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

Why do banks accept short sales?• Win-win solution for all parties to the transaction

1. Homeowner avoids devastation of foreclosure on their record

2. Bank avoids time & expense of foreclosure process & holding property on books until it sells

3. Buyer buys property below market value & walks in with immediate equity

4. Realtor receives a commission for negotiating on behalf of client

What is short sale process?

• Varies depending on loan typeLead

Qualification (via phone)

Listing Appointment

Short Sale Package to Bank

FHA VA/Conventional

FHA vs. VA/Conventional

FHAShort Sale Package to Bank

Appraisal

Acceptance into program

MLS

Offer

Offer Approval

Closing

VA/Conventional

Short Sale Package to Bank

MLS

Offer

Appraisal

Offer Approval

Closing

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

What is considered “in default”?

• Homeowner is at least 30 days past last day of lender’s grace period for making mortgage payment

Example: Payment due April 1st

Bank extends 15-day grace periodIn default 30 days after April 15th

In default beginning May 15th

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

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)• Purchase Offer (if there is one yet)• Estimated HUD-1 Settlement Statement (if submitting purchase offer)• Comparable Market Analysis (CMA)

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)

Hardship Letter

• Sympathetically portrays homeowner’s situation

• Should contain trigger points to get bank’s attention

• Homeowner must be prepared to support whatever is portrayed in hardship letter (i.e.—divorce…divorce decree; loss of job…letter of dismissal; death in family…death certificate or obituary)

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

Listing Agreement

• Short Sale Addendum Right of Sale Listing Agreement

• Hold Harmless Agreement• Lender will be responsible for commission.• Minimum of $2,000

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

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

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

Purchase Offer

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

• They will also start the process of trying to obtain an approved price.

Estimated HUD-1 Statement

• Very important to work with closing officer who is experienced in closing short sales

• Harbor Land Title, Gale Marcell

• Bottom line on Seller’s side of HUD-1 must ALWAYS net to ZERO

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, lender’s fax #)

• Fax it to right person in right department!• Key to making sure you’re in “short stack” is

to have all paperwork completed and completed correctly

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

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!

Special Provisions

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

Calculating the MLS list price

• Objective is to list the property at a price that will generate an offer quickly, achieve the bank’s required net for the transaction, and cover all commissions and seller closing costs

• If set too low, first thing to be cut is agent’s commission!

Calculating the MLS list price

Discount ThresholdsConventional 85-92%

FHA Insured 82%VA Guaranteed 88-91%

Example: Appraised value = $150,000FHA 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

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%

Calculating the MLS list price

EXAMPLEType of Loan? FHACurrent market Value (appraisal) $150,000Lender 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

Judgments/Liens/Other Costs

• Add any additional amounts due by homeowner for judgments, liens, delinquent taxes, HOA dues

• Add some “negotiation room” or a “buffer” (2-3%)

EXAMPLE

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

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

Bank Of America Short Sale

• Any Florida Property • Must be eligible for either HAFA or our proprietary

program • Exclusions: Ginnie Mae, FHA, VA and USDA loans are

ineligible for participation Lot loans are ineligible for participation.

• Properties outside the state of Florida are ineligible for participation.

• Short sales initiated with an offer are not currently eligible for the enhanced relocation assistance

• Homeowners may get up to $20K• Minimum $5K• Up to 5% of the unpaid principle blance• Must not currently have an offer.• Must initiate short sale by November 30, 2011• Must Close by August 31, 2012• Money is reported on the HUD and 1099

issued.

How to initiate a B of A short sale

• Sign up for equator (www.equator.com) Free• Initiate Short Sale with/without offer• Upload 3rd party Authorization Document• Owner contacts customer service

1.866.880.1232• Advise them you want to initiate a Co-op

Short Sale