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The 3 Steps to
Short Sale Success
By: Speare
Valasakos
With the
cooling of the real estate market, the meltdown of sub-prime
loans and over $1 Trillion worth of loans scheduled to reset
in 2007, the number of homeowners that find themselves in
foreclosure has skyrocketed.
As real estate
professionals we are seeing more and more people in
foreclosure that are upside down in their properties. They
owe more on their loans than the property is worth.
Unfortunately, many agents today do not know how to help
these people. Some may have heard about a short sale but
don't have the expertise to successfully complete one. Most
agents struggle with short sales because they have not
learned how to effectively manage the process.
In our
advanced Pre-Foreclosure/Short Sale Certification training,
we instruct our students to break down the short sale
process into three steps. By breaking the process down it
helps the student focus on the important elements for
completing each step. Once each step is mastered, the short
sales process becomes systematic and easier for the student
to successfully complete a short sale.
The 3 Steps to
Short Sale Success Are:
Step One -
Qualify the Property: The first thing to do when assessing
a potential short sale is to take a detailed look at the
property. You must reconstruct the chain of title. List
all loans/liens in order or priority (1st, 2nd, 3rd, etc.),
then determine the rights of each position. Are the loans
recourse or non-recourse? If any loan/lien is in
foreclosure, you must create a separate foreclosure timeline
for each one. While these terms may be unfamiliar to some,
the key to becoming a short sale expert is learning and
understanding the rights of each lien position. Once you
have a snapshot of the property's title you can lay out your
game plan on how to attack the short sale. Having this
knowledge will give you an edge in successfully completing a
short sale as well as becoming a power negotiator when
discounting liens.
Step Two -
Qualify the Homeowner: Many agents' short sales fall apart
because they do not have the cooperation of the homeowner or
they try to put the short sale package together at the last
minute. It is important before you take a listing to
educate the seller that you need their cooperation in order
for the lender to approve the short sale. They must
understand that they will have to provide you with current
financial information necessary to complete the lender's
workout package. You want to gather this information early
in the process so there are no surprises in the end. Some
lenders will allow you to submit this information before you
get a buyer's offer; others will only look at it with the
offer. Either way this saves you valuable time in getting
your short sale package submitted and approved.
In addition,
you need to determine: (1) does the owner have a hardship
that will qualify for the short sale; (2) does the owner
have any assets; and (3) will hardship or assets be a factor
in negotiating the short sale? Many agents mistakenly
believe that an owner needs to have no assets to qualify for
a short sale. In California, we have been successful in
closing short sales with clients that have assets.
If the
lender's loan is non-recourse, which means the lender cannot
legally pursue the owner for any deficiency amount, we
gently remind the lender that the owner is not liable for
any loan shortage and it is in the lender's best interest to
accept the short sale. The seller's assets are not a factor
if the loan is non-recourse.
If the loan is
recourse, which means the owner is personally liable for the
loan shortage, we remind the lender that to pursue the
owner, it would have to file a court action which is time
consuming and expensive. In our negotiations we may agree
to have the owner execute a separate promissory note for a
portion of the shortage, but it is usually for less than 50%
of the unpaid balance of the loan.
Step Three -
Qualify the Buyer: Many short sale transactions fail
because the buyer's offers are not properly structured or
packaged for the lenders to accept the offer. Educating the
buyer or the buyer's agent on how to submit the offer to
increase the chances that the lender will accept the short
sale, saves valuable time and effort, and streamlines the
approval process. Here are some of the things to remember
with offers:
Verification
of Funds and Loan Pre-Qualification. You will greatly
increase the lender's comfort level with the offer by
showing that you have a buyer that can perform on the
contract. You want to include with the offer and in your
short sale package a Verification of the Funds needed from
the buyer to close the sale. This includes the down payment
and any additional cash required at closing including
closing costs. Usually a copy of a bank statement or other
documentation showing that they have the money to close
should be sufficient. You also want to include a Loan
Pre-Qualification or Approval letter showing the buyer's
ability to obtain the loan necessary to close the sale.
Clean Offers.
Remember that the lender is taking a loss in approving the
short sale. To improve the odds of the lender's approval,
the offer needs to be clean without excessive contingencies
and concessions. For instance, an offer can be contingent
on buyer's loan approval and obtaining clear title, but an
offer contingent upon the sale of buyer's property is a red
flag to the lender. With concessions, requiring the lender
to pay a small amount of the buyer's closing costs would be
reasonable, but large repair requests or extras such as a
home warranty would most likely be rejected by the lender.
Keeping the
Buyer Informed. Many buyers do not fully understand the
process involved in purchasing a short sale property and
will walk away from the sale before it is complete.
Educating the buyers upfront and keeping them informed
along the way will help keep your transaction together.
Today, loss mitigation departments are light years ahead in
reviewing short sale requests than in years past. If you
have assembled your short sale package correctly and
followed the steps outlined above, you should be able to get
a short sale approved in 30 days or less. However, in some
instances, lenders may still take up to 60 days or longer to
approve a short sale. This is unsettling to many buyers.
Educating them that the short sale process takes time, as
well as reminding them of the benefits of foreclosure
purchases, such as purchasing a property at below market
price, should help alleviate any buyers' fears.
In some states
when qualifying the buyer, you need to determine if the
buyer is an owner occupant or investor, and if there are any
additional forms needed to keep your transaction legal.
In California,
there are foreclosure laws that apply to pre-foreclosure
purchases (check your own state laws) California Civil Code
§1695, known as the "Equity Purchasing Law," applies to any
non-owner occupant purchaser of a residential property in
foreclosure. This is not the format to detail the law, but
there are very strict guidelines that must be adhered to and
special forms that must be used.
In California
because of bonding requirements, an agent cannot represent
non-owner occupants. The California Association of Realtors
has created forms where the buyer's agent must terminate
his/her agency with the buyer and receive compensation as a
referring agent. As you can image, most agents and
investors do not understand these laws and become
frustrated. Again, your job is to educate them upfront to
keep your transaction on track.
In my opinion,
we have just hit the tip of the iceberg of the increase in
foreclosures. For those of you that decide to specialize in
foreclosures, the future looks bright. You can become
expert in short sales transactions in no time by breaking
the process down into three manageable steps. If you would
like more information on additional foreclosure training go
to www.frontlineseminars.com
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