the first, the lender may be more inclined to approve it, which obviously benefits the seller. Another consideration could be any repayment of the deficiency your seller owes could be less with the higher offer.

Presenting Offers: NAR Code of Ethics Standards of Practice

Standard of Practice 1‐6 REALTORS® shall submit offers and counter‐offers objectively and as quickly as possible. (Adopted 1/93, Amended 1/95)

Standard of Practice 1‐7 When acting as listing brokers, REALTORS® shall continue to submit to the seller/landlord all offers and counter‐offers until closing or execution of a lease unless the seller/landlord has waived this obligation in writing. REALTORS® shall not be obligated to continue to market the property after an offer has been accepted by the seller/landlord. REALTORS® shall recommend that sellers/landlords obtain the advice of legal counsel prior to acceptance of a subsequent offer except where the acceptance is contingent on the termination of the pre‐existing purchase contract or lease. (Amended 1/93) Standard of Practice 3‐6 REALTORS® shall disclose the existence of accepted offers, including offers with unresolved contingencies, to any broker seeking cooperation.



41

Common Negotiating Challenges It is not only appropriate but required that both agents assist their clients in negotiating the best price and terms. Some potential challenges in negotiating may include:

• Low earnest money. A buyer may not hesitate to walk away from the

transaction if the amount of earnest money is insignificant. The greater the amount of the earnest money, the greater the chance of the buyer being committed to the contract and not walking away.

• Inspections after lender approval. There is not much protection for the seller if the buyer negotiates the ability to do the property inspection after the lender has approved the contract. After waiting for sometimes months for the lender to approve the contract to have the buyer back out after lender approval could put the seller in danger of a foreclosure sale. From the buyer’s perspective, waiting until the lender has approved the contract negates any ability to ask the lender to give concessions on repairs.

• Low offer issue #1. An exceptionally low offer runs the risk of not being approved by the lender and, again, may put the seller in imminent danger of a foreclosure sale. From the buyer’s perspective, if the lender is not going to approve this contract and the buyer has waited months he or she may have missed out on other properties that would have been suitable and available.

• Low offer issue #2. Even if the offer is approved by the lender, the lender may require the seller to pay back the deficiency. A low offer means money out of the seller’s pocket if that is the case. From the buyer’s perspective, a seller may decide not to go through with the short sale if he or she has to repay a huge deficiency.

• Low interest rate. Most short‐sale transactions will not close within the typical time span of 30 to 60 days. The buyer’s interest rate lock‐in may expire during that time. If there is a low interest rate in the contract and the interest rate goes up and never comes back down to what the contract stipulates, the buyer may be able to walk away from the transaction with no recourse on the part of the seller. Again, the seller’s house has been under contract for sometimes months only to have the buyer not be required to close. From the buyer’s perspective, this might weaken the chance of approval by the lender.

Slide 3‐30


42

4. The Short‐Sale Package In this chapter: • Components of an effective short‐sale package • Why short sales fail

COMPONENTS OF AN EFFECTIVE SHORT‐SALE PACKAGE

• Short‐sale proposal letter (cover letter) • Seller’s signed short‐sale payoff application, if available • Seller’s hardship letter • Seller’s financial information • Supporting financial information • Supporting hardship information • Repair estimate for the property, if repairs are required • CMA with supporting sales history • Marketing history, showings, and feedback • Purchase contract signed by both the buyer and seller • Written proof of the buyer’s ability to purchase the property

(completed loan application, lender’s preapproval, or bank statement if the buyer is purchasing with cash)

• Copy of certified escrow instructions, if applicable • HUD‐1 settlement statement • Preliminary title report, if applicable Remember, there can be multiple loans and you will need to repeat this process for each lien holder. If there is more than one lien holder, they will generally want payoff information from each other. In terms of the amount of paperwork required by short sales, one expert notes: “It takes more documentation to get out of their mortgage than it took them to get it in the first place.” The submission of the short‐sale package will be at the direction of the lender. The lender may want it faxed, e‐mailed, delivered via hard copy. The listing agent should make a copy of the entire package prior to delivery and follow up to ensure it was received.

Slide 4‐1 Slide 4‐2 Slide 4‐3 Exam Question 12

4. The Short‐Sale Package

43

Skill Builder Tip 7: For Each Page

Prior to sending the short‐sale package to the lender(s) you should print the name of your client(s) and the loan number on each page.

Proposal Letter The proposal letter should be clear and concise giving the needed information to the bank. It should not be more than one page. It should include an overview of the homeowners’ situation, what they owe on the property, and what the property is worth. The proposal letter should also identify the amount of the needed repairs and what the offer to the bank is. You should either list the contents of the package in your proposal letter (see Figure 4.1 for a sample) or create a “contents page” to facilitate review of the file.

Slide 4‐4


44

Figure 4.1: Sample Proposal Letter

TO: The Loss Mitigation Department of ABC Lenders ATTN: Janice Johnson, Loss Mitigation Specialist FROM: Alice Agent RE: Short Sale Proposal for 123 Main Street, Anytown, USA Dear Ms. Johnson, We have a signed real estate purchase contract with your borrower Daniel and Sandy Smith, the owners of 123 Main Street, Anytown, USA. The Smiths have agreed to sell their property to Lee and Sandra Jones for a purchase price of $375,000. The current loan balance for loan #456781239 is $450,000. The Smiths are five payments behind in the amount of $9,000. Since their real estate taxes were not escrowed, the current taxes in the amount of $8,000 are also due. Daniel has lost his job as a manager of a large home improvement company and Sandy is a stay‐at‐home mom with their four children. Please review the enclosed information. Our market analysis of the property and overview of the market as well as the situation of the seller indicate that it is in the best interest of both you as the lender and the Smiths to accept this buyer’s offer. We look forward to doing business with you. Sincerely, Alice Agent

Short‐Sale Payoff Application This application is provided by the lender. The seller should complete the application; the real estate professional should include it as part of the short‐sale package. Although the payoff application may have previously been submitted, based on lender request, it is a good idea to include it in the package as well.

Slide 4‐5


45

Seller’s Hardship Letter The goal of the hardship letter is to have the seller explain their situation to the bank. The hardship letter should communicate three key points: 1. “I’m sorry” 2. “Here are my circumstances (such as job loss, medical issues, divorce,

health issues, damage to the property not covered by insurance, etc.).” 3. “I have exhausted all of my options and the only next step is letting the

property go to foreclosure.” See Figure 4.2 for a sample hardship letter. As with the proposal letter, the hardship letter should be kept to one page. It should be clear, concise, and easy to read.

Slide 4‐6


46

Figure 4.2: Sample Seller’s Hardship Letter

To Whom It May Concern:

This is a very difficult thing to write. I have always been able to pay my debts in the past and am truly sorry that I cannot do so now.

I lost my job as a manager for a large home improvement company. I have been unemployed for six months. I have been receiving unemployment benefits. However, my unemployment check replaces about one quarter of my previous income. My wife is a stay‐at‐home mom responsible for our four children. We have both been looking for employment. We have exhausted our savings. Our credit cards are maxed out and we are in the process of filing for divorce.

We can no longer afford to make the $1,800 monthly mortgage payment on our home. We are currently five months behind and see no way to make up the $9,000 in back payments. Our real estate taxes are also due and we have no way to pay those either.

We have agreed to sell our property for $375,000. It has been on the market for over 60 days and this is the only offer we have received. We want to avoid a foreclosure sale that will further damage our credit. We respectfully request that you consider this offer and work with our agent to negotiate a short‐sale transaction.

We have exhausted all of our options and the only next step is letting the property go to foreclosure.

Sincerely,

Daniel and Sandy Smith

Seller’s Financial Information An owners’ financial statement can be constructed very simply with a list of assets and liabilities. Assets • Real estate • Stocks, bonds, mutual funds • Bank accounts

Slide 4‐7


47

• Personal property • Retirement accounts Liabilities • Real estate loan(s) • Personal loans • Credit card debt • IRS liens • Judgments • Lawsuits

Lenders will want the amount of all the monthly expenses in addition to the assets and liabilities. These would include: • Credit card bills • Utility bills • Car payments • Insurance costs • Food and clothing • Medical bills • Child support • Tuition expenses

Supporting Financial Information These items are typically the same required by a borrower when applying for a loan. The lender will let you know how far back (2 months, 3 months, 12 months) the seller needs to go in supplying this information. • Pay stubs. Pay stubs allow the lender to see if the monthly take‐

home pay would cover the loan payments plus all the other monthly expenses. If the owner is unemployed, there will be no pay stubs to include.

• W‐2s and/or tax returns. The lender is trying to get a complete picture of the owner’s financial situation. Is the income going up? Is the income going down? Will the borrower be able to make payments if the lender agrees to a repayment program?

• Bank statements and credit reports. Again, the lender wants to be sure the borrower is truly unable to make the payments and these support that. The bank will order a credit report on the borrower but if they have one available attaching it is a benefit.

Slide 4‐8


48

Skill Builder Tip 8: Fraud Alert

Any explanation of the seller’s financial status that differs from what they put on their original loan application to get the mortgage could become a problem for the seller. If the lender sees an unexplained difference between what was stated on the application to get the loan and what is now being used to get out of the loan it could raise the question of loan fraud. If the seller is concerned or has questions they should consult with their attorney.

Supporting Hardship Information In order to provide the lender with a complete picture of the seller’s hardship, it can help to provide additional documents: • HOA liens • Medical bills • Disability statements • Unemployment benefits or status • Divorce decree Medical hardships and unemployment, to a certain extent, are easy for a lender to understand and they will agree to a short sale in just about every medical hardship situation. The seller should not try to “fake” medical hardship. The lender will verify this information.

Comparative Market Analysis The real estate professional should create a comparative market analysis (CMA) using the most current comparable sales. The lender will order one or two broker price opinions (BPOs) after they receive the short‐sale submission package. Real estate professionals should not mislead the lender as to the fair market value. If the CMA is too far below the BPOs, the lender may view the entire short‐sale package in a negative light.

When doing the market absorption portion of a CMA for a lender/bank on a short sale, the bank/lender may ask for a one‐month base, a three‐month base and then a six‐month base for comparison which will indicate



49

pricing trends in a given market. The bank is not a local pricing expert and needs to understand where value and pricing is headed in order to make the appropriate decision on a short sale contract.

Highlight such data as: • Average time on market—cumulative market time is critical • Number of short sales and REO listings in the area • Price trends • Recent economic data • Absorption rate It is suggested that you take digital photos of the interior of the property and include them as well. Many of the BPOs are drive‐bys and no consideration has been given to interior condition.

Marketing History Lenders should be presented with a complete history of showings, feedback, and advertising—in short, all the marketing efforts made to provide the lender with a contract. Real estate professionals need to show lenders that they’ve done a thorough job of attempting to get the best price possible. The importance of the CMA and marketing history cannot be over emphasized. The decision maker(s) are most likely in another state and will not necessarily understand what is happening in your market. It has been reported recently that the BPOs being done are not as accurate as they could be and this has been affecting the decision by the lender as to whether they approve the short sale. The listing agents’ CMA and marketing history are more thorough than a BPO and should include MLS print‐outs of all property in the area as well as pictures of comparables and on‐market properties that are in competition with the subject property.

Repair Estimate for the Property If you didn’t request repair estimates at the time of pricing the short‐sale listing, now is the time to do so. Providing the lender with a detailed repair estimate from a reputable (licensed) contractor will assist greatly in getting the short sale accepted. The lender doesn’t want to own property—and especially not property that needs a complete overhaul.



50

Some lenders have been known to make some repairs. However, they would much rather sell “as is” and have the buyer make the needed repairs. Two offers netting the lender the same bottom line—one where the buyer will do their own repairs (buying “as is”) and one where the lender is asked to do them—usually results in the “as is” buyer being successful.

Contract and the HUD‐1 The real estate professional should provide the lender with a copy of the purchase contract, the buyer’s pre‐approval letter and will have to supply a notarized statement that the buyer is not related to the current homeowner. All supporting documents including the HUD‐1 should be attached. Note: Many lenders will reference the HUD‐1 in their acceptance, e.g., “Lender will accept net proceeds of no less than $327, 500 no later than [specified date].”

Follow‐Up • After the package has been submitted, it is important to verify initially

that it was received and there is nothing more needed to approve the short sale.

• Verification that the loss mitigation department has or will communicate with the foreclosure department to try to ensure the foreclosure process is stopped during the short‐sale negotiations.

• You should coordinate with the seller’s attorney to determine who will be making these follow‐up calls.

• At some lending institutions, loss mitigation staff do not answer their phones. You will get a voice‐mail message that says the staff person will “return all calls within 48 hours.” If you do not receive a call back in that time frame, call again.

• The negotiator may request that all correspondence be via e‐mail.



51

COMMON RESULTS OF SHORT SALES From a lender’s perspective, there are many ways short‐sale transactions may close: • The lender releases the lien and requires the seller to carry remaining

debt on a payment plan. • The lender releases the lien and requires the seller to liquidate other

assets to pay some or all of the remaining balance. • The lender releases the lien and forgives the remaining indebtedness.

Lender Approval Letters When lenders approve a short sale, they will notify the seller in writing. The seller and his or her finance, tax, and legal professionals should review the approval letter closely both for the terms disclosed and for items not mentioned. The approval letter should also be reviewed for any items requiring lender clarification.

Sample Lender Approval Letter #1

Date: July 1, 2009 Dear Borrower: Bank A agrees to release its security interests in the above collateral upon receipt of $1,000 in certified funds. This amount is for the release of Bank A’s security interest only. Please contact your tax advisor regarding any tax ramifications from this transaction. Bank A requires that we approve a final settlement statement prior to closing that shows a balance to be paid to Bank A of no less than $473,285, which will show a real estate commission of no more than $28,397 which is to be included in closing costs not to exceed $52,412.75. Closing shall take place no later than July 10, 2009.

Slide 4‐15 Exam Question 13 Slides 4‐16 – 4‐19

In sample lender approval letter #1, note: • The bank is

releasing security interest only (mortgage)

• No mention of releasing the promissory note

• Needs clarification to determine if the seller has to pay the deficiency

• Note the date of the approval and date of closing


52

Sample Lender Approval Letter #2: Date: May 7, 2009 Dear Borrower: In response to your request for a sale of the above referenced property for less than the total payoff of the property, Joes’ Servicing Company (JSC) hereby agree to the short sale between Sam and Sally Smith, the seller(s) and Bob and Betty Brown, the buyer(s) and will release its lien, contingent upon the following terms: 1. With a purchase of $300,000 in which the required minimum net proceeds for JSC loan number 12367893 should be no less than $262,404.51. The settlement/closing is scheduled on or before 6/7/09. 2. Any extension of the closing date requires the written approval of Joe’s Servicing Company. 3. A copy of the HUD1 Settlement Statement (preliminary) must be faxed to JSC. This fax should be sent to 555‐555‐5555 or emailed to [email protected]. Do not close without an approved HUD from JSC. 4. IN NO EVENT SHALL THE BORROWER RECEIVE ANY FUNDS FROM THE SALE OF THIS PROPERTY. Any surplus funds above the agreed upon Short Sale purchase price at the time of closing is the exclusive property of JSC and shall be made payable to JSC. The mortgagor(s) also waive their rights to any escrowed funds or refunds from prepaid expenses. 5. The following items are in agreement to be paid at closing:

• 2nd lien to receive $5,000 • Commission paid to be no more than $8,000 • Closing costs paid to be $37,595.49 • Any outstanding settlement costs to be paid by Seller(s),

Buyer(s) or Agents Upon satisfaction of all terms of this approval, the mortgage will be discharged and a release document will be forwarded for recording. If a foreclosure action was commenced against this property, then upon satisfaction of all terms of this approval, the pending foreclosure action will be dismissed and appropriate instruments recorded.

In sample lender approval letter #2, note: • No mention of

cancelling promissory note

• No forgiveness of deficiency


53

Sample Lender Approval Letter #3

Date: January 20, 2009 Dear Borrower: This letter will serve as Bank C’s demand for payment and advises you that Bank C and its investors and/or insurers have agreed to accept a short payoff involving the above‐referenced property (the Short Sale transaction). This demand should be used by the closing agent as our formal demand statement. No additional statement will be issued. This approval is exclusive to the offer by the buyer referenced in this letter. The conditions of the approval are as follows: 1. Closing must take place no later than February 5, 2009 or this

approval is VOID. 2. The approved buyers are Bob and Carol Smith and the sales price for

the property is $260,000. 3. Another buyer cannot be substituted without Bank C’s prior written

approval. 4. Proceeds to Bank C to be no less than $230,733.51. 5. Total closing costs, including real estate commission, not to exceed

$29,266.49. This figure includes $1,000 for second lien and $3,000 for third lien.

6. Termite reports and repairs not to exceed $1,000.00. 7. Real estate commission not to exceed $13,000.00. 8. This property is being sold in “AS IS” condition. No repairs will be paid

for out of the proceeds unless specifically state otherwise. 9. The sellers will not receive any proceeds from this short sale

transaction. If there are any remaining escrow funds or refunds they will not be returned to the seller, they will be sent to Bank C to offset the loss.

10. Bank C or its investors will not pursue a deficiency judgment if the short sale closes on the referenced loan. If the short sale does not close, then the referenced loan secured by the Note and Security Instrument shall remain in full force and effect and we will pursue all remedies under the Note and Security Instrument.

In sample lender approval letter #3, note: • The lender is

forgiving the deficiency on this

• Also note the approval date and closing date


54

WHY SHORT SALES FAIL

Problem: Incomplete Short‐Sale Package This is one of the most common reasons why short sales fail. If the package is not complete, many of the lenders will not call and tell you what is missing. They will simply set the package aside and it will be handled when they have the time to start making such calls. Other lenders will attempt to communicate with you on the missing pieces but that alone slows down the process. And still others will never let you know at all.

Solution: Submit a complete short‐sale package

Problem: Package Not Submitted Properly Every lender has different procedures for how they want the package submitted. You must follow those instructions. If they ask for it to be faxed—you fax it. If they want it scanned and e‐mailed—you scan and e‐mail. If they want two copies sent – you send two copies. This is not your decision, it is the lender’s.

Solution: Submit the package as directed

Problem: Offer Too Low Each lender has its own formula for what price they will accept on a short sale. There are no hard and fast guidelines on what the lender will approve. This is why the buyer’s representative should have done a thorough CMA for the buyer prior to writing the offer and why the listing agent should have counseled their sellers to counter any offers to establish the best price and terms possible prior to accepting it.

Solution for buyer’s representatives: Do an accurate CMA and counsel your buyer on making an acceptable offer

Solution for listing agents: Have sellers negotiate the best contract they can prior to acceptance and submission to the lender

Slide 4‐20


55

Problem: Buyer Not Strong Enough A pre‐approved buyer has a much better chance of getting their contract approved by the lender than one who is only pre‐qualified. A cash buyer will need to submit proof of funds. The lender wants to see a contract that has a strong chance of closing.

Solution: Submit thorough buyer qualification information and a strong contract with as few contingencies as possible. From the lender’s point of view a contract that stipulates that the buyer will be doing his mortgage application, home inspection, etc., after lender approval has less of a chance of closing than one where the buyer has already taken the appropriate steps.

Problem: Lender Took Too Long and Buyer Backed Out Although length of lender approval is not tracked for all mortgage servicers in the U.S., anecdotal feedback from real estate practitioners is that many short sales fail because the buyer simply got tired of waiting.

Solution for buyer’s representative: Counsel the buyer on the frustration of time delays.

Solutions for listing agents: • Recommend the seller negotiate sufficient earnest money to

keep the buyer from backing out as well as negotiate a realistic time frame for the buyer to wait for lender approval in the contract.

• Keep the lines of communication open between listing agent and buyer’s representative and then, in turn, keeping the buyer in the loop of communication.

Problem: Inaccurate BPOs As discussed previously, if the BPOs and/or appraisal of the property was inaccurate and the lender has a distorted picture of what the fair market value of the property is, this could influence the lender’s approval.

Solution: If the contract is not approved, ask the negotiator how the BPOs compared to your CMA and see if there is a problem that can be resolved. Be certain to have interior photos that further support the buyer’s contract terms.


56

Problem: Doesn’t Meet Lender Criteria or Investor Will Not Approve Many of the loans we are attempting to do a short sale on have been securitized and sold to investors. The securitization agreement the lender has with the investor often gives specific parameters of how much the lender can discount the loan in a short‐sale situation.

Solution: Submitting a thorough CMA can show what the value of the property, but this is where logic sometimes fails and it becomes a “because they said so” situation. You might ask the negotiator how the BPOs compared to your CMA and see if there is a problem that can be resolved.

Note: A securitization is a financial transaction in which assets are pooled and securities representing interests in the pool are issued. During the early and mid‐2000s there was a huge demand for mortgage backed securities and many of the current loans were packaged and sold to investors.

Problem: Junior Lien holder Says “No”

Solution: The listing agent needs to assess the plan for repayment of debt to the junior lien holders prior to acceptance of an offer. This area of negotiations is a major battlefield at the present time and if you know the holder of the junior lien and you can ascertain what they are willing to accept to release their lien, then resolving this prior to seller acceptance of contract would be best.

Exam Question 21

5. Foreclosed and Real Estate Owned (REO) Properties

57

5. Foreclosed and Real Estate Owned (REO) Properties In this chapter: • When all alternatives are exhausted: foreclosure • Forced sale of property • Redemption • When the property fails to sell at the foreclosure sale: REO

WHEN ALL ALTERNATIVES ARE EXHAUSTED: FORECLOSURE When refinancing, a loan modification or a short sale doesn’t work, the distressed homeowner is left with only one option: foreclosure, which results in a forced sale of the property and eviction of the homeowner. How the proceedings will take place and the length of time to complete the proceedings are guided by individual state foreclosure laws, e.g., judicial foreclosure, non‐judicial foreclosure. Judicial • If the instrument is a mortgage, a judicial foreclosure or court‐

ordered action is typically used to execute the foreclosure proceedings.

• In a judicial foreclosure, the lender obtains the right to foreclose by filing and winning a lawsuit.

Non‐Judicial • If the instrument is a deed of trust, a non‐judicial foreclosure is

typically used to execute the foreclosure proceedings. • Non‐judicial foreclosures generally take less time to complete than

judicial foreclosures. This is because the borrower pre‐authorizes the sale of the home in the loan document, which orders foreclosure upon default.

For a simplified overview of judicial and non‐judicial foreclosure processes, please see Figure 5.1.

Slide 5‐1 Slide 5‐2 Slide 5‐3 Slide 5‐4 Slide 5‐5


58

Figure 5.1: Judicial Foreclosure vs. Nonjudicial Foreclosure


59

FORCED SALE OF PROPERTY If homeowners are unable to take advantage of foreclosure alternatives, foreclosure proceedings require a forced sale of the property, known as a foreclosure sale or sheriff’s sale. A foreclosure sale entails sale of a property, commonly through an auction, under authority of a court judgment in order to satisfy an unpaid obligation. In some states, this forced sale is done through a trustee sale.

A Closer Look at Foreclosure and Sheriff’s Sales • The sales are usually listed among the legal/judicial notices in the

local newspaper. Some municipalities have lists to which you can subscribe. Still others post the upcoming properties to be sold/auctioned on their website.

• The scheduled sale of a particular property is published for a specific number of weeks prior to the sheriff’s auction/sale, depending on state law.

• Even though the auction/sale of a specific property may be advertised and scheduled, often properties are not actually auctioned that day because the property owner has either sold it or reached an agreement with the lender (workout option or short sale) that takes the property “off the auction block.”

Foreclosure sales/auctions pose unique considerations for real estate buyers: • The opportunity to conduct property inspections can be negligible or

extremely limited. Real estate professionals should not expect to schedule a property inspection before the foreclosure/sheriff’s sale. Potential buyers usually have limited or no access to properties offered at a foreclosure sale because they are often still occupied by the owners or tenants.

• After completion of the sale and approval by the courts, if required by state law, it may be necessary for the buyer to initiate legal action to evict the occupants.

• Buyers are responsible for paying any outstanding liens. • The possibility exists that the buyer may not receive clear title. For

example, if a special warranty deed is issued, clear title is not guaranteed.

• Buyers may be impacted in states that offer borrowers the right of redemption.

Slide 5‐6 Slide 5‐7 Slides 5‐8 – 5‐9 Exam Question 16

Exam Question 26


60

Skill Builder Tip 9: Getting to Know Foreclosure and Sheriff’s Sales

Buyers may want to attend a foreclosure sale and attempt to purchase a property. If you are going to accompany your buyer to the auction, you both should attend at least two or three auctions in advance to observe the protocol. In addition, buyer’s representatives should consider recommending that buyers have a limited lien search done prior to the foreclosure sale.

Note: Most buyer’s representatives who accompany buyer clients to foreclosure sales should do so only with a written buyer representation agreement.

Foreclosure and Sheriff’s Sale Reality Check: Why the Lender Gets the House • The minimum bid the lender will consider at auction is, typically,

more than what a buyer is willing to pay. Just the mortgage alone is often more than the property is worth, and when you consider the extra costs incurred by the lender as well as delinquent property taxes, legal fees, etc., the property is not a bargain.

• In an area of declining property values, savvy investor buyers will not pay what is owed since that would be more than the market value of the property. Additionally, most investor buyers who attend these sales are looking for a bargain. Consequently, the property goes to the lender.

• The pool of well‐financed investors has diminished in many markets. These issues, plus those mentioned previously, are why, in most cases, the foreclosure or sheriff’s sale does not bring viable buyers for the property and the lender takes the property back.


61

REDEMPTION As explained in Chapter 1, the right of the borrower to recover a property after foreclosure sale is known as a redemption period. This period varies widely from state to state; some states allow no redemption period, others allow up to a year or longer. If the borrower makes good on the past due payments during the redemption period, title to the property can be recovered. Some states allow the borrower to redeem the property by paying only the missed payments along with any accrued late charges and penalties; however, many states require the borrower to pay the loan balance in full.

WHEN THE PROPERTY FAILS TO SELL AT AUCTION: REO When foreclosed properties don’t attract bidders at the auction or trustee sale, the property is considered real estate owned (REO). REO means that the property or asset is transferred to the lender. Lenders are motivated to recover the current balance of the asset and minimize the future loss. The asset manager is the person assigned to oversee the REO property from the listing through sale to close. Some lenders handle asset management in‐house; others will outsource this responsibility. Asset managers will work with the listing broker once the property has been assigned. All communication about the listing will go through the asset manager who may handle 200 to 300 listings at a time and oversee a multi‐state territory.

Listing REO Properties Prior to agreeing to list REO properties, it is important that you know what you are agreeing to. For example, listing agents should verify what the listing agreement requires from the agent and the broker. Listing agents also should verify whether errors and omissions (E & O) insurance covers for these activities since they may be considered property management functions, not real estate functions. Activities include, but are not limited to:



62

• Hiring and paying service providers such as well and septic inspections or other inspectors or contractors to fulfill the contract contingencies

• Hiring and paying contractors during the listing period for the following: - Winterization procedures - Snow removal - Lawn care - Utility disconnection and reconnection - Repairs - Security issues

Many banks and/or asset managers are requiring the deposit of earnest money at the time they verbally accept the buyer’s offer, which could be weeks prior to the seller actually signing the contract. This practice is often in violation of state license laws and needs to be explained to the seller and modified in the listing agreement.

Showing REO Properties Finding REO properties for buyer clients may not be as easy as it seems. Although all multiple‐listing services (MLSs) now have a category for short sales or at least a way that they can be disclosed, many do not have a category or any requirement to disclose a bank‐owned property. You may need to search the “Remarks” section for keywords that would indicate that the property is bank owned. Such keywords may include “bank owned,” “lender owned,” “foreclosure,” and “REO.”

Safety Issues Issues of safety cannot be overlooked when showing vacant properties. In all cases the buyer representatives should know who their buyers are prior to showing and should not be meeting buyers at the property for the first time. Many of these properties have no electricity and showing them at night, and sometimes even during the day, can be hazardous. Real estate professionals should always take a flashlight with them and be mindful at all times of the potential for less than admirable condition of the premises.



63

Skill Builder Tip 10: Don’t Allow the Client Unsupervised Access

A serious error made by many agents is to give a buyer client the access code or lock combination to enter these properties without the licensee being present. In many states this would be considered a violation of license law and/or MLS rules. Given their busy schedules, some licensees may think that this practice offers a transaction shortcut and saves time. However, allowing clients unsupervised access to an REO property is dangerous and should be avoided.

WRITING OFFERS ON REO PROPERTIES The lender’s internal cost to foreclose can be significant, considering items such as accrued interest, legal fees, condo fees/assessments, property taxes, water/sewer and the like. Costs accumulate and as the lender continues to incur costs over time, it improves the buyer’s negotiating position. REO transactions are investment driven; therefore, there are no emotional ties to the properties other than asset managers achieving their monthly goals. The buyer representative must be able to counsel the buyer on procedures and keep the end result in mind. Typically, the initial offer is written on the contract form customarily used by the buyer representative. The chances of the buyer’s offer being accepted are greater when: • The buyer makes an offer based upon market value. • The buyer has been pre‐approved for financing and includes this

information from the buyer’s lender with the contract. • The buyer asks for a quick closing date, possibly closing before

month’s end, so the lender does not have to continue to carry the property on their books.

• The buyer agrees upfront to an “as‐is” transaction. Most lenders will not give seller concessions.

• The buyer does not have any home sale or home close contingencies

Slide 5‐16 Exam Question 20 Slide 5‐17 Exam Question 24 Slides 5‐18 – 5‐19 Exam Question 27


64

Many times the REO seller will want the buyer to be pre‐approved prior to accepting the buyer’s offer. REO sellers may or may not want to compete for the new buyer financing.

Note: Buying in “as‐is” condition does NOT eliminate the right to an inspection period. Be certain your buyer asks for a home inspection in their offer and has a licensed inspector do a thorough inspection of the property. It is highly recommended that the buyer also have a mold inspection done on any REO property. Many of them have had the utilities disconnected and mold has become an increasing concern.

NEGOTIATING THE REO CONTRACT When a buyer’s offer is made, the listing agent submits the buyer’s offer to the asset manager. The asset manager, not the listing agent, makes the decision on how the offers are handled. Even though the offer may have been accepted by the asset manager, it is common for the acceptance to be subject to approval from an authority higher than the asset manager. Real estate professionals should also note that there is no binding contract until the seller (bank) and the buyer have signed and initialed the contract and all riders and addendums. In the time (sometimes weeks) it takes for the bank to get the signed contract back to the buyer’s representative, there could be other offers which must be presented to the seller. Whether the seller decides to accept one of those and nullify the original offer is a matter of choice.

Counteroffers and Addenda A counteroffer is handled through an addendum, which is sent to the listing agent from the asset manager, who forwards it to the buyer representative via fax or e‐mail. It is imperative that the buyer understands fully the contents of the addendum and it is advisable that the buyer seeks legal counsel. Frequent addendum issues include: • Altering the inspection period • Modifying the seller warranties • Changing the financing provisions



65

• Imposing monetary penalties for buyer’s failure to close • Containing mold and other environmental disclaimers • Limiting the seller’s liability

Limited Property Disclosures There may be limited property disclosures when it comes to REO properties. In some states, sellers of REO properties have no duty to provide a written disclosure form, however, they would be required to disclose material defects of which they have knowledge. On the other hand, federal lead‐based paint disclosure laws do apply to REO transactions. Even though REO properties are generally bought “as‐is,” a home inspection offers some protection for the buyer. If a seller agrees to make concessions to the buyer for repairs, make sure they are included in the contract.

City Point of Sale (POS) Inspection Some cities require a point of sale (POS) inspection. The purpose of this inspection is to assess the safety, soundness, and security of the property. The POS inspection may include both internal and external aspects, such as landscaping, sewer, and the like. An occupancy permit will not be issued until POS criteria are met. If the seller (bank) does not agree to make the repairs prior to closing, many cities require an escrow fund to cover costs of such repairs; for example, the municipality may require an amount equivalent to 1.5 times the bid be placed in escrow to assure correction of violations. Other cities have been known to block the closing until the repairs are made. It is imperative that you know what the requirements and rules are in the cities in which you are selling.

Final Walkthrough It might be best for the walkthrough to occur a few days prior to the closing, if possible, to ensure there is time to work out any issues that may arise. Even though the buyer knows he or she is buying the property “as is,” the walkthrough assures the same “as is” condition as when the offer was presented.

Slide 5‐23 Slide 5‐24 Exam Question 22 Slide 5‐25


66

The listing agent and seller usually have photos of the property condition at the time it was listed to ensure the buyer does not request unneeded repairs at closing. It is a good idea for the buyer’s representative to take photos for the buyer at the time of purchase contract as a precaution in the event the property is not in the same condition at time of closing.

Closing Dates and Per Diems In order to meet monthly revenue goals, asset managers prefer closings to take place at the end of the month rather than the beginning of the next month. The buyer representative should explain to the buyer that the closing date must be adhered to because, if not, it could cost the buyer extra dollars above and beyond the contract purchase price. Most REO sellers charge a daily penalty for every day the buyer is late in meeting the contract closing date. This fee is charged regardless of who caused the delay on the buyer’s side of the transaction, whether it is the buyer who is slow to deliver documents or the buyer’s lender who has no sense of urgency or a combination of both.


6. Finding Distressed Property Opportunities

67

6. Finding Distressed Property Opportunities In this chapter: • Finding buyers (or how they find you) • Finding short‐sale listings • Listing real estate owned (REO) properties

FINDING BUYERS (OR HOW THEY FIND YOU) There has never been a better time to promote your services as a distressed property resource or take advantage of current market dynamics. There are numerous potential buyers looking for bargain properties. Many of them are first‐time home buyers who need the services of an agent to help them navigate the process. Others are investors who routinely buy and sell dozens of properties a year. Suggestions for finding buyers are outlined below. Give your Web site copy a facelift. NAR data show that over 75% of homebuyers use the Internet in some way prior to purchasing a property. And most do so before to contacting a real estate agent. Your Web site copy should stress your ability to assist homebuyers in the purchase of short sales and REO properties. At your Web site, enable consumers to sign up for a weekly e‐mail newsletter. The concept of pull marketing is the consumer pulling data and information that interests them. If you have a place on your Web site where a consumer can sign up (an excellent call to action) for information like a newsletter or tips on distressed property listings via e‐mail, they are pulling the information. It is information they actually want and think they have a need for. The weekly e‐mail newsletter is a primary marketing strategy for Columbus Realty, a real estate firm that now specializes in REO properties. To read more, see Figure 6.1.



68

Figure 6.1: Columbus Realty: Fast Growth from REO Sales After starting as a real estate investor and rehabber, then spending a few years as a real estate salesperson, Michael Zouglas launched Columbus Realty in 2002 as a traditional residential brokerage. In two years, it grew to 25 sales associates. But when his St. Louis market started slowing in 2005, he switched gears, focusing on REO property. To ramp up the company’s REO expertise fast, Zouglas joined forces with Blair Lavagna. “Blair’s eleven years of REO experience provided instant credibility with banks,” he says. Today, as a company specializing in REO properties, Zouglas has increased his company’s revenues by 273 percent from 2005 to 2007. At the same time, he’s cut his sales force to eight full‐time and four part‐time associates, including Lavagna’s two‐person team. Getting REOs Sold About three‐quarters of Columbus Realty’s buyers are local investors who buy one or two properties at a time, most of them in the $30,000 to $70,000 range. A small portion of buyers are from out of state, including a few seeking to buy properties in bulk. A year‐old Florida office headed by Lavagna is expanding the options for out‐of‐ state sales. The brokerage’s two main marketing vehicles are a weekly e‐mail newsletter that goes out to the company’s investor clients and REALTOR.com, where the brokerage makes extensive use of the site’s enhanced listing features. “The cost to be the one at the top of the listing search, especially if you’re in the REO business and carry as many listings as we do, is a steal,” he says. “It’s what makes you visible to the person across the country or down the street who finds you and says, ‘I’ve got half a million dollars I have to spend.’” Source: Excerpt, “Columbus Realty: Fast Growth from REO Sales,” REALTOR® Magazine Online, September 2008. Copyright REALTOR® Magazine Online.


69

Look into the HomeSteps program from Freddie Mac. It is a service brand of Freddie Mac, and a free‐of‐charge service available to homebuyers and real estate professionals. For more information, visit www.homesteps.com. And don’t forgo traditional marketing techniques. For example: • Create a direct mail postcard or brochure with the following copy

and send to prospects in your database: “Our current market conditions are full of opportunities for buyers to purchase and invest in real property. Over the past few months, I have gained additional information and knowledge regarding distressed property sales. If you are a potential purchaser looking for an investment or a new home, contact me to discuss your interest. “

• Contact your sphere of influence (SOI). Letting your SOI know you are trained and ready to assist them in purchasing a distressed property is an excellent way to create business. You can call or mail – or both – using pre‐designed campaigns or design your own.

FINDING SHORT‐SALE LISTINGS Short‐sale listings can come from a variety of sources, including, but not limited to: • Unlisted properties • For sale by owner (FSBO) properties • Expired listings • SOI

Unlisted and FSBO Properties Many unlisted properties are in distress, and owners have chosen to sell on their own to recoup some of their losses. To confirm whether or not an unlisted property is a distressed property, consider consulting the following sources: • Tax records • Online subscription services such as www.realtytrac.com and

www.foreclosures.com



70

If your research confirms that the owner is in distress, your approach should be the same as with any FSBO seller. Experienced practitioners understand that the odds of listing the FSBO property on the first appointment are slim. Remember, distressed owners may not have a lot of time to sell the house, but they may still want to try it on their own for a while. Consider adding some of the following to your normal FSBO follow‐up procedures: 1. A mailing emphasizing your new knowledge of listing and selling

distressed properties. 2. Information on the Foreclosure Alternatives Program. 3. NAR brochure “Are You Having Trouble Paying Your Mortgage?” In all cases, it is vital to approach distressed owners with respect and sensitivity.

Expired Listings Expired listings have become an increasingly important part of most successful agent’s bottom line. Many sellers will not put their home on the market at the recommended price with their first listing agent, but will reduce the price and listen to the recommendations of their second listing agent as to strategies, staging, etc. With short sales, the situation is even more critical. If the agent who had the property listed was not trained in doing short sales, the problem may not have been with what the seller was doing, but in what the agent was – or was not – doing. Experience has shown that many sellers were not in a short‐sale position when they listed the first time but now are. The listing may not show in the MLS as a potential short sale. These are lucrative leads for an experienced short‐sale resource. Possible scripts include the following: “Mr. Hanson, please. Mr. Hanson? This is with . I notice that your home has come out of the multiple listing service. Have you changed your mind about selling?” If the owner is going to re‐list with present brokerage: “I don’t blame you for staying with . They are an excellent firm. Thanks for your time, and good luck!”

Slide 6‐7

Slide 6‐8


71

If the property is already sold: “That’s great! Sometimes our databases are not as up‐to‐date as we’d like. Best of luck to you.” If the owner is uncertain: “Before you make any decisions, I noticed that your home was listed as a potential short sale and I wanted you to know I have taken extensive training in assisting homeowners whose properties are no longer worth what they owe and I’d certainly like an opportunity to get together and discuss some strategies with you that could help you avoid any further financial hardship.” Note: Calling on expired listings and for‐sale‐by‐owners, as with any other lead‐generation calls, must be done in compliance with the Do‐Not‐Call Laws. If they are on the Do‐Not‐Call list and your purpose for calling is to solicit their listing, you cannot make the call. Remember, if you are calling on behalf of a specific buyer client, the Do‐Not‐Call regulations do not apply. However, you do need to comply with any requests a homeowner may have made to your company to cease any calls. In‐person contact, unless prohibited by local anti‐solicitation laws, would be recommended.

Again, Don’t Forgo Your SOI For most real estate professionals, their SOI has always given them their best leads. This approach to your SOI will give them the opportunity to refer business to you and to let you know if they themselves are in need of your services. A possible script includes: • “Hi Joe, this is Sam Smith. I don’t want to take a lot of your time but

with all that is happening in the real estate market and the economy there are a lot of people who may be in financial trouble and are struggling with their mortgages. Over the past few months I have been learning how to help homeowners having difficulty paying their mortgages. If you know anyone needing this type of resource, please feel free to give them my contact information…email or phone number.”

Another possible script is:

“I just wanted to let you know that I’ve added another specialty to my real estate business. In light of what is going on in our economy and in the local housing market and with so many people facing

Slide 6‐9


72

foreclosure or finding themselves upside down in their mortgages I have taken special training on helping homeowners in distress.

According to statistics, one of the biggest problems is that most people do not know of their options if they are facing a financial difficulty. One of the issues I’ve been trained in is explaining those strategies to the homeowners so they can make the best decision for their future.

If you know of anyone who may need some help, please give me a call. I assure you I will give them the finest professional service available.”

Your SOI for distressed properties should include the following: • Attorneys and certified public accountants (CPAs)—Bankruptcy

attorneys as well as divorce attorneys frequently have the need for experienced agents well versed in distressed sales to market the property. Networking with those in your marketplace and letting them know of your training and desire to assist trouble homeowners could generate leads.

• Local housing counseling centers—When someone contacts a

housing counseling center, he or she often needs assistance of a real estate agent to put the house on the market. Letting the counselors know of your commitment and training in this area and how you can help is another source of business.

• Direct mail –farming—For those who have been working a geographic farm, this approach is only slightly different that for your SOI. Here you might want to remind them of the negative impact of a foreclosed property on their property values.

“I just wanted to let you know that I’ve added another specialty to my real estate business. In light of what is going on in our economy and in the local housing market and with so many people facing foreclosure or finding themselves upside down in their mortgages I have taken special training on helping homeowners in distress. A foreclosed property in a neighborhood can have an extremely negative effect on the entire marketplace and one of my goals is to help homeowners avoid foreclosure completely.

Slide 6‐10


73

One of the biggest problems according to all the statistics is that most people do not know of their options if they are facing a financial difficulty. One of the issues we’ve been trained in is explaining those strategies to the homeowners so they can make the best decision for their future.

If you know of anyone who may need some help, please give me a call. I assure you I will give them the finest professional service available.”

LISTING REO PROPERTIES Just because you do the broker price opinion (BPO) on a property does not ensure you will list it. The BPO can be requested by the asset manager, the negotiator on a short sale, or the lender’s foreclosure department. There are numerous sites on the Internet where you can put your name on a list to do BPOs. Many agents are trying to get on a “list” to become listing agents for REO properties. This is not as easy as it sounds. For example, becoming a vendor for Fannie Mae can take up to two years. Pursuing listing opportunities requires diligence and exceptional follow through.

NETWORKING Contacting and networking with other agents who list REO properties is one of the best ways to break into the REO business. There are several REO‐related associations, for example, the REO Brokers Association. Before doing business with any contacts you’ve gained from networking, be sure to verify the legality and business practices of the company.


short sales and foreclosures - home | rebacrebac.net/teach/foreclosure/2009/october/short sales...

Documents