In this chapter:

• Qualifying sellers• Pricing short-sale listings• Frequently asked questions (FAQs)• Listing agents’ commission

concerns• Counseling buyers• Finding short-sale listings for buyer

clients

3. Anatomy of a Short Sale

3-1

• If short sale is best option, agents must be exacting and thorough in qualifying homeowner for short sale.

• Not every owner is a short-sale candidate and not every owner can be saved from foreclosure.

Qualifying Sellers

3-2

Qualifying Sellers

3-3

Agents should confirm:•Hardship•Sufficient time for short sale•Finance, tax, and legal professionals•Amount owed on property•Additional liens•Condition of property•Homeowner’s cooperation

Defining Hardship

3-4

Lenders will consider short sales for owners who experience:• Job loss

• Business failure

• Illness and medical costs

• Divorce or death of a spouse

• Natural disasters

Note: Loss of equity is NOT a hardship.

Sufficient Time to Accomplish Short Sale

3-5

To calculate:

1. Confirm approximate foreclosure timeline in your state

2. Subtract # of months that homeowner has missed payments

Contracting with Finance, Tax, and Legal Professionals

3-6

• Attorneys who work with distressed owners may allow for few fees upfront.

• Visit U.S. Foreclosure Network (USFN) as possible source: www.usfn.org

Contracting with Finance, Tax, and Legal Professionals

3-7

Qualified foreclosure attorney can help seller determine whether loan is:

•Recourse—borrower is liable for deficiency after short sale or foreclosure•Non-recourse—borrower is not liable

Determining What Is Owed

3-8

• Critical to have accurate assessment of what seller’s equity position is or isn’t

• To facilitate this, consider using pre-listing worksheet and seller short-sale checklist in Figures 3.1 and 3.2

Confirming Property Condition

3-9

• Inspect home and document any damages or items needing repair

• Contractors should be consulted for specific repair estimates

Pricing Short-Sale Listings

3-10

• Price property so seller receives offer from qualified buyer with realistic chance of closing

• No standard formula for what lender will accept

• Per Freddie Mac, target sales price is 88% of BPO

Estimating Net Equity

3-11

• Carefully estimate net equity

• Once listing is in MLS and offer of compensation is made, listing broker could be responsible for paying compensation even if seller doesn’t pay listing broker

• See Figure 3.3

Frequently Asked Questions

3-12

• Initial paperwork owners need to complete?

- Yes, owners complete an authorization to release financial information (Figure 3.4)

• This is just beginning of paperwork required for short sale

Frequently Asked Questions

3-13

• Who should sellers contact? - “Loss Mitigation”- “Work-Out”- “Asset Recovery”- “Loan Modification”- “Loan Reinstatement”

Frequently Asked Questions

3-14

• When should real estate agent contact lender?

- As soon as possible after taking listing

Frequently Asked Questions

3-15

• What should be asked of lender? - When should seller submit short-

sale application—now or with short-sale package?

- Will lender begin short-sale process by pre-approving the seller for short sale now or when agent has a contract?

Frequently Asked Questions

3-16

• What should be asked of lender? - What is anticipated timeline for

short-sale approval?- For junior lien holders: Is there a

formula for calculating what is required to release junior lien?

Frequently Asked Questions

3-17

• What must be disclosed? - State/federal disclosures are

required- No confidential information should

be disclosed without seller’s written permission

- Obtain written authorization to disclose short sale

Frequently Asked Questions

3-18

• Will seller pay income tax on forgiven debt?

- Review Mortgage Debt Relief and Emergency Economic Stabilization Act of 2008

- Taxpayers do not pay federal income tax on forgiven debt, provided the property is principal residence only

Frequently Asked Questions

3-19

• Is it better for seller to declare bankruptcy than pursue short sale?

• Should seller stop making mortgage payments?

• Will seller need liquid assets to cure a deficiency at closing?

- Beyond scope of real estate agent to answer

Listing Agents’ Commission Concerns

3-20

• Lenders not legally responsible for payment of any commission

• If you disclose in MLS, explain that reduction in gross commission will be divided among listing agent and cooperating agents

Listing Agents’ Commission Concerns

3-21

• Per Fannie Mae, servicers may NOT negotiate commissions for short sales below amount specified in the listing agreement (if listing compensation is 6% or less)

Counseling Buyers

3-22

• Ideal buyer candidates:- Few to no contingencies- Do not have to sell current

home- Patient and have time to wait- Have resources for repairs

• Use worksheet and checklist in Figures 3.5 and 3.6

Frequently Asked Questions

3-23

• How long will this take and what if buyer changes mind?

- 30 days or less or up to 6 months or longer

- Note: property value may decline while waiting for lender

- Contract addendum should stipulate how long buyer will wait

Frequently Asked Questions

3-24

• What about the earnest money? - According to terms of written

agreement- Should be deposited as required by

state license law based on date contract was signed by buyer and seller

Frequently Asked Questions

3-25

• When should home inspection and mortgage application be completed?

- For home inspection: per contract- For mortgage application: short

time frame

Finding Short-Sale Listings for Buyer Clients

3-26

• If buyer wishes to see potential short-sale properties, include “contingent” properties

• “Lender pre-approval”—ask listing agents what is meant by “pre-approved”

Questions to Ask Listing Agents

3-27

1. “Is the short-sale package ready for submission to lender?”

2. “How many liens are on property?”

3. “If more than one lien, what are they?”

4. “What is plan to satisfy all lien holders?”

Negotiating the Short-Sale Contract

3-28

• Contract is signed by buyer and seller—not lender

• Lender only approves contract

• The fact that seller accepts offer contingent on bank approval does NOT guarantee bank approval

Subsequent Offers

3-29

• Listing agent must submit all subsequent offers to seller all the way to closing – whether or not subsequent offers are “better” than first

Common Negotiating Challenges

3-30

• Low earnest money

• Inspections after lender approval

• Low offer issue #1—may put seller in danger of foreclosure sale

• Low offer issue #2—seller may be required to pay deficiency for low offer

• Low interest rate