Short Sales

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Short Sales

• Presented by Kim Galvan
• Keller Williams Realty, Waco

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What is a short sale?

• Homeowner owes more on their property than the
  property is actually worth
• Bank agrees to accept less than what is owed as
  payment in full
• Foreclosure process is far more expensive than
  the discount the bank takes on a Short Sale

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Why do banks accept short sales?

• Win-win solution for all parties to the
  transaction
• Homeowner avoids devastation of foreclosure on
  their record
• Bank avoids time expense of foreclosure process
  holding property on books until it sells
• Buyer buys property below market value walks in
  with immediate equity
• Realtor receives a commission for negotiating on
  behalf of client

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What is short sale process?

• Varies depending on loan type
• Lead
• Qualification (via phone)
• Listing Appointment
• Short Sale Package to Bank
• FHA VA/Conventional

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FHA Short Sale Process

• Short Sale Package to Bank
• Appraisal
• Acceptance into program
• MLS
• Offer
• Offer Approval
• Closing

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VA/Conventional Short Sale Process

• Short Sale Package to Bank
• MLS
• Offer
• Appraisal
• Offer Approval
• Closing

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FHA vs. VA/Conventional

• FHA

• VA/Conventional

• Short Sale Package to Bank
• Appraisal
• Acceptance into program
• MLS
• Offer
• Offer Approval
• Closing

• Short Sale Package to Bank
• MLS
• Offer
• Appraisal
• Offer Approval
• Closing

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Who qualifies for a short sale?

• The homeowner
• is in default with their mortgage lender
• AND
• has little to no equity in the property
• AND
• has a legitimate hardship

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What is considered in default?

• Homeowner is at least 30 days past last day of
  lenders grace period for making mortgage payment
• Example Payment due April 1st
• Bank extends 15-day grace period
• In default 30 days after April 15th
• In default beginning May 15th

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What are legitimate hardships?

• Temporary or permanent loss of job
• Significant cut in pay
• Divorce
• Illness or death in family
• Increase in property taxes
• Increase in payment due to ARM resetting

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What documents are required in Short Sale Package?

• Authorization to Release Information Form
• Hardship Letter
• Financial Worksheet
• Copies of Tax Returns (last 2 years)
• Copies of All Bank Statements (last 2 months for
  all borrowers)
• Copies of Pay Stubs (last 2 pay periods for all
  borrowers)
• Application for Pre-Foreclosure Sale Program (if
  FHA)
• Homeownership Counseling Form (if FHA)
• Purchase Offer (if there is one yet)
• Estimated HUD-1 Settlement Statement (if
  submitting purchase offer)
• Comparable Market Analysis (CMA)

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Authorization to Release Information Form

• Gives authorization by homeowner to bank for bank
  to discuss any details of loan with you, the
  Realtor
• Without this form, bank is legally prohibited
  from discussing any details related to mortgage
  with you or any other third party (i.e. title
  company)

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Hardship Letter

• Sympathetically portrays homeowners situation
• Should contain trigger points to get banks
  attention
• Homeowner must be prepared to support whatever is
  portrayed in hardship letter (i.e.divorcedivorce
  decree loss of jobletter of dismissal death
  in familydeath certificate or obituary)

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Financial Worksheet

• Lists borrowers name, date of birth, SS, phone
  s, and address
• Also includes all income (detailed), all expenses
  (detailed), account balances, and any additional
  assets
• Used to show that expenses exceed income and
  assets that could be liquidated to make up
  missing payments

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Listing Agreement

• Must include two specific clauses in Special
  Provisions
• Must check box to indicate home will not be
  placed in MLS until after communication has been
  established with lender
• Waiting to put listing in MLS until after short
  sale is approved will save you an enormous amount
  of time and frustration!

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Copies of Tax Return

• Returns for last 2 years for all borrowers
• If unavailable, bank requires the homeowner to
  submit a sheet of paper stating that this
  particular document is unavailable
• If return has not been filed, bank may require
  copies of all W-2s and 1099s for year(s) return
  not filed

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Copies of Bank Statements

• Statements for last 2 months for all borrowers on
  loan
• Statements for all bank accounts
• If unavailable, bank requires homeowner to submit
  a sheet of paper stating that this particular
  document is unavailable

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Copies of Pay Stubs

• Copies of last 2 pay stubs for all jobs worked by
  all borrowers on the loan
• If homeowner(s) is/are not working and therefore
  do not have any pay stubs, bank requires that
  homeowner submit a sheet of paper stating that
  this particular document is unavailable

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For FHA only

• Application for Pre-Foreclosure Sale Program (HUD
  form 90036)
• Homeownership counseling Form (HUD form 90038)
• Homeowner will be required to call a HUD-approved
  counselor to discuss all Pre-Foreclosure
  Assistance Programs available
• Phone numbers for HUD-approved counselors on
  website www.hud.gov

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Purchase Offer

• If there is no Offer, go ahead and submit Short
  Sale Package without the Offer in effort to
  establish communication with bank

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Estimated HUD-1 Statement

• Very important to work with closing officer who
  is experienced in closing short sales
• First American Title Company, Dora Betts
• Bottom line on Sellers side of HUD-1 must ALWAYS
  net to ZERO

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Submitting Short Sale Package

• Utilize Short Sale Fax Cover Letter each time
• Only info that will change is info specific to
  individual transaction (loan , homeowner(s)
  name, lender, lenders fax )
• Fax it to right person in right department!
• Key to making sure youre in short stack is to
  have all paperwork completed and completed
  correctly

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How much will bank take for payoff?

• Appraisal is most critical piece of information!
• FHA loans insured at 82 of appraised value
  therefore, bank can discount pay-off amount down
  to 82 of appraised value
• VA loans guaranteed at 88-91 of appraised value
  therefore, bank can discount pay-off amount down
  to 88-91 of appraised value
• Conventional loans tend to be discounted at
  anywhere from 85-92 of appraised value

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Earnest Money and Option Period

• Recommend no less than 1000 earnest money
• Bank will typically reject offers with less
  earnest money because they consider them not
  serious enough to warrant an approval
• Option Period should not exceed 7 days
• The clock is ticking!

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Special Provisions

• All parties understand that the subject property
  is being sold via a short sale with the sellers
  lender and that all terms of the purchase offer
  must be approved by this lender. The contract
  will not be executed and therefore the Option
  Period will not begin until approval is received
  from the sellers lender. If all terms are
  approved, the sellers lender will pay certain
  closing costs on behalf of the seller, including
  broker commissions.

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Calculating the MLS list price

• Objective is to list the property at a price that
  will generate an offer quickly, achieve the
  banks required net for the transaction, and
  cover all commissions and seller closing costs
• If set too low, first thing to be cut is agents
  commission!

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Calculating the MLS list price

• Discount Thresholds
• Conventional 85-92
• FHA Insured 82
• VA Guaranteed 88-91
• Example Appraised value 150,000
• FHA loan 150,000 x 82
• Conventional loan 150,000 x 85
• VA loan 150,000 x 88
• Gross-up to include seller closing costs and
  commissions

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Calculating the MLS list price

• Next, add real estate commissions and seller
  closing costs
• Typically 6 for commissions
• and 2 for seller closing costs
• To gross-up by 8, divide by the inverse,
• which is 92

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Calculating the MLS list price

• EXAMPLE
• Type of Loan? FHA
• Current market Value (appraisal) 150,000
• Lender Threshold? 82
• Real Estate Commissions? 6
• Closing Costs? 2
• Calculation
• 150,000 x .82 123,000 / .92 133,696
• This is lowest offer you would take for lender
  approval to cover costs

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Judgments/Liens/Other Costs

• Add any additional amounts due by homeowner for
  judgments, liens, delinquent taxes, HOA dues
• If FHA, add an additional 1000 for Seller
  Incentive
• Add some negotiation room or a buffer (2-3)

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EXAMPLE

• Type of loan? FHA
• Current Market Value? 150,000
• Lender Threshold? 82
• Real Estate Commissions? 6
• Closing Costs? 2
• Judgments/Liens? (Mechanics, IRS, Ppty Tax)
  4,200
• Seller Incentive? 1,000
• Buffer? 3

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Deficiency Judgment

• Difference between the mortgage balance and the
  discounted amount accepted by the bank as a
  result of the short sale
• Bank can pursue a deficiency judgment against
  homeowner
• FHA and VA are required to waive the deficiency
• As part of negotiations, you should require that
  bank waive their right to any future deficiency
  judgment against homeowner

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Tax Ramifications

• IRS considers shortage on net amount received by
  bank versus principal amount due by homeowner to
  be forgiveness of debt
• IRS deems forgiveness of debt to be taxable
  income
• Banks required to issue Form 1099 for amount of
  debt forgiveness
• Bank CANNOT issue both Form 1099 and deficiency
  judgment

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Most Common Set-Backs

• Judgments that have attached to the property
• Clouds on title
• Inexperienced escrow agent
• Disconnected utilities

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Thank you for coming!

• Please fill out an evaluation
• before you leave.