5 New Short Sale Myths - Busted! :)

ommon short sale myths once evidenced widespread confusion about what a short sale is - mostly misconceptions that they are quick, or faster than “normal” real estate transactions. In reality, the “short” in short sale has nothing to do with timing. Short sales usually take many multiples of time longer than traditional real estate deals - running anywhere from 3 to 8 months-plus, on average, from contract to closing!

The only thing short in a short sale is the sales price - it is less than, or “short” of, the amount the seller would need to pay off all the loans and other outstanding obligations (tax liens, delinquent HOA dues, etc.) against the property. In these situations, unless the seller is willing to write a check to make up the difference, their lender(s) must agree to forgive the shortfall in order for the sale to close.

But most short sale buyers - and sellers - know this stuff by now. With one in four homeowners in America owing more on their homes than they are worth, short sales won’t be going anywhere for a long time to come. And the more people get involved in a short sale transaction, the more confusion and misunderstandings result.

Here are 5 of these “next-generation” myths about short sales, and the facts to shatter them:

Myth #1: That there is anything typical, standard or normal when it comes to getting a short sale approved.

Fact: There’s no such thing as “normal” in a short sale.

Some of the most frequently asked questions in the Trulia Voices Community include things like:

Is it normal for a bank to respond to a short sale with a counteroffer higher than the list price and the appraised price?
What’s the standard amount of time it takes a bank to approve a short sale package?
What’s the rule of thumb for how much below asking a bank will approve?

Despite the recent goverment “streamlining” efforts that promised to impose a set of standards most banks would follow in processing short sales, it’s still a black box experience for most buyers and sellers. Buyers submit their offers, sellers sign them and hand over all their financials to their listing agent who submits it all to the bank - and then often no one hears anything back for a few months, if ever. Other times, the whole thing is approved in a matter of weeks (though this is much less rare).

The bank is in the power position, and can respond to your offer however they want. They may counter at a much higher price and demand a cash payment from the seller. Or not. They may take weeks, or they make take six months. They may approve a way-below asking offer, or require a hundred thousand over the asking price. Forget the idea of standard, when it comes to a short sale.

Hint: short sale listing agents who have done a lot of recent, successful short sales with the same bank do often have insider knowledge that is the closest thing to a rule of thumb over what any individual bank’s practices are. If you’re a buyer, prioritize short sales that are listed by short sale masters - your agent will know who they are. If you’re a seller, ask prospective listing agents for a list of short sales they recently closed, including which bank(s) were involved.


Myth #2: It’s smarter for homeowners to walk away than to short sell their homes.

Fact: Increasingly, I’m hearing those who own upside down homes ask why they would bother with a short sale, when they could just walk away with much less effort and drama. The reality is that walking away and letting your home go to foreclosure is an extremely serious, personal decision - the wisdom of which varies dramatically owner to owner and state-to-state. Some states allow lenders to sue homeowners who default on their mortgages, and impose state taxes on the mortgage debt cancelled out in a foreclosure, sometimes totalling tens of thousands of dollars.

Other homeowners’ family and financial plans would be impaired much less by a short sale than by a foreclosure. For still others, it’s pretty much a wash. For everyone, though, it is faster to recover your credit and ability to take out another mortgage on a new home after a short sale than after a foreclosure.

Given that a short sale costs a seller little or nothing except some time and effort, in many instances it is smarter to make the effort to short sale than it is to walk away.

Myth #3: A short sale is the same as a pre-foreclosure.

Fact: A short sale is a home being sold for less than what is owed on it. A pre-foreclosure is a home that is in some stage of the foreclosure process because the owners are behind on the mortgage payments. Many short sales are pre-foreclosures, because the owners stopped making payments when they put the home on the market, either because they can’t afford them, they are simply done with the property and don’t see a need to continue paying on it, or because they feel the bank is more likely to approve their short sale application if they are in default on their loan (a position many experienced short sale agents argue is true).

But not all. Remember, nothing is standard when it comes to short sales. Short sales are closed every day on which the seller is still in good standing on their loan - these are mostly the short sales of owners who elect this strategy out of a desire to maintain their credit as much as possible, but have to move for work or family reasons.

Buyers should not assume that every short sale will come on the market later as a foreclosure; they should inquire as to any foreclosure notices against the property, and keep track of those time frames. Many a buyer has been surprised when the bank auctions a property they are in contract to buy.

Myth #4: The the buyer’s broker - or even the buyer’s offer - has much to do with getting a short sale approved.

Fact: Writing a clean, well-qualified offer is important to getting a short sale seller to believe that a buyer will hang into the short sale for the duration so they will sign the contract. However, the buyer’s offer and agent have little, if anything, to do with whether the seller’s bank green lights the deal, as needed to close it.

While the bank obviously cares about the price you offer, even that’s not as important as several other factors, including:

the bank’s perception of the home’s fair market value (as usually indicated by a third-party broker’s opinion, or an automated computer model),
the seller’s financials (if they have a bunch of cash stashed, the lenders is unlikely to let them sell the place with no contribution from them)
the completion of the seller’s workout application package and follow-up (squeaky wheel gets the grease and all that, and it’s the listing agent that needs to be that, often, for these transactions to get closed).


Myth #5. That the bank “can’t” do X or “has to” do Y.

Fact: The seller’s bank in a short sale is being asked to waive debt that they are legally owed. They have the absolute right to simply refuse entirely to accomodate this debt forgiveness request. However, if they do choose to waive some or all of the shortfall, they also have the right to place whatever conditions on that waiver. They can ask for more money from the seller - or the buyer (and often do). They can ask the agents to reduce their commissions (and often do that, too). They can refuse to pay various closing costs, if they want. And the buyer or seller can counter, accept or refuse any or all of the bank’s demands, too, but know that the banks do have the right to place whatever conditions on the short sale they want. After all - he, she or it who has the cash (or the mortgage, in this case!) makes the rules!


Psst - you should follow Trulia and Tara on Facebook, too!
So, why buy a short sale? With all the hassle, there are still some great deals to be had. In many cities, most homes on the market are short sales, so if you rule them out, you may never find a home.

Short Sale Rules: Negotiation Negotiating with Buyers.

As you may have noticed, many short sale articles rehash very basic “this is a short sale package” information. While that is still needed, I think most agents and investors in the game are ready for some advanced techniques. In this two-part series, I will explain my strategies for actual price negotiations with lenders, and discuss setting up the deal so that it “flows” in the price direction that you want to achieve.

The Seven P’s

An old Navy term that simply states: Proper Previous Planning Prevents Piss Poor Performance. In other words, have a plan in place before you submit your short sale. It all starts with the offer, and whether or not you are on the sell side or the buy side, this strategy works both ways. In fact, it is imperative that the listing and selling side work together at this point so that everyone is on board and aware of the strategy.

The Offer

When presented with an offer, or when deciding what to offer, always agree on a “maximum” or “all in” price. When I receive an offer from a buyer, the first call I make is to the buyer or buyer's agent and ask, “What is the all in or maximum price? It is critical that you get the buy side to understand that you want their offer to be successful and that there is a strategy to get these short sales done. You will be glad to submit the lower offer, but we need to know what is the maximum the buyer will tolerate. This spread creates negotiation room. For example, if an offer for $200,000 is tendered, I will find out what is the absolute most that the buyer will pay. Here is my strategy:



Example 1: $200,000 offer. Buyer will not pay any more. “Best and final”

Response: Lower offer to $190,000 with understanding that it may be increased as negotiations proceed.



Example 2: $200,000 offer, will go as far as $220,000.

Response: Submit $200,000. Find out if extra room is cash or financed*

*Very important if there is a credit union or HELOC involved.



In Example 1, the buyer offered a “highest and best” price. A “highest” offer should never be submitted to the lender at this stage. Why? Because you have no negotiating room! What can happen in this scenario is the max price is offered, the lender counter offers, even a small amount, and the listing agent now has to beg and fight with the buyer to come up in price. If the buyer refuses, the only option is to have the seller pay the difference (unlikely) or reduce agent commission. Sound familiar? When I hear agents cry that they lost their commission, many times poor negotiating is the cause. “But Joe, aren’t agents required to disclose the 'highest' offer to the lender?” No, you are not! Your Fiduciary Duty is to the seller, NOT THE LENDER.

The solution in Example 1 is to have the buyer lower their offer to $190,000 (or even lower) as long as you have market data, i.e.; sold comps, to justify the offer. The trick here is to make sure that the buyer understands that they may not close at the lower offer, and that they must agree to counter back up to at least their maximum price. Sometimes an attorney-generated agreement is helpful in this case. You may get a surprised reaction from the buyer agent. Lower my offer?!? But once you explain the strategy, most understand, and there is even a possibility that you may get the lower offer approved, which is an incentive for the buyer to stay in the deal--an important consideration when many buyers walk from contracts on a short sale.

In Example 2, the buyer has submitted an offer of $200,000, but has admitted that they will pay as high as $220,000. This is a great scenario, and explain that, just like in Example 1, you will submit the lower offer and use the spread as negotiating room. If there is a credit union, HELOC second, or collection servicer like GreenTree or SLS involved, keep in mind that there may be a higher demand from the second than what the first will approve, therefore it is important to ask if the buyer can bring extra CASH to close rather than simply raising their offer. This cash can be used to settle deficiency for the seller. As always, allow your buyer to lower their offer to compensate for having to possibly bring extra cash to close. If the buyer is unwilling or unable to bring extra cash, and your seller has a problem second, strongly consider not accepting the offer. Not properly accounting for buyer cash is one of the biggest deal killers, and an experienced short sale negotiator should be able to identify these scenarios early and disclose to the buyers early. In fact, sometimes I have my agents add “Buyer must agree to bring cash to close for seller costs” right in the MLS listing.

Conclusion

By properly setting up negotiation expectations, you will be able to not only close more deals and have happy buyers (which can lead to referrals,) but you can also get sellers deficiencies settled (which can lead to more referrals.) Remember, your duty as a listing agent is to get the deal closed and to put the sellers in the best financial position, so take the time to plan out your short sale deals. In part 2, I will discuss negotiation techniques with the lenders.

Call Justin Thayer @ 541-543-7287 for short sale questions.

Top 2 State of Oregon specific short sale questions.

1. Do short sale negotiators need to be licensed with the state of Oregon?

Generally, yes. In 2009, the legislature enacted two bills related to short sales and loan
modifications. House Bill 2191 created a registration requirement for persons who provide debt
management services and House Bill 2189 created a licensing requirement for persons doing
mortgage loan origination. The Department of Consumer and Business Services (DCBS) is
responsible for both programs.
A person or company offering short sales / loan modifications in Oregon may legally do so with:
1) A debt management company registration;
2) A mortgage loan originator license; or
3) A real estate broker license if they do NOT charge any special fees related to short sales.
(*Note: Banks, credit unions, and licensed consumer finance companies are also exempt.)


2. Are there any additional requirements that a short sale negotiator or a debt
management company must follow in Oregon?

This applies to debt settlement companies, loan modifiers, and “short sale negotiators.” Loan
modification is defined as modifying or offering to modify terms and conditions of an existing
loan or obligation. The law requires debt management companies to provide consumers with
specified disclosures and written contracts, honor a three-day right of cancellation, evaluate
whether the proposed services will benefit the consumer, and post a $25,000 surety bond. The
bill also prohibits misleading advertising and limits the fees that may be charged -- for short sales
and all other types of debt management services.

HAFA short sale rules may help sellers

Highlights
Home Affordable Foreclosure Alternatives program changes rules.
Borrowers, lenders incentivized to avoid foreclosure.
Predefined steps intended to speed and facilitate short sale process.

Homeowners struggling to sell their homes in a short sale are getting some relief, thanks to the federal government's Home Affordable Foreclosure Alternatives, or HAFA, program.

Up to now, many short sales -- in which the lender accepts a sale of the property for less than the full amount owed -- have taken months to complete. Sometimes, the complex and lengthy process has failed, .

"The streamlined short sales process will definitely help homeowners," says David Liniger, Re/Max International chairman and co-founder.
Prior to HAFA, homeowners often listed their home for sale without an idea of what the lender would accept.

"A lot of sellers and their Realtors have not been able to sort out the problems with short sales and have given up on the process because, even after sending in the correct paperwork, they have sometimes waited three or four months for their lender to respond," Liniger says.

Under HAFA, borrowers receive preapproved short sale terms from the lender prior to putting the home on the market.

Lisa Matykiewicz, a Realtor and Certified Distressed Property Expert in Gilbert, Ariz., says the updated short sale rules establish an easy-to-understand process with predefined steps that "make it easier for everyone to understand."

Eligibility requirements
The HAFA guidelines apply to lenders who voluntarily participate in the HAMP program. The Department of Housing and Urban Development says more than 100 servicers have signed up to participate in HAMP, covering more than 89 percent of mortgage debt outstanding in the country.
To be eligible for HAFA, homeowners must first apply for a loan modification through the Home Affordable Modification Program, or HAMP. Owners who do not qualify for a loan modification or miss payments during the initial loan modification period qualify for HAFA.

Other HAFA requirements include:
Property is principal residence.
Mortgage originated before Jan. 1, 2009.
Mortgage is owned or guaranteed by Fannie Mae or Freddie Mac.
Borrower is delinquent or default is foreseeable.
Homeowner demonstrates hardship.
Borrower's total monthly housing payment exceeds 31 percent of gross income.
Unpaid principal does not exceed $729,750.


According to HAFA rules, lenders now must offer a short sale in writing to the borrower within 30 days if the borrower does not qualify for or complete a loan modification. Borrowers then must respond within 14 days to the lender's short sale agreement.

Shortening the Short Sale Timeline: Broker Price Opinions

Short sales have been hampered by cycle times that can easily last months. One of the critical steps to improving adoption of this loss mitigation tool is to standardize and shorten the time from initial offer to investor acceptance.

Using BPOs (Broker Price Opinions) to benchmark and vet purchase offers is a critical step that can save weeks or more from the process. Rather than a buyer submitting an offer and not knowing whether it was accepted or rejected for one or two weeks, they could have a response in just a few days.

Anyone who has used or seen the evolution of BPO services over the past six to 12 months understands the comprehensive and statistical data and methodologies that are used to derive a value opinion.

This month, appraiser groups told Treasury Secretary Geithner that real estate agents and brokers have an inherent bias toward quick results that produces a fee for themselves. I have a hard time supporting the argument that BPOs are somehow less accurate or any more subject to fraud than traditional appraisals.

The National Association of Realtors wrote Geithner to say there is no reason why the Treasury Department should ban the use of BPOs in short sales. "There is no evidence that BPO exacerbates mortgage fraud or abuse," NAR says in its letter to Treasury. The group emphasized that BPOs are used frequently to analyze mortgage loan portfolios for risk management and fraud detection.

Is a short sale worth the knock on my credit?

Is a short sale worth the knock on my credit?
Question: My townhome has lost about 25 percent of its value. I'm barely managing the payments. Similar homes in my complex are renting at less than half of what I am paying every month. We send our child to a private school because we don't care for the public school in our district. I have tried to talk to my lender but because the house is underwater, refinancing is not an option. We also do not qualify for a refinancing. We have an adjustable-rate mortgage, and both my spouse and I have excellent credit histories. I am the only one on the mortgage, but my wife is on the title with me. Is it worth going for a short sale and taking a hit on my credit?

Answer: Yes. I am a big believer that your house is your home first and an investment second. And while a good credit history is important, so is living in a house and in a neighborhood you like. Several weeks ago, I counseled another reader that if the property is in a good location with a good school district, and the payments are affordable, the reader should not be too concerned that the property was worth less than what he owed the bank. Your situation is different in that you don't care for the home or where you live and are even incurring additional expenses based on its location. Further, while your mortgage payment may be low now, you are sitting on a ticking time bomb in that interest rates are sure to rise sooner or later, and when they do, you will no longer be able to afford the payments. Because your wife is not on the loan, her credit will not suffer when you complete a short sale, so you should be able to find a home to live in that's more appropriate for your situation.

Q: I am a co-owner with my brother of a property in Ocala, Fla., that has a dilapidated mobile home on it. No one lives there, but I'm concerned about liability because there is no insurance on it. I'd like to do a quit-claim deed to my brother. Would this release me from any liability?

A: Yes. If you do not want anything more to do with the property, it is best not to keep an ownership interest in it for liability reasons. As long as you own part of the property, you are liable to the tax collector and anyone who may be harmed on the property. Further, if the property is not properly maintained, you may be subject to fines from the city or county. You should arrange with your brother to transfer ownership to him as soon as possible.

Q: I own an investment property that I have stopped paying on. I have one mortgage on the property. Recently, the lender filed a lawsuit against me to collect on the note, but it is not trying to take the property back in foreclosure. I have money in the bank and other assets. I called the lender, and it doesn't really want the property back. I am afraid that the bank will come after my other assets. Can it?

A: Yes. This is getting to be a much more common trend. First mortgage lenders are starting to decide that they really do not want the responsibility of owning the property, especially if it has a low value or is in disrepair. Second mortgage lenders realize that even if they foreclose the property, the first mortgage lender is going to get all of the proceeds from the foreclosure sale, leaving the second mortgage holder with little more than a legal bill. The lenders know that a promissory note case is much easier - and cheaper - to bring than a foreclosure action and can be finished much faster. After the lender wins the lawsuit on the promissory note, it will get a judgment that it can execute against your other property, your bank accounts and even your wages. Plus, it still has the mortgage lien against the original property, so it can go back and take that at a later date if it decides to. I have long advised my clients that this is one of the real dangers in "strategic defaults" and it looks like the lenders are starting to catch on, at least a little. Further, it is too late to try to transfer the assets as most states have a two-year, look-back period for fraudulent transfers made for the purpose of hiding assets to creditors. The best thing that you can do now is to fight your lender in court and try to come to some sort of settlement.

Call: Justin Thayer for short sale questions and/or help @ 541-543-7287 or visit www.teamthayer.com and click on the short sale or Real Estate news links for tons of short sale info.

President Obama’s Short Sale Program

Since the Obama Administration took office, it seemed that their goal was to keep home owners in their homes. Now, the strategy appears to have changed with a recent announcement from the U.S. Treasury. Recently, the Treasury revealed that it would encourage home owners to leave their properties – by paying them. It is believed that the new plan will prompt home owners that are behind on their mortgages to choose short sales, which could reduce the amount of foreclosures throughout America.

During short sales, home owners who are delinquent on their mortgages agree to sell their houses for less than the remaining balance of the loan. In return, banks and mortgage lenders agree to undertake losses (in lieu of not receiving any debt service from borrowers).

With an increase in short sales being eminent, many people are wondering what bearing Obama’s short sale plan will have on the real estate market. With the new plan coming into play, there are a few things people with a mortgage can expect.

First, fewer people may pursue loan modifications. In the recent past, big banks said that they were committed to helping struggling home owners who had defaulted on their mortgages. Yet, according to ABC News, of the 1.1 million people that have requested help from banks, only 168,000 have completed loan modifications this year. With the loan modification success rate being so low, more home owners may view short sales as a viable option.

Next, the number of foreclosures may decrease as the number of short sales continues to increase. Finally, more home buyers will choose to purchase short sale properties. Prior to the plan, home buyers and real estate agents wanted little to do with short sales because these real estate transactions involve long waits and complicated paperwork. Now, due to the increase in short sales and bargain prices, more home buyers will stop turning a blind eye to these types of properties.

While it is still too early to determine how US real estate markets will be impacted by the President’s short sale plan, it is apparent that more home owners will be persuaded to sell their homes and receive a payout than enter into foreclosure.