Short Sales


The recent downturn in the real estate market nationwide has also affected Northwest Arkansas. The recent housing bubble has burst, and many people who purchased homes at the peak of the market now cannot sell them for what they paid for them. Corporate transfers or other reasons dictate that they sell their homes, despite the declining market, but their mortgage balance is higher than what they can sell their homes for.

A short sale is when a property is sold for less than the amount owed and the lender agrees to accept that amount as satisfaction of the mortgage.

Two things have to occur for this to happen:

1. The home must be under contract (i.e. have an offer to purchase) and,

2. The mortgage lender must accept the discounted payoff amount. The objective of a short sale is to obtain written confirmation of the recordation of release or satisfaction of mortgage from the mortgage lender upon receipt of the funds.

A foreclosure damages a person’s credit rating for a long time, whereas a short sale--as an alternative to foreclosure, may protect the seller’s credit rating. But it can be a lengthy and often frustrating process.

Benefits to the parties:

Seller

 1. The seller maintains their credit score by not having a foreclosure on their credit report, since the mortgage is recorded as having been paid off.

2. The seller can continue to live in the home during the process without making payments.

3. The seller doesn’t have to pay back the difference between what is owed and what is actually paid back. By filing a Form 982 with the IRS, sellers can ask that the 1099 income from the short sale be forgiven if it is their primary residence. This is a provision of the Mortgage Debt Relief Act of 2007 
 

Lender 

1. The lender doesn’t have to go through a lengthy and costly foreclosure process. The costs to the lender to foreclose can run 40-45% of the loan amount.

2. “Toxic” loans are removed from their portfolios (foreclosed properties are considered a liability on a lender’s balance sheet, while the loans which are being paid by mortgage holders are considered to be assets).

3. The cost of REOs is reduced. The lender doesn’t have to incur costs for listing and marketing the property through a broker or REO servicing company.

4. The lender doesn’t have to deal with issues surrounding the eviction process, including having to pay for the owners’ cooperation to move out.

5. The lender doesn’t have to spend time and money to correct problems with the house due to defects or the homeowner’s frustration and acts of desperation destroying the home.

6. Eliminates having to sell the home as an REO for a lesser amount than the proceeds of the short sale in a declining market.

7. Recent stimulus bills passed by Congress encourage short sales and provide incentives to lenders. Where they might get a $500 payment from the government for a repayment plan or $750 for a loan modification, lenders can request $2200 for a short sale. 
 

The Mechanics of a Short Sale—the Process

 1. The listing agent or broker determines the best price to list the property for a quick sale.

2. The listing agent or broker prepares the seller for all of the necessary paperwork that the Lender will require. This includes: 

      a. A letter of authorization allowing the listing agent to speak to the lender on the seller’s behalf. 

      b. Complete financial statement showing all income sources, current bank balances, any assets and expenses that the seller may have, along with supporting documentation.

     c. Hardship Letter written by the sellers explaining why they can’t pay off the mortgage. Signatures of all owners must be present.

Note: this letter must create a human impact on the lender—make it as sad as possible and make him cry. The 3 main acceptable reasons cited for not paying one’s mortgage are the so-called “Three M’s”: Money (loss of job), Marital and Medical.

     d. Executed contract between buyer and seller for the property (i.e. the property has to have received an offer from a buyer).

     e. Inspection report noting all necessary repairs and property defects.

     f. Preliminary HUD-1 settlement statement showing a zero balance to the seller with all costs included.

     g. Competitive Market Analysis/Regression Analysis of the property to document the value of the property. 

     h. Neighborhood foreclosure statistics. Also any information about special assessments and/or zoning changes or environmental issues, which could influence value.

     i. Documentation of other liens or violations on the property.

     j. Broker’s listing agreement for the property.

3. Listing agent submits the complete package to the Lender with a Cover Letter and a Complete Table of Contents.

4. Lender will order a BPO (Broker Price Opinion) from a different real estate agent or broker.

5. Negotiations with the lender.

6. Closing and satisfying of the mortgage or deed of trust. 
 

Financial Information necessary for the seller to submit: 
 

1. Bank statements—last two bank statements from all current accounts.

2. W-2s for the previous two years.

3. Tax returns for the previous two years

4. Other account information including IRAs, 401ks, stocks, bonds, mutual funds, etc.

5. Other pertinent information that the lender may deem necessary including bankruptcy filings (if it has been filed) and, proof of death, divorce, disability, etc.
 

When a Short Sale is Not Likely to Happen 
 

Although a short sale may seem like the ideal solution for many people behind on their mortgages on homes that are worth less than they paid for them, it is not a “silver bullet” solution. There are many situations when a lender is not likely to approve a short sale.

1. If the seller is current with their payments, even though they may be upside down in their home. In this case, a loan modification may be a better solution.

2. When there is no real hardship that has caused the delinquency of payments.

3. If the property is a second home or an investment property.

4. When the seller has filed for bankruptcy protection under Chapter 7 or Chapter 13.

5. If there is a recent cash-out refinancing of the home prior to the seller deciding to sell the home or if the seller has a recent Home Equity Line of Credit (HELOC).

6. When the proceeds of the sale are not sufficient to satisfy the lender in the first position and giving a sufficient percentage to junior liens after all closing costs are paid in full.

7. When there are clouds on the title due to outstanding liens. Sometimes other lien holders will want to be fully satisfied and may be difficult to negotiate with.

8. The time frame for the sales process is not adequate to complete the sale (i.e. if the property is too close to foreclosure).

9. If the seller has access to enough funds to be able to satisfy the outstanding debts from the proceeds of the sale of the home. The seller cannot have other assets.

10. If the seller wants to receive money from the sale of the home after the discounted payoff to the lender and all closing costs are paid.

11. If there are potential zoning or building code violations, i.e. if the seller has made modifications to the home without obtaining the proper permits.

12. If the Short Sale Submission Package is incomplete. Lenders will not waste time on an incomplete package. 
 

Short Sales from a Buyer’s Point of View—
concerns & potential pitfalls 

 

1. Buyers must have a lot of patience to purchase a short sale property. Approval of the offer by the seller’s lender is necessary, and this may take several months. In this time period the buyer doesn’t really know if the transaction will close and/or if he has “really purchased the home.”

2. Buyers may have to update their loan, since they could be under contract for a long time. Their original lock may expire and their interest rate may change. But they also need to be prepared to close quickly once the seller’s lender approves the sale.

3. The home must meet the standards for the loan program selected by the buyer. If the home is not in livable condition, the appraiser may note that, and the buyer’s lender may not approve their loan.

4. The home is purchased “as is.” This means that although the buyer is entitled to a home inspection, no repairs will be made. The buyer must be prepared financially to do the repairs needed to bring the home to livable condition.

5. If the buyer is paying cash for the home, they must be prepared to show proof of funds.

6. As with any home purchase, buyers need to think about resale even as they are purchasing the home. It should meet their criteria/needs and wants, as well as being a good business investment.

7. Buyers should consult with their agent on a regular basis. Their agent, in turn, should keep on top of the transaction and be in communication with the listing agent, who should be in regular communication with the seller’s bank.

8. The buyer’s agent should also be protecting their buyers’ interests. Sometimes forms are used that the agent may not be familiar with and may be unable to explain. Arkansas real estate agents are not allowed to “practice law” so if you don’t understand a particular legal document associated with the sale, you may want to consult an attorney.

9. Buyers may want to delay paying such items as the home inspection and appraisal until after the seller’s lender has approved the sale. On the other hand, a timely home inspection may reveal conditions of the home that may make the buyer not wish to purchase the home. It would be a shame to wait several months for the seller’s lender to approve the sale, only to find that there are problems with the condition of the home that are beyond what the buyer is able or willing to fix. Buyers should discuss this with their agent prior to writing an offer.

10. Buyers should also be prepared to pay their buyer’s agent’s commission if the seller’s bank ultimately refuses to do so. A short sale is unlike a normal sale where the seller pays all of the commissions. In this case, the seller doesn’t pay any of the closing costs (his lender does). And sometimes banks try to save money at real estate agents’ expense. The commissions are normally included in the purchase price of the home.