Bank Pays Seller $23,000 To Do A Short Sale

The story:
Underwater on their mortgage, the owner of this Issaquah townhome had decided to walk away and let the home go into foreclosure. The HOA president talked to the owners and convinced them to try a short sale.

Washington Property Solutions was able to successfully broker the short sale, as well as negotiate with the lender to get 100% of the seller's debt forgiven. Not only are the sellers in a better position financially than they would have been had they gone into foreclosure, they also got a bonus: a $23,000 cash incentive paid to them by the lender.

Lenders, including Chase and Bank of America, are paying significant cash incentives to encourage sellers to do a short sale and avoid foreclosure. The programs are for a limited time. Find out more about how short sale cash incentive programs work.

The Top 3 Reasons Short Sales Fail

Short sales are complicated.  With all the variables that need to be juggled,  it's easy to make mistakes that end up derailing a transaction.  Here are the most common reasons that short sales fail.  
 

1)  Failure to understand and justify market value. 

 

Setting a price for a short sale is the delicate art of balancing what a buyer will pay and what the lender will approve. It's important to understand how the lender values a property. The bank will commonly hire an appraiser or BPO broker to set a value after you submit an offer.  If you have set the price too low, the lender will not approve the offer.  Everyone loses.  The buyer has been given an unrealistic expectation of what they should pay, so usually is not willing or able to offer much more.  More importantly, your client's clock is ticking.  They have a certain deadline to do a short sale and avoid foreclosure, and you have squandered valuable time on a deal that was never going to go through. (If you think the value the bank set is unreasonable, this Ask the Expert article explains how to dispute lender valuations.)

 

2)  Not knowing the specific lender's short sale process.

 

On average, the bank's short sale negotiator has over 1,000 short sale transactions that they are processing at any given time. And each lender's process is different. If you don’t follow the lender's specific process or there is an error in the paperwork or you're missing a form, it all comes to a halt. Your file gets set  aside until the issues can be resolved. And unless you call, it can be weeks before you are even aware that there is a problem. (We have a dedicated staff that follows up with lenders daily to make sure the process is moving forward.)  The short sale transaction that closes, and closes quickly, is the one where everything is done right the first time. 

 

3) No system to monitor the short sale process.

 

Because a short sale has so many more variables than a traditional real estate transaction, one of the most important jobs the listing broker has is making sure everyone involved has all the information they need to make their part of the deal happen. We have a private password-protected online system that lets all parties see what's happening with a transaction at any time- 24 hours a day, 7 days a week. This helps everyone involved track deadlines and ensure that no details fall through the cracks.  It's also important for you to build a team of professionals who are highly experienced in short sales. For example, we work with title and escrow agents who understand the additional documentation and complex issues that are specifically related to short sales.

How to Dispute a Short Sale Valuation That's Too High

Occasionally a lender's valuation of a short sale property is significantly more than what the market will pay.  As a broker you may have recourse,  however, every lender has a different process for reevaluating value. The first step is to contact the lender and get a detailed overview of their value dispute resolution process.  You want to make sure that you are providing the lender with the precise information they need to consider a change in value.

The BPO broker or appraiser who sets the original value often does not have a complete picture of the property. When we request that a lender reconsider a home's value, we gather as much documentation as possible.  That includes comps, a summary of repairs needed, and contractor bids for those repairs. We sometimes pay to have our own appraisal done as well.

 

If the lender is unwilling to budge on their value, we find out when the appraisal or BPO figure expires and then work with the lender to order a new one. 

 

Bank of America is one lender who is making an extra effort to work with brokers. BofA has streamlined their process for settling valuation disputes during a short sale, making it faster and easier for brokers to get the bank to consider an alternate value. Get step-by-step  instruction on How to Dispute a Bank ofAmerica Short Sale Valuation.  

Questions Buyer's Agents Should Ask in a Short Sale

Some buyer's agents shy away from short sales because of the complexity and uncertainty involved.  And it's true, short sales are complicated transactions even for those highly experienced in short sale negotiation. Properties that are represented by brokers with little or no short sale experience can result in transactions that are a nightmare for both you and your buyer. Here are a few questions you can ask to determine whether you want to move forward with an offer. 

    

1)  Who are the lien holders?

 

The amount of time it takes to process a short sale varies greatly from lender to lender. The broker should be able to tell you who the lien holders are, and the average number of days the lenders take for closing. This will help your buyer decide whether the lender timeline matches their timeline.  

 

2)  Who is negotiating the sale? How many short sales have they closed? Do they have experience working with the seller's lien holders? 

 

Real estate brokers, attorneys and mortgage brokers are the only individuals that can legally negotiate a short sale.  If the negotiator is a real estate broker, they must be listing or co-listing the property — they cannot legally negotiate the sale unless they are part of the listing agreement. 

 

Because of the complexity and ever-changing nature of short sales, you want to make sure the negotiator is highly experienced. That means they've closed a minimum of 100 short sales and have worked with a broad range of lenders, including the seller's lien holders. 

 

3)  Are there any additional costs to negotiate the sale? If yes, who pays those costs?

 

If the negotiator is a real estate agent, negotiating the short sale is part of the service that they provide when they list or co-list the property. There is no additional fee to anyone.

 

Attorneys typically charge a fee of 1-2% of the purchase price to negotiate a short sale. The lender may be willing to pay their fee, but more and more often they're not. The seller typically is undergoing economic hardship and doesn't have the funds. That leaves the listing agent, buyer or buyer's agent to pick up the attorney's fee. Before you make an offer make sure you have in writing who is responsible for the negotiating cost. 

 

4)  Is there someone dedicated specifically to follow up with the lender?  How often do they follow up? 

 

For a short sale to progress smoothly it is essential that the negotiator has a system to follow up regularly with all the various lender departments that are involved with the short sale.  The negotiator can never assume that just because they have sent the correct paperwork, the lender is moving forward on the sale. We call lenders daily to make sure the right people have the right information to close the sale in the shortest possible time. 

 

Here is more information to help your buyer decide whether buying a short sale is right for them.   

 

If you have any additional questions, we're happy to give advice. Call Richard Eastern at (206) 612-5541.

3 reasons why NOW is the best time to do a short sale

If you have a client who is considering a short sale,  there are a number of compelling reasons to make the move now.

1)  Tax advantages for doing a short sale are set to expire.

When a lender forgives a homeowner's debt, the tax laws had previously considered the forgiven debt as taxable income. This law applies equally to short sales and foreclosures. 

 

The Mortgage Forgiveness Debt Relief Act enacted in 2007 allows debt forgiveness of up to $2 million to NOT be considered taxable income if:

• The house has been used as the principal place of residence for at least two of the  previous five years.
• The debt has been used to buy, build, or make substantial improvements to the home.

That law is set to expire at the end of 2012. While Congress has begun discussions on extending the act, the outcome is uncertain. If a seller wants to make sure their deficiency is not counted as taxable income, their short sale must close by December 31, 2012. That means they need to get their house on the market now.        

2)  Lenders are offering significant incentives for sellers to do a short sale instead of foreclosure.

Banks have recognized how expensive the foreclosure process is for them. They also do not want to add to their already bulging inventory of bank-owned homes, which are expensive to insure and maintain. As a result Chase and Bank of America are paying significant cash incentives to encourage sellers to do a short sale and avoid foreclosure.

 

Recent examples include a client who sold a $200,000 home and received a cash incentive of $20,000 at closing, and the owner of a $350,000 home who received $30,000.  If you have a client who is – or should be – considering a short sale, this may be the incentive they need to move forward.  

3)  It's a seller's market.

 

Inventory levels in the Puget Sound area are the lowest they have been since 2006.  Low interest rates and affordable home prices have drawn additional buyers into the market. As a result, more buyers are competing for a shrinking pool of properties. That growing competition for homes has resulted in multiple offers and escalation clauses on many of our short sale listings. It's an ideal time to sell a home.   

Why agents are better short sale negotiators than attorneys

I have nothing against attorneys.  In fact, we always advise our clients to speak with an attorney about how a short sale will affect them. However, there are concrete reasons why agents experienced with short sales typically are more successful at negotiating a short sale than attorneys.

1) A short sale transaction will succeed or fail based on how experienced and effective the real estate agent is, not the attorney.

The structure of the purchase and sale agreement is critical to a successful short sale transaction. The number one reason that short sales fail is a lack of understanding on the part of the negotiator about how the short sale process works. Maybe they are unfamiliar with the intricacies of all the forms that need to accompany the purchase and sale agreement. Or they don't understand how lenders manage short sales. Or they insist on including language in the agreement that banks are not willing or able to approve. For example, a P & S agreement we saw recently that was written by an attorney included a 25 day closing deadline. Since the average short sale takes 60 to 90 days to close, the inclusion of this impossible deadline guaranteed the sale would not go through, creating frustration and lost time for buyer and seller alike. 

Deep understanding of the real estate process, knowing what lenders want, qualifying buyers, setting the right price, providing constant communication with all parties-  these are the keys to short sale success. And these are  skills unique to a real estate agent who specializes in short sales, not an attorney.                 

2) If you use an attorney to negotiate a short sale, will you or your client get stuck with the bill?

All short sale negotiators are paid for their work.  If the negotiator is a real estate agent, negotiating the short sale is part of the professional service that they provide and are compensated for through their commission.  There is no additional fee to anyone.   

Attorneys typically charge a fee of 1-2% of the purchase price to negotiate a short sale. Sometimes the lender is willing to pay their fee, but more and more often they're not. Since short sales sellers typically don’t have the money, that leaves the listing agent, buyer or buyer's agent to pick up the tab.   The listing agent certainly doesn't want to get stuck paying the fee. And it's tough enough to sell a short sale property-  why make it harder by adding the possibility of additional fees to the buyer and/or their agent?  

We were recently involved in a situation where a law firm negotiating a short sale neglected to have the listing agent or seller sign a services contract, leaving it unclear who was responsible for paying their 1% fee. Once the short sale was approved, the firm asked the listing agent to pay the fee of $3,100 and threatened to not allow closing until they were paid.

If you depend on a third-party negotiator that charges an additional fee for their service you are to a large degree at the mercy of their process and their timing. The best way to avoid being taken hostage by a third-party negotiator is for YOU to be in control of the sale.

The bottom line:  

• We believe that short sales are first and foremost real estate transactions, and they should be handled by real estate agents who are highly experienced in short sales.   

• Negotiating the short sale should be a part of the professional services that the real estate agent offers at no additional fee to anyone.  

If you're looking for legal advice, see an attorney.  If you're looking to sell a home, see a real estate agent.  

Tips For Pricing A Short Sale

We often get questions about the best way to price a short sale. In reality, many of the same principles that go into pricing a non-distressed property  apply equally to setting the list price of a short sale. Price depends on the location of the property, its condition, the availability of strong comparable properties, and the amount of competitive inventory.

When pricing a short sale,  the key is to strike a balance between what a buyer will pay and what a bank will approve. It's not unusual to see agents apply an across the board discount to a short sale property (for example, a 10% price reduction). This is a mistake. In so-called "hot" neighborhoods, short sales often can be priced at market value.  When the bank's appraiser does a value determination of a short sale property, they generally will try to seek out comparable short sales in the neighborhood. If there are none, the appraiser will use non-distressed properties as comps. If an agent lops $30,000 off the value of a home just because it’s a short sale, it's unlikely that such low offers would be approved by the bank.  

An added note: If you want to dispute a short sale valuation, and your client's loan is with Bank of America, BofA has launched a streamlined process for considering an alternate value.      

BofA launches faster way to dispute short sale valuations

Listing agents that disagree with bank valuations of short sale properties now have a new option. Bank of America has streamlined their process for settling valuation disputes during a short sale, making it faster and easier for agents to get the bank to consider an alternate value.  

The value of a property is established by independent third-party vendors shortly after a short sale is initiated. If a listing agent wants to contest that value, this is the new process:

How to dispute a Bank of America short sale valuation

1. Tell your BofA short sale specialist that you would like a reconsideration of the value.

2. The BofA short sale specialist sends you an investor-specific, easy-to-complete form that specifies all requirements for a successful value dispute.

3. You fill out the form and attach specified evidence.

4. You can expect a value dispute review within 10-12 business days once all required information has been received.

Evidence you need to provide to Bank of America to dispute a value

When contesting a home value, Bank of America requires compelling evidence to support your claim. Here are the guidelines outlined by BofA: 

• Do not reference property pricing amounts in the narrative on the form. This violates appraiser independence policy and is against industry standards. Any reference to pricing will disqualify the dispute. 
• Provide comparables that are recent, proximate (nearby) and similar to the property in question.
• “Recent” means sold within 90 days of the actual value document date.
• “Proximate” varies by location. In a rural area, for example, a home five miles away could be considered proximate.
• You will be able to provide additional notes to highlight characteristics of the comps.

When the dispute centers on property condition or hazards:

• Provide an itemized estimate from a licensed contractor on the contractor’s letterhead.
• Provide photos to illustrate the repair, condition issue or hazard you want to highlight.

The above is a summary of the new changes. Your Bank of America short sale specialist can provide additional guidance about the process.

3 Landmines That Can Destroy a Short Sale

There are some assumptions that a short sale negotiator can make that will wreak havoc on the process.  Here are a few common mistakes inexperienced negotiatiors make, and tips on how to avoid them.

Landmine #1: Assuming lender approval of an offer will automatically postpone foreclosure proceedings. 

In Washington State, lender approval of a short sale does not automatically halt a foreclosure sale. Once foreclosure proceedings are initiated, there are three parties involved in your transaction: the lender's loss mitigation contact, the lender's foreclosure contact (who is in a separate department), and an independent local trustee who has been hired by the lender to sell the property at auction.  Once lender approval is obtained, the relevant parties are supposed to take the necessary steps to take the foreclosure sale off the calendar.  However, there are instances where that does not happen, and the results can be disastrous. We recommend that agents always follow up with the loss mitigation department and local trustee to make sure they've received directions to cancel the scheduled foreclosure.  

Landmine #2:  Assuming that the short sale approval letter includes satisfaction of the seller's debt. 

Lenders may or may not issue a short sale approval letter to satisfy the buyer's debt or waive the deficiency in full.  Unless it is clearly stated in writing that the debt will be satisfied or the deficiency waived, you should assume that it is not.  While it is getting better of late, lenders can be notoriously vague on this subject in many of their letters. If you receive an approval letter that does not clearly outline satisfaction or a full settlement of the debt, it may require you to do further negotiation with the lender on your client's behalf. 

Landmine #3:  Assuming all banks have the same timeline. 

In the over 800 short sale transactions we've completed, we have seen timelines vary significantly from bank to bank. In our experience, after mutual acceptance is received it can take from 30 to over 90 days to get lender consent, depending on the bank. The investor on the loan may require another level of approval, and the existence of second liens and mortgage insurance can add yet more time to the process.  Knowing individual lender timelines is key in managing the expectations of the buyer and seller upfront.  

Some good news: Banks that use the Equator system- including Bank of America, Wells Fargo and Nationstar- have sped up the process considerably. The system includes deadlines and specific lender contact information, so it adds a level of accountability that helps you identify bottlenecks in the process and allows you to escalate things if necessary.