The Phoenix Area Foreclosure Experts

Real estate short sales -- beware of the "non-purchase money" second mortgage

Real estate short sales can provide some great deals if you can wait out the 3-5 month process. They are becoming more common in today's market and harder to ignore (as many agents have chosen to do). Why would agents choose to ignore real estate short sales? It's because they are more complicated, take much longer to close escrow, and their outcomes can be uncertain.

To begin May 2009, metro Phoenix foreclosures accounted for 40% of all listings in the Phoenix area real estate market. Real estate short sales accounted for 58% of all active metro Phoenix foreclosure listings. However, this is the first month  that Metro Phoenix foreclosures consisted of more real estate short sale listings been REO property listings. This is due to the fact that most of the homes that sell in the Phoenix area real estate market are REO properties and because more homeowners are trying to avoid foreclosures.

If you decide to pursue a real estate short sale, be aware of the "non-purchase money" 2nd mortgage. A non-purchase money mortgage is one that was used for more than the purchase of the house.  For example, a HELOC ( home equity line of credit) is a non-purchase money second mortgage. Such a loan may have been used to consolidate debt, take a vacation, or buy a new boat/car. In other words, the repayment of this kind of loan is for more things than just the house.  In contrast, a purchase money second mortgage was taken out at the time of purchase and used exclusively to buy the house.

Lenders who hold the note for a non-purchase money mortgage are far less likely to let the homeowner walk away from the house without repaying a higher portion of the loan. Many feel that the homeowner will still be enjoying the benefits of their debt consolidation, vacation, or new boat/car long after they sell their home on a short sale. Therefore, they feel the homeowner should take more financial responsibility and may ask them to sign a promissory note for up to one half of the second mortgage.  Many times these promissory notes will be "zero" interest loans for up to 15 years.

So here is the real problem: if the listing agent and seller don't do their homework up front (to determine the intentions of the non-purchase money second lender), a buyer could be waiting up to three months to negotiate  a short sale -- only to find out the second mortgage requires a large promissory note and the seller refuses to sign it.  When this happens the second mortgage holder will not sign off on the sale of the home and it's will go to the trustee's sale. The buyer has invested months of emotional commitment to the house only to have the deal blowup.

DO SHORT SALES REALLY WORK OUT?

by Shawn Robert, Transaction Manager, http://www.reliablepropertysolutions.com/

We sometimes hear Realtors say that short sales aren’t worth it and rarely work out.  That is not our overall experience and we have several practices in place to ensure success.

First and most important is to prescreen the Homeowner before taking the listing.  This means collecting and reviewing all of the financials (including Hardship Letter) so there are no surprises (like 20K sitting in the bank).  This also includes going over  ramifications of short sale with the Homeowner (i.e. possibility of a 1099, a soft note on the 2nd and that any liens on the property will need to be paid).  For example, if a Homeowner has a home equity line of credit the bank will most definitely ask them for a soft note to proceed with a short sale.  If the Homeowner absolutely refuses to comply with such condition it is best to know upfront rather then after many months of hard work obtaining an approval.

Second, following up and educating the Buyer’s Agent throughout the process is very important.  This practice will keep the Buyer’s Agent calm which in turn creates a trickle down affect to their client.  We have had many Buyer’s Agents tell us that our involvement lead to the first short sale that ever worked out for them.  Most of these Buyer’s Agents ultimately became clients when they listed their own short sales.

Third, consistently following up and pushing the bank(s) is important in facilitating whatever the bank(s) need as quickly as possible.  We all know the banks move slow but when we find out that a package has disappeared after a month it is key to move quickly and supply whatever they need.  Consistent follow up is also important when it comes to escalating a file when things are not moving forward in the time indicated by the bank(s).

Utilizing these practices will guarantee a much higher success rate with short sales.  We can attest to that!

One thing to keep in mind throughout this year is that the Mortgage Tax Relief Act which exempts primary residents from receiving a 1099 resulting from short sale does expire on 1/01/10.  It would be nice to see this extended but there is no guarantee.

I wish everyone a Happy and Prosperous New Year.

Final Post on SHORT SALES -- Part 12

Here is a sample authorization form you can use:

Borrower Authorization

I/we hereby authorize _________________ with ________________to obtain information from my Mortgage Company, Insurance Provider, Homeowner’s Association, HUD or VA regarding my loan(s) and insurance coverage. I further authorize the above named individual(s) to request and/or order a payoff statement on my behalf, discuss any information regarding my loan with the lender, and order a letter of insurance claims history or CLUE report.

______________________________ ____________

Signature                                      Date

______________________________ ____________

Signature                                      Date

Seller’s Information to Close Escrow

Sellers  Last 4 digits of Social: __________

Sellers  Last 4 digits of Social: __________

Property: __________________________________________

APN: ___-___-___-___

Primary Lender Lender: ______________________________

Loan No: __________________ Phone No: _______________

Approx Balance:__________________

Secondary Lender: __________________________________

Loan No: __________________ Phone No: _______________

Approx Balance:__________________

Homeowner’s Association Information

HOA Name: ________________________________________

Management Co. Name: _____________________________

Phone Number: ____________________________________

Account Number: __________________________________

This concludes this series. Feel free to call or email with any questions. Happy hunting!

Lender Has Rejected Your Offer -- Short Sales Part 11

Here is a familiar situation:

The lender receives the BPO back from the agent. It's higher than the offered sales price, so the loss mitigator requests that the contract price be increased by $25,000. If this happens try this:

• Send back a "counter to the counter" with the original offer price. Send some more proof as to why no more money will be paid for the home
• Send pictures of the neighborhood
• Send copies of newspaper articles with “bad housing news”
• Send a bid for repair estimates
• Send them the crime rating for the area (if it's not good)

Negotiations -- Short Sales part 10

Here are some highlights about negotiating a short sale in the Phoenix / Tempe area in an easy to read format:

• Every bank has it's own personality and approach when it comes to short sales
• Be patient, yet persistent with the lender
• From the lenders perspective, a short sale saves many costs associated with the foreclosure process: attorney’s fees, eviction procedure, delays from borrower's bankruptcy, damages to property, and costs associated with resale
• Your job is to convince the lender that it's in their best interest to approve the short sale by accepting less money now
• No matter how good your offer is, always expect a counter offer
• Don’t be discouraged, respond to the counter offer
• Ask open-ended questions directed to the mitigators about their opinion of the validity of the BPO
• Ask if they agree with the agent’s assessment and why
• The idea is to keep the mitigators talking and drawing information about the BPO
• Expect that the lender will accept between $10,000 and $20,000 less than what they say they will accept

The Brokers Price Opinion -- Short Sales Part 9

The most important fact the bank needs to know is: How much is the property worth? Most banks hire a real estate broker/agent or appraiser to evaluate the property. This evaluation is called the brokers price opinion or BPO. The BPO is one of the largest hurdles you need to clear when perfecting your short sale negotiations. Your goal  -- after submitting your initial package to the lender -- is to get them to order this evaluation.

Make sure you let the lender know that you would like an interior BPO and not just a "drive by" evaluation. As we mentioned in Part 7, put this on your cover sheet when sending the package to the Loss Mitigation Department. If the lender states they already have a BPO be sure to ask them how old it is. Let them know, depending on how old it is, that there may be  "issues" regarding the interior of the property.

The agent will call you to set up an appointment once the BPO is ordered. If you can fit it in your schedule, meet the agent at the home and feel out the situation. Explain the seller’s circumstance and why they can’t sell the home for what it may be worth. Share your comps and opinion of the properties value. However, do not be pushy with the agent/appraiser. They are professionals and may not take it lightly if they perceive you are trying to tell them how to do their job. Ask them questions and develop a rapport. Some will actually tell you what evaluation price they are going to submit to the lender. This is a huge bonus for you.

Most lenders will not tell you the ACTUAL amount of the BPO. If they do, don’t be surprised if it's higher than the agent/appraiser's opinion. Lenders have been known to "stretch the truth" to get the most money for their investor. Whatever you do, don’t say “The agent told me it was worth $$$,$$$." This only leads to confrontation and violates the trust the agent/appraiser placed in you.

Many short sales never occur because the BPO comes in too high. Don’t get discouraged, instead ask the lender if you can submit a third party appraisal for their review. Many times the lender will reduce their original price based on a 3rd party appraisal. Of course, this will cost you or the seller more money. However, it can prove to be profitable if it helps to get the sale closed. Keep in mind that once the lender receives the BPO (and perhaps the 3rd party appraisal), that's when the real negotiations can start!

Common Mistakes -- Short Sales Part 8

This is a short post, but hey ... everyone get busy at times.

Four common Short Sale Mistakes:

1. Sending in a low-ball offer that you know the lender will not accept.
2. Not being thoroughly familiar with the short sale process itself. Lenders are busy and they don’t have the time to explain the process.  Show them you know what you are doing.
3. Not knowing what is actually owed on the property. You will have to work harder to make this deal work if there are several loans. Always know the financials of the property before submitting an offer.
4. Forgetting that real estate is a cycle – its always gone through boom and bust cycles and always will. In other words, be persistent and thorough with your loan mitigator, but do not be pushy or try to convince him/her that your situation is an emergency and demands their immediate attention (at the cost of their other files). Be polite and friendly, yet firm, and you will get better results.

We'll talk more about BPO's in the next post.

Loss Mitigation Department -- Short Sales part 7

Call the Loss Mitigation Department and ask how long the approval process will take once a complete package is received by them. Find out their fax number to send in all the information we discussed in Part 5. Be sure to include a fax cover page stating that "this is a NEW SHORT SALE PACKAGE."  Also state on the cover page that you would like them to order an interior BPO, or Broker Price Opinion (this is an advanced form of a comparable market sales report). The more complete the package, the greater your chance for success. Additionally, the Loss Mitigation Department will be more likely and willing to work with you.  You have ONE opportunity to impress the lender with a strong, complete and well organized short sale package!

Once you have sent in your package, you will usually need to wait one week before calling back and asking which loss mitigation specialist is handling your file. When foreclosures are at a peak, the Loss Mitigation Department at the bank is busy ... if not highly overworked. These loss mitigators each usually have between 80 to 300 files on their desk at one time. The loss mitigation specialist will be your contact on this file for the duration of the sale. Remember, you need to get the specialist to want to work with you. Give them as much information as possible. This will help them with the file and will ultimately help your client.  Show the mitigator you know what you are doing by sending them a complete package and by being organized. Also, let them know you understand they are busy, and that you appreciate the valuable time they are spending to negotiate with you.

The next post will cover 4 common mistakes.

Fees: what the lender will and will not pay (Short Sales Part 6)

The lender will usually pay for the following costs associated with the sale:

• Escrow fee (seller’s half)
• Owner’s title policy
• Recording fee’s
• Some will pay the reconveyance fee
• Some will pay the overnight mailing fee for the payoff
• Real estate property taxes and prorations to the buyer
• Real estate commissions (6% or below -- lender will set the amount)
• HOA dues and fee’s (some will not pay the disclosure fee)

If the HOA has placed a lien on the property, the lender will usually only allow $1,000 to be paid towards this lien. You will need to negotiate with the HOA to reduce their fee’s and accept this money as payment in full. Remind the HOA, that if this home goes to foreclosure and is sold at auction -- they will receive nothing! This is a good deal for them!

Lender will NOT pay for the following:

• any buyer costs or allow any seller contributions to be paid to the buyer for any reason (it does not matter how high you raise the sales price to compensate for this amount; they will gladly accept the higher sales price, but will require the contract to be amended to remove the seller contributions to the buyer; ultimately the buyer will simply pay more for the home)
• a home warranty
• the buyer’s appraisal
• the buyer’s inspection
• for any repairs; all contracts are to be purchased in “As-Is” condition; use an "As-Is Addendum" to the contract

NOTE: as of the middle of 2008, most of the above rules have changed. Lenders are now much more willing to negotiate any and all details regarding a short sale. The bottom line is: if you want the property and the bank wants to sell its ... make an offer and negotiate! 

There is still quite a bit more to cover in additional posts.

Items the lender will want (Short Sales Part 5)

Now that you are authorized to talk to the lender, what will the lender want? Here is a list of items needed by most Lenders (NOTE ***You will need to write the seller’s loan number on every page you fax to the lender***):

• Letter of authorization
• Hardship letter (the sadder the better, the more descriptive the better)
  • Family illness or injury
  • Job relocation
  • Job loss or significant income loss
  • Divorce or split of domestic partners
  • Adjustment in mortgage payment or unforeseen increase in living expenses
  • Anything else life can throw at a person
• 2 months pay stubs for each homeowner on the loan
• 2 months bank statements, all pages, for all accounts
• 2 years tax returns for each homeowner on the loan
• Comparative Market Analysis – use "actives," "pendings," and "solds"
• Listing agreement
• Purchase contract and all counter offers – offer must state the following: 
  • “Purchase contract is contingent upon approval by existing lender(s) of a short sale at no cost to the seller. Seller shall not be required to deposit funds to close escrow.”
• Buyer’s LSR to show prequalification for purchasing the property
• Settlement statement / HUD-1 from the title company showing the lender’s net after all costs are paid

Will talk about fees the lender will pay an the next post.