Short Sales Tutorial for Real Estate Agents

Every year, there is a new buzzword in the real estate world. One year it is "flipping", another year it is "staging". 2008 was definitely the year of the SHORT SALE. With the economy teetering on its axis right now, short sales will be a part of the foreseeable future of any successful real estate agent. By learning the process and techniques of perfecting the short sale process, you can become THE expert on short sales in your area.

The first step to becoming the "short sale guru" is simple- KNOW WHAT A SHORT SALE IS! You would be surprised at the number of agents who really do not understand what a short sale entails. How can you explain it to your client if you don't understand it yourself?

WHAT IS A SHORT SALE?
A short sale is occurs when the proceeds of the sale of the home will fall short of what is owed on the loan. By working with the loss mitigation department of the mortgage company, the "short sale guru" can often get the bank to agree to take a "loss" in order to get the home sold. This saves the bank from dealing with the foreclosure process and associated legal costs. An owner may need to do a short sale due to financial hardship or other issues that are preventing the homeowner from paying the monthly note on the home.

Now that we know what a short sale is, let's talk about who qualifies for a short sale.
Here are examples of situations where a seller may be interested in doing a short sale on their home:

* Loss of job
* Medical hardship/medical bills
* Job relocation (and no equity to sell home quickly)
* Divorce
* ARM/interest adjusts beyond owner's ability to pay monthly payment
* Economic changes
* Salary cut at current job
* Bought too much house for current income/never could afford
* Overextended credit issues

Everyone has stumbling points in their lives. Many owners in this current economy were hit broadside in the head by the seemingly quick shift in the economy. Everyone seems to have been affected in some way, whether large or small. Many homeowners have been faced with losing their homes or attempting to work out a short sale with their lenders. This is where the caring, knowledgeable real estate agent can be a huge asset. When you focus on assisting in others in their time of need, not only do you attract good things to your life and your business (law of attraction!), but you can also make a great income in the process.

So why would a lender want to go through the process of a short sale when they can just foreclose? There are several reasons why a lender would be interested in a short sale scenario.

* There can be exorbitant legal costs associated not only with foreclosing, but also with evicting the people currently residing in the home (could be owner or tenants renting the home from the owner)

* While waiting for the deed to change over into the bank's hands, they are missing out on monthly loan payments. The change in the deed can take several weeks to several months.

* Most foreclosures end up needing work done to them before being resold. Many times, the upset homeowner will remove items from the home before the foreclosure. I have seen them remove not only appliances, but HVAC systems, hot water heaters, light fixtures, ceiling fans and even kitchen cabinets! This can obviously be a large cost to the bank who receives title to the property.

* Once they foreclose, they will most likely still list with a real estate agent and pay a commission.

So, in essence, if a bank decides to foreclosure rather than short sale:

* They accumulate legal fees as well as possible eviction fees and "cash for keys" fees (this is where the bank will actually pay the tenant to move out).

* They are accumulating monthly debt since no one is living in the home.

* They accumulate fees to repair the home and possibly replace missing items.

* They accumulate commission fees when all is said and done anyway!

So you can see why it would be beneficial for most banks to consider a short sale instead of foreclosing on a property!

Did you know that some lenders will even consider a short sale if the payments are NOT delinquent? It's true! Some lenders in this current economy are considering short sales in cases where the value of the home has been diminished so greatly by the surrounding home values (possibly too many foreclosures in a neighborhood, for example). Each lender is different, however, so there is no guarantee that the lender will agree to this.

DO LENDERS ALWAYS APPROVE THE SHORT SALE?

No. All of the planets in the universe could align and there are still some lenders who are not willing to do a short sale. Due to the current economic situation, however, most lenders are at least open to the idea.

You may be wondering what happens to that money that the bank takes a "loss" on. Does the buyer get penalized if they purchase a short sale? Absolutely not. The buyer had no relationship to the loan, therefore the buyer will not inherit the difference.

Will the seller possibly inherit the deficiency? There is a strong possibility, unless negotiated otherwise, that the seller will incur a deficiency. We will discuss this in a later section.

Some buyers also worry that they will inherit LIENS against the property in a short sale. This often comes up in both short sales and foreclosures. The title must be clean for the buyer to get their new loan on the property. Unfortunately, there are occasional cases where something on the title comes up later after the closing. Buyers should always be urged to purchase OWNER'S title insurance on any transaction, but especially short sales and foreclosures.

The short sale process can be long, frustrating, arduous%u2026. Scared yet? :)

For the real estate agent who has the following qualities, short sales can be a valuable process to master:
* Determined
* Helpful attitude
* Honesty
* Ambition
* Handles rejection easily
* Organized
* Efficient
* Energetic
* Never take no for an answer attitude

The set of qualities above would be a great for any real estate agent, but are especially important for short sale agents. Learning short sales takes a shift in the way you approach your business.

So where do you begin? Let's begin a fictional scenario detailing the short sale process.

Bob and Susan Clark bought a home in 2003. This was their dream home with 5 bedrooms for their growing family and a great big backyard for their dog. Bob had been working at his job for 10 years with a solid company in the financial services industry. Susan was a stay at home to their 3 children and one on the way. They put 5% down on the home and had a very doable monthly house payment.

Fast forward to 2008%u2026 Bob's company downsized and cut his pay. Then, he was laid off. Susan took a work at home job part-time to make extra money. Bob was lucky to find a new job, but it was half of what he made previously. To top it off, Susan found out she had some medical issues that required extensive tests in 2008. Before long, they were falling behind on their house payment. They tried to keep up, but just could not.

So, Bob and Susan called Realtor Laura. She told them that she would come out and do a CMA (Comparitive Market Analysis) to see what was selling in the area.

Bob and Susan had paid $160,000 for the house in 2001. They were hoping with an appreciation rate of about 3% a year, they could sell it for $195,000. They had to take out a small home equity line in 2005 for some repair work, so all in all they still owed around $160,000 on the home.

Realtor Laura did an extensive CMA which revealed some bad news. There had been 3 foreclosures in the neighborhood in the last 9 months. This meant that the home was only worth around $169,000. Bob and Susan were devastated. There was no way they could sell their home the "normal" way now. With real estate commission, buyer closing costs and legal fees added on by the bank for the late payments, Bob and Susan felt like they had no option but to let the home foreclose. They just could not believe that they had come to this place in their lives.

Luckily, Realtor Laura was a short sale expert in her area. She knew the ins and outs of the whole process and offered to assist them in wading through the paperwork. They were ecstatic that there may be a way out of this whole mess.

The first thing Laura did was arrange a conference call between herself, the owner and the lender. They called the lender's loss mitigation department to inquire about the possibility of a short sale. The loss mitigation department informed the agent that she needed to submit a short sale packet first.

Many lenders will require a short sale packet from you and your seller in order to determine if the bank wants to go down the short sale path.

Here are some examples of the kinds of documents that may be required by the seller's lender:

* A signed listing agreement between the seller and your brokerage firm
* Net To Seller form and/or a sample HUD-1 Settlement Statement
* Authorization to Release Information form (to allow you to speak with the bank on the seller's behalf and discuss the details of the short sale)
* Financial Statement from the seller
* Hardship letter from the seller

Once you list the property for sale, the bank will begin the process of considering the short sale. You will market the property and attempt to solicit as many offers as possible to present to the seller and their lender.
When a buyer makes an offer on the property, you will submit the following to the bank for review:

* A copy of the contract signed by the buyer
* A copy of the buyer's earnest money check
* Buyer's prequalification letter/proof of funds

Remember that the bank will prefer an "as is" sale because they are already taking a loss on the property. They certainly do not want to take the loss, pay a commission and then repair the home.

A common question from agents is how to price the home to get offers in today's market without being misleading to potential buyers and selling agents. This is a tough one. There are a couple of schools of thought on how to price a short sale.

Most lenders will not set the price for you. Therefore, you might just be shooting in the dark when it comes to setting the price.

One school of thought is to price the home just a tad under what the Market Value is on the home. For instance, if you do a CMA and feel that the home's fair market value is $150,000, perhaps you want to list the home for $145,000 to generate more interest.

Another school of thought is to drastically reduce the price of the home to generate a bidding war scenario. For instance, let's assume in our $150,000 example above that we price it for $100,000. Is that misleading to the public?

In this example, a buyer could make a full price offer of $100,000 and the seller's lender may counteroffer back at $150,000. How would the buyer feel? Bait and switch, perhaps?

The safest way to market a short sale is to price the home slightly under others in the area and (VERY IMPORTANT) always put remarks in the listing (and any offers) that states "All parties agree that this property is subject to a short sale and the contract and commission is based upon the seller's lender's approval."

WILL THE SELLER BE TAXED FOR THE LOSS TAKEN BY THE LENDER?

As of January 1, 2008, the "Forgiven Mortgage Debt" is excluded from taxable income. There are some restrictions (investors do not qualify, for instance), so the owner needs to consult with their tax professional.