April 2011

Short Sales

By Stephanie Sievers Associate Editor

For REALTOR® Alexis Eldorrado it was the stuff of short sale nightmares. She was representing a distressed seller with a short sale and an eager buyer who had jumped through multiple hoops and was still ready to close the deal. After much back and forth, they’d reached a verbal agreement with the bank’s negotiator and the closing was just hours away.   

Smooth sailing right? Not so fast.  

As Eldorrado, the managing broker of Eldorrado Chicago Real Estate in Chicago, and other Illinois REALTORS®have experienced, there are many bumps on the path to getting a short sale to closing.

In Eldorrado’s case, the bank negotiator’s manager continued to insist—despite ongoing verbal agreements to the contrary—that the seller be on the hook for any loan deficiency despite multiple hardship letters, proof of bank statements and verbal negotiations asserting that the seller couldn’t afford to proceed with a short sale if that were required.

Facing a showdown at the eleventh hour, Eldorrado insisted the bank negotiator talk directly to the seller about why he couldn’t afford the deficiency, the bank waived it and the short sale went through. Eldorrado’s advice: Be patient, be a tough negotiator and ultimately, be willing to walk away.
Short sales account for an ever-growing share of transactions. In fact, the number of new short sales in late 2010 had increased nearly 83 percent compared to a year earlier, according to the  Treasury’s Third Quarter 2010 Mortgage Metrics Report. 

The Instructor:

• Lynn Madison, owner of Lynn Madison Seminars, co-wrote NAR/REBAC Short Sales and Foreclosure Resources Course (SFR)

Determine if there is a qualifying hardship. If you are the listing agent, one of the first things you need to determine is whether or not your client has a real hardship—a job loss or other financial setback—that will qualify them for a short sale in the first place. There are still agents who take listings and buyers wait months to find out the reason the short sale isn’t going through is not because of their offer but because the seller isn’t qualified to do a short sale.

Does the short sale qualify for Home Affordable Foreclosure Alternatives (HAFA)? If it does, determine whether it is a Fannie Mae, Freddie Mac or non-GSE, as the guidelines for each differ. (See sidebar for details). 

Not doing a HAFA short sale? Make sure sellers understand they could owe the deficiency if negotiation efforts to waive it fail.

Don’t assume old short sale trends apply. The first mortgages to go into short sales/foreclosure were in the lower price range and many banks did not go after deficiencies. Now with higher-end homes going into short sales, banks are more aggressive about deficiencies because they believe the owners are more likely to get back on their feet and have the ability to pay the money back in the future.

Keep the lines of communication open. Listing agents and buyer agents need to talk to each other throughout the process. Listing agents can get frustrated because they can’t get answers from the bank, but they still need to communicate whatever they can to the buyer agent. Better feedback can help keep buyers interested.

Buyers need to submit a reasonable offer. Just because it is a short sale doesn’t mean the banks will agree to a low number. As a buyer’s agent, write a contract that has a reasonable chance of closing. What’s a bad contract? Madison says one with too low an offer, one that doesn’t include
earnest money or has a buyer who won’t do the home inspection.

Get educated about short sales. Don’t let inexperience derail your short sale. Take a course and learn everything you can about the short sale process. Many listing agents have educated themselves, now buyers’ agents must do the same.

The REALTORS®

• Jason Shapiro, broker-owner of Rising Realty, Chicago

Get the documentation and authorizations in order at the outset. Find out who has liens on the property. Second mortgages can be a challenge because you’ll need to get authorization from both lenders in order to handle the short sale.

When you hit a roadblock with a lender, know who else to contact. Knowing who to call is part of the expertise of the business. Short sales fall into a bank’s loss mitigation department and like everything else in business, relationships are key. The person assigned to the short sale may be overloaded or may drop the ball. Be prepared to contact other people at the bank to move things along.

• Alexis Eldorrado, managing broker of Eldorrado Chicago Real Estate, Chicago

Have the title company pull a title report early so you don’t get hit with surprises later. You don’t want to be deep into the short sale process and find out there are other mortgages and tax liens on the property that you didn’t know about. Full title reports can be expensive; preliminary reports are a cheaper option. Get one as soon as the offer has been at least verbally accepted so there is time to deal with anything that may come up. 

Don’t show a short sale listing to a buyer until you’ve spoken to the listing agent. Find out whether there are other offers on the table, how many there are and how long they have been sitting there as multiple pending offers could be red flags.

• Joe Marella, broker-owner Keller Williams Realty Partners, Park Ridge

Asking the right questions can be key. You have no real control over who you get as a negotiator but asking the right questions can keep things moving. Sometimes it’s just the straightforward but simple question,” How do I get this escalated?” Be the squeaky wheel but it can be a fine line to walk.

Find attorneys who are familiar with the short sale process. Marella works with attorneys on every short sale and stresses that it’s important attorneys be familiar with short sales as they will be involved in negotiating and communicating with the bank.

Add the short sale addendum to the listing on MLS so everyone is clear on what is expected with the property.

The Lender

• Bank of America provides these short sale tips in seminars for REALTORS®.

Submit fully-executed purchase offers with appropriate addendums signed by buyer and homeowner.

Negotiate external third-party fees prior to submission of HUD and ensure that the HUD is valid for at least 60 days and information is fully transferred to the Offer Worksheet in their processing system.

Get agreements on counter-offers before accepting.

Notify the lender if things change such as: a change in the buyer, seller files bankruptcy, the closing date changes or there are changes after the approval letter is issued.

The Mortgage Banker

• Glen Marino, president of Aspen Mortgage Corporation, Naperville

Plan, plan and plan some more. Pre-plan, get pre-approved for a short sale, deal with all the liens upfront, and short sales do get approved. All sides have become more educated and are having better success. Some advice for buyers’ agents, make sure the price on the contract is within the
pre-approved guidelines.  

How much do you know about Home Affordable Foreclosure Alternatives (HAFA?)

If the answer is “not much” you could be hurting your success at short sales. Different loans have different HAFA rules. Go to the federal website, www.makinghomeaffordable.gov, to find if a client’s mortgage is through Fannie Mae or Freddie Mac, short sale packet requirements from various lenders and counselor information.

Some HAFA differences at a glance:

HAFA for non-GSEs 

• (does not apply to mortgages owned or guaranteed by Fannie Mae, Freddie Mac or government agencies such as FHA). New provisions were put in place as of Feb. 1, 2011 including:
• No restrictions on the reasons for a homeowner’s relocation and while homeowners must show a hardship, the servicer no longer has to verify the mortgage payment exceeds 31 percent of gross income.
• The servicer has 30 days after receiving an executed sales contract, Alternative Request for Approval of Short Sale or signed Hardship Affidavit to approve, disapprove or provide a counter offer. Servicer has 30 days to determine eligibility if an unsolicited borrower requests HAFA.
• There will no longer be a percentage cap on payments to subordinate mortgage liens. The $6,000 aggregate is still in effect.
• REMINDER - Participation in HAFA by non-GSE servicers is voluntary and that can have an impact on how quickly short sales are processed.

HAFA for Freddie Mac 

• The loan must be more than 60 days delinquent and there are limits on the cash reserves that homeowners can have to qualify for a short sale.

HAFA for Fannie Mae

• Homeowner must be in imminent risk of default and is not eligible for a short sale if still able to make mortgage payments.
• Homeowners don’t qualify for a short sale if they have cash reserves, unencumbered assets or a high surplus of income.

Source: IAR LEGAL WEBINAR: Lending, Short Sales and Foreclosures (Jan. 18 ) www.illinoisrealtor.org/legal/webinars