Lease Option Strategies

Greetings fellow earthlings from PlanetEarth Realty,

1. Permission for use of each article is given for a one-time printing only. For multiple reprints, please ask for permission first (uleinhase@ulrichleinhase.com) which will almost certainly be given. 

2. Maximum Success, Incorporated retains all copyrights. 

3. If your publication prints photos of other writers and contributors you must use a photo of Ulrich Leinhase with his articles. A publicity photo can be obtained by contacting uleinhase@ulrichleinhase.com

4. In all cases, the article reprint must include a tag at the end indicating copyright, contact information, and noting that the article has been excerpted from a certain book, workshop, or seminar. That tag is printed at the end of each article here on this web site.

5. After you reprint the article, send one copy of the periodical in which it is included to: Maximum Success, Incorporated PO Box 600794, St. Johns, FL  32260

In this final installment of a three-part series on short sales, I’ll explore the mechanics of putting a short sale package – the paperwork – together for a seller. Many sales associates believe this to be the most difficult part of a short sale. The only difficulty is the old military adage, “hurry-up … and wait.”

The reason short sales are considered to be so difficult is because there are no set rules. Some lenders require their own forms to be submitted in the short sale package. Some lenders use Freddie Mac’s Form – 1126. And some lenders have no set procedures and simply state, “send in the offer and we’ll review it and make our decision”.

That’s why I always remind sales associates at my workshops that short sales are not regular real estate transactions. If a seller is uncooperative or ask you to do something unethical or unlawful you don’t want their listing. Don’t walk away from these sellers – run as fast as you can. The pickier you become when choosing with whom to work will result in making more money in today’s market.

Pricing a short sale property correctly is critical. The price should always be established by a comparative market analysis. The listed price should be better (lower) than comparable listings in the neighborhood. This is not to say the property should be listed below the market. However, the seller has to sell as quickly as possible to get out from under their financial burden. The down side when we first list the property is that we have no idea if the seller’s lender(s) will consider a short sale.

The first thing after the seller signs the listing agreement is having the seller contact their lender(s). Have the seller call them before you leave their house. The information you want the seller to obtain is the lender’s loss mitigator’s name, telephone number, fax number, and their mailing address.

Then have the seller contact the loss mitigator and inquire about; 1) will the lender consider a short sale; 2) does the lender require the use of specific forms or paperwork; 3) will the lender provide an adjusted acceptable payoff; and 4) what other requirements does the lender have concerning short sales.

The first short sale package sent to the lender(s) should be sent right after listing the house. This package would include local marketing information; local market conditions; information about the seller’s financial predicaments; a preliminary HUD-1 indicating the listed price as the sale price and all expenses that will be incurred including the brokerage fee; and most importantly line 603 cash to seller must indicate zero funds going to the seller at closing.

The response from the lender(s) could be “yes” we will consider a short sale; “yes” we will accept a short sale at the stated price; “yes” we will accept a short sale but we require the use of our forms and paperwork; or “no” we will not consider a short sale.

With the information we now have from the lender(s) you can proceed with marketing the property or canceling the listing if the lender will not consider a short sale. In today’s market you will not be able to help all sellers that want to list with you. Brutal honesty, as harsh as it may be, is sometimes the only way to deal with short sale sellers you are unable to help.

When a buyer makes an offer on a short sale property, the Purchase and Sale Agreement should include a contingency, “This offer contingent upon the existing lien holder(s)/lender(s)/court accepting a payoff of less than the full amount owed that is acceptable to the lien holder(s)/ lenders(s) buyer(s) and seller(s).”

After the seller accepts the offer (contingent on the lien holder(s)/lender(s) approval) another short sale package is prepared. This package should be much more detailed then the first package. It should include a cover letter indicating all of the enclosures, including seller’s hardship letter; seller’s financials (two years tax returns, last two months pay stubs, last two months bank statement); another preliminary HUD-1 indicating the offering price as the sale price and all expenses that will be incurred including the brokerage fee; and line 603 cash to seller must indicate zero funds going to the seller.

The seller’s hardship letter should be written by the seller. It should indicate what led to the sellers problem; he/she/both lost their job; death of one of the wage earners; divorce; medical/catastrophic illness; bankruptcy; mortgage payment issues (never tell a seller to stop making mortgage payments); and property repair issues.

I’ve talked with lenders that indicated that they have heard it all: “Everybody’s child has been diagnosed with cancer; everybody’s grandmother has died; everybody is losing their job.” Lenders want the truth. If the truth is that the seller mismanaged their finances, that statement should be included in the seller’s hardship letter.

Now comes the toughest part of the entire process, the wait. The purchaser should be counseled about the wait. Some purchasers decide after only a few weeks that the wait just isn’t worth it. Sometimes it’s more difficult dealing with buyers in a short sale transaction then it is with the seller.

At this stage, salespeople learn some words used as a threesome: follow-up – follow-up – follow-up. This is where you will hear things like: “The loss mitagator you have been working with is no longer handling this case.” (Oh no, we are back to square one.) “The offering price is too low.” Don’t get mad just be prepared.

Never talk about how hard you worked to put a deal together. Talk about current market conditions. As tempting as it may be never tell the lender’s employees how unprofessional their performance is unless you’re not concerned about having your deal approved until next year.

The buyer’s contingencies should be taken care of as quickly as possible. Once the lender(s) approve the short sale they will provide a very small window for closing. Once they approve the short sale there are no more negotiations. The contract cannot be assigned. And if the lender determines that there is any collusion between the buyer and seller, the short sale shall be voided.

The property is sold as is. The seller has no money to make repairs and the lender is accepting less then they are owed and usually unwilling to make any repairs. The buyer should have inspections made and be satisfied with the condition of the property. Sometimes, depending on the buyer’s lender and the property appraisal, the lender may loan enough to cover repairs.

Prior to closing as the listing agent, you should get written pay off approval from the seller’s lender(s) and inquire if they will issue a Satisfaction of Mortgage or Release of Lien. The satisfaction of mortgage may state the payoff was reduced. The lender also has the right to require the seller to sign an unsecured note. The seller should have this information before closing so the closing will go as smoothly as possible.

Short sales are not for the weak and timid. A successful shot sale strategy is, get the facts get all the facts. Solve people’s problems and they will want to do business with you. With a solid understanding of laws and ethics you can make good decisions and make money listing and selling overleveraged and short sale houses.

Wishing you continued real estate success.

Ulrich Leinhase, GRI

Educating Successful Real Estate Professionals™ 

1. Permission for use of each article is given for a one-time printing only. For multiple reprints, please ask for permission first (uleinhase@ulrichleinhase.com) which will almost certainly be given. 

2. Maximum Success, Incorporated retains all copyrights. 

3. If your publication prints photos of other writers and contributors you must use a photo of Ulrich Leinhase with his articles. A publicity photo can be obtained by contacting  uleinhase@ulrichleinhase.com

4. In all cases, the article reprint must include a tag at the end indicating copyright, contact information, and noting that the article has been excerpted from a certain book, workshop, or seminar. That tag is printed at the end of each article here on this web site.

5. After you reprint the article, send one copy of the periodical in which it is included to: Maximum Success, Incorporated PO Box 600794, St. Johns, FL  32260

When a Realtor lists or sells a short sale house, careful consideration must be given to state and federal laws, in addition to the National Association of Realtors Code of Ethics. A short sale in today’s environment is a political hot button. For that reason, greater attention than usual must be focused on exactly what we, as Realtors do.

There is no tolerance for misinformation, errors, or lack of professionalism when listing and selling short sale properties. More and more state and federal regulatory agencies are looking into these issues. A seller believing their salesperson has taken advantage of them in a short sale or pre-foreclosure will file and ethics complaint.

In this article, I’m covering the Code of Ethics Articles 1, 4, 5, 11, 13, and 17. Please note these are not the only Articles that can be violated in a short sale transaction. A careless, uninformed, or unprofessional salesperson could potentially violate all of the 17 Articles.

Article 1 … Protect and promote your clients interests, but be honest with all parties.

To understand our responsibilities under this article, we should review Standard of Practice 1-9. “The obligation of Realtors to preserve confidential information (as defined by state law) provided by their clients in the course of any agency relationship…”

Let me assure you that we are not only dealing with state, but also federal laws. Part of the information we obtain from our customers when listing a short sale property includes the seller’s Social Security Number. Without that, and additional personal information, the seller’s mortgage lender will not discuss with us our customer’s financial issues.

Federal and state laws have very strict requirements concerning personal information. Article 1 mirrors these laws. If you are careless with a customer’s personal information you not only violate state and federal laws but are also in violation of Article 1.

Article 4…When buying or selling, make your position in the transaction or interests known.

When Article 4 is discussed at my short sale workshops, I always start by asking if anyone buys properties that they have listed. There usually is a number of salespeople that answer ‘yes’.

When we first talk with a seller about a short sale, we have to make a decisions right at the beginning either. I am acting in the capacity of a Realtor and will list your house as a short sale; or I am an investor and plan to purchase your house if I can make the numbers work.

Under Florida License Law, we can start as a listing agent then transition to an investor as long as proper agency disclosures are made. However, I believe that a salesperson that lists a short sale property would be hard pressed to defend their position.

Picture a tearful seller in front of a judge, “Your honor, this salesperson did not try to market my house. He knew my position and caused me to loose valuable marketing time because all along he planed to buy my house. And now he has put my family into a position that caused us to loose our home and all our equity.”

Remember, even though a salesperson complies with Florida License Law, a short sale is a political hot button. I don’t think anyone wants to defend themselves in court or in front of a Professional Standards Panel on accusations that they profited and the seller lost their home.

Article 5…Disclose present or contemplated interests in any property to all parties.

When I discuss Article 5 at my short sale workshops, I always ask if anyone is working with an investor. I then ask if they are going to list or manage the property as a rental after the investor has purchased it. Again, salespeople often answer ‘yes’. That positive answer indicates that the salesperson has an interest or potential interest in the transaction and that interest should be disclosed.

Article 11…Be knowledgeable and competent in the fields of practice in which you ordinarily engage. Obtain assistance or disclose lack of experience if necessary.

Brokers, when your sales associates list or sell a short sale property without specific knowledge of what they are doing, there are two words with which you must become familiar – WALKING LAWSUIT. You should insist your sales associates attend a short sale workshop.

Article 13…Do not engage in the unauthorized practice of Law.

When Article 13 is discussed at my workshop, salespeople firmly state they would never violate Article 13, so I provide a little story. We are sitting on our tearful seller’s couch. They hold up there mortgage and ask a question about their mortgage.

Like all good salespeople we would be able to rip through the verbiage and provide our seller the answer. My next question is, “What is a mortgage?” At first I usually don’t get the right answer. The correct answer is, “A mortgage is a contract.” I follow that with; “Who is authorized to interpret a contract for another.” Only attorneys have the authority to interpret a party’s rights and interests in a contract.

Salespeople provide the answers because they believe they are helping their customer.

Article 17…Arbitrate contractual and specific non-contractual disputes with other Realtors and with your clients.

The reason Article 17 is included is because of the way short sale offers are accepted and approved. The seller starts the process by accepting the offer contingent upon the seller’s mortgage holder(s) approval of the short sale offer.

A listing broker offering a set percent or dollar amount as a brokerage fee in the Multiple Listing Service must pay that amount to the selling broker. Unfortunately, the seller’s mortgage holder(s) and in some cases a court may ‘cram down’ the brokerage fee when they approve the short sale offer.

If the listing broker did not indicate in the Multiple Listing Service offering that the brokerage fee was subject to change at the time the short sale offer is approved by the seller’s lender(s), the selling broker could file an arbitration case demanding the advertised amount. When listing short sale properties make it clear that the brokerage fee may be changed by the seller’s mortgage holder(s) or possibly a court.

The last issue that needs to be addressed is listing agents who offer huge brokerage fees on short sale listings knowing that the seller’s mortgage holder(s) will cram down the brokerage fee. Not only could this be an ethics violation, it could also be a licensing law violation concerning false advertising.

I’ll say it again. Short sales and pre-foreclosure properties are political hot buttons. Just tune into the evening news and you’ll hear about these issues. As Realtors we don’t want to be part of those headlines. The headlines we want to hear about Realtors are how we help distressed homeowners overcome these negative issues and sell their house.

In the final article of this series, I’ll write about the actual mechanics of how to put the paperwork together and send a professional short sale package to the lender.

Wishing you continued real estate success.

Ulrich Leinhase, GRI

Educating Successful Real Estate Professionals™