Real Estate Short Sale Guide

In today’s real estate market there isn’t a straight answer for most situations. Not only are you learning along the way for a real estate short sale but so are the real estate agents, bankers and sellers are all trying to get learn the process as we all go.

Here is an important checklist of issues buyers and sellers need to consider when purchasing or listing a short sale property.

Short Sale Listings

Setting a good and comparable listing price for a short sale is quite important to attract the right buyers and bring an offer quickly to the lender. Choosing an expert real estate professional that has dealt with short sales can be quite beneficial.

The buyer must put together all the information requested by the lender that is required for short sale consideration:

1) A hardship letter that honestly describes how the situation was entered – the more details the better and include any supporting evidence of the hardship to further prove to the bank.

2) Include the last few months of pay stubs.

3) Include the last few months of bank statements, last 2 years of tax returns, and last 2 years of W-2 statements.

4) Also, complete a financial statement showing the detailed incomes and expenses.

The Listing Agent:

1) Must provide a CMA to support the listing sale price

2) The listing agent must also keep track of all the activities related to the transaction to be on top of all the parties involved. They also must stay in good communication with sellers and the lenders.

The Title Company:

1) Needs to estimate the closing related expenses such as any tax liens, judgments, commissions, lien search fee and more.

2) Preliminary HUD

Buying a Short Sale:

A short sale may appear like a regular transaction but the short sale timeline is quite an obstacle for many involved. It definitely requires a lot of follow up and consistent communication. Once the seller and buyer are delivered written approval by the bank or lender on the short sale, things can move very quickly.

Sometimes PMI companies can complicate short sales further by requiring a note to be signed by the homeowner. What to do?

A PMI is an acronym for private mortgage insurance, given to those that placed less than 20% down for their property.

In this type of situation, the short sale may not work. Many times the cutoff point for the amount of loss is usually about 12% and that is after attorney fees and additional fees.

Working with lenders like Countrywide can make short sales greatly difficult as they do not negotiate with the PMI companies no longer, which can be quite difficult to obtain good terms from. In quite a few cases, the PMI company may be requesting the homeowner to sign the promissory note before proceeding forward with the short sale. Many times the seller/homeowner is quite surprised by the request and do not want to sign the note. Over a period of 5 years, could result in payments being over $100 a month. If the note isn’t signed the short sale cannot go forward.

Countrywide has a new short sale policy to cancel a file if changes are made. This could include mistakes Countrywide made – which unfortunately can happen quite often.

Common mistakes could include:

1) Countrywide forgetting to add back taxes to the HUD-1.
2) Countrywide listing the wrong buyer on the HUD-1.

Unfortunately even escalating files to senior management does not reinstate the file due to Countrywide’s new policy.

Apparently the new policy by Countrywide is due to some short sale sellers submitting fake short sale purchase offer to make an attempt to postpone the trustee sale. Unfortunately, due to a few shady acts, the rest of the short sale agents, sellers and buyers pay the price.

Due to the recent economic downturn, short sales have increased greatly in popularity as short sales enable homeowners to sell their home for less than what is owed on the property.

Unfortunately for overly excited buyers who want to purchase a home at a discount, will find that there is a high failure rate of successfully closing a short sale as they take more time and sometimes more money to close than a traditional sale. Each short sale is different. The lender (not the seller) will be making the negotiations in the end since they are taking the hit financially by forgiving part of the loan. Closing costs and broker commissions are typically paid by the seller, but this time around, will typically be paid by the bank.

It’s quite important for buyers to check for liens against the property and to make sure the bank or the seller are taking care of those costs.

As for sellers, the parties involved on their side now include the lender and sometimes the 2nd or home equity lender, any tax or lien holders on the property, the IRS and any other attorney specialists hired. The deal can get more complicated, costly and time consuming for all parties involved, including the buyer.

It is good to consult brokers and attorneys who are experienced to get an idea of the deal is good and to get a successfully negotiated short sale completed while keeping you happy.

A short sale happens when the current value of a property falls below than the amount owed.  THe homeowner has suffered hardship, making it difficult for them to pay for the mortgage.

Here are a few myths explained based on experiences of realtors dealing with lenders.

Short sales take forever, as long as 6 to 9 months: If a short sale is handled properly it doesn’t have to take all year for the short sale process to be completed.  It should and should take at least 60 days.  Today, lenders are more equipped to handle short sales due to systems in place.  Of course, the listing agent needs to be aware of the process of the ank and needs to know what to ask of the bank to have it complete quickly.  The short sale package must also be completed fully,neat and received by the lender.  A good cover letter always helps.

The homeowner has to be behind on mortgage payments: While many homeowners are behind on their mortgage when they try to sell their home as a short sale, they do not have to behind on the mortgage.  They just need to show they are experiencing a hardship and cannot afford the home no longer.

The home needs to be on the market for 90 days: Most lenders want to see the home on the market for 90 days for them to agree to a Deed in Lieu of Foreclosure.  Although it is most important to have a hardship letter, an offer and the complete package delivered to the bank.

The lenders will cut the commission: Many lenders will have a set commission for short sales.  Most lenders will pay 5% and some will even pay 6%.

Short sales are too hard: Nothing is easy in the real estate business.  While short sales are not hard ,they take quite a bit of patience, sweat, and perseverance.

The contract is between the buyer and lender: A short sale contract is really between the buyer and seller with a huge continency that the lender needs to release the lien in order for the buyer to purchase the seller.  Thus the lender has control, but the buyer and seller are the parties on the contract.

Short sales can take quite a long time to complete. More than many expect. Many buyers frequently will get burnt out of bidding on short sales and walk away from the process altogether even after months of waiting. The process can be quite draining even with REOs. The buyer is truly ready and qualified, but they want to move soon and these thigns can take quite a long time in many cases.

Real estate agents need to continuously work with their clients and get them to hang in there. The waiting process to hear back on an offer can take up to 60 days for a response sometimes, or the home they are interested in, already has many offers and surprisingly has already entered escrow.

Buyers are in great need of lots of hand holding during this process and it is best to really counsel them through the process. Of course, if more banks realize that time is crucial to helping the real estate market pick up again and to get more buyers into the scene, they will need to pick their game and understand that time is something.

The Fannie Mae is testing a program to pre-approve short sales in a couple of areas: Phoenix and Orlando, which are the two hardest hit cities.  The goal by Fannie Mae is to expedite the short sale process.

The short sale process can allow homeowners an option out of a mortgage they can no longer afford.  The short sale deal must be approved by the lender, and usually the remaining debt is forgiven by the lender.

Foreclosures have soared in many parts of the country.  Due to the length of time to complete a short sale and the number of short sales out there, it has caused somewhat of a slow down with some banks.

Fannie Mae’s new short sale program focuses on homes listed to sell for less than the mortgage balance and are being serviced by Countrywide Financial Mortgage.

If the program works, it will be expanded to other part of the country.