NEW SOLUTIONS TO MOVE PROPERTIES | SHORT SALES – LONG CLOSE
December 11th, 2008 categories: Uncategorized
In a down market, new solutions are required to “move properties.” During the 80’s, I worked in the commercial side of real estate. I remember working with our real estate clients, helping them renegotiate transactions with their Lenders in order to prevent foreclosure. Loan terms were changed, lender’s took interests in property and all other sorts of creative arrangements were made. In this current market, we are doing the same or similar things with our residential clients. Creativity, perserverence and patience are the key characteristics required.
Short Sales are a solution that many are finding useful and necessary in this current real estate climate. If you talk with many in the industry, you’ll hear a lot of horror stories (e.g., a whole lot of time can be spent just to have the bank foreclose on the property anyway or the Broker gets cut out of his/her commission by the mortgage company, etc.).
My recent experience went pretty smoothly, thankfully. Here’s a recap of my experience along with a couple of pointers I learned a long the way.
What is a short sale? The definition (according to Short Sale Solutions, by American Home Rescue) occurs when a homeowner owes more on their property than the property is actually worth, but the bank agrees to accept less than what is owed as payment-in-full. In other words, the bank is willing to take a discounted pay-off in order to avoid the foreclosure process.
The benefit to the bank is that they don’t have to take the property back (e.g., they avoid the foreclosure process and all the costs associated with it along with having a REO on their books). The benefit to the owner is that they are able to sell the home even though they are “upside down” and they also avoid the devastating effects of a foreclosure on their credit. The bank reports the short sale as “agreed settlement short of full payment,” not as a foreclosure.
The case I just worked on was a classic example of someone truly needing a short sale arrangement. The person I represented had several layers of hardship (any one of them could create a legitimate hardship warranting a short sale). His hardship was due to ALL of the following:
Personal Issues:
- Divorce
- Death in the Family
- Illness
- Loss of Job
Property Issues:
The House had a significant decline in value due the well not producing (either it dried up or needed significant repairs).
Market Issues:
- The House was listed for 6 months at “Break-Even” (e.g., the Owner would walk away with nothing) with no offers.
- Sales and Values in the market where the property was located declined significantly.
After about the six month mark of the house being on the market, the Owner just was not able to continue making payments any longer. Foreclosure was eminent. When he had finally exhausted his means to deal with the process, we began the process of negotiating a short sale with his Lender.
In the old days, you could just call the Lender directly and try to work an arrangement out. Today, every large lender has a Loss Mitigation Department with large staffs.
My experience was as follows:
I called the Lender’s Loss Mitigation Department (Wells Fargo, in my case) to find out their process. I spent several calls just trying to persuade the Lender that my client was a REAL candidate for a short sale so that they would actually send out the Short Sale Packet (instructions on what my client needed to provide/do in order to be CONSIDERED as a short sale candidate). Actually, I had my client working on gathering the information ahead of time because I already knew the general information that was needed. Some lenders require that you use THEIR forms, though.
Since my client’s loan was a FHA loan (which is governed by HUD and HUD guidelines), my client ultimately had to call to get the process going. First, he had to receive Home Ownership Counseling (e.g., they explain the process, the ups, the downs, etc.). Once that was completed, HUD contacted the Lender and the Lender finally began to cooperate (e.g, they finally sent out the packet).
Interestingly enough, once the process gets going, Lenders will NOT work a Short Sale directly with the borrowers. They REQUIRE that a real estate broker be involved. That requires paperwork. A document entitled, Authorization to Release Information, had to be signed by the borrower giving authority to the Broker to act on the borrower’s behalf thoughout the process. Once in the Lender’s system, we could continue the process.
Essentially, the process is a qualification process. The Lender requires that you “requalify” that you are NOT QUALIFIED for the current Loan.
Here’s a few examples of what the Lender will likely require:
- Bank Statements
- Previous Year’s Tax Statements
- Pay Check Stubs
- HUD Forms in the case of a FHA Loan (Application for Pre-Foreclosure Sale Program & Homeownership Counseling Form)
- A Hardship Letter (outlining the hardship)
Initially, I had to gather all of this information from my client (making sure it was all done correctly) and then provide the Lender with a Letter describing market conditions, the condition of the property (estimates, pictures, etc.), and provide comparables which better defined the “real value” of the home.
You get the information, you fax it to them, you call to confirm if they got the documents, if not, you refax, then you recall, etc. You don’t get to talk with one person. It’s always someone different and they are just reading you the notes on the file.
Finally, a Loss Mitigation Rep is assigned (although, in my case, I didn’t ever get to talk with that person). In fact, there seems to be an effort to protect the identity and direct phone numbers of the person(s) who actually have the authority to make the decisions on the matter. I guess, they don’t want these people getting overwhelmed with direct calls. In my case, the rep was changed mid stream through the process. The second rep seemed to work more efficiently/quickly than the first.
An appraisal was ordered and done early in the process (only on FHA Loans is it done at the beginning) although the Lender would not and did not disclose the Appraised Value until after we actually had an offer. Had they revealed this information earlier, the process could have been expedited quicker.
The Appraisal is the key piece of information in a Short Sale as the bottom line that the Lender will accept is based on a percentage of the Appraised Value (the percentage is different for each type of loan: FHA, VA, and Conventional). In my case, since it was not disclosed, I just had to guess in order to try to cultivate offers. Lucky for me, my guess ended up being the exact value that the appraisal came in at.
I could go on AD NAUSEUM about all the back and forth that went on and all of the documentation required by the Lender to get the short sale completed … but eventually, we got an offer and that offer was accepted. In this particular case, the Lender approved the sale and the house was sold for $75,000 … a good deal given that the original break even was $105,000 and the original list price was $109,000.
The synopsis:
With regard to the reward, I’m talking emotionally, not necessarily monetarily. Commissions are based on the ultimate sales price (In my case, $75K vs. $105K) so a traditional market sale is definitely better from the real estate broker’s perspective. However, still worth it!
Hard work aside, my recent example is a good example of the process. It was a rewarding experience as my client avoided the repercussions of foreclosure on his credit.
If, by chance, any one out there gets in the same scenario, I’d be privileged to walk along side you through the process. A Short Sale is just one option. Loan Modifications are another. Call or email and we’ll talk about the best option for you. We work Kendall, Kerr, Gillespie, Bexar, Comal, and Bandera Counties.
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