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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™