Short Sales – Everything You Wish You Knew
Background of the difference between a Short sale and other types of sales
A short sale is much different than an Equity sale or Foreclosure. But you may not realize one major difference . If we were to divide transactions up in to two different categories, on the left side would Be Equity Sales (Traditional), and Foreclosures. On the right side would be Short Sales and “Court Ordered” sales where the court must approve the sale. Understanding the difference is a good place to start and will be key later on to understanding how to be more successful. Let’s review a normal “Equity” sale. the seller enters a contract with an agent who lists the house (The “Listing” team). A buyer agrees (or sometimes signs a contract) with a agent (The “Selling or Buyers” Team) and makes an offer on the house. The offer is negotiated through counter offers and if all goes will is accepted by both sides. The contract that has been ratified by both parties and their agents is legal and binding. Generally speaking, no other approvals are needed. Escrow is opened and when all of the conditions of the contract have been met by both sides, escrow closes (the house is sold). For the most part it is the same with a foreclosure (because the bank owns the property and has the right to sell it). On the foreclosure, there is an investor who owns the note (the IOU that the seller signed to get the loan). This investor is the true seller of the house but has so many foreclosures that he cannot handle them all by himself. So he hires an Asset Manager (AM) to handle the sale on his behalf. Usually the AM is the bank that services the loan (takes the payments and answered the phone calls, etc). The investor/seller provides the AM with a set of guidelines to sell the home and the AM has the authority to negotiate the contract within those guidelines. Many times the AM has the authority to sign the agreement to, but if not the seller (investor who owns the note) must sign the agreement before it is considered legal and binding. Just like in an Equity sale, in a Foreclosure, all parties sign the contracts prior to an official acceptance. This is possible because in an equity sale, the seller has the authority to sell the house, and in a foreclosure, the Investor has the authority to sell the house. But in a Short Sale this is not the case. As you already know, in a short sale the owner/seller owes more money on the “note” (loan) than the property is worth. It is important to distinguish that in this case the owner still owns the house (not the bank), they just do not have the authority to sell the house unless the give the bank back all money still owed on the “note” (loan). You commonly hear this referred to as “upside down”. In these cases the owner/seller lists there house for an amount that will leave them “Short” of funds to pay off the note. Thus we call it a short sale. So once again we have a listing side and a buying side. The offer is made and negotiated and if all goes well accepted by all sides. It is signed by both parties and their agents. Sometimes the listing agent will require that escrow be opened, but this is not really necessary except to make the contract feel more real. In fact the contract is legal and binding, but unlike in an Equity sale or foreclosure, this time there is a short sale addendum attached that says “yes we agree to sell and you agree to buy as per this contract, but the contract really means nothing because the seller does not have the ability to sell this house for this price”. The addendum covers many topics but basically says that the owner/seller will send the buyers offer to the Loss Mitigator (LM) Again usually the loan service, and ask them for permission to sell short”. In the case of a short sale, the LM has been given guidelines by the investor/owner of the note on how to proceed and the negotiations begin again. As you can see then, in an equity sale or foreclosure, there are two sides and once an agreement has been made, it is done. But in a short sale there are 3 sides. Once the initial agreement is made, it is then up for complete renegotiation by the third party.
Are there different Types of Short Sales?
- If the loan servicer (usually the bank) and the Investor that owns the note have agreed to participate in the HAMP/HAFA programs, then you may qualify for for this program.
- Additionally many of the servicers have their own programs which can be used if they don’t participate in HAMP/HAFA or if you were declined by the HAMP/HAFA program.
We will provide a great amount of details and resources on the programs later.
How Can Home Owners Determine If A Short Sale Is Appropriate for them.
First and most important, you can’t determine your families best interests until you know what your options are. Simply put, you have to take the first step and educate yourself on the options. You can call a real estate agent and ask them, but in truth most do not know the answers. Instead, read about the programs yourself, then ask your questions! Here are some initial steps you can take to help you understand your options.
Find out which program you are most likely to qualify for. First determine who your investor is.
- Freddie Mac: http://www.freddiemac.com/mymortgage
- Fannie Mae: http://www.fanniemae.com/loanlookup
- If it is not one of those two, we will say it is owned by “Other Investor
Find out what programs your mortgage Servicer participate in. The link shown here has a list of all servicers along with the programs they participate in and their phone numbers.
- If your servicer participates in HAMP/HAFA and also has their own program, then they are required to offer you HAMP/HAFA first.
- If your mortgage is not held By Fannie Mae or Freddie Mac then you will apply for a HAMP/HAFFA program.
- If your mortgage is held By Fannie Mae or Freddie Mac then you will apply for a Fannie Mae/Freddie Mac HAMP/HAFFA program.
- If you are declined for a HAMP/HAFA program then your service may evaluate you for their internal program
- If your servicer does not participate in HAMP/HAFA, but does offer their own program, you will be evaluated for their internal program
In a moment we will give you access to more information on the programs, but before we do, let’s take a moment and talk about things that no one seems to talk about.
Bankruptcy and the Short Sale: Bankrupts is not required and may not be appropriate but it is absolutely critical that you talk to a Tax attorney and/or a Bk attorney prior to the short sale of your house. Among other things, if you intend to (or might be considering) a bankruptcy after the short sale, you may find that it is in your est interests to do it prior to the short sale. Here are just a few reasons why.
- One of the determinations on whether you can do a chapter 7 (no payment plan) vs a chapter 13 (payment plan) is your monthly dept including your mortgage payment. If you reduce your monthly payment from your mortgage from for example 3,000.00 to a rent of 1,500 dollars, you could find that you forced yourself into a chapter 13 and lost the no payment option.
- You may have liens on the property that are discharged. As part of the short sale process, you will be required to deliver a clear title. In a HAFA short sale the bank will make their determination on whether to approve your short sale based on net proceeds from the sale. Forcing the bank to pay off liens that you were planning to discharge anyway may reduce the likelihood of a successful short sale.
- It is important to understand the tax ramifications (if any) from the discharged debt. As laws are changing all of the time, who are you going to believe, your real estate agent or your gut telling you to talk with a legal professional (go with your gut)
- Here is the names of some Bankruptcy Attorneys. If you are reading this post and have used a bankruptcy attorney for situations like we are discussing here, email me the name and number to include in this page.
- The McDonald Legal Group William McDonald 858-437-0103 (San Diego). Additionally, I will invite him to give some insight on his own page here (if the word “Here is not a link then the page has not been created yet.
- Gardnier Inc nor any of it’s owners, investors, sponsors, etc offer legal advise nor endorse any specific company or person. The names listed above are simple a courtesy for our clients and in no way reflect any personal knowledge of the service providers expertise.
Loan Modification: Please do not forget that there are great loan modification programs out there. If you apply for a HAFA short sale, you will automatically be reviewed for a HAMP loan modification. You will not be forced to accept one, but if you want to keep the house the option is there. As we get time we will try to place a link from the Sellers Menu for loan modifications and provide more info.
Agents: To many clients have come to think that real estate is a simple profession. They have seen friends and family members become successful agents with little training and no background. This has lead to an industry that applies pressure on the clients to use a particular agent just because they are your friend. Even worse is the fact that there are so many agents that most people have more than one agent as a friend and are stuck trying to choose between them. Which one will give them the least hassle if they are not chosen. When a escrow is closed, it is nearly impossible for the client to know if they got a good deal or not. They just know that the transaction closed and are happy. They never knew what the true potential of the transaction was so they have no idea of how well the agent did for them. To be sure, like in all other professions real estate agents have a wide range of capabilities. Simply closing a bunch of transactions does not help the client to understand the true level of the agents competency. You should interview agents as if they were applying for a job. Listen to their answers! If an agent tells you they can get 350,000 for your house and you know that it is only worth 310,000 then move on. I see a lot of agents now advertising that they are experts in short sales but need to hire “short sale negotiators” to negotiate with the bank. Ask yourself why? If you are hiring them, why are they hiring someone else? Even worse, many times they reduce not only their own commissions to pay for this “negotiator” but the Buyers Agents Commissions to!. Think about it, if you were an agent and your buyer said that he wanted to look at 25 properties, and you only had time to show him 10 properties, which ones would you show. First you would show him the ones that hes specifically asked to see, then you would show him the ones that did not cut your paycheck. The amount you get for an offer will be directly proportional to the number of people who walk through your home. While you can argue that the agents shouldn’t act in this way, why would you want to take the chance of loosing the best offer to come to your house? Your agent should where at all possible have the expertise to list the property and complete the successful short sale. That’s why they are called the listing agent. Recently there has been a trend where the agent convinces the seller that they are doing more work than the buyers agent so they should get more commission. We are seeing some agents advertising the short sales where the Listing Agent gets 60% of the commission and the buyers agent gets 40% of the commission. While the agent is correct, they will do more work in the case of a short sale, this is no excuse to place the seller in harms way. After all, in Equity and Forclosure3 sales the buyers agent is doing far more work than the listing agent (Driving the buyer around making offer after offer until one is accepted), but the listing agent is not offering to take a lower commission because they are doing less work. We are all agents. Sometimes we take listings and some times we represent buyers. If a particular transaction is more work than we want to do, we should polity decline the transaction and not impede our clients chances for not only success, but for getting the fullest potential in the transaction. A good rule of thumb is to look at the agents website to see the amount of effort placed into educating potential clients. Agents spend money where the anticipate a return on their money. A person specializing in short sales with a webpage that advertise 8 billion transactions done would not be as impressive as an agent that provides a website designed to educates the clients in the type of transaction they are entering into. Is the agent helping the clients to understand the true potential of the transaction and guiding them towards obtaining it.