Sunday, August 30, 2009

The Long and Short of a Short Sale, Part 3

Continuing our posts on short sales, this post focuses on how different situations can impact your chances of success with a short sale.  Below, I've outlined highlights of the ingredients which improve your chances of having a successful short sale.

A true hardship

If you had a true hardship which is impacting your ability to pay for your mortgage, and you provide evidence to back that up, banks have a strong reason to consider your request for a short sale.  

Banking is big business and they are under a lot of scrutiny right now; policy (i.e. politics), and the perception thereof = credibility to their share holders and financial backers; and consequently impacts their bottom line.  In other words, banks look better when they are helping people with a true sob story, a true hardship that any of us can imagine happening in our lives or the lives of others we know.  So, yes, in some ways, banks are being judgemental about your situation.  Don't let your pride get in the way when writing your hardship letter. Tell them why you need their help.  They are more likely to give it to you.

You have no other reasonable alternatives

In your hardship letter, you should spell out what alternatives you have considered (and ruled out) and what still exist, and, do it with strength.  It increases incentives to the bank for considering your request.  For example, if they can show (and you remind them) that you attempted to get a loan modification but didn't qualify, then they know you've TRIED to find alternatives.  If you've depleated savings and credit lines (and you demonstrate that), they realize you've TRIED to handle the problem on your own, but were unsuccessful.  If you're considering bankruptsy, they realize you consider yourself destitute with few options. 

Your letter should always state that you are looking for the best alternative for all involved, and you believe that is the short sale.  A foreclosure is not good for you or the lender.

For some banks, if you continue to pay your mortgage payment, they will believe that some how, some way, you will continue to stay current; and therefore, they may not consider your request, or it may be prioritized very low in the stack of requests.  Banks, too, go through a state of denial.
In all cases, expect your financial records to be required (in detail).  They will do their own calculations to determine if you CAN continue to pay. It's your job to show them you can not.  You are not asking for a small favor here; so don't expect it to be easy. 

Lower numbers of approval layers = Higher chances of success

For every bank/lender involved, another approval is required.  The more approvals required, the more the complicated and time consuming the process gets; and consequently, each approval required reduces the chance of success.  If any ONE party denies the request, the short sale will not go through.

If you have only one lender and one loan, the process is fairly easy.    If you have multiple loans with one bank, it's also a reasonable transaction to try to accomplish. 

If there are two different lenders on two different loans, you must get approvals from both; and it gets tricky.  For example, let's say you own a house worth $250,000 today, but you bought it in 2005 for $375,000 with what we called an 80/20 split - meaning you had one loan for 80% of the value ($300,000), and another loan for 20% of the value ($75,000).  Again, if both loans are through the same bank, it's not too hard; but if there are two banks, they will argue over how the proceeds get split.
In a foreclosure, the primary lien holder (the one with the $300K loan) would get the full proceeds of the sale - approximately $225K after closing costs; which translates to something like $215K after having to incur the costs for foreclosing, too.  (There are HUGE variables depending on banks and states here, so please understand this is only an approximate example.) The secondary lien holder will get nothing. 
In a short sale, the only reason a second lender would even consider approving a short sale is for a reward of some sort.  Fairly commonly, we see that the second lender will accept $5K as full payoff for the $75K loan.  Remember that it costs them money to process the sale, and so they are really not getting much at all for this.  That means they take their time approving (or not) the sale. 
The other thing is that the primary lender - the one that would get $215K of the $300K you owe them (of the $600K they thought they were going to get if you paid it over 30 years) - is being forced to face a painful situation, and they do NOT want to share another $5K with the second bank.  But, they might....after all, do they have a better alternative?
As you can easily see, however, the higher the number is that the second bank requires, the less likely the first bank is to agree to split to split the proceeds.  At some point, it makes more financial sense for the primary lender to allow the property to go through foreclosure.
If you add 3 or more loans with different lenders to the equation, everything can very easily can fall apart.
Most consumers have no idea that very often, they are paying (for example) Countrywide (now Bank of America) every month but another lender or institution is actually the mortgage holder, and BofA only services the loan (handles collections, escrows, paperwork and customer service).  When there is a servicer and investor, you must work through the servicer but the investor must approve the short sale.  While this generally does not deter chances of approval (it depends on who the investor is), it will often increase the length of time required to process a short sale.  The longer it takes, the more challenging it can be to keep buyers on the other end.  At some point, their patience may wear out.  No buyer, no sale.
If you have some kind of mortgage insurance on your loan, the insurance policy can impact your ability to get a short sale approved.  If the bank is not taking "enough" of a hit on the short sale, it may not qualify to collect on the insurance; and it may be better for them to foreclose on the property so they get foreclosure proceeds plus the insurance payout.  We're seeing this affect less short sales, but it can be a "behind the scenes" factor.  Part of the reason it is not impacting us too much today is that we were rarely doing FHA or VA loans or even those with private mortgage insurance in 2004-2006; at least in the Washington DC market. And, those homeowners are the ones that are being most impacted by the recent decline in home values.  When combined with a personal hardship, these homeowners make up the majority of the short sale candidates in our market.


Some parts of "timing" you don't choose.  You don't know the lenders internal climate, and what their current business policy is for dealing with short sales - and this changes often based on market and political influences; and it can impact your sale.

What you CAN choose is when to ask for professional help.  Get your real estate agent involved before you have missed a payment.  This gives your agent the most amount of time to help you examine your options and then to start the process moving along if short sale is the best strategy.

Make sure that once the ball starts rolling, everything happens as quickly as possibly.  Have your financial package ready, so that once you have a ratified contract, you can submit the package to the bank immediately without delay.
Also, in cases where there are multiple lenders, make sure you submit packages to all of them at the same time, or the earliest time at which you can deliver a complete package.  Do not get approval from one lender first, and then submit for approval from the second lender.  Your multiple banks can work concurrently on processing their packages.
Your agent(s):  The "Professional Negotiator"

Some people immediately reach out to a "professional" negotiator.  Many of these negotiators are asking for very high (non-refundable) fees upfront, and additional success fees.  I am not a fan of these companies, although some are reasonable and work WITH your real estate agent to assist you. 

I see these companies as extensions of the real estate agent.  Instead of hiring additional administrative assistants to handle all the paperwork, emails and phone calls, the agent is choosing to hire an outside company with specialized experience in the area of short sales.  However, some agents are hiring these companies because they are intimidated by the process of negotiating with your bank.  Any real estate agent afraid of negotiating is not an agent I would want to hire. 

So, if a third party company is involved, do your research and make sure you understand their role and your agent's role.  Usually, these companies require some fee upfront - if you have a complicated case, then a fee may be reasonable (not thousands of dollars).  Any success fees, since they are working as an extension of the listing agent, should be incurred by that agent, and guarranteed by the owner (my opinion). 

NOTE:  Some states are not allowing agents to negotiate short sales on behalf of their clients; they are requiring attorneys and/or third party negotiators.  In these cases, it makes sense that the agents would pass along those fees to the clients.

Your agent(s):  The Real Estate Agent

To me, the most critical decision an owner makes during this process is what real estate agent to hire.  Your agent will be guiding you through the process from start to finish.  You want to make sure your agent knows how.  Do they understand the process?  Do they have good communication skills (written and spoken mastery of the English language)?  Good follow up skills?  Do you know what the process is and who will be doing what for you? 
Remember, your agent must negotiate with the bank, facilitate a lot of financial paperwork exchange, market and advertise your property for sale, negotiate on your behalf with the showing agents and their clients; and coordinate the transaction all the way through to the closing.  It's a TOUGH job; hire carefully.

The right marketing and good price negotiation

You will need to demonstrate the marketing plan used to procure an offer.  Walking across the street to the neighbor's house and asking what they are willing to pay for the house is not going to suffice.  You must show that you listed the home, usually with a real estate agent who placed it in the multiple listing service (not all areas have these, believe it or not).  You must show that you did all the typical stuff - internet advertising, signage, etc. and that you attempted to make the availability of the home known to the widest possible audience in an attempt to procure the best offer possible.
You must also demonstrate why you used the asking price you did - with comps and market data... not because just about anyone will buy just about anything if it is cheap enough.  You can not ask $100K for your $250K house and then expect the bank to accept an offer at that price. 
In a continuing declining market (by the way, this is no longer the case in our area), you might have run comps that supported a $240K-260K price point, so you listed it at $235K to try to get a quick offer.  After 2 weeks, you dropped the price to $225K, still nothing.  Now, you're 30 days into this and there have been no new sales in your market place in that 30 days and no body seems that interested.  You get an offer of $175K. 

Well, here's what I'd do - I'd drop the asking price to $175K and wait a few days - maybe a week, to see if I can get that offer from anyone else.  Hopefully, you'll get an offer at $200K, maybe $215K, and then you can ratify and send it to the bank.  If not, I'd ratify the $175K offer and submit it.  You can then show that you TRIED to get a better offer or multiple offers at that point, and you couldn't.  It demonstrates that the price is not below, or at least not far below true market value.

The right buyer

Selecting a buyer who understands the short sale process is important.  If the buyer MUST move within 60 days, and you haven't started the process with your bank, that is not going to work. 
Selecting a well qualified buyer is critical.  Make sure that the buyer has the funds available to close, and that they are in an FDIC insured account (not the stock market).  Make sure the pre-approval letter is from a well respected loan officer and from lender (not a mortgage broker) and is current.  If the process takes several months, your agent should be checking in with the lender to make sure the loan program remains available and that the buyer (to the best of his/her knowledge) is still qualified.

The right offer

If you're in a fairly active market, your agent should market your price agressively, but not ridiculously, in order to obtain a quick offer - hopefully many.  The lesser contingencies the better. The buyer will want some protection in the contract - it is only reasonable.  But, as the seller, negotiate as much as you can in your favor.  Make sure the buyer understands - even if they do a home inspection - the property is being sold as is, and the homeowner will make no repairs (after all, this is a financial crisis, and the buyer is getting a great deal).

If you are "approvable" based on the bank criteria, the price is the make or break it point of the short sale contract.  While everyone knows that short sales, from a buyers perspective, SHOULD be good deals, it can not be much below what the bank's appraisers show is fair market value for the home.  If you sent in an offer of $100K on your $250K home, the banks generally won't accept it.  Remember, most are taking public bail out funds, and almost all have public share holders or atleast multiple financial backers.  Even if they WANT to, they can not take ridiculous offers... their financial backers would walk, the public would scream.  It simply isn't possible.  (Keep in mind here that I am not referencing a list price, but market value.)

When it falls apart

With so many variables, often sales fall apart on the buyer's side.  Maybe the buyer can't wait any longer, or their financial situation changed, or you simply picked the wrong offer because the buyers agent can't manage her clients' expectations, or maybe the bank counters with a higher price and the buyer chooses not to accept it.  Whatever the reasons, buyers often walk.  But, the first contract is critical because it starts the ball rolling with the lender.  If your contract falls apart, I discourage you from telling the bank this information, because they will stop their process.  Just get a new contract; and try to collect the earnest money for your clients.

Maybe you had back up contracts, or maybe just other offers - call them back.  Maybe they are still interested?

If you've gotten bank approval when the contract falls apart, getting the second offer should be easier - once you put the house back on the market, and you can show potential buyers the terms that the bank agreed to, it means most of the waiting is over.  If you replace the contract quickly enough, perhaps you won't even need to get reapproval (depends on how the approval was issued by the lender).  Even if you are required to get re-approval, try hard to match the terms and conditions and make the contract as strong as possible.  From a buyer standpoint, putting an offer on an "approved" short sale takes much of the guessing and waiting out of the process, and makes your home a very attractive alternative.
BOTTOM LINE:  By working with a qualified professional who understands the various nuances involved in these types of sales, your chances of success are dramatically increased.  I've done my best to outline for you the major considerations.  I hope you will use these to interview agents.  Make sure they can expand on these items, and explain which are mostly likely to impact you.



Of course, if you own a home in Northern Virginia, I hope you'll call ME first to see if I can assist you.  Also, no matter where you are in the country, feel free to contact me.  While I can not give real estate advise outside of Virginia, I can connect you with a proven professional in your area.  I belong to many networks, including REO and short sale expert networks, and we have members throughout the country.
I can be reached at:
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