By:  Brian Patrick, Broker

JULY 21, 2009

Summary:

During 2007 and 2008, the real estate industry began to see a new trend in doing business, the Short Sale.  As its name implies, a property is sold for less than it the amount owed on the property.  In a period of declining real estate values, it is not unusual to see a market value of a house or condominium 10-25% less than the amount owed on the property.  Property owners losing employment or suffering from other financial problems have difficulty making mortgage payments, and they are trapped in the home mortgage because the property cannot be sold for what they owe.  A short sale resolves this problem by reaching an agreement with the mortgage company to accept less than is owed to avoid the costs of foreclosure (legal fees, commissions, repairs, further value losses).

Hardship:

To qualify for a short sale, several conditions must exist, but the primary circumstance which creates a favorable situation for a short sale is some form of hardship that prevents the property owner from paying the mortgage.  To determine this, a hardship letter from the property owner is required.  The types of hardship include a loss of income or employment, death or serious illness of property owner or immediate family or divorce.  Any kind of negative “life changing” event can justify the reason for the mortgage company to grant a short sale.

Documentation:

Most lenders require a documentation package that includes information to process a short sale.  This package should include at minimum the following:

1.   Authorization of representative – Appointment of the Realtor to negotiate the short sale on behalf of the property owner

2.   Hardship letter – A one or two page explanation of the circumstances that led to the mortgage default

3.  Proof of hardship – A death certificate, divorce documentation or employment termination letter are sufficient to support the property owner’s claim of hardship.  While not necessary, these types of documents will help in the short sale negotiations.

4.   Personal financial statement – A brief and current report of the property owner’s financial situation, including assets (Cash, savings, stock, etc.) and liabilities (credit cards, mortgages, car loans, etc.).   The Personal financial statement should also include monthly income and living expenses.

5.   Prior years’ tax returns – The mortgage company will require the front and back pages of the last two years’ Form 1040 Income Tax Returns.  If the property owner is self employed, they will also want to see the Schedule C.

6.   Proof of income – The property owner’s two most recent pay stubs are required to establish the proof of income.  In the event that the property owner is self-employed, an interim financial statement or other documentation showing current income is necessary.

7.   Bank statements – The last two months’ bank statements for checking and savings accounts

8.   Offer contract – Once an offer is received by the property owner, it has to be submitted with the short sale package for approval

9.   Seller’s net sheet – Either a Seller’s Net Sheet prepared by the Realtor or a preliminary HUD-1 prepared by a title company will be necessary to show the closing expenses and the proceeds available to the mortgage company.  The Seller (or property owner) cannot receive any funds from the sale of the property.

Process:

The short sale timetable is critical to a successful short sale outcome.  A property must be marketed for 90 days with a realtor before a short sale can be considered.  In addition, an offer must be submitted to the mortgage company for approval before any short sale file is opened.  The mortgage companies have special departments that work with property owners, and they will not assign a case negotiator until a full short sale package is received…including an offer and net sheet.

Short sale package submission:

The short sale process starts once an offer is received.  The mortgage company will assign a negotiator to work the short sale file, and in a few days a BPO (broker price opinion) should be ordered on the property.  If the offer fits within the guidelines of the mortgage investor, then the sale will be allowed to proceed.  If the price does not meet the minimum guidelines, then the negotiator will respond with the bank’s counter-offer.

The Negotiator:

The mortgage company maintains a department specifically authorized to negotiate and approve short sale offers.  The department may be called the forbearance department or loss mitigation department.  Because the mortgage companies are inundated with these short sale offers and the departments handling them are understaffed, it is not unusual to spend 45 minutes on the telephone waiting for someone to answer.  Although most businesses and professionals are able to take telephone calls or emails, the negotiators often are isolated from communications because of their workloads.  The negotiator has the authority to suspend a foreclosure sale while a short sale offer is processed and negotiated, so communication with the negotiator is crucial to the process to ensure that the property is not foreclosed during the short sale negotiations.

Broker Price Opinion:

The Broker Price Opinion (the “BPO”) is an important part of the process because the acceptance of an offer depends on it.  Because the mortgage company sold the mortgage to an investor, usually FNMA, it doesn’t actually own the mortgage.  There are written agreements between the investor and the mortgage company that establish guidelines to accept short sales, and they vary between investors.  The initial short sale offer is compared to the BPO value and a decision is made to accept or reject the offer, and in some cases to refer the offer to the investor for approval if it does not meet the immediate acceptance guidelines for the mortgage company.  The BPO cannot be more than 90 days old.  If it is older, then a new BPO must be ordered.

1^st and 2^nd Lien Holders:

During the height of the home building boom, sales were driven by mortgages backed by FNMA and Freddie MAC, two government sponsored enterprises (GSE’s).  These two organizations purchased loans from mortgage companies and used relaxed credit standards to encourage home purchases.  The 80% mortgage did not require private mortgage insurance and allowed a 2^nd lien to be placed on the home. 

As a result, many properties were financed with 100% loans, as a 1^st mortgage or in combination with a 1^st and 2^nd mortgage.  Both of these mortgages must be settled through the short sale process.  The short sale package must be prepared for both mortgage companies to secure the proper approvals for the short sale.  The junior lien holder can prevent a short sale by not releasing the lien securing the 2^nd mortgage.  The good news is that the settlements for the junior liens are typically 10% of the loan balance.

Pending Foreclosures:

In many short sale circumstances the property owner has not kept up with the mortgage payments.  The mortgage companies will work with property owners to avoid foreclosures and often will enter into a forbearance agreement to bring the loan current.  If this is not a solution, then failing to make mortgage payments will trigger a foreclosure process taking up to 5 or 6 months.  As the troubled loan moves through departments at the mortgage company the property owner will receive phone calls and letters from the lender requesting payment or at least a contact with their workout departments.  Prior to the actual foreclosure, the mortgage company will assign the file to a law firm that will send a certified letter to the property address accelerating the loan and to warn the property owner of a foreclosure sale.  The actual foreclosure in the State of Texas takes place on the county courthouse steps on the first Tuesday of each month.

What if you have Tenants?

Tenants occupying property under the terms of a lease will have no rights to occupy the property after the foreclosure sale.  If they have paid rent for the month of foreclosure, then the judicial system will allow them to stay in the property until their prepaid rent expires.  It can be challenging to sell a leased property occupied by a tenant because of the condition of the property and sometime lack of cooperation of the tenant.  A sale to an investor is possible in this circumstance if the tenant is a good tenant, but the likelihood of a sale to an investor is less than to a homebuyer looking for a residence.  Short of eviction for cause (failure to pay rent on time or repair damage to the property), the landlord must find another way to either secure the tenant’s cooperation or vacating the property.

New Incentives for Short Sales

A recent program announced by the Federal government is designed to assist homeowners find alternatives to foreclosures.  In the Making Home Affordable Program, there were several incentives put in place to assist the short sale process.  The borrower (homeowner) who sells a home using the short sale can receive incentive compensation up to $1,500 for relocation expenses.  The mortgage loan servicers can receive up to $1,000 for successful completion of a short sale.  Finally, the federal government will contribute $1 for every $2 paid to settle a junior lien, up to the amount of $1,000.  These incentives took place in May of 2009.  The government also implemented a requirement that lenders use standardized documentation, and that the loan servicer cannot negotiate commissions and closing costs after an offer is received.

What does a Short Sale Accomplish?

The short sale will prevent a foreclosure of the property with a following sale for even less money.  At the end of a foreclosure seizure and subsequent sale, the property owner is faced with a large deficiency on the unpaid balance of the loan.  In many cases, the foreclosed property sells for less than with a short sale because the bank fails to maintain the property by watering the grass or protecting it from vandalism.  With a foreclosure, the additional legal and sales costs are deducted from the eventual sale of the property, creating a greater deficiency. A short sale is a negotiated agreement which allows the property owner to walk away from the property without further liability.  If there are two mortgages (1^st and 2^nd), then both mortgages are settled. 

Superior Realty, LLC:

The real estate firm of Superior Realty, LLC is prepared to offer exceptional services to property owners considering a short sale of their property.  With a success rate far exceeding most real estate companies, the property owner has a better likelihood of succeeding with a short sale.  Systems are in place to prepare all required documentation for the short sale package, and the experience with actual short sales will help the property owner secure better results. 

The principle broker of the firm is Brian Patrick, a long-time North Texas resident.  Brian has a strong financial background and held positions as chief financial officer for several firms.  He also was an asset manager for the Resolution Trust Corporation in the late 80’s and early 90’s.  During the last nine years, Brian has sold over 245 homes valued at over $40 million, earning him the Certified Residential Specialist (CRS) designation.

For a no-obligation presentation on the short sale process, please contact Brian Patrick, CRS, Broker at Superior Realty, LLC.