intro to short sales pt 2

INTRODUCTION TO SHORT SALES PART II Introduction to Short Sales Part II: C. Short Sales 1. Definition of a Short Sale 2. Short Sale Candidates 3. How to Qualify Candidates 4. Special Considerations in Qualifying Candidates D. E. F. G. H. Eight Steps to a Short Sale Reasons for Non-Acceptance of Proposal Possible Negative Outcomes Opportunities for Business Checklists & Sample Forms 1. Sample Chase Repayment Plan 2. Sample Chase Loan Modification Documents 3. Required Information for a Short Sale 4. Third Party Authorization 5. Sample Hardship Letters 6. Sample Short Sale Addendum 7. Short Sale Proposal Packet Checklist 8. Sample Countrywide Short Sale Acceptance 9. Sample Deed-in-Lieu of Foreclosure 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 2 C. SHORT SALES 1. What is a Short Sale? A Short Sale is when a homeowner who is unable to meet their debt obligations and is facing foreclosure, sells their home for less than the value of their loan and the lender accepts the sale as payment in full for the loan. When selling short, the homeowner escapes foreclosure but they are not allowed to receive any funds at closing. Keep in mind that dealing with short sales is very time consuming and hard work. These transactions are very emotional for the homeowner and you must proceed with a high degree of caution and seriousness. If you mess up, you may loose a commission, but your client loses their home. Short sales are not for the faint of heart. 2. Short Sale Candidates The 6 best sources for short sales 1. Lenders - based on current relationships 2. FSBO’s - could be financially distressed. Call FSBO’s and offer your services 3. Marketing - “Need to sell fast? Call now” 4. Notice of Default Lists - recorded with County Clerk at recorders office 5. Public Notice of Auction - County Recorders Office or local newspapers 6. Listing Appointments - politely ask if seller is current on their loans. Be reassuring. By asking if they are current, it’s a non-threatening way of initiating the conversation. 7. Word of Mouth The best opportunities for discovering candidates are found through marketing and prospecting. If you want to work the short sale market, marketing solutions and professionalism can be a powerful draw. Once a preforeclosure notice has been made public, the homeowner will be inundated with advertising that promises to make the problem go away. Your opportunity is to set yourself apart by presenting yourself as a professional who specializes in short sales. When you are working with a listing or a FSBO, ask questions that help you 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 3 determine whether or not the seller is in trouble. If so, turn the conversation to solutions that can help. 3. How to Qualify Candidates a. Demonstrate financial hardship 1. The homeowner must be able to show a long term financial hardship and the inability to pay the mortgage, cure the default, or sell without special lender consideration & concession, and that that caused him or her to miss their payments. 2. Have the homeowner write a detailed letter explaining what happened so that you can compile the supporting documentation. For example, if the homeowner’s interest rate adjusted on their home loan, then obtain copies of the loan statements; and if their spouse died be sure to get a copy of the death certificate. Every time a concern or issue is mentioned that contributes to the hardship, you should provide supporting documentation in the form of an exhibit as proof to back it up. You’ll want to include as much proof as possible in your short sale proposal. (Sample Hardship Letter Attached) 3. If the property is in bad shape and the homeowner couldn’t afford to make the repairs, point out in as much detail as possible all of the things that are wrong with the house. Prepare a room-by-room detailed letter explaining the problems and take pictures as well to include in the package. b. Show financial insolvency - The homeowner must be financially insolvent which means they have an incapacity to pay debts on the date when they become due, and the homeowners property and assets are inadequate to discharge their debt. A person is insolvent when their liabilities exceed the fair market value of their assets. The homeowner must have no other options and no means of meeting their loan obligation. c. Cooperation on part of the homeowner – the agent, lender and buyer must have the full cooperation of the homeowner. The homeowner will have to sign an authorization giving the agent permission to speak with the lender directly and trust the agent enough to give them their private documents. (Sample Third Party Authorization Attached) 1. Just because someone may be facing foreclosure doesn’t mean they may be a good candidate for a short sale. The lender will not be interested in negotiating a short sale if 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 4 the homeowner has assets or money somewhere else. The goal of the homeowner is to show that they have no money and no means of paying their monthly expenses. 2. Keep in mind that all of the documentation you help the homeowner compile will be similar to information gathered when they applied for their loan. Although, instead of proving that they are qualified, your trying to prove that they under-qualified for their mortgage. 3. The lender is still losing money, but a short sale will usually cost the lender less overall than a foreclosure. 4. Special Considerations in Qualifying Candidates Every lender has different criteria for accepting a short sale offer. a. FHA and VA loans – In addition to proving financial insolvency, the following conditions must also be met:  FMV must be at least 63% of current total loan amount  Net proceeds from sale must be at least 82% of the as-is appraised value.  If there is a second mortgage, the lender can only receive $1,000  If home repairs are required, they must be less than 10% of the home’s after repairs value.  If it’s a VA loan, the net proceeds must be at least 88% of the home’s appraised value b. Bankruptcy – It will be extremely difficult to negotiate a short sale if the homeowner has filed for bankruptcy. The Bankruptcy Trustee and the Bankruptcy Court would have to give the homeowner permission to list the home. In Maryland, as in some other states, the filing of a bankruptcy stops the foreclosure. Typically when you mention the words bankruptcy or legal counsel to a short sale lender, they cease communications with you. It’s best not to threaten them with legal action if you want to get somewhere with your short sale. Remember, do not give legal advice to your clients….seek the advice of an attorney. 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 5 D. EIGHT (8) STEPS TO A SHORT SALE SHORT SALES ARE ADMINISTRATIVELY INTENSE 1. Gather Information from Homeowner a. Compile information as you would to complete a loan application, although you’re trying to prove financial insolvency. b. Have homeowner sign the Third Party Authorization Letter and send back to you. c. For all homeowners/borrowers, collect two months bank statements for all checking, saving and/or money market accounts for all borrowers. d. For all homeowners/borrowers, collect two years W2s and last two paystubs and/or 1099’s for self employed. e. Copy of property tax bill and homeowner’s insurance policy. f. Create a financial worksheet using all monthly bills to show financial insolvency. Items include, but are not limited to, credit card bills, utility bills, car payments, medical bills, etc. g. Ask about all liens on the home. Have the homeowner get a copy of their credit report for FREE at www.annualcreditreport.com. You can obtain a FREE credit report from Experian, Transunion & Equifax on this website. h. Order a title search to verify liens on home. This is for your review and assessment. You do not need to send this to the lender. i. Have the homeowner prepare a hardship letter describing specifically and persuasively, how their hardship prevented them from making loan payments. Make sure it includes all steps they took to remedy their circumstance. The homeowner should demonstrate that they tried at all costs to meet their monthly debt obligations. j. Gather all loan information including the payoff-lenders name, address, loan number, account number, last payment made, and payoff amount, etc. k. Check for credit lines, 2 nd and 3rd mortgage liens on the property. 2. List the Home a. Develop a pricing strategy for the home. 1. List home at a Realistic Market Price. List Price will vary on a case-by-case basis. Depending on situation, you could start with 10-15% below what the lenders payoff amount is. 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 6 2. List house “As Is”. 3. In agent remarks on MLS enter “Short Sale”. 4. On MLS indicate commission split (typical is 50/50). Keep in mind that commissions are usually reduced to about 5% in order for the lender to net a certain amount. 5. Drop price as the public auction date nears. 6. Develop a detailed plan. 7. Request a HUD-1 from a Short Sale Certified Title Company, such as Milestone Title. Your title company should be experienced when it comes to handling short sale closings. Preparation of the HUD-1 is extremely important because the figures must zero out and the lender needs to see what their bottom line will be. In addition, because sellers are not allowed to receive any money at the table, if there is an HOA or tax reimbursement due to the seller, the seller is not allowed to any portion of the funds. Figures are constantly being re-negotiated which causes the HUD-1 to change. (See attached HUD-1) 8. Include a Short Sale Addendum with the Sales Contract. (Sample attached) 9. Educate the seller on your strategy that may help him avoid foreclosure. Things to Think About… Short sales are counterintuitive. You must do everything opposite of what you’ve been taught thus far. You must prove that the homeowner is under-qualified for the mortgage, that the house is worth less that what they purchased it for and you are attempting to get the lender to accept a payoff that is less that what they’re owed. 3. Open Communication with the Lender a. Call the lender and request to be connected to the Loss Mitigation Department or Short Sale Department. b. Ask the lender if they do short sales. If they do, ask about their procedures, timelines and what they look for in a proposal. Get as much information as you can. c. Request a Short Sale Application Packet. If they don’t have one, that’s okay. d. Request the direct phone number and fax number for the Loss Mitigation Department. 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 7 e. Submit the seller authorization to the Loss Mitigation department ASAP. In order to speak with the lender directly on behalf of your client, you need their written authorization. Make sure all borrowers sign the authorization and include their account number, social security numbers, birth dates and phone numbers. f. Request the name of the supervisor in the Loss Mitigation department. You want to maintain contact with this person later. g. Keep track of every conversation you have with the lender (date, time, who you spoke with, topic and outcome) on a call log that you can refer back to later. Print out all emails and keep them in your file. One of the most important parts of your job will be follow-up. After you send the authorization, call the lender and thank them for their hard work and verify that they’ve received the sellers’ authorization. h. Call the department EVERY DAY for updates. 4. Develop the Proposal a. Be concise and thorough and detail the financial benefits of the short sale to the lender. 1. Show proof of seller’s hardship 2. Show proof of financial insolvency 3. Show that you have a qualified, ready & willing buyer who can close ASAP. b. The proposal should be professional. Make it stand out from the rest c. Be ORGANIZED. Make the lenders job easier. 1. Use a 3-ring binder with tabbed dividers to organize and separate the sections of your proposal. 2. Follow the checklists so you have all the documents needed. Once you’ve completed the proposal make 5 copies (1. Loss Mitigation, 2. Loss Mitigation Supervisor, 3. Agent, 4. Office, 5. Homeowner). 5. Obtain an offer a. Use your negotiation skills to find out lender’s requirements. Sometimes lenders won’t reveal their requirements until they’ve received an offer. b. Lender orders a Broker’s Price Opinion (BPO) or an appraisal. The lender will hire a Realtor to assess the property’s worth and give an opinion. If you provide a detailed CMA, the lender may bipass the BPO or appraisal (not likely). 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 8 c. Only send the lender your best offer. If the lender rejects your offer, you can counter with another one. d. Educate the Buyer and buyer’s agent on the Short Sale process 1. Include language in sales contract like “subject to seller’s lender’s approval”. 2. Inform them that it may take at least 30-45 days for lender to accept the offer. 3. Buyer must close within 30 days, 45 is ideal. Make sure settlement date in the contract is not less than 30 days from date contract is signed. 4. Make sure the buyer and their agent are clear about the process and that short sales benefit the buyer too. 6. Submit a proposa1 – Once you have an offer add it to the proposal package and send it off to the lender a. Send a copy of the proposal by UPS or FEDEX to the Supervisor of the Loss Mitigation Department and to the Loan Mitigation Officer or collection clerk who is assigned to the case. b. Use the same process for all loans. c. Ask the lender to respond within two (2) weeks for their response to the proposal. d. Follow up on your submission and confirm that the lender has your proposal. e. Resend copies as needed. f. Be persistent. Call every day once your proposal is received by the lender. Keep track of where the lender is with your proposal. The lender is not obligated to you to do anything. If you are not good at paperwork and administrative duties, partner with someone who is. g. Be persuasive and remember that the purpose of calling is to develop relationships so that you can later ask for their REO’s. 7. Negotiate the deal a. Clarify lender’s criteria b. Negotiate with both the first and second trust lenders at the same time. If one lender agrees to your proposal, send a copy to the other lender immediately. This will help your negotiations. h. Ask the lender to report the short sale to the Credit Bureaus as “Paid as Agreed,” “Settled Debt” or “Settlement in Full,” with a full release of the lien. 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 9 i. Create a system as to when you’ll call the lender. If it’s every Tuesday and Thursday at 12:30 pm, keep a record and stick to it. Be mindful of time zone differences or if your negotiator doesn’t work on Friday. 8. Close the deal a. Close ASAP. b. Know what you’re looking for as an acceptance by the lender. Acceptance doesn’t typically come in the form of a special letter. You’ll probably receive a new payoff statement with wire instructions as proof of acceptance. (Sample Short Sale Acceptance Letter Attached) c. Send all Sales Contract and all short sale information to Milestone Title as soon as possible so they can order title. Investor wants you to close on time and closing late is not an option. d. Title Company and Buyers Lender must be on point and be able to close early if possible. D. REASONS FOR NON-ACCEPTANCE OF PROPOSAL If the lender does not accept your proposal, request a reason in writing. A proposal may not be accepted because of one of the following: 1. Doesn’t meet lender’s criteria. 2. Not enough time to evaluate. 3. Missing information. 4. Submitted to the wrong person 5. Loan was sold. 6. Loan was reassigned. 7. Listing agent or buyers agent was mis-informed. 8. Title company didn’t know what they were doing 9. Buyer didn’t have solid loan in place. Regular communication with the lender should help to prevent surprises like the proposal being submitted to the wrong person. If the proposal is not accepted, do not despair of closing the deal. 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 10 You may just have to tighten a couple of specifics and resubmit it. Don’t despair, you can always resubmit. E. POSSIBLE NEGATIVE OUTCOMES 1. Deficiency Judgment If the house is sold through a Short Sale and the lender is paid less than the mortgage debt owed, the lender can file a Deficiency Judgment for the shortage on the actual amount received versus the amount that was due. Some lenders will choose the deficiency judgment while others may choose to write off the loan and issue a 1099 form, although President Bush announced plans to do away with this tax penalty. While there is no guarantee that a short sale will eliminate a deficiency judgment, the short sale process by its very nature will show the lien holder(s) that the borrower is insolvent. Most banks won't seek a deficiency judgment if they have been convinced, through the short sale process, that there is no money to go after. When negotiating a short sale, you can require that the bank waive its right to a deficiency judgment. More often than not, the bank will because we have proven such a desperate hardship. Although you must keep in mind that that the lender cannot pursue a deficiency judgment and issue a 1099. They can only do one or the other, not both. If the deficiency is waived as a condition to the short sale, the homeowners will probably receive a 1099. 2. 1099 and Tax Form 982 Although President Bush is currently working with Congress to reach agreement on a bill that would protect homeowners from having to pay taxes on cancelled mortgage debt, current tax law counts cancelled mortgage debt on primary residences as taxable income. Until the new legislation is passed, please make note of the following:  Inform the seller that there may be financial risk involved with the short sale, and that it could be less than a foreclosure. It’s important that the seller speak with a tax accountant for advice regarding 1099 reporting, debt cancellation and debt forgiveness as well as Tax Form 982 which could help your seller prove insolvency.  You must explain to the homeowner that the forgiven amount (the difference 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 11 between the mortgage balance and the short sale) may be declared as income to them and the lender may send them a 1099. In addition, the IRS could determine that it’s the seller’s responsibility to report the forgiven amount as income, even if the lender doesn’t issue a 1099.  Again, it’s important that the seller speak with a tax accountant for the following additional reasons: 1. If they are entering in a short sale they probably do not have enough money to pay the taxes on the forgiven debt. 2. Since the homeowner has been under such extreme duress and probably hasn’t made much income, a 1099 may not adversely affect them, 3. The seller is responsible to claim the forgiven amount if the investor reports its loss as income to the seller.  Not everyone is given a 1099. You can request during negotiations that the seller not be given a 1099. F. OPPORTUNITIES FOR BUSINESS Referrals from your client because of the great job you did helping them. 1. Future business from your client once they are in a position to buy again. 2. REO’s – based on your relationships with the lenders and new knowledge of the process. Remember: A successful short sale will eliminate a deficiency judgment, minimize tax liability, and keep the foreclosure off your clients credit! 4351 Garden City Drive  Suite 350  Landover, Maryland 20785  Phone (301) 459-0400  Fax (301) 459-4510 www.milestonetitlellc.com 12