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The Short Sale Puzzle

There are several important pieces to the short sale puzzle. The first piece for any investor is to establish their team. Once the investor lands a short sale client, he needs to rely on his team to help to get the transaction across the finish line.

First on the list, an attorney. And not just any attorney mind you.

Your attorney needs to have as many of the below listed characteristics as possible. In my opinion, these traits are listed below in their order of importance.

• Owns a title company
• Has short sale knowledge /      experience
• Can make effective      arguments regarding consumer protection and foreclosure defense
• Has a member of his staff      available to serve as a short sale processor?

Attorney

A sometimes-overlooked feature of successful short sale transactions is the presence of an attorney. The attorney should have some experience with foreclosure defense work. Because if the deal starts to appear it mike be going off the rails, a well written attorney letter has a better than average chance to bring things back under control.

Who hires the attorney?

In my experience I find that it’s usually better if the property owner hires the attorney. This way the lender knows that the owner is represented and will generally conduct themselves accordingly.

I’ll make the introduction, but it’s much more effective if the owner is the attorneys client. Additionally, I prefer to refer foreclosure defense attorneys that also own title companies.

How is the attorney paid?

If the attorney owns a title company, as well as a law practice, they’re guaranteed a payday from the closing (if one occurs).

Additionally, from the 100’s of short sales of which I’ve participated, over 80% of the lenders allow for an additional attorney fee to be charged to the file. Funny, once the attorney is approved for a fee, the lender rarely eats into it. (The same cannot be said of real estate commissions.)

It’s important to every attorney that they get paid for their time. However, your client / his client, (the homeowner) doesn’t have any available cash. The moral of this story is hopefully the attorney will recognize the value in having your business and might look the other way instead of demanding a retainer.

Sure, they’ll be paid for their services as a closing agent as well as their representation of the homeowner during the short sale. But only 25% of all short sales close. Hopefully this training will give you a clearer sense of how to measure potential short opportunities. It’ll be hard, but maybe you won’t open a file just because a homeowner agrees to move forward. 

One of the main concerns of the attorney is to defend the homeowner against the lenders attempt to simply release the lien versus satisfying the mortgage. If the lender merely releases the lien, it effects only the property. Leaving the homeowner vulnerable to any additional judgments or debt left behind by the mortgage note.

You need an attorney. Your clients/ homeowners need any attorney. Just make sure you get one hired. 

The next member of your team is a real estate agent / broker.

Real Estate Broker

Any real estate agent can complete a short sale. There are seminars and training that offers “short sale certification”, however this is not required to submit a short sale package or to complete a short sale transaction. A short sale is like a standard-arm’s length transaction in almost every way. And even the least experienced agent can find their way through those.

It is the listing brokers responsibility to get activity on the subject property (no matter what the market conditions) enough to obtain an offer. The single best way to increase activity on any listing is to keep downward pressure on the asking price and the wise use of bonus commission to a selling agent.

The bonus may or not be honored by the lender. As the party in control, it’s pretty much going to be up to them. But beware, I’ve seen transactions where a selling agent bonus was offered. The lender struck the bonus off the HUD. In order to keep the deal together the listing agent coughed up the majority of their commission to help to off-set the selling sides loss.

There are some other lender-required listing instructions. For instance, the lender will need to approve any sales contract. Therefore, the listing should read “third party approval is required” somewhere within the body of the listing. 

Short Sale Processor

The short sale processor is the party that acts as the liaison between all parties and the lender. No other party should be in contact with the lender other than the attorney.

The short sale processor is one of the more important characters in the short sale process. They must be excellent at communication (both written and verbal), organized, and a very firm and useful negotiator.

It’s much easier said than done finding a processor organized enough to process the files as well as being a resourceful negotiator. As I’ve stated in other videos and articles, perhaps the best person suited for the negotiator job is you, the investor. 

Although they’ll most likely be taking their marching orders from someone else (you or the attorney), their ability to represent the owners’ position effectively is paramount to the short sale success.

The Short Sale Situation Makes Itself Known

Homeowner Default / Foreclosure Filed

The homeowner must be in foreclosure in order for them to access the loss mitigation protocols within each lenders default criteria solutions. Once the loan is in default status the lenders loss mitigation departments becomes involved. 

The Loss Mit department will bring to the forefront the lenders “special servicing” sector. The special servicing includes a stepped-up mail and phone call programs. If the homeowner answers the phone, they talk directly with a “counselor” in the loss mitigation department.

If, on the other hand the homeowner doesn’t answer or return calls, they remain blind as to the continuing efforts by the bank to help get the loan settled. Loss mitigation calls are intended for the lender to get an idea from the homeowner if the situation can be corrected and therefore salvaged. Without cooperation from the homeowner the uninformed lender only has once choice. They must foreclose.

Once the foreclosure is filed there will be some sort of public notice or filing that makes the public aware of the action. In Florida for example, the document is recorded in the Official Public Records and is known as a Lis Pendens, LP for short.

An investor running a short sale business is keenly aware of the foreclosure notices filed in their respective state. As a matter of practice these investors should be searching for foreclosure notices every day (or at least every other day depending on the size of your staff and foreclosure activity in their state).

Since I’m familiar with Florida, we’ll use LP to indicate the filing of a foreclosure action.

Once the LP shows up in the public records its time for the investor to go to work. The first thing that must be done is to determine if the subject property (the property that is the subject of the foreclosure action) is sufficiently over encumbered.

Over encumbered is just another way of saying upside-down. If the amount owed on the property is more than the property’s value, the property is over encumbered. The investor can find the amount owed on the property by accessing the complaint filed with the Clerk of the Court. The LP and the complaint are two of the early documents filed in judicial state foreclosure actions.

After you finish your research and the subject property is sufficiently over encumbered, you can move on to the next step.

Drive to the property to check its condition. Sure, you can use some online program to get a photo but going there yourself serves a few purposes.

Seeing in person is always better than a photo. The photo may be outdated, and the properties condition may have improved or gotten worse. Most folks in foreclosure stop taking care of their properties months before there is any public notice of foreclosure.

While standing out front of the subject property, look around at the other homes in the neighborhood and ask yourself. Is this property in poor enough condition to entice the lender into accepting a low enough offer?

You as an investor are looking to make a profit on this transaction. for your profit to be worth the risk of a short sale purchase, you’ll need to be closer to the bottom of the pricing spectrum. Does this property, just on this preliminary exterior examination, qualify for this type of offer?

If the answer is still yes, knock on the door and try to set your first appointment with the homeowner.

I generally prefer to make an appointment for another day during my first contact for a few reasons. I have more time to prepare for the presentation and I prefer if all the decision makers are present. It makes little to no sense to make a presentation to the wife if the husband isn’t sitting with you too.

What are some of the benefits a short sale may provide the homeowner?

When I make short sale presentations, I like for the homeowner to realize it’s not just up to them whether they participate or not, they have to qualify. My opening reads something like this.

“Debbie, Jack in order for a short sale to work you and your situation must qualify based on your lenders criteria. Who is your lender again?” “Bank of America,” says Debbie. (I realize that short sale qualifications are generally considered to be universally accepted. However, presenting them in this fashion tends to give me a little creditability) Let’s go over the qualifications for Bank of America first. Because if you don’t qualify, your preferences won’t matter.” As I begin to discuss the short sale qualifications.

Seller Short Sale Qualifications

Depending on your style and or preferences you can either follow my presentation ideas or use something that fits you better.

I use a checklist style for discussing the lenders short sale qualifications. As I read from my prepared list, the homeowners and I discuss them one by one.

[ ] The single-family property must be owner-occupied. 

[ ] No single-family investment properties can be shorted.

[ ]  The homeowner must prove a hardship. Hardship Letter

The hardship letter itself is so important to the success of the project that I have given it its own part in this course.

[ ] No co-signor on the mortgage

I always brought a copy of the mortgage from the public records to show the homeowners. This also earns me some creditability and professional points. It also subtlety let them know that I’ll most likely verify what they tell me. 

[ ] No equity in the property

Of course, we (the investor) know there is no equity in the subject property based on the preliminary research. I just like to hear the thoughts of the homeowner on the subject.

Right now, all you need is verbal confirmation and short description of the following facts. You might ask the homeowner to expand on a certain answer here and there. Now is a good time to tell them to begin gathering proof for all of the financial condition questions you ask.

[ ] Prove no cash or assets. 

Several recent months of bank statements will eventually be required to complete and submit the short sale package.

[ ] Prove monthly expenses exceed your income. 

The lender will usually provide a financial form that will need to be filled out by the homeowners.

[ ] Not qualified for a Loan Modification

Have the homeowners been in touch with the lender’s loss mitigation department from just prior to the filing of the foreclosure until recently? If no, the lender my require them to make application for a loan modification prior to becoming eligible for a short sale.

[ ] There are no other liens on the property

This can be a thorny proposition. Because if there are two mortgages on the subject property now you have two lenders that need to agree to a short payoff. And one lender is more than enough to cause a substantial amount of grief and aggravation. Now imagine two?

Title search may be required. An experienced investor can perform their own title search form the documents provided in the public records. For most lenders it is required to obtain a lien release from any other mortgage or liens in order to be considered a short sale candidate.

This means that in order for this homeowner to even become a candidate for a short sale with the lender holding the first mortgage, the second lien, or lender, must be satisfied first.

Raise your hand if you’re interested in paying off a second mortgagee BEFORE knowing if the first lender will agree to a short sale. Not me. This is a deal killer.

After discussing the lenders qualifications with the homeowners, I think you’ll agree, that you’ve gotten to know them well. And believe it or not, even through they did most of the talking, they feel like they know you too.

If everything to this point qualifies and you think you might have a chance of putting this thig together, lets move on to what might benefit you.

What are you as an Investor Looking For?

Are there any pending code violations?

The property is generally in poor repair.

Any big-ticket repairs required?

What caused the owner to fall behind in the payments?

The owner understands that they need some help and are willing to commit to achieving the goal of a successful short sale.

All parties effected must be willing and able to consummate the short sale. This desire is important. Without it, you’ll fail.

During your initial examination determine if the property taxes are current or delinquent? Escrowed taxes are unpaid- goes to lender intent

This in no way guarantees much of anything but I like to review old foreclosure sale results to learn if this mortgagee might discount their foreclosure judgments. If they do discount, then I’m already beginning to feel good about this potential deal.

Once the situation and the property qualify. All that’s left is to have the homeowners agree to the short sale.

Homeowner

You (as the investor) have discovered this opportunity as a result of the filing of a foreclosure action. This generally means that the homeowner does not qualify for loss mitigation assistance from their current lender. (Or they haven’t yet been in contact with the loss mitigation department of their lender. But have no fear. No fear? Okay have a little fear. If the homeowner needs to get processed in and out of loss mit, all it will take is some time.)

Right now, the only issue keeping time is the foreclosure action. That will keep moving along until either a Judge slows it, the short sale is completed, or the property is sold at auction.

Understand that the homeowner is scared as this is hopefully the first and the last time, they are experiencing foreclosure. After the situation and the property qualifies, you’ll interview them seeking permission to make a short sale application on their behalf with their lender. 

The homeowner has most likely seen better seasons in their life and may feel a bit downtrodden. You must be sensitive to the situation. The homeowner will need to be a very willing participant in order to get this closed.

Getting the Homeowner to Agree

What are the Benefits of a Short Sale to the Owner?

Short Sales are better than any of the alternatives.

With a completed foreclosure the homeowner has no permanent relief from the mortgage debt. Any amount of money the lender doesn’t recover from the ultimate sale of the asset (asset, that’s what lenders call their REO’s) the bank will have the right to seek a deficiency against the homeowner/ borrowers.

The damage to the homeowner’s credit is the most severe after a finalized foreclosure. Additionally, it will most likely be as long as seven years.

A loan modification isn’t much better. The credit hit is similar to that of a short sale but, the payment relief may be only temporary. You’re also still in debt for the full amount of your mortgage and once the program expires your payments may be higher than they were before the loss mit program began. 

If you owe more on your debt than the property is worth, how long can you continue to throw good money after bad?

A short sale brings about permanent relief, potentially no mortgage debt and the homeowner can buy a home again (with conventional, VA or FHA financing) in two years.

The attorney seeks the release of the entire obligation under the note and makes the argument to help prevent the lender from seeking a deficiency against the homeowner. 

A 1099-C is an IRS form for reporting the forgiveness of debt. If the debt owed to the lender under the mortgage is not paid in full a 1099-C may be issued. This or a deficiency judgment will occur under all options available to the homeowner. 

Generally, the homeowner is not permitted to receive any proceeds from the sale of their property. However, some lenders are adjusting to the rather friendly idea of allowing some sort of relocation assistance to the homeowner. It’s not uncommon for the lender to permit the homeowner a small stipend in the $3,000-$4,000 range.

During your presentation do not promise any specific result. Only promise your best efforts and to keep them informed.

Remind them that the lender will remain in control throughout the process.

NOTE - Because of the up-side-down nature of the property the seller has no reasonable expectation to receive any proceeds no matter what form the sale takes.

Potential Loss Mitigation Review

Transition / Relocation Assistance Cash

Satisfaction/Release of Lien

No Foreclosure Sale

Less of a sting on your credit report

Leave a successful presentation with the homeowners with copies of the first set of required documents; their drivers’ license, copy of the last mortgage statement, a letter requesting mortgage assistance, and finally a signed “Authorization to Release Information”.

Your short sale processor will submit these documents to the lender and ask for mortgage relief as well as permission to pursue a short sale through their request for a short sale package. 

Authorization to Release Information

This is the document that will allow those named within the document to speak to the lender on behalf of the homeowner/borrower.  Some lenders require the use of their “special” authorization, which is not special at all.  It’s just that they are required to use their own form.  Don’t argue, just use it.

Once the authorization is completed it should be immediately forwarded to the lender.  It may take up to 10 days for the lender to get the authorization into their system.

Once the homeowner has agreed to the short sale, it’s time to introduce them to the attorney and begin the process.

Begin the Process Immediately Upon Acceptance

Immediately after the homeowners set their meeting with the attorney, its time to get the property listed. 

Listing Agreement

The listing agreement should include language addressing third party approval required when the asking price will not allow the homeowner to sell without (ostensibly) having to come out of pocket to close the transaction. It should also include a description of the commission spilt between brokers should the lender see fit to get into their pockets.

Additionally, the lender will require a copy of a copy of a current listing agreement prior to approving any short payoff. The listing agreement could reflect a bonus commission to a selling agent. They may not actually get it (because of the lender axing commissions regularly) but it might get your listing shown more often.

One of the more important features of the listing agreement serves to establish to the lender that a real estate commission is due and payable.