Short Sale Transaction
I am presenting at a short sale workshop in Keene, NH on October 13, 2010 and wanted to post this outlined information for anyone else who might be interested. As we all know, nothing is set in stone but I've put together the most systematic way I can to approach the short sale transaction.
The Short Sale Decision
If property is not on the market:
•· Agent has told them the value of their home is less than what is owed
If property is on the market:
•· Listing has been on the market for several months with several price reductions
•· price cannot be reduced any lower without dropping below sellers "break even" point
•· Ultimate Role: To sell the house and get the mortgage released (becoming an unsecured debt)
•o To counsel the seller through potential challenges of a short sale transaction
•o To assist sellers with initiating the short sale dialogue with their lender
•o To accurately price the property
•o To monitor buyer feedback
•o To provide frequent updates to seller about buyers' comments
•o To encourage sellers to be proactive by seeking out regular price reductions in a timely fashion until the property is sold
•· Keep property, rent instead or workout alternative payment options with lender
•· Sell and bring cash to closing
•· Deed in lieu of foreclosure (trade property in exchange for cancelling note)
•· Short sale
•o Seller must be cooperative with lender/agent, it is very emotionally difficult to be in this position
•o Lender must be willing to entertain a short sale
•o Property must be properly priced
Timeline (some of the steps may occur out of order listed below since all scenarios vary greatly)
•1. Seller consults with agent, attorney and accountant before making final decision to consider short sale.
•2. Seller contacts lender to notify them of short sale potential, to see if they are open to entertaining a short sale and to gather information regarding lender's requirements to complete a short sale
•3. Seller provides lender with authorization to speak with agent (in writing) and obtains short sale department contact information for agent to begin working with lender (need point of contact if you can get one, their number, fax and email if they will give it to you)
•4. Seller begins working on short sale packet while agent begins listing procedures for the property
•a. Listing file is completed by seller and agent and any short sale addendums are signed for the listing file
•b. Seller begins working on short sale packet (usually these are required documents for the short sale packet):
• i. Hardship letter is written
• ii. Payoff letter is ordered
• iii. 2 yrs tax returns
• iv. 2 recent pay stubs
• v. recent bank statements
• vi. mortgage statements
• vii. financial statements
•5. Property goes on the market subject to lender approval of any offer
•6. Periodic price reductions take place as necessary, typically I like to do them every 2 weeks and provide feedback to lender regarding any showings, feedback and price reductions
•a. All offers are negotiated to include buyer's highest price they are willing to pay and to remove any unnecessary contingencies that might slow us down
•b. Seller signs offers and agent obtains preliminary HUD (lender's net figure) for lender to review and entire short sale packet is submitted to lender by agent (sometimes parts of it may be submitted by seller) for lender decision
• i. Lender may take 1-2 weeks or over 2 months to respond to buyer's offer. Lender orders another appraisal or a broker's price opinion to see if it's worth close to what is offered.
• ii. Listing agent must properly communicate this with buyers/buyer's agent and help keep them focused on their goals.
**This is where many buyers back out.
•c. Rejection, counter offer, or acceptance is granted by lender. Sometimes they need to speak with seller prior to responding to negotiate terms post sale with seller. Sometimes they only request seller contact a workout number after the sale. Sometimes there is no further contact with seller.
•d. Written approval may be granted with strict closing procedures
•· Inspections and renegotiations after initial acceptance
•· Buyer requested closing funds contribution
•· Property damage occurs mid transaction or after acceptance
•· Buyers become anxious and back out
•· Property goes to foreclosure instead
•· Poor communication between all parties involved, including and especially lender
•· Buyer's rate lock period is exceeded and buyers get anxious
•· Seller is not completely honest and open at listing appointment about all possible liens and debts associated with the property
Our office policy
•· Disclose on MLS that property is "subject to lender approval"
•· P&S Addendum "lender approved sale" signed by buyer/seller, protecting buyer and seller from future commitment and buyer from losing earnest money if sale is not approved
•· Third party authorization and release form signed by borrower (seller ) authorizing their lender to release info about account to their agent
•· Listing Agreement Addendum "lender approved sale" / foreclosure disclaimer, seller acknowledges they will likely not receive any proceeds from sale, there could be tax consequences, there is no guarantee of a sale and that property could still go to foreclosure if lender chooses not to accept short sale, though every attempt will be made to save the home from foreclosure.
What happens next
•· Could have negotiated (seller and lender) prior closing what will happen with the underlying debt deficiency
•· Could have reaffirmed loan with new unsecured terms
•· Loan could be discharged in bankruptcy or written off by lender as uncollectable (could result in 1099 filing and appear as income to the sellers)
•· Lender could be required by law to demand payment after closing even if they are already planning on writing it off