Short Sales – How To Do Them

 

Greetings agents today were talking about short sales what they are and how to do them as they could very potentially be a more significant part of what we do is Agents depending on how the economy Carries On with as it relates to this this pandemic and we’re seeing in the news more forbearances I should quickly to find what a forbearance is a forbearance is when someone is struggling to make a mortgage payment and contacts the lender in the lender puts together a plan and a plan is usually a either a payment deferral so you the borrower might go several months without making a payment or often it’s a reduced payment and there’s an agreement where let’s see the power goes a year and their mortgage payments cut in half and then at the end of that year they continued back to what they were doing before and the Deferred portion of the painting gets added on to the principal mortgage amount but so we’re seeing that there’s a huge increase in forbearances okay and there’s with a massive unemployment of course there’s the potential for more foreclosures naturally I hope that this doesn’t happen I hope that we have a quick turnaround and things get better and if if people are unable to make mortgage payments or the residential real estate market declines then you’re going to see more short sales and foreclosures in general and there’s so much to be said about foreclosures and what makes what makes a property bank-owned like a bank-owned REO asset what a trustee sale is the courthouse auction the notice of default the notice of trustee sale all these time lines that go into foreclosure but I’ll save that for another podcast episode for now let’s focus exclusively on short sales because the short-sale opportunity precedes all of the foreclosure opportunities are foreclosure situations that I was referring to so as agents we you know we really Incorporated short sales as a as a mainstream facet of what we do in the rest in the recession in 2008 because prior to that and I actually was doing short sales prior to that I I think I did my first short sale in 2005 it was I mean if I said short sell to and ask for company they had no idea what I was talking about and and just to give you some history on it so markets marketing I did and this was your 2006 is when I really ran with this campaign and I continued it for some time but the leads I purchased were they came in Excel format and they were people that were 6090 and 120 days late on a mortgage payment and you had a phone number and so what I would do is I would call these people and I would talk to him talk to them about their scenario ask them how much their home is worth and their mortgage balance it was already clear that they were in trouble financially or they were unable to make their payment because that’s how they ended up on the lead lists these were people that were making a payment and and what I offered was a solution the solution was let me help you get out of being under this house that is is that you owe on the mortgage then to home is worth because at this time when short sales weren’t such a well-known concept you’d have to write a check if you want to sell your home so mean the last last eight years we watch the home. I used to go on this unprecedented rally and the implication is everyone has Equity because you probably put a down payment when you bought the property and then you had appreciation when you owned it so the seller sank how much do I get when this closes When I close escrow how much is it Escrow Company going to give me as my net proceeds they’re thinking about taking their equity and using it to buy another property or cashing out or whatever and so the conversation isn’t how much will it cost me to sell the conversation is how much do I get if I sell which makes sense of values have been going up and we’ve been in this business booming real estate market but in a big picture perspective that’s not realistic in the long run I mean that’s that’s not always how it is because there are closing costs you don’t always have Equity to absorb the closing costs does closing costs are cost to liquidate the I set which is there their property and that’s just being deducted from a huge chunk of equity so there’s a bunch of equity left over and those are the seller proceeds but what happens if real estate just stayed the same what it what if it was an appreciating and let’s say it didn’t go down either but you bought the property and if you bought it with a small down payment like an FHA which is 3 and a half percent down and it costs 4% to sell that property then you’re writing a check for the for the difference you go to ask for your the closing as a seller and you don’t say hey how much do I get out of this that’s was going to say you need to write a check for this amount to cover the cost of selling your home that’s not rare for people that have been home owners for decades terminate they understand how this goes when it’s we were we’ve been kind of spoiled us unique situation of just when do Ghibli low mortgage rates and other factors that have contributed to just two huge rally in the real estate market anyway so when I would contact these people often they owed a lot more than their home was this was worth so they were trapped because you’re you’re kind of stuck in a point where you’re getting foreclosed on foreclosures moved swifter back then by the way the process has been could become very drawn-out over the years but what what you could do as a solution and this is what I did is is let’s say someone over 250,000 more than their home was worth well you put their home on the market at fair market value and so you’re going to get an offer at $150 and less than what’s owed on the mortgage because that’s fair market value and you contact the lender and I’ll I’ll go to this slowly so I can explain because these are the steps that you eat that you’ll do in this the steps her are the same now as they were then for the most part and in terms of what you do to facilitate a short sale as the agent I would contact the lender or lenders if there is more than one and I would send them an authorization form now when you take a listing of someone that is is upside down which is another term is the underwater as well but that’s the kind of industry jargon term for people that that owe more than home is worth when you take a listing and you know that’s that’s going to be an obstacle you’ll want to ask that that seller for their most recent mortgage statements and then you’re going to have an authorization form an end car actually has an authorization form you can use to convey information on behalf of your client and thus I was going to put it in their information and the loan number in the lender and their social & it and you’re going to be listed as someone that is authorized to speak about private financial matters with the lender on the seller’s behalf because if you call a seller’s lender uses questions they’re going to say hey you’re a stranger we can’t share this private information with you so you going to take the listing and get that sellers authorization form the soldado relation form at to speak on your behalf and a mortgage statement you are going to contact the mortgage company or the servicer servicers just a company that collects payments just doesn’t make it simple you’ll see mortgage servicer often that’s the company that manages the mortgage for the mortgage holder so offended the mortgage company that that lent the money isn’t the same company that deals with collecting the payment and sending the bill and all the headaches of managing the payments and payment collection because that a term is used to so often now and it’s in again somewheres companies do service their own loans but either way the servicers the first point of contact and you’re going to contact them and send them over the borrowers authorization form that get a permit to speak on their behalf and let them know that you anticipate a short sale and you ask for a document checklist I or a short sale package sometimes they call that because they might the lender might have a bundle of documents that need to be filled out by the seller and request another form other documents that you need to furnish Okay so so you you’ve you’ve cut your listing agreement you’ve collected the authorization form you’ve made contact with the lender you put the property on the market and then you’re going to get an offer fair market value which is much lower than what is owed on the mortgage or mortgages then what you do is you contact an escrow company and you let them know that you need a closing statement an estimated closing statement these used to be called an estimated HUD is a I just be closing statement but the HUD How do you spell closing statement but the HUD was substituted actually replaced replaced with just there’s a a standard form now that is simply called a closing statement people still use the term hard but it’s dated anyway so you you have an estimated closing statement and escrow is going to fill it in with does Scheels price on the purchase contract that you received the commission the closing cost permitted taxes the payoff now here’s the interesting part about this estimate closing statement is that you’re putting all this information just like you would in a normal escrow but here’s the catch because the the seller owes more than the homes worth if you put all the figures in exactly as they stand you’re going to show the amount due to the seller being a negative number it could be in this case a hundred fifty thousand is it the seller owes 150 Grand more than their homes worth and they try to sell it well as Christmas a look if you want me to pay off the mortgages in this escrow which must be done to close escrow then you need to write a check for the difference and and so that defeats the purpose of a short sale because if someone can write a check on people sell at a loss all the time especially in situations where you have high purchase price properties and a lot of times our cash purchases and someone might have paid 5 million for a property and then a few years later have to sell and highest offer they can get his 4.7 and now they’re not getting their whole fighting back at closing only getting 4.7 of it now of course if you pay cash it you know you’re just getting less back of of your money your Papa Was a storage vehicle for your for your money for your cash and you’re getting a little bit less back of course taking that that haircut isn’t pleasant but it doesn’t sting as as you know that I guess we’re still just a little bit more when you can write a check and that is much more likely to happen if you have a mortgage because if you have to pay the mortgage off and you’re getting a lower lower purchase price than you paid there’s there’s more likelihood that to pay everything off you know all the debt to probably tax is everything at closing with a low purchase price lower than what you paid you may have to bring cash to closing so that could happen very easily in a scenario where what’s an FHA buyer let’s go back to that because there were tons of FHA Loans. Three and a half percent and then they’re there was other types of conventional financing with just a 5% down loan and then and then and then I mean there’s people that put 10 or 20% down and if a market changes significantly then and and and values drop that 10 or 20% and then Dare To Break Even point and they have to pay their closing costs out-of-pocket so anyway back to the original example of someone that owes $140 and more than their home is currently worth so if you go to ask girl and you have them fill everything out with the payoffs the current playoffs with the mortgage One Mortgage just to make it simple and then I’ll explain what you do if there’s more than one mortgage but let’s pretend in this scenario I’m talking about there’s only one mortgage and and that mortgage is far more than the Holmes worth escrows estimated closing statement will show the seller having to bring all that cash at closing to pay off that mortgage or else they can’t close what you’re doing a short sale is you’re going to Escrow you’re putting in the amount of money coming in which is that offer any amount of money going out balancing matching so there’s a break even with the money coming in so that at the at the bottom of that ledger cuz it closing statements just a ledger money coming in money going out to Second basic accounting Ledger well you’re you’re changing the numbers your arbitrarily making up a payoff to balance those numbers so if you’re off by 150000 then ask room I shave off $150,000 of the mortgage so if what’s owed on the mortgage is 480000 s Chrome I put a payoff for the Morrie to 330000 hundred fifty thousand dollars less and I’m just using kind of some round numbers here so just bear with me on this it’ll make sense and escrows shaving that down again so that at the bottom of the Ledger where you typically see how much money that’s what we’ve been seeing in this huge rally we’re going has Equity it’s going to show this are getting zero rather than the seller having to pay and so you take that estimated closing statement and you take that reflects the reduced payoff the short payoff to the lender and you bundle that with all this other paperwork to the lender has requested an offering its financial hardship documents because if you have $1000000 sitting in it as some account somewhere and you ask the the lender to reduce your mortgage by six figures or whatever might be interesting to say no just write a check you have all this money so financial hardship is important factor in all this you have to show that you’re asking for a reduction because you can’t you can’t pay it you don’t have the money you’re stuck you’re stuck in this house because it would cost you a hundred fifty thousand at closing that escrowed have you bring to the table to facilitate the close of which you don’t have and in the meantime you can’t make the payments so you’re creating an incentive for the lender to negotiate with you and for the letter to say okay this person’s not paying us so we’re already this hearty is is is a losing proposition for us as a institution that loans money for interest and this person will never be able to pay us because they’re their there they have no money and the markets gone down so the clatter we have has has lost his value so there’s all these factors that incentivize the lender to just take a loss and move on and so you’re going to send that reduced payoff estimate closing statement and there and ask for copy of the ball of the real estate paperwork and the MLS and your son to the lender and they have a a loss mitigation or short sale department or some sort of foreclosure Department that reviews all this and and they’re not dumb because agents of course try to get in the system on this just happens they they they find someone that wants to short sell they called someone intelligent investor and investor makes a lowball offer and it will packaged up a lowball offer and will you know that the seller doesn’t care because the seller just wants to be out of this mess and not owe the $150,000 you know in addition to what the property is worth so sellers me to make sure I’m on board with whatever as long as you can just get this property out of my hair and I don’t have to pay anything and I can just walk away from it meant then they’re happy because at the end of the day the seller is not going to make anything they just don’t want to have to cough up money to make it closed and so these agents will get some best for come along and make a lowball offer the seller goes along with it they just want to move the property all the banks going to do a BPO broker price opinion they’re probably going to do an appraisal or what you know one of those two things or both they’re in a look at comparable starting to look at your MLS listing and see how many days could you had it never asked you questions like okay you have a bunch of comparables that are significantly higher than what you know what you accepted as an offer why would you accept such a low offer and and how many years did you have this property in the market and they’re going to look at what you’ve done is an agent to procure the highest offer to submit because why would the bank be in any hurry to take a loss they want to know what they’re getting the most of the highest offer the market can deliver under the circumstances now it’s real simple if you have as the agent have have not truly advertises property on an open market so that the best buyer can come forward and make the highest offer then then the the bank is just going to Simply rely on comparables from their BPO and or appraisal unless they look we’re willing to do with short payoff but based on you getting an offer that’s much higher and that offer what should be in line with what the comparable say which means we’d only have to take a $50,000 loss not $150,000 loss so go back out there mark of the property and find it by its going to pay a lot more and yes we’ll take a loss when you get a higher offer and that that happens a lot that’s kind of a common scenario and that’s why the hardest parts in negotiating short sales is is I give you a scenario of an agent that might have cut corners but there are a lot of agents that do get the highest offer that the market will will deliver these agents will be out Mark in the houses prion that you know the MLS of course I properties syndicated to countless other internet sites so the the properties getting all the publicity it needs to do to get a buyer and when the buyer comes along the fires going to make a fair market offer because if the properties listed low a proposed listen really low you’re going to go Financial offers right if you list of property way below market value you’re going to have a lot of offers and you can have multiple offers and you can do counter-offers and actually did the price of property up and a good Agent could probably did that property up to market value or even higher just because there is a exuberance that comes in a bidding war if you list a property too high which is pretty common cuz every seller wants to get top dollar for the probably going to sit there for a week so you can hear crickets and you might get foot traffic and no one’s interested and then after the first couple weeks no one’s you can show your property in more so even if you get the the list price wrong the markets pretty good about telling you where you should you should be listed at because you’re there in a good activity in interest or not and you can kind of adjust from there so you’ll get this offer that is at fair market value and the lender might say look we think you can go higher and they refuse to a short sale unless you can even higher offer and you have to tell the lender no look I’m I’m showing you I had this on the market for 60 days I finally got an offer after 2 months of marketing this thing like crazy it’s it’s the same as with the concert showing yeah please give me the short payoff and that’s theirs that’s where the negotiation comes in its send me a lot of evidence being extremely tenacious and I want to touch on tenacity actually because that’s the number one characteristic or trait that makes a good short sale negotiator better than than the other I always negotiate of my own short sales because I had a vested interest as the listing agent and making a deal work and and I was just coming up completely aggressive and tenacious about it calling as much as I took emailing faxing whatever whatever I need to do to push because as they say the squeaky wheel gets oiled and I was always polite but I mean if if there is a lender in Southern California I would just drive there and and to drop paperwork off I mean I would it whatever I could do to to be nagging the whoever the contact was in the short sale department and and I’m getting my case heard or getting my concerns addressed I did and that’s why I recommend for anyone to Goshen short sell you have to be a complete psycho about it cycling a good way not talking about I just want to clarify so what you want to do is keep negotiating get the short payoff a approval you finally get a letter that acceptable to Escrow that the lender issues that reduces the payoff because in any escrow where there’s a mortgage escrow is going to have to get a payoff demand from the lender and and if you’ve been successful in negotiating a short sale during to get a reduced payoff demand demand and adjust the estimate closing statement so the numbers balance and when they do you are clear to close your short sale transaction now the in that middle part where out you’re going back and forth with negotiating and waiting it’s it can take weeks or months and I mean I did a short sale that I think took almost two years that was the extreme case I’ve had ones I’ve gone you very quickly but the most time-consuming part of the process is going to be getting all that paperwork to the lender they’re going to lose it there to misplace it the person that you’re talking to is going to leave their job and you have to talk to someone else and then they’re going to ask for that you know that they have to request their BPO appraisal I mean it you know you submitted this paperwork off to lender and there’s a lot of waiting and then that’s when you’re to be tenacious and push and push and push because getting offers not that really the hard part it’s the negotiation that really makes or breaks a deal now when there are two lenders it gets a little trickier because the second lender the second letter being the second position if the first lender forecloses on a homeowner II lender gets nothing because they’re in second position they’re in there in a subordinate lien position just like I’ll remember for me real estate exam property taxes and government leans they are first priority it when a property is sold and if you could like a County property tax auction does the County property taxes if they sell through a tax foreclosure tax auction then it wipes away the the subsequently means like the mortgage that does not convey to them to the investor that buys the property from the county getting off track here but the point is a subsequent and secondary position they get nothing and so the first lender knows this and so they don’t really budge on negotiating until the second shows a huge concession now the tricky part we need to Goshen short sales is that the second lien holder might be old like what’s a $100,000 a second mortgage might be for a hundred grand and the first night before like five hundred grand and you might say will look if both need to shave a little bit off of what’s owed I can make this work the first letter will say no you need to go to the second letter and have them take $5,000 of the $100,000 owed and then when they do that will reduce to whatever is needed to make the deal closed and then you’re you’re charged with this really difficult task of making a second lien holder only accept 5000 of the hundred thousands owed again negotiation going back and forth going up the chain of command at these lenders compromise to make a deal work I mean there’s it really is all about trying to bring to parties together which is what we’re good at as agents and having them come to agreeable terms so you’ll get that second mortgage payoff and then you’ll use that to negotiate a sure path for the first and then give everything to ask girl make sure it balances out with escrow on their estimated closing statement and then continue the transaction to closing so that that’s kind of an overview of of a short sale what it is how it works with the process is you know it’s a final note you’re you’re under this this foreclosure timeline because if you’re doing a short sale the homeowner hasn’t been making payments on their mortgage and you have a a foreclosure looming the background so what you need to do is number one move fast but you should do that anyway right because the whole reason you’re doing this is to get paid I mean is your job you’re doing this on speculation hoping that you can pull it off and get a paycheck at the end so what why wouldn’t you be going as fast as you can and pushing as hard as you can so there’s already a huge incentive to move quickly also you have the Foreclosure that can also be delayed I mean I’ve had it where there’s problems are going to trust you still on on Monday and I’ve had on the preceding Thursday or Friday I’ve had the trust you still delayed and the property the Foreclosure auction delayed so that if I was you more time so you can you can use the fact that there’s an active negotiation to delay and get an extension on how much time before the property goes to trustee sale so anyways those hurt some final thoughts on it again I’m always happy to chat on these topics or answer questions publicly or do follow-up answers feel like going to contact me for any questions Hunter@balboateam.com www.balboateam.com I do hope you found this podcast episode informative thank you for listening