I have often been asked how I was able to get into the market of short sales. Years ago, when lenders began offering 100% financing on investment and owner occupied properties, I knew (from historical data) there was going to come a time when the market was going to take a shot in the arm. Because of this, any lender who was loaning at 100% or, in some cases, 105% of CLTV, was risking the market position of their investment. Many home owners today are falling victim to this devastating problem in our mortgage market. The lenders answer to this is a multifaceted approach. The following are options each homeowner has when trying to sell a property that has lost value due to tumbling market conditions:
- Foreclosure. Many costs are involved when a lender forecloses on a property. Not only are there attorney’s fees, eviction fees and the possible cost of repairs to the home, but there is also the possibility of a greater loss when a home sells at auction for well below its market value.
- Loan Restructure. This may be a great option if the lender is willing to add missed payments to the end of the loan or if the interest rate can be reduced, but if the homeowner is in dire straights, this may not be enough to help.
- Deed-in-Lieu-of-Foreclosure. This involves signing the house over to the bank. Now the bank has become a real estate broker, with the burden of marketing and selling the home. Most lenders do not want this responsibility.
- Short Sale. The lender recoups most of the loan for a much smaller loss than other options. It is difficult going this route because account specialists (at the bank) who put your short sale package together may not receive any bonus on a short sale, as they would with a restructured loan.
Our discussion today, and in the next two articles, will focus on the Short Sale.
A short sale, for all intents and purposes, allows a homeowner to place the house on the market for the current market price, which is usually less than the principal of all mortgage loans on the property. This seems to be a good idea, since it allows the homeowner to get out of the mortgage without letting the property fall into the quagmire of “foreclosure” that we hear so much about today. However, banks are surprisingly reluctant to participate in this scenario. Many individuals and real estate agents who have tried short sales in the past have become very frustrated at the banks’ lack of response to requests for this mutually beneficial solution. Most banks would much rather coax a homeowner into modifying the loan than allow sale of the note on a property for what the bank perceives as “pennies on the dollar”. I will be discussing the most proven method of executing a short sale, as judged by my personal success with them — 40% as compared to the 20% industry standard.
Preparing Your Home for a Short Sale
In selling any home, preparation is key – of your representative, your home and your financial statements.
The first step is finding an agent with a proven track-record in closing short sales. Search the internet, interview local agents, ask friends and family, and perhaps even put an ad in the paper (or your favorite online classifieds) to find this special representative. Unfortunately, as you may soon find, very few real estate agents have actually closed a short sale. Any realtor can place a home on the market and submit an offer to the bank, but finding a team to be the metaphorical “squeaky wheel” in the bank’s ear long enough to garner success is quite a challenge. Even still, once you’ve found your winning team, there are still several tasks to do before you can actually list your home for sale.
If you watch HGTV or have browsed the internet, you’ll probably have found the overwhelming storehouses of information that guide you on preparing your home for sale. Many of these sources offer accurate and worthwhile advice — from mowing the yard and tidying the flower gardens, adding fresh mulch and pruning trees, to cleaning out closets and painting. The adage of “less is better” certainly applies to the furnishings inside your home. However, since staging and landscaping ideas are worthy of a separate discussion, we’ll save those details for another time.
Preparation isn’t limited to your real estate team and your house; you should also attend to your financial position. Remember, you are asking the bank to take a loss on their investment, so you must prove that you can no longer keep up with the payments. In fact, most lenders won’t even consider a short sale until you are at least two payments behind. It is imperative to paint a clear and truthful picture when presenting your situation to the bank, since the details will be thoroughly checked. The necessary documents may include (but are certainly not limited to):
- current pay stubs
- bank statements
- income tax statements from the past two years
- a balance sheet for your current list of bills
- utility bills and credit card statements that show your payment history (and possible delinquency)
You should begin gathering this information as early as possible, perhaps even before finding a real estate agent. I always have my clients collect a full file of financial information because all lenders prefer to have a full package upon submission for a short sale. This package includes the homeowner’s current financial position demonstrated by the items listed above, an offer on the home with the buyer’s prequalification letter or proof of funds, and a HUD-1 statement.
Preparation is a lot of hard work, but it may open doors that might otherwise remain closed and locked. In my next article, I will discuss the next steps in a successful short sale — the offer — as well as taking a closer look at what needs to be delivered to the lender to expedite the successful and positive handling of your file.