Since the summer is over and we are now heading into the slower months, I am running into more listings where sellers do not have any intention of selling. The listings I am referring to are the ones listed as short sales.
The name of the game in real estate is to take in as many listings as you can. Sometimes it means taking a listing that you know is a challenge. For example the seller may be asking for too much, or there are title issues that can prevent the home from being conveyed without some work and concessions by both the seller and buyer. We do take these listings for obvious reasons, one of them being a lead generator. And that is fine.
However I see all too often realtors who took in a short sale listing without realizing the seller does not want to sell, but want to push off the foreclosure process by listing the home. Honestly I have seen this tactic work. However it does not help us, the realtor. It only serves to waste our time and the time of other agents and potential buyers.
It is for this reason I wrote this blog. I have spoken with many of my friends that are realtors that work on short sales, and I have combined my experience to help a realtor spot a seller who needs to do a short sale but has no intentions of closing, or at least not closing until the last possible moment.
There are several things you can look for so that you know when the seller has no intentions of selling a home as a short sale:
- When taking the listing, ask the seller what their plans are. If they are unsure of what they are going to do, then most likely they are not serious about selling. A short sale is not like a typical sale where the seller is walking away with money. They are not getting any money. Therefore they need a plan of where they are going to move. It is true that a seller may get money from the lender to move, however you will not know this until you initiate the short sale with the lender. Then you will find this out.
- When taking the listing be sure to get the documents needed to apply for the short sale, ie paystubs, bank statements, utility bill, mortgage statement. If the seller will not provide you with these documents, they are not serious about completing the short sale.
- As mentioned in previous blogs, before you actually put the listing on MLS or advertise the home be sure to get a lien search so you know what is needed to close the deal. Many of these liens will not accept a small amount inorder to satisfy the lien in full. They will generally accept a small amount to release the lien on the property. This means the seller will be responsible for the debt on some of these liens, except for the first mortgage. Discuss this with them and if they do not want to have any amounts owed, then you are wasting your time trying to sell this home as a short sale.
- Get the best day and times for the seller or sellers to show the home.
Being a realtor means that most of your time is wasted. We often show multi homes to a buyer, solicit new listings, and spend time marketing, all of which often result in no business. It is therefore more important to know what to look for so you do not waste more of your time on a listing that will not go anywhere.
In each and every short sale the lender is being asked to accept less than the full balance to satisfy the mortgage. The amount the lender reduces the debt by is actually taxable.
To be clear, if you owe $200,000 and the lender agrees to accept $100,000 to satisfy the debt, the $100,000 that is being forgiven is actually taxable as income. That’s right, income. Someone may owe tens of thousands of dollars in taxes to the federal state and local governments. This amount cannot be discharged in bankruptcy.
In 2007 Congress passed a law, Mortgage Forgiveness Debt Relief and Debt Cancelation Act, which essentially allows this amount to be forgiven and not treated as income. At the end of 2012 this law expires.
Further, if you go into foreclosure and the home is sold and the amount it sells for is not enough to pay the first mortgage in ful, you will be on the hook for the amount that was not recovered by the lender, and any other lien holder, such as second mortgages, if they settle for less than full balance. The same goes for credit cards, if you settle for less than the full balance, the amount you did not pay off is income and you have to pay income tax on it…well not for 2012, but if this law is not extended then starting in 2013 you will.
As of the time of writing this blog short sales make up one third of all sales nationwide. This law allows short sales to be an effective tool in preventing foreclosure actions which in turn has been keeping home prices stable and in some areas the values have increased. With the most recent Hurricane Sandy damage to the North East, there will be many who have to sell and will not be able to repair their home. If this law is not extended, not only will they have the stress of losing their home to a natural disaster but they will be also on the hook for potentially tens of thousands of dollars in taxes.
This effects of us all and in these tough times we should extend this another 3 years to give time for the economy to recover.
In August of 2012 Fannie Me issued new Short Sale guidelines that will become effective November 1 2012. These guidelines are for mortgages owned by Fannie Mae. So if a loan is owned by JP Morgan Chase, these guidelines mean nothing. To determine if Fannie Mae owns the loan on the home being sold, click here.
The objective of the new guidelines is to facilitate the short sale process. Per the announcement on the fannie mae website:
“Short sales have become an increasingly important tool in preventing foreclosures and stabilizing communities,” said Leslie Peeler, senior vice president, National Servicing Organization, Fannie Mae. “We want to help as many homeowners avoid foreclosure as possible. It is vital that servicers, junior lien holders and mortgage insurers step up to the plate with us. These new guidelines will open doors to help more homeowners qualify for short sales, remove barriers to completing short sales, and make the process more efficient for homeowners and servicers.”
This appears to be good news for those realtors, attorneys, and sellers. So I took the time to read the guidelines. I made a list of what I believe are the important points:
- Servicers now have the ability to approve a short sale without the written approval from Fannie Mae. To do this the servicer, the one collecting the monthly payment and managing the escrow account, must meet the conditions of the guidelines (The list of items I have written in this blog.). This of course appears to be a very good thing, not needing to wait for the investor, in this case Fannie Mae, to issue an approval. However, there are still a number of requirements that each servicer will want to review twice if not three times to be sure your one individual loan qualifies. Because if they are wrong, they will have to explain to Fannie Mae why they allowed this short sale, and may possibly be on the hook for a penalty to Fannie Mae. Dealing with servicers everyday I have learned that they are not inclined to take any risks and will continue to seek written approval from Fannie Mae regardless of this new found freedom.
- One of the qualifications required to allow the servicers to issue an approval for a short sale without the written permission from fannie mae is if the person meets the acceptable Forms of hardship. They are:
- Death of a borrower or co borrower on the mortgage
- Legal separation
- Reduction of income
- Increase in housing expenses
- Disaster damage
- Business failure
All of these forms of hardship have not changed, they have always been the only acceptable hardships. However they state, if a seller is more than 90 days late and have a credit score of 620 or less, the proof of the hardship does not need to be supplied. This is very good as most of the sellers I have worked with in a short sale are late more than 90 days on their mortgage thus have a credit score of much less than 620.
- If the seller is 31 days or more late on the mortgage the property can be a primary residence, second home, or investment property. If it seller is 30 days late or less, or not late at all, it can only be a primary residence.
- 4. The servicer must calculate a monthly expense number for the borrower. What is important to note here is that if the servicer does not know the amount for the property taxes or the home owners insurance, they are to estimate. This can work against the seller if the estimation is too low. Therefore it is very important that when an application for a short sale is submitted to the servicer it include very clearly the accurate amount of the property taxes and the home owners insurance.
With this monthly expenses that will include your mortgage payment, and all debts that appear on a credit report, second mortgages, and certain housing expenses, the servicer will determine, based on the income provided (Your gross income, BEFORE taxes or deductions are taken out of your pay if W-2 income. If self employed it would be what you are showing on the profit and loss provided.) if your debts are equal to or greater than 55% of your income. A simple example is if you make $4000 a month and your monthly expenses are $3000, your debts are equal to 75% of your income, the lender would approve this because it is greater than 55%. However if your income is $4000 a month and your debts are $2000 a month, your debts are equal to 50% of your income, you would not qualify for the short sale unless you are going to make a cash contribution.
- The new guidelines provide a formula for determining if the seller will be REQUIRED to make a cash contribution or sign a promissory note in order for the short sale to be approved. The formula has a few steps:
- First, the Cash Contribution it depends on what assets you have. If you have more than $10,000 in any type of account, checking, savings, CD, Annuities, retirement savings, mutual funds, stock market account, anything that has a value, OR if the seller has 6 X the monthly mortgage payment that includes the property taxes, home owners insurance, HOA fees, Condo or coop monthly charges, and PMI if applicable, then a cash contribution of 20% of the total cash on hand will be asked for, possibly more, depending on how much assets the seller has.
- Second, the Promissory Note. If the sellers percentage of debt compared to their income as described in number 4 above is less than 55% a formula is used to calculate the cash contribution in the form of a promissory note. It is rather complicated so for the math geeks out there it is:
First you must get the difference between the percentage of the sellers debts when compared to their income and 55%. You take this percentage and divide it in half. This figure, a percentage, is then multiplied against the monthly income. The figure you get is then multiplied by 60 as in a cash contribution in the form of a Note, that is payable for 60 months or 5 years. So with numbers:
Sellers debt compared to income ratio is 49%. We first subtract 49% from 55% and get 6%. This 6% is multiplied by the monthly income, for example $4000. This gives $120. $120 is multiplied by 60 to equal $7200. $7200 is a note that is paid off in 5 years or 60 months at a rate of $120 per month.
These are the two formulas to use when determining if Fannie Mae will require the seller to make a cash contribution or to sign a promissory note. I believe this is very helpful as it can used early on in the process to make the seller aware of what may happen so that the sellers can seek out advice and counsel on this issue and determine what is right for them.
- The guidelines require that an interior and exterior BPO or appraisal be used for determining the value for a property. This is very important and positive. Often times a drive by only is ordered and the real negative to the property is the interior. This will help in getting BPO’s and Appraisals that are accurate, which can only help more short sales close.
- The guidelines state that all subordinate liens will have a total of $6000 from the sales price to be used for subordinate lines. If the buyer, realtor or someone else wants to come up with the rest of the money to release a lien, no problem. But Fannie Mae will only allow $6000 from the sales price to be used for this.
- Fannie mae has made available to the servicers the Minimum Net they Require (MNR). It states explicitly in the guidelines that this information should not be shared with any interested parties to the transaction. This is not new info. All those working on short sales have seen a property or two (sadly sometimes more.) not close as a short sale, end up as a vacant REO that sold for 40% less than the Short sale we put together. So there has always been a number that the investor wants and appears to willing to risk getting less.
- The new guidelines spell out unacceptable fees that Fannie Mae will not pay for. They include:
- Short Sale Negotiation fees or any third party fee for negotiating the short sale.
- Any commission to a realtor that represents the buyer.
- Buyers discount points or Mortgage Loan Originator fees.
- The guidelines also make it clear that a home that is purchased as a short sale and is owned by fannie mae cannot be sold within 30 days of the short sale, or sold for 120% more than what was paid for the home in the short sale if sold within 90 days of the purchase. This language will be required to be added to the contract of sale.
In my area many times, not all the time but many times, the purchaser of the home is an investor looking to flip the home within 90 days. This could become a problem with some of my short sales.
- If the seller qualifies for the short sale and the seller is NOT receiving any cash incentives from any source, Fannie Mae will give the seller $3000 to relocate.
- The guidelines also address the foreclosure process. It states that the servicer, on a fannie mae owned loan, must review all applications for a payment plan or alternative to a short sale submitted between 75 to 15 days before the foreclosure sale. This is good because often times the seller is in the middle of a short sale when they are told the home is being auctioned. Now there is a hard fast rule to look out for this. However if the servicer receives the request for a work out plan or short sale within 15 days of the auction, they are not required to look at it.
- The guidelines also state that when a foreclosure sale date has been set not more than 15 days before and not less than 7 days before this date, a certification of foreclosure that will be required by the attorney holding the foreclosure auction, should not be issued if:
- A closing date on a short sale has been agreed to and set up with the approval of Fannie Mae
- A repayment plan or short sale application has been received and an offer for a replyment plan or short sale was made by the servicer.
This too is good news because now there is a rule that addresses servicers pushing for the foreclosure when some type of arrangement, whether it be for a short sale or a loan modification, has been made. They cannot continue and they have to respond in a timely fashion.
In conclusion, of course these guidelines will not make every short sale an easy process. Certainly there any many good points to these regulations. The benefit here is that the rules to the playing field are being made known. Other than the Minimum Net Received mysterious figure mentioned above there are good concrete items to discuss with a seller and that is needed in order for a short sale to be successful.
I provided a link to every document I used to write this blog. Please take your time to read the guidelines yourself and let me know if there is anything that I left out. Short sales are gaining momentum as being a good portion of the sales happening today. It is important to know this information so that you can close more deals, and not waste your time on ones that will never close. It is also good info for when speaking with a negotiator from the servicer, to know this info and help direct the process.
Many times I hear realtors, sellers, and attorney use the word “Lender” when they really mean investor.
I want to take a minute to explain who the investors are and why are they important to your short sale.
Most lenders give a mortgage to a home owner and then sell the loan, after it closes. The person or company that buys the mortgage is called the investor. And they are the ones who make the final decision on the short sale. Lenders, like Bank Of America, do not keep any loans. They sell every loan to one of the 5000 investors they deal with. Sometimes the investor can be a large organization like Fannie Mae or Freddie Mac. And other times it can be a small company you have never heard of.
Each one of these investors has their own guidelines for a short sale. Further each investor considers each short sale on their own merits and determines how much they are willing to accept as a payoff. It is for this reason someone may have a smooth short sale transaction, when someone dealing with the same lender, has a hard time and cannot close. It is because each loan has its own investor.
Is it helpful to know who the investor is on your loan? It does when it comes to working out a solution to keep you in the home. For example, if your loan is owned by Fannie mae, they have a program called HARP (Home Affordable Refinance Program.). This is a special type of refinance loan where the appraised value is unimportant. If you are not trying to stay in your home, I am not sure what the value is to know who the investor is.
How do these investors make a decision on what to accept for the short sale? Each investor has their own process. Some have a clerk gather the paperwork and then a committee of individuals will make a decision. Sometimes there are strict guidelines that one person has to make a decision based on. AS far as I know there is no way to determine what each investors requirements are
As a realtor I have come across many buyers of homes selling as a short sale confused by the process and unsure of how long the process will take. Buyers need a resource they can go to help them understand the process. This is the objective of this blog. I am not going to mention every step a buyer should be taking when purchasing a home. I will only address those steps that a buyer should be aware of when purchasing a home being sold as a short sale.
In this blog I will go over a few important steps and milestones to be aware of. This way you can sort of track, for lack of a better word, the progress of your short sale. It is important to track the progress because too many professionals do not understand the short sales process and what is involved.
Let me make sure that you understand that a Short Sale in real estate means a home will not sell for enough to pay the mortgage or mortgages that are on the home off in full. The lender who holds the mortgage for the seller is being asked to accept less than what is owed to them, hence “Short Sale.”
There are many players in the sale of a home, realtors, the seller, the buyer, and the attorneys to name a few. In each short sale, the party contacting the bank that holds the mortgage for the seller is not always the same player. Sometimes it is the attorney. Sometimes it is the realtor. Sometimes it is the seller. Sometimes these parties contact a separate company that helps them with the short sale. Your first objective is to find out who is working the short sale, with the lender that is holding the mortgage for the seller.
When you purchase a home that is selling as a short sale, do not think you are paying below market for the home. The lender that is being paid off, the one that holds the sellers mortgage (We will call “the short sale bank.”), will have the home valued independently of the appraisal a buyer will have when getting a mortgage. The person valuing the home, sometimes a realtor that is not involved in your transaction, sometimes an appraiser, often will not know the contract price. There are instances where a buyer can get a short sale for much less than the market value but most of the time the buyer is paying market price.
It is also important to know that when a seller is selling as a short sale, they have no control over what the Short Sale Bank will agree to sell the home for. On a short sale the seller is not allowed to get any money from the sale, therefore they can agree to sell it for one dollar. What do they care? It is important to realize that making an offer and the seller accepting it, is just a step in the process.
If you are buying a home and the seller and/or the tenants are not cooperating, meaning they will not show the home or their unit to you or an appraiser or a realtor, then don’t waste your time walk away. During the short sale process the home and/or the units have to be shown a few times. So if they give anyone trouble, don’t waste your time walk away.
Once the seller has agreed to the price the buyer wants to pay, the short sale will be initiated. By initiated it means that an application for a short sale has been submitted and accepted by the short sale bank. The application is a very simple process that involves the seller submitting an application and some financial information to the short sale bank. Once they accept it they will evaluate it to see if the person can qualify for a loan modification or other type of program that will keep the seller in the home. Typically the sellers do not qualify for any programs, this is why they are selling their home. However once the short sale bank determines they want to move forward with the short sale, they order the valuation of the home. And this is the third milestone you want to follow up on. The Second being that the seller applied, and the third being the short sale bank is ordering their valuation. This valuation can be an appraisal or it can be a Broker Price Opinion (Also called a BPO.).
Please read my blog about BPO’s and appraisals on a short sale. It explains that in some cases the valuation is done by driving by and in some cases an interior inspection is required. A drive by is not the best way to evaluate a home since the person making the valuation has no idea of the interior condition. However, most of time the inspection is an interior and when that is the case the seller is contacted and an appointment is set. So when you contact the seller or the realtor that is representing you, you want to see if an appointment was set up for the appraisal or BPO by the lender for the seller.
Once the short sale bank says they will order the appraisal or BPO it will only be a few days before someone gets a call to set up an appointment if it is an interior inspection. If it is an exterior inspection you will not know when it is being done, however typically it takes two weeks for the short sale bank to receive the appraisal or BPO. If it is an interior once the inspection is held it will be about one week before the short sale bank receives it.
Once the valuation is submitted to the short sale bank they will want to complete their paperwork, which sometimes means documents on their end and other times means they need additional documents from the seller and/or the listing agent or sellers attorney. It is hard to follow up on this because you often times are not told what if anything additional is needed until someone calls the short sale bank to push this part of the process to completion. So once you know that the valuation has been received you want to make sure someone is calling the short sale bank to confirm they have the appraisal or BPO.
Once the short sale bank has all of their documents it will take between 5 days and 30 days to find out what they will accept as a sales price. This means from the time an accepted offer is made, it will take between 30 and 45 days to know what the lender will agree to sell the home for. This process takes time because often times the short sale bank is not the owner of this mortgage. Most of the time when a loan is made the loan is sold to an entity called the investor. The investor can be a government sponsored agency like Fannie Mae or Freddie Mac or it can be a private bank like Citibank or Wells Fargo. If the loan belongs to an investor then this investor needs to review the documents. Often times the final decision on the value is not made by one person but by a committee of several people. So as a buyer you should follow up every 3 weeks to see if anyone heard anything.
When a home is being sold as a short sale it is super important to know the total amounts of mortgages and liens that have to be paid off. So once a buyer and the seller have agreed on a purchase price I recommend the buyer to ask their attorney to run a title search, a mortgage search, and a lien search on the property. I suggest this is done as early in the process as possible. It is not free so expect to pay a few hundred for this. This is really the responsibility of the seller and the person who is working with the short sale bank. However I have seen this not happen and then after the valuation comes back the deal dies because no one knew that the seller had a $50,000 judgment against them that needs to be paid off in order to sell. So as early in the process as possible find out this information so once the valuation comes back the buyer knows all that is involved in getting this deal to close.
It is also important to find out what property taxes are due, and if there are any water and sewer charges that need to be paid. Often times a seller is not paying the water and sewer and therefore this amount can be rather substantial and could mean the buyer needs to come up with more money to make the deal close.
Once the valuation comes back and if it is agreeable to the buyer there is a short sale letter that is issued. This letter details exactly what the short sale bank will accept and when the letter expires. It is important for the buyer to apply for their mortgage at this point, and get their financing in line.
Once the mortgage has been approved and the buyer is looking to close, all of the payoff letters need to be gathered by the attorney representing the seller and a closing can take place.
So just a few highlights of what needs to be followup on by the buyer of a home sold as a short sale’
- Find out who is contacting the short sale bank. Get their name number and email address.
- After the buyer and seller agree on a price the seller needs to apply to the short sale bank for the short sale.
- The short sale bank has to order the appraisal or BPO, if it is an interior when is the inspection, then you want to follow up to see if it was received.
- The buyer should order a title search that will include a lien and mortgage search to see what is owned by the seller so they can close.
- The short sale bank receives the appraisal or BPO and then determines a value they will accept.
- The buyer applies for their mortgage.
- All payoffs including the short sale letter are obtained and payoffs for any liens on the property are gathered.
- The mortgage for the buyer is cleared and a closing is set.
I hope this blog was helpful. If you think I missed any steps or if you would like more information that, as a buyer, you should be aware of, feel free to reach me at GSchmidt@SiGold.com.