KWU___SHIFT_Distressed Properties-Listing Short Sales(SHIFT Tactic 11)
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1
Listing Short Sales
Roger Higle
> Helping Sellers When They Need to Sell <
SHIFT: Tactic 1
Distressed Properties:
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Acknowledgments
The author gratefully acknowledges the assistance of the following individuals in the creation of this
usly of their precious
a unique set of conditions, while also posing, and learning
mense economicseeking move ups,
Many of the top distressed property specialist agents who participated have literally invented theirs are
ived agents w pioneered taught here— about how tothrive in un
ller lly Williams evin Kauffman ver ith Tony DiCello
amilton ris Hellerllington Papasan
a Nace Tod Barton Son Nguyen Alexis McIntyreDavid Reed Aaron Rice Gene RiversBruce Hardie Stacia Thompson Rick GehaMary Keith Trawick Jeff Ryder Tamara HurwitzKatie Nelms Deborah Stafford Shirley MantynenSteve Mangelson Debbie Zois Kristina Arias
course. These busy agents, leadership, and KWRI leaders and staff gave generotime to provide insights, data, quotes, and editing time to this project.
The distressed properties phenomenon has createdstark contrasts with more traditional markets—in practices, systems, economicsopportunities.
The sellers are both distressed individual homeowners and institutions under impressure from shareholders and the government. The buyers are homeownersfirst time buyers, and investors with all levels of expertise.
businesses while building them. Some have practiced in previous distressed markets. Other
t isnewly arr ho have boldly much of whasurvive and usual times.
Gary Ke Kno K Fred Wea Scott Sm
aron HBarbara Horan vey
Sh ChMona Co Bryon E JayMartin Boum Kirk Wendy Shaw
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Notices
While Keller Williams Realty, Inc. (KWRI) has taken due care in the preparationmaterials, we do not guarantee its accuracy now or in th
of all coursee future. KWRI makes no warranties either
course, or in this
rcises that aretributions andmpensation under
illiams Markethypothetical. Theyake as a Keller
t Center is likelyults of the exercisess Licensee and nota Keller Williams
epartment.
system and the, Inc. byto market and
any derivatives owned by orcreated in cooperation with Corporate Consulting.
rpted from The Millionaire Real Estate Agent and SHIFT: How Top Real Estate Agentse Millionaire Real Estate Agent
is copyright © 2003–2004 Rellek Publishing Partners LTD. SHIFT: How Top Real Estate Agents Tacklecopyright © 2008 Rellek Publishing Partners LTD. All rights reserved.
Copyright notice
All other materials are copyright © 2009 Keller Williams Realty, Inc. All rights reserved.
Printed June 2009.
No part of this publication and its associated materials may be reproduced or transmitted in anyform or by any means without the prior permission of Keller Williams Realty, Inc.
expressed or implied with regard to the information, programs presented in themanual, and reserves the right to make changes from time to time.
This manual and any course it’s used as a part of may contain hypothetical exedesigned to help you understand how Keller Williams calculates profit sharing condistributions under the MORE System, how Keller Williams determines agents cothe Keller Williams Compensation System, and how other aspects of a Keller W Center’s financial results are determined and evaluated. Any exercises are entirelyare not intended to enable you to determine how much money you are likely to m
Williams Licensee or to predict the amount or range of sales or profits your Marketo achieve. Keller Williams therefore cautions you not to assume that the resbear any relation to the financial performance you can expect as a Keller Williamto consider or rely on the results of the exercises in deciding whether to invest inMarket Center. If any part of this notice is unclear, please contact Keller Williams’ legal d
Materials based on the Recruit-Select-Train-Manage-Motivate™ (RSTMM™) Winning Through Selection™ course have been licensed to Keller Williams Realty Corporate Consulting. KWRI has the exclusive right within the real estate industrypresent material from RSTMM™, Winning Through Selection™, and
Material exceTackle Tough Times appears courtesy of The McGraw-Hill Companies. Th
Tough Times is
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Table of Contents
CHAPTER 1: WHAT YOU WILL LEARN ................................................................ 7
..........................7
..........................8
..........................9
........................10
........................10
........................10
........................11
.................. 13
........................13
........................18
........................18
.................. 27
........................27
8
........................29
Specific Benefits for Sellers.....................................................................................................30
........................32
........................34
........................35
........................36
.................. 41
Lender’s Criteria: Necessary and Possible ............................................................................41
Homeowner Criteria ................................................................................................................42
No Short Sale? Pre-foreclosure Alternatives........................................................................47
Summary: Positive and Negative Alternatives for Homeowners in Distress..................51
Your Role in Homeowner Choices: Adviser and Fiduciary...............................................56
Issue: Arm’s Length Transaction...........................................................................................59
Series Objectives...............................................................................................
Listing Short Sales Objectives ........................................................................
Graduate Study: Where to Look Next ..........................................................
“Watch Out” Alerts .........................................................................................
Tips for You......................................................................................................
Course References............................................................................................
Tool Kit .............................................................................................................
CHAPTER 2: DISTRESSED PROPERTY TIMELINE ................................
Personal Shift—Through the Homeowner’s Eyes......................................
The Distressed Property Process—Before and After Foreclosure...........
Know Your State Laws and Regulations ......................................................
Distressed Property Timeline.................................................................................................19
CHAPTER 3: WHAT IS A SHORT SALE?.............................................
An Option Before Foreclosure ......................................................................
A Settlement..............................................................................................................................2
What Short Sales Accomplish ........................................................................
Win-Win Solution for Everyone ....................................................................
A Business Building Opportunity ..................................................................
Short Sales Are Just Plain Different ..............................................................
Your Options for Short Sale Business ..........................................................
CHAPTER 4: CRITERIA FOR A SHORT SALE.......................................
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Issue: Streamlining Short Sales...............................................................................................60
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........................66
........................69
........................72
75
........................75
Agent Goals
........................77
112
................ 115
..................... 115
................ 121
..................... 121
rk not defined.
SHORT SALE TOOL K IT .................................................................................... 127
Short Sale Package Documents........................................................................................... 127
Marketing Documents.......................................................................................................... 127
Miscellaneous Documents ................................................................................................... 127
CHAPTER 5: MINDSETS: SELLERS, BUYERS, LENDERS, AND AGENTS
Mindset Map: Traditional vs. Distressed ......................................................
Sellers .................................................................................................................
Lenders ..............................................................................................................
Listing Agents ...................................................................................................
Buyer’s Agents and Buyers .............................................................................
CHAPTER 6: THE SHORT SALE PROCESS............................................................
Overview: Four Phases....................................................................................
in the Short Sale Process..................................................................................77
Details: Ten Steps to a Short Sale..................................................................
FHA and VA Process Differences .....................................................................................
CHAPTER 7: LEAD GENERATION......................................................
Lead Sources and Lead Generation...............................................................
CHAPTER 8: EVALUATE LISTING SHORT SALES AND YOU .............
Wrap Up: Is There a Fit? What Is It? ............................................................
Evaluate and Act: Which Path to Follow?.......................Error! Bookma
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Chapter 1: What You Will Learn 7
Chapter 1: What You Will Learn
Keller Williams University (KWU) called SHIFT:the series are:
closures, andperties provides an
property market—the “market of the moment”—works,and how to gain a foothold in short sale and REO (bank-owned property) and win all the
mshis market as they
he siness differently—to succeed with
These courses will show you the following:
y business
• Action steps to take now, to propel your business forward
Canadian Distressed Properties
This guide is one of three in a series from Tactic 11 Distressed Properties. The courses in
SHIFT: Tactic 11 Distressed Properties: Listing Short Sales
SHIFT: Tactic 11 Distressed Properties: Listing REOs
SHIFT: Tactic 11 Distressed Properties: Working with Buyers These courses update and replace An Agent’s Guide to Short Sales, ForeREOs which was released in late 2007. SHIFT: Tactic 11 Distressed Prooverview of how the distressed
business you want.
These markets have grown dramatically and they have evolved—and so has Keller WilliaRealty expertise. Now you will learn from the top agents succeeding in tshare their experience and their wisdom.
Series Objectives T eries of three self study guides titled SHIFT: Tactic 11 Distressed Properties is meantto help you learn how to pursue your real estate busbuyers and sellers of distressed properties.
• Skills you will need to excel in this market, and how to develop them
• Mindset challenges you will face, and how to deal with them
• Resource demands that come with doing distressed propert
Research calls were made to Keller Williams agents and leadership in Canada. Theircomments, and data generated in SHIFT 2 Tour research in early 2009, showed thatdistressed properties represent a very small percentage of Canadian transactions—in the worst cases, less than 5 percent. Therefore, these courses focus entirely on U.S. markets.
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Chapter 1: What You Will Learn8
Listing Short Sales Objectives
ort sale listing
ave a workingd
h for information on new industry
mers are coming
e work most
he seller and preparing
ork Effectively with Buyer Agents: Learn the importance of educating
d Close Rates: Learn helpful tips toensure that offers are accepted and transactions close.
Recognize Sources of Short Sale Business: Learn how to find and attract buyers to
distressed properties.Make a Sound Choice: Discover what aspect of the distressed property business you willfocus on—is working with buyers the best option for you?
At the conclusion of this guide, Listing Short Sales, you will:
1. See the Opportunity: Understand the power and scope of the shopportunity in distressed properties.
Grasp the Market Background and Distressed Property Timeline: Hunderstanding of distressed markets, how they came to be, and how they affect agents anconsumers. Be able to effectively consult about this with homeowners.
Know What Changes to Expect: Learn where to watctrends and government policies that will change your market.
Understand Sellers’ Mindset and Motivation: Understand where consufrom—and the options they have. Be prepared to consult effectively.
Know Lenders’ and Asset Managers’ Mindset and Motivation: Understand where thultimate sellers are coming from—why they do what they do, and how toeffectively with them.
Know the Short Sale Process: Know all the steps, from qualifying tthe short sale package to submitting the offer and package, negotiation, and closing.
Know How to Wand creating a winning mindset in cooperation with buyer agents.
Know How to Improve Offer Acceptance an
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Chapter 1: What You Will Learn 9
Graduate Study: Where to Look These three guides are not the last word on any of these topics. Th“undergraduate level” material. They help you define and build y
Nextey are offered as strong
our foundation indistressed property. So where do you go to take your learning to the next level? Thefollowing are p is course:
ills pursue MAPS Coaching programs
aths you can take to further your education after taking th
To hone and fine-tune your sk for short sales and REOs. Offerings you’ll want to check outinclude:
• Short Sale Coaching with Knolly Williams
• Working with Buyers with Shon Kokoszka
There are a number of vendors—including some Keller Williamsagents— who offer certifications and designations connected withcourses you can purchase and programs you can attend.
Look for Keller Williams approved vendors on KW.com and on theKW Distressed Property Community site.
s a web-based The KW Distressed Property Community iinformation center where agents can ask and answer questions oftheir fellow agents and experts of Keller Williams Realty Inc.,(KWRI).
If you have a distressed property question that you want answeredor addressed, it’s the place to go—to communicate with otheragents about issues, learn about approved vendors, and much more.
You can access this community at www.agentmountain.com.
KWConnect posts a monthly real estate market conditions andtrends report for agents called “This Month in Real Estate.” Keepan eye on this report for analysis of new developments in distressedproperty markets. “This Month in Real Estate” is available in both video and PowerPoint.
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Chapter 1: What You Will Learn10
“Watch Out” Alerts“Watch Out” AlertsDistressed property markets, like all markets, are always changing. In distressed property
markets, agents need to b
des. It flags an area where
0
Distressed property markets, like all markets, are always changing. In distressed property
markets, agents need to b
des. It flags an area where
e especially watchful of changes.e especially watchful of changes.
Watch for this symbol throughout the gui Watch for this symbol throughout the guiyou need to monitor change carefully. Wherever possible, we’llpoint you to where you can get more information on the topic.
Guard your consultant and fiduciary role. Stay on top of:
• Laws: Federal, state, and local laws governing foreclosure andpossible solutions for homeowners being foreclosed upon.
• Industry Regulations: Your local real estate board and MLS’s
standards for listing, marketing, and closing distressed propertysales.
• Market Trends: Be especially watchful for important turns ofevents that impact market pricing and sales volume. Forexample, are defaults in your market increasing or decreasing?
• Your Business Mix: Default trends may be especiallyimportant to you if your business is currently built mainly onlisting and selling short sales, or if you are balancing a mix oftraditional and distressed properties business.
Tips for You
Watch for these tip indicators throughout the guide.
Course References
This icon appears when there is more information on the topic inother guides in this series, or in other courses offered throughKeller Williams University.
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Chapter 1: What You Will Learn 11
Tool Kit
This icon appears when a document is included in the course tool kit for agents’use in their marketing or in short sale transaction processing.
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Chapter 2: Distressed Property Timeline 1313
Chapter 2:Distressed Property
Timeline
Truth
To be effective with buyers and listing agents, you must understand thetimeline of distressed properties—from beginning to end—and whathappens with homeowners, lenders, buyers, and agents along the way.
This chapter is included in all three agent self study guides in the SHIFT: Tactic 11 Distressedcourses, and whichever
tressedntil the
ure.
before itause homeowners—for a wide variety of reasons—stop paying back their loans, and their lender declares them in default. If
rocess, from beginning to end. You’lled properties come to exist—both the legal side and the
Homeowner’s Eyes What’s happening in distressed property markets today is, more than anything, aboutcircumstances and recent history—markets always are. Knowing this world from the consumer’s perspective is a key ingredient in becoming an expert. Understanding the human and economicroot causes behind distressed property markets goes a long way toward building yourcredibility.
Properties series. Why? Because these guides are stand alone self study course you pick up first, a good basic understanding of what happens to disproperties is essential—from the time a homeowner faces a missed payment uproperty is foreclosed and moved to a new owner in some way.
The fundamental process at work that creates distressed inventory is foreclos
Foreclosure is a legal process that happens on a timeline. Some things happenbegins. Some happen after it ends. Foreclosure happens bec
they do not find another option, they lose their home.
Let’s examine all parties and all steps involved in the pget an appreciation for how distresspersonal and emotional side of it. You’ll see where buyer interest arises.
Personal Shift—Through the
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Chapter 2: Distressed Property Timeline14
Four Primary Causes of Personal ShiftFour Primary Causes of Personal Shift
4
As has become common in this market, a homeowner has an event in“personal shift.” The primary causes of this
their life that causes apersonal shift, which lead to distressed
quity from Market Shifts
3. Personal Crisis
In any of these e deeply personal experience.
situations, are:
1. Negative E
2. Unemployment
4. Consumer Overconfidence
vents or situations, foreclosure is a
An Agent’s Own Foreclosure Story
Knolly Williams is one of the top short sale agents in Texas, andKeller Williams Realty nationally. He and his small team have a veryhigh closing success rate (near 95 percent). Knolly offers short salecoaching through MAPS and is developing additional learningmaterial for agents.
His own personal experience with foreclosure led him into the shortsale business. “I had a music business for years,” he says. “Whendigital recording and distribution exploded, we did not change ourbusiness model fast enough. Revenue plummeted and I found myself
in default on my home. Eventually a short sale was negotiated forme. It allowed me to get on with my life,” he recalls.
Knolly turned to real estate as his next career—and short sales as hisspecialty. “It was a natural,” he says. “I’ll never forget how it felt toget the help I so desperately needed. Now I help others the same way. I really get where people in distress are coming from. I share mystory with them. It helps them be more open with me and get pastsome of their embarrassment and awkwardness.” Knolly has closedhundreds of n, just a fewshort sales since he made his career decisioyears ago.
Let’s explore the causes one at a time.
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Chapter 2: Distressed Property Timeline 1515
1. Negative Equity from Market Shifts
A negative equity situation arises when a homeowner finds the market value oproperty is less that the amount they owe on their mortgage. When a homeowner purchases
f their
arket value can
ppreciatinge. But declining
cial decision—downwardually, this.
This bar chart illustrates how owner equity can disappear. In this illustration, the downpayment was 10 percent and the market shifted down 20 percent. In the shifted market, thedifference between value and debt has become negative equity.
with a very high percentage of debt, a relatively small downward shift in m wipe out their equity.
A homeowner with significant equity can borrow against that equity. When amarkets are increasing overall value (and equity), this seems to make sensmarkets reverse the process. Unlike refinancing—a personal finanmarket movement leaves the homeowner with a sense of helplessness. Eventhelpless feeling can turn to fear if the declining value situation becomes acute
-10
0
20
30
40
50
60
70
80
90
100
Value
Debt
10
Before Shifted
Equity
Here’s what changed in the chart examp
Before Shifted
le:
Value at 100 Market declined 20 percent; value now 80 Arbitrarily set
Debt Set at 90—property waspurchased with 10 percent cashdown
Most mortgages pay interest first andprincipal later; debt is virtually the same inearly years
Equity Value was 100 minus 90 owedleaving 10 in equity
Turned from positive 10 to negative 10
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Chapter 2: Distressed Property Timeline16
2. Unemployment Triggers Mortgage Delinquencies
Clearly, significant value declines can create negative equity and negative equity severely
ents are too
limits whether and how homeowners can sell. But why are borrowers defaulting in record
numbers? The Wall Street Journal (May 29, 2009) offers this perspective: Why do borrowers default? Many have assumed it’s because mortgage paymhigh. But a new paper from the Federal Reserve Bank of Atlanta argues that unaffordablloans—with high mortgage payments relative to income from the time they’re originated— are “unlikely to be the main reason that borrowers decide to default.” Insteadunemployment and future home price declines are likely to play a bigger role.
e
,
ooks at loans that are unaffordable from the time they’re originated, and not atay start with low “teaser” rates before jumping higher.) Here’s a summary ofs.
t n 90-Day
ncy
yment t
(i.e. 8 percent to 9
cent to 20 percent
linquenciest to 11 percent
linquencies
Home Prices 10 percent decline in home prices
50 percent greater probability of default
By the way, the U.S. Department of Labor reports the length of people’s unemployedstretches (measured in weeks) is getting longer. Here’s the picture from 1940 to 2010.
(The paper lloans that mtheir finding
Market Factor Factor Movemen Impact o
Delinque
r Unemplo 1 percentage poin increase
percent)
10 pe
more deDebt to Income Ratio 10 percent increase 7 percen
more de
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Chapter 2: Distressed Property Timeline 1717
3. Personal Crises
On top of all this financial and economic shifting, personal crises hapare about health and family; some are
pen, as always. Sometriggered by the slowing economy. Common
edical expenses
Unplanned job transfers
at may force homeowners to become potential
Plays Both Ways
s in distressedetplace.
s—and in market recovery. Experts seem to agree that there isark of
ave taken to callin favor of
about why peopleple of thisd in other
aily newspapers. It appeared in the Austin American-Statesman on May 4, 2009. The commentary is based on a 2006 book by a professor, Jean Twenge, at San Diego
ere veryoverconfident about w e thingaffected the bankers who were giving the loans. Everybody was overconfident anddidn’t anticipate the downside, so when the downside came it was worse than anyoneimagined.”
Now that you have a better understanding from the homeowners’ view,let’s look at the complete timeline of events.
homeowner crises include:• Unforeseen large m
•
• Death in the family
• Divorce
• Job loss
All these events bring financial challenges thforeclosures in a shifted market.
4. Consumer Confidence
In these times, many are writing about what role confidence, or lack of it, play markets and foreclosure. Here are two views you may hear in the mark
1. Naive Confidence Can Help Much is being written in these times about the role of consumer confidence in downand distressed marketsome level of consumer confidence, or exuberance, which is the hallmrecovering and rising markets. Writers in major news organizations hthis mindset “naïve confidence”—the willingness to overlook risksrewards in markets.
2. Overconfidence Can Hurt In a shifted market that has become distressed, opinions aboundmade the choices they made that contributed to the result. One examopinion appeared in The San Diego Union-Tribune , and has been reprintemajor d
State University titled “Generation Me.” Quoting the book, “People w hat size mortgage they could afford and the sam
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Chapter 2: Distressed Property Timeline18
The Distressed ProThe Distressed Property Process—Before
elines, depending on local laws . Localsales—so you
or knows
oration (FDIC)
This process is described on a timeline, with definitions, that appear on the following pages.It includes both pre-foreclosure and post-foreclosure events.
8
perty Process—Before
elines, depending on local laws . Localsales—so you
or knows
oration (FDIC)
This process is described on a timeline, with definitions, that appear on the following pages.It includes both pre-foreclosure and post-foreclosure events.
and After ForeclosureForeclosure is a process that happens over varying tim
and After ForeclosureForeclosure is a process that happens over varying tim timeline differences can have a big impact on important details of distressedmust know your local foreclosure timeline, and what governs it.
The process begins with the point where a homeowner first misses a payment—
timeline differences can have a big impact on important details of distressedmust know your local foreclosure timeline, and what governs it.
The process begins with the point where a homeowner first misses a payment— they are about to do so—and ends after foreclosure, with the sale of bank-owned propertiesand the possible transfer of properties to the Federal Deposit Insurance Corp when banks fail.
they are about to do so—and ends after foreclosure, with the sale of bank-owned propertiesand the possible transfer of properties to the Federal Deposit Insurance Corp when banks fail.
Truth
Knowing the foreclosure process overall is a great first step. And to dodistressed property business in your community, you must know all
the relevant local rules and regulations as well.
Know Your State Laws and Regulationsstates, so be sure to
answers if you need
The foreclosure legal process can be completed in as little as 90–120onths or more.
how itocal title
companies, your ools are offering a foreclosure course.
Local Knowledge.
The timeline of the process can be different in some
know your own state laws and regulations, and seek them.
days. In others, it may extend to as long as twelve m
The foreclosure process and state and local laws governing l day class in their own right. Check around. Chances are llocal board, or real estate sch
happens are a ful
Tip! – Taking a Course? Always Seek
If you decide to take a foreclosure course from a national vendor, bealert to whether they have modified it to include steps that are theright ones for your local market.
If they have not, you’ll need to get that information from a highlyreliable local source—your Team Leader, an expert agent in yourMarket Center, or a title company are your best bet.
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Chapter 2: Distressed Property Timeline 1919
Distressed Property Timeline
Market
Shift
Personal
Shift
How to Read the Timeline
The timeline chart summarizes the critical details you must learn to be a dexpert. Though this course focuses on short sales, this chapter addresses all ste
istressed propertyps in the
g to local law or
for the items that appear:
1. Personal Shift (PS) – Things that involve or impact the homeowner directly. Forexample, the homeowner or individual seller faces a challenge such as a job loss,excessive medical bills, etc., that causes them to be unable to make their loan payment.
a. Market Shift (MS) – Things relating to the status of the property itself of theinstitution that holds the loan. For example, the market changes, home valuesdecline, lending regulations change, inventory increases, etc.
timeline. Make note of how many steps’ terminology or internal timeline vary accordin regulation of some kind.
The description of the timeline establishes three categories
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Chapter 2: Distressed Property Timeline20
b. Buyer Interest (BI) – Points in time when buyers become awareproperty that’s available—on the Internet, through MLS, or fromBuyer interest arises a
of distressedother sources.
t a number of different points along the way, indicated by
The items in each category are numbered PS, MS, BI, so you can refer back and forth to thetions.
1. Personal Shift (PS)
the “group of buyers” icon.
diagram and the descrip
These are things that involve or impact the homeowner personally.
PS-1: Missed mortgage payment(s)
The diagram assumes the homeowner occupies the home as their primary refirst sign of trouble comes when the homeowner misses a mortgage paymen
sidence. Thet.
s because of:
b loss, unwanted and expensive job relocation, divorce, death inthe family, or illness resulting in high medical bills
• Market shift – market value declines to the point where the home is worth less than
Homeowners miss payments for any number of reasons. Typically, it happen
• Personal crisis – jo
the owner’s loan balance
Truth
When one or more payments are missed, homeowners have the right
and responsibility to contact their lender to explore what can be doneto make the situation right. Lenders often prefer not foreclose if a
better option can be found.
PS-2: Notice of Default
laws, the homeowner will receive a Notice ofce is a formal
are in jeopardy.foreclosure process—in order to recover their
losses, or to get the homeowner quickly back on track.
PS-3: Deed in Lieu or Loan Modification
These are the homeowner’s two main options when they are behind on payments. Onecourse is swift, but risky. The other is slower, but can allow the homeowner to stay in theirhome.
Depending on the lender, and local foreclosureDefault within 60–90 days after one or more payments are missed. The notiletter from the lender advising the homeowner that their loan and ownershipDefault is what causes lenders to trigger the
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Chapter 2: Distressed Property Timeline 2121
• Deed in Lieu – This is very legal—but may also be very risky for the odefault. Why? A deed in lieu of foreclosure does not necessarily clear ajudgments against a property owner. The former owner may think thefurther demands only to find other parties (not part of the deed in lieu
after them for othe
wner in way all othery have escapeddeal) coming
r money they owe. Deed in lieu of foreclosure agreements usually value equal to
cting to provide new
because thement is
home value may be asatch for
s as the government works to keepmore homeowners out of foreclosure and in their homes.
rtain date.
closure
e property,otice must be
rom the propertylocal sheriff or
In some states there are provisions for homeowners to escape foreclosure by makingrepayment arrangements with the lender to “catch up” on the amount in arrears. That’s
redemption. In some states, there is also a reinstatement period that can actually extendbeyond the foreclosure date and even beyond a trustee or sheriff’s sale (auction) of theproperty. In these rare situations, if the homeowner completes catch-up arrangements, aperson who bought the home at auction may even have to give it back to the owner. Theauction winner gets their money back.
only happen if the parties can agree the property being signed over hasthe amount of the debt!
• Loan Modification – The U.S. government is afinancial incentives to lenders to remake loan terms with distressedhomeowners. Some of the early programs failedincentive or terms were inadequate. Now the governhelping lenders remake loans in cases wheremuch as 25 percent under the current loan balance. W more changes in these program
• Short Sale – This is the homeowner’s other option—a good one that will be coveredin the Market Shift and Buyer Interest sections that follow.
PS-4: Intent to Foreclose
The lender follows up with a written notice that they will foreclose by a ce
PS-5: Fore
A representative of the lender posts a foreclosure notice on the outside of thstating that the lender has taken possession and all inquiries until further n
directed to them.
PS-6: Eviction
If no sale has been arranged, and if the homeowner has not walked away f before foreclosure, they will be forcibly evicted on order of the lender. Aconstable typically enforces the eviction.
PS-7: Redemption/Reinstatement
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Chapter 2: Distressed Property Timeline22
2. Market Shift (MS)
These are things relating to the status of the property itself of the institution that holds the
property, thee balance are to be
says what will happen if the payments are not made! Conventional loanstypes and sizes—though not as many as before the current
ral Housing
(frequentlyents about down payments and property condition than conventional loans.
eowner hast a default.
e
wner in whichloan balance.
eriff’s sale is a common vehicle for getting foreclosed properties sold tos typically musthe sales are
foreclosed property.review” on theparties can go
MS-6: Assignment to Asset Manager
If there’s no short sale, and no auction sale of any kind, the property will remain bank-owned. The bank will typically turn the property over to either its own asset managementarm, or a third-party asset manager. Their job is to manage and market the property (you willsometimes hear the term “M and M Firm” used to describe them.) They may list propertydirectly for sale. These are the people who typically turn to specialized REO listing agents tolist and sell lender-owned homes.
loan.
MS-1: Conventional Loan
A mortgage deed is a contract that states the amount due on a loan to buy theterm of the loan, the rate of interest charged, and how payments on thmade. It usually alsocome in many differentdistressed property crisis.
MS-2: FHA or VA Loan
Homeowners can also get mortgage loans from the U.S. government’s Fede
Administration or Veterans Administration. The loans often have differenttighter) requirem
Another difference: FHA and VA will not approve a short sale unless the homactually defaulted. Some conventional lenders will approve a short sale withou
MS-3: Short Sal
A short sale is basically a negotiated settlement between the lender and homeothe lender agrees to accept a buyer’s offer for less than the homeowner’s total
MS-4: Trustee Sale
The trustee sale or shbuyers—frequently to investors who are regulars at these auctions. The buyerpay cash for their winning bid—either on the spot or very shortly afterward. Toften referred to as “courthouse steps” sales.
MS-5: Prelist Auction
This is another auction format—usually arranged by a lender that holds A professional auctioneer is hired and property to be auctioned is listed for “pInternet. Sometimes the preview properties are held open briefly so interestedinside.
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Chapter 2: Distressed Property Timeline 2323
MS-7: REO Listing with Agent
Listing bank-owned real estate (REO) can be a big business for distressed pagents, albeit with low profit margins. It is,
roperty specialist
three main waysListing REO properties is the subject of an entire guide in this series.
along with auctions and short sales, one of the
distressed properties are marketed and sold.
It’s called SHIFT Tactic 11: Distressed Properties: Listing REOs.
MS-8: REO Purchase
This is where you come in—as an agent for the buyer. REO properties are listed on MLSard contract approved by your local real estate
re occasions, banks fail. If they are federally chartered, they are taken over bythe chartering authority, under the direction of the Federal Deposit Insurance Corporation
IC then seeks real estate brokers to help sell the properties, or the FDICmay return to the prelist auction step and try to sell properties before seeking the help of
and are sold, usually, with the same standboard or MLS—with some very important exceptions and additions.
MS-9: Bank Fails; FDIC Takes PossessionOn relatively ra
(FDIC). The FD
brokers and agents.
Buyer Interest
Buyers have multiple opportunities along the way to learn about and look at distressedproperties for sale. The timeline chart identifies six of these situations:
ify propertiese foreclosure road, but are not yet foreclosed.
BI-2: Short Sa
Buyers will learn of short sales on MLS in their area, or via national searches of MLS data.Most MLS’s and real estate boards have requirements about agents identifying short sales ass
Short sales, like REOs, have unique features. One of the main
BI-1: Pre-foreclosure Sales
Buyers can search the Internet and local legal advertising and records to identthat have started down th
les
uch when they are first listed.
things—short sale buyers, like the agents themselves, will not knowinitially what price the bank or lender’s asset manager may accept fora sale.
There are other complications too. Refer to the companion coursefor more information on short sales, SHIFT: Tactic 11: DistressedProperties: Listing Shirt Sales.
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Chapter 2: Distressed Property Timeline24
BI-3: Trustee Sale
This “courthouse steps” auction sale is open to the public. Investors w
BI-3: Trustee Sale
This “courthouse steps” auction sale is open to the public. Investors who seek to buyets further in the process often frequent it. These are cash sales.
perienced auction company.
Like short sales, these listings go on MLS and are typically noted as REO (real estate owned),bank-owned, inst
REOs listed by an agent on behalf of a bank or asset manager is the
4
ho seek to buyets further in the process often frequent it. These are cash sales.
perienced auction company.
Like short sales, these listings go on MLS and are typically noted as REO (real estate owned),bank-owned, inst
REOs listed by an agent on behalf of a bank or asset manager is the
property before it g property before it g
BI-4: Prelist AuctionBI-4: Prelist Auction
This is another buyer opportunity. Prelist auctions can be large scale and well-attended ifthey are well-promoted by an ex This is another buyer opportunity. Prelist auctions can be large scale and well-attended ifthey are well-promoted by an ex
BI-5: REO Listed with an AgentBI-5: REO Listed with an Agent
itutional sales, or some similar designation.itutional sales, or some similar designation.
subject of an entire companion guide in this series called SHIFT:Tactic 11: Distressed Properties: Listing REOs.
BI-6: FDIC Sales
If a bank that owns real estate fails, under its federal charter the FDIC will assume control. The FDIC will then either hire a real estate broker and other firms to market or managethese properties, or it will go back to the prelist step first and try to sell that way beforegoing the listing route.
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Chapter 3: What Is a Short Sale? 27
Chapter 3: What Is a Short Sale?
fted rapidly into aift connected with
d it, were localized. It was felt mainly inrn California
a, and theexample.
d much more widespread marketcountry. A short sale is a proactive
losure is triggered by default—the homeowner fails to make one or morelder of the note, or mortgage loan, on their property.
default. One of
Short sales are not “new news.” They’ve been around for years.
For example, the high technology or “dot com boom” of the late 1990s shi“dot com bust” just a few years later, in the early 2000s. The economic shthat business cycle, and real estate cycle that followeregions where high technology companies had exploded to life—the Northe
Bay Area, Boston’s Route 128 Loop, the “Golden Triangle” in North CarolinCentral Texas metropolitan areas around Austin, for
Now, a few years later, larger economic issues have createshifts and short sales are increasingly common across thesettlement between the homeowner in distress and their lender.
An Option Before Foreclosure The threat of forecpayments to the ho
There are some alternate paths that can unfold when a home loan goes intothe best options is a short sale.
A Proactive Step
Any time a homeowner recognizes they are about to have trouble making their mortgageoices.
e time when a homeowner has been notifiedthey are in default—and before the property is actually foreclosed on by the lender—thepre-foreclosure stage of the process.
It’s this way most of the time, but not always—because a homeowner might be able to applyfor a short sale even before they have defaulted. This is relatively rare.
Either way, choosing to be proactive is the homeowner’s best option. A well-informed realestate agent/consultant plays a vital role in that process.
loan payment—or are already missing one or more payments—they have ch
Short sales happen, most of the time, during th
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Chapter 3: What Is a Short Sale?28
A SettlementA Settlement
8
The short sale concept is not new. It’s been around for years, but has garnered plenty off the Moment.”
into a seller’st less than the full amount due on their note (loan) when the
property is sold. In do doing, the lender is “short” a certain portion of the total due atclosing—thus the term “short sal
attention as one of the key forms taken by the distressed property “Market o
A short sale is basically a settlement agreement in which the lender buysproposal that the lender accep
e.”
Truth
A short sale is a contract between the buyer and seller—with at leastone contingency—that the deal is approved by the seller’s lender. Theseller’s lender is approving an agreement to settle for less than the full
amount owed.
In reality, a closed short sale may or may not be as simple as the description above. A keycomplication can arise, for example, if the lender decides afterward to pursue some or all ofthe remaining balance on the original loan—by seeking a deficiency judgment against theseller. We’ll cover this issue a bit later.
Truth
When customers ask “why a short sale?” the shortest answer is that a
short sale is a written negotiated settlement with agreed terms. Aforeclosure is a taking of their property with no terms and no written
settlement.
How Banks Decide
The determination about whether there can be a short sale is up tothe seller’s lender, and the lender’s position is summed up nicely byDavid Reed, Austin, Texas—a lender, commentator, and author.
David has consulted with Keller Williams Realty on lending issuesand wrote Financing Solutions, a great guide to financing principles,programs—including lending tips for both buyers and sellers.
David says, “If a bank thinks they can get more money out offoreclosing on the property than reselling it, then a short sale mightnot be in your future. If, however, the bank sees that a short saleoffer is reasonable and you (the seller) are not making money on theproperty, then your short sale request will likely be approved.”
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Chapter 3: What Is a Short Sale? 29
What Short Sales AccomplishIn a marketplace filled with pre-foreclosure and foreclosed properties, short sales offer a
generally more positive outcome for all parties involved.
Truth
Short sales are gaining ground as a solution for homeowners. In aKeller Williams survey of distressed property specialists, 55 percent
reported seeing more REOs in their market, but 78 percent said they were seeing more short sales. Also 29 percent said REOs were
decreasing, while 2 percent said short sale were decreasing in number.
lly to monitorMonitor Short Sale Trends: Watch the market carefutrends. One of them is the trend toward short sales. To succeed youmust monitor short sale trends and guidelines.
Lenders and the U.S. government are all getting more involved intrying to facilitate short sales. Why? Short sales are an important partof the distressed property landscape—because they provide anavenue that allows consumers to avoid foreclosure while protectingtheir ability to be homeowners again in the future.
Research shows several key positive outcomes that arise for
consumers, lenders, and agents:
1. Consumer Protection – They are a viable option that releasesconsumers from homeownership debt. Their home is sold andtheir lender forgives most, if not all, of their debt.
2. Lender Liability Avoidance – They are a way for lenders toregain a substantial amount of what is owed them—withouttaking the property on as a bank-owned liability
3. Lender Cost Reduction – The cost of a short sale to the lenderis typically significantly less than the cost of taking the propertyon as bank–owned.
4. Business Building Opportunity for Agents – Solving apersonal and financial crisis issue for a homeowner can positionthe agent who assisted as a lifetime resource for that homeowner,their family, and their friends.
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Chapter 3: What Is a Short Sale?30
Specific Benefits for SellersResidential foreclosures are dominating the U.S. economy in unprecedented
spring 2009, the real estate industry data tracking firm RealtyTrac announced t
numbers. In
hat one ineholds! It was
ontinue in many
The consequences of foreclosure make it something to avoid. Real estate agents have anopportunity to assist consumers— d advice and short sale expertise.
every 374 homes received a foreclosure notice in one month—342,000 housthe highest reported rate since RealtyTrac began reporting this data at the beginning of 2005.
Future projections of defaulting loans suggest this default trend may well cmarkets through 2012.
with goo
Truth
Only a minority of households that receive a notice of default fromtheir lender find a way to avoid foreclosure.
A number of things can happen when property becomes distressed, but distressed sellers’
nd complete a short sale.
3. Foreclosure – Be foreclosed and lose their home, credit, and ability to buy againanytime soon.
The U.S. government and the real estate industry are both focused on advising consumers tohelp them find the best path for them.
primary options are:
1. Modification – Re-make or modify their mortgage somehow
2. Short Sale – Apply for a
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Chapter 3: What Is a Short Sale? 31
Ten Reasons to Avoid Foreclosure
Keller Williams Realty short sale specialist Aaron Rice, Baltimore, Maryland
consumers a list of issues and challenges t
provides
hey will face if their home is foreclosed. He hasposted his list on the Keller Williams Distressed Property Community site. This summary was assembled from his list, and other agent input.
f This list can become a great flier to use with potential short sale candidates
ou can use.
lose that they haveortgage application and (many job applications) that they
ortgage rates.
here is no
0-plus points vastating credit
eowner will be ineligiblesale). A
have repaired.
udgmentale.
dit checks onut a potential
loyers run
ent positions— to military and law enforcement—can be jeopardized by a
ent or loss.
ure may bebt will be higher
9. You Have Alternatives – As your expert, I will explore every option with you and work toward the best resolution.
10. Do Everything You Can – While it may not seem like it now there will come a time where your current financial troubles will pass. You will feel much better knowing thatyou did everything you could to avoid this devastating financial consequence that somany people face today.
acing foreclosure. See the course tool kit for a sample handout y
1. Foreclosure Follows You – Homeowners will always have to dischad a foreclosure on any msubmit in the future. This can have an adverse affect on their future m
This is a credit item that is asked about specifically in credit inquiries. Tseven-year time limit on this item.
2. Credit Score Negative Impact – Credit scores will be lowered by 30(per loan). Along with bankruptcy, a foreclosure is one of the most deissues you can have in relation to future credit availability.
3. Ineligibility for a Government Insured Loan – The homfor a government insured loan for 5-7 years (only two years in a shortForeclosure is the one credit report item that is almost impossible to
4. Possibility of Deficiency Judgment – Your lender can seek a deficiency jagainst you and collect any amount they do not recuperate at bank s
5. Negative in Employment Credit Checks – Many employers run creprospective employees. Foreclosure is one of the top items that will pnew hire in jeopardy.
6. Potentially Damaging in Current Employment – Many current empcredit checks. A foreclosure can put a current position in jeopardy.
7. Negative on Security Clearances – Security clearances and governmincluding but not limitedforeclosure. Revocation of security clearance can result in job reassignm
8. Lower Tax Liability than Foreclosure – The tax liability in a foreclosmuch higher than in a properly negotiated short sale since canceled de
in a foreclosure.
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Chapter 3: What Is a Short Sale?32
Win-Win Solution for Everyone
2
Win-Win Solution for Everyone
Truth A short sale can be a win-win for everyone—the homeowner facing
foreclosure, the buyer, the lender. and the agent.
When completed with a high level of integrity and client service, a short sale is a win-win foras dominated the
ce ver time.
all parties involved. Although foreclosed bank-owned property volume hnews media, short sales seem to be coming on as a valid alternate solution that can reduprice pressure on markets o
Here’s how each party benefits in a short sale—homeowner, buyer, lender, and agents.
Relief for Homeowners
The seller will be able to walk away from the growing stress of impending foloss of their prop
reclosure anderty to a public auction. The seller won’t have foreclosure on his credit
report, though he will still take a hit for any missed mortgage payments and possibly for theshort sale itself. Foreclosure is an automatic substantial hit to a credit rating and stays on thereport for 7-10 y nding on howthe lender report
Note that the credit score impact of a short sale is reportedly under
ears; a short sale’s impact on credit scores may be less, depes it.
review by credit rating agencies and may change.
Bargain for Buyers
Buyers almost always end up owning a property they wanted—at a signif price, compared to what they might otherwise have paid for a comparabl
icantly discountede property.
This means, even in a downshifted market, the buyer’s chances of seeing an early positivereturn on their investment is improved.
Lenders’ Liability Reduced
Lenders see the benefits of a short sale in financial terms. It is expensive for lenders toforeclose on a home.
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Chapter 3: What Is a Short Sale? 33
Truth
According to the report by the Joint Economic Committee of Congresson April 11, 2007, “Sheltering Neighborhoods from the SubprimeForeclosure Storm,” each foreclosure costs lenders approximately
$50,000. That figure is now approaching $60,000 by some estimates.
These costs include the following items:
gal fees
le eviction costs
• Selling costs
property (now an REO) shows up as a liability
• Le
• Possib
• Taxes
• Insurance
• Maintenance
• Neighborhood association dues
If the lender does foreclose on a home, thaton their balance sheets. Their business is loaning, not owning.
Agent Client for Life Potential Is High Agents who specialize in short sales can grow their businesses. While doing so, they canenjoy the satisfaction of knowing that they have helped people in crisis. Develop your skillsin this nich are unfamiliar with short likely going to betheir top-o
They Need My Expertise
e and you can be a prime target for referrals from associates who sales. Additionally, if you save a client from foreclosure, you aref-mind agent for life.
Sharon Hamilton, a perennial top agent from Santa Rosa, California, says,“My clients really need me. They need my advice; they need my expertise.
People are looking for somebody who has the tools to be prepared for thismarket. That’s what I bring.”
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Chapter 3: What Is a Short Sale?34
A Business Building OpportunityIt just makes common sense. If you have the skill and tenacity to win a short s
and get an offer accepted and closed for a distressed client, there’s a good chance you will
A Business Building OpportunityIt just makes common sense. If you have the skill and tenacity to win a short s
and get an offer accepted and closed for a distressed client, there’s a good chance you will
ale approval,
beremembered by them and referred by them. You’ve basically accomplished a rescue mission,and life savers tend to become friends for life.
4
ale approval,
beremembered by them and referred by them. You’ve basically accomplished a rescue mission,and life savers tend to become friends for life.
Why I Focus on Short Sales Why I Focus on Short Sales
Tod Barton, Las Vegas, Nevada, lives in what some of his associatescall “REO world headquarters”—but he is a top short sale specialist.Ninety percent of all sales in the area are distressed.
A very few years ago, Tod was living a different life—as a dot comentrepreneur running a small company with a partner. They sold golf
equipment on the Internet.
“My partner decided to take up playing poker as a career,” says Tod,“and golf manufacturers were pushing the bricks and mortar modelfor distribution. That was going to be expensive, so I got out.”
Like some other top distressed property agents in Keller WilliamsRealty today, Tod says he doesn’t really know any other market.“When I got started, the market here was just turning south—and ithappened fast.”
Tod says he was drawn to short sales because, “I like helping people,but I’m not a great face-to-face person. What I am good at is
negotiating and persisting.” It was the perfect equation for short salesuccess.
Tod and three others he brought on board do more than 100 shortsales a year, and they have plans to ramp up higher. “It’s anegotiation and systems business,” Tod says. “Now that we’re doingthis much volume, homeowners are coming to us for help—and weare perfecting our systems for dealing with the lenders in a planned,scheduled way. I never thought I’d be here, but here I am.”
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Chapter 3: What Is a Short Sale? 35
Short Sales Are Just Plain DiffereLike REO, these transactions are significantly different from traditional sales. Here’s a
nt
s y of key ifference
ion
ummar points of d .
Phase Tradit al Short Sal RE HUD
ing ooa
tionar V
e O
Defaultdefaulted l
rn
ConvenFHA, o
l, A
Conventional, FHA,or VA
onve l FHA
Pricingresponsibility
Listing agent,CMA, and seller
C ntiona
BPO or appraisalcontracted by bank;listing agent C
nk sets value,based on listinggent
rai
u
HUD
Marketing Listing agent
MA aapp
Ba
BPO or ansal. BPOs
pdated
Listing agen Banmarketing and/or
listing agent.rketin rts
up
HUD or aHUD
managementand
marketing(M&M) vendor
actin
t k direct
Ma g repodated
Contr g MLS contract MLS contract, withbank adde it
bank contract
HUDcontract
LS contra
ndumMLS contract w
addendum, or
h bank
only
Offers By M ct By MLS contract;sometimes by bank
co
urs
ntract
By MLS contract;sometimes byban
By onlineclosedbidding
Financingrequired
oclosing
k contract
24–48 hbefore
24–48 hours beforeclosing
24–4before closing
7–10 daysbefore closing
Acceptance Seller
8 hours
Seller and Bank Bank HUD
Closing Date certain. Title/escrow
company choicenegotiated by
parties
Date may be postponed. Listing
agent’s or Bank’s titlecompany
Date usuallycertain. Bank’stitle company
Date certain.HUD’s title
company
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Chapter 3: What Is a Short Sale?36
The other two courses in the SHIFT: Tactic 11 Distressed The other two courses in the SHIFT: Tactic 11 Distressed Properties:
6
Properties:series— Listing REOs and Working with Buyers —delve more deeply intothe REO and HUD-related markets, and the listing and sellingprocess differences they present.
_
Your Options for Short Sale Business
lved. These are the
t sales youes—learn it, or master it.”
ort sales have become a Market of the Moment option that’s too big to ignorets you meet to the
d to end.
tough negotiating phase with lenders andother lienholders, and bringing the deal to closing.
specting for leads, qualifying distressed sellers forest over to a
1. End-to-End Short Sale Agent
Handling short sales, especially in volume, can be lucrative and satisfying. But it’s not abusiness for everyone. Fortunately, there’s more than one way to be invooptions.
Knolly Williams, a top short sale agent in Austin, Texas says, “Really in shorshould think about having only two choic
His point: Shin many markets. Whether you choose to know enough to steer prospecexperts, or become an expert yourself, is your call.
Your choices are:
1. End-to-End Short Sale Agent – Handling the short sale business en
2. Processor/Negotiator – Handling the
3. Referral Only – Focusing on proshort sale, preparing a document package and offer—then turning the rprocessor/negotiator to complete the transaction.
This means doing the business from “soup to nuts”—all of it. It means you are prospectinge way througher, through
n
for the leads, prequalifying the promising ones, and then taking the deal all ththe process, from assembling and submitting the application package and off
egotiation and closing.
Truth
Most agents who decide to go full bore and do end-to-end short salesare driven by a desire to truly help distressed sellers. They have done
their homework and believe no one is better qualified to representsellers in lender negotiations than they are.
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Chapter 3: What Is a Short Sale? 37
2. Negotiator/Processor
Some agents and their teams become proficient at the hard work and detail of pushing asful
tion to detailfee.
ve sprung up—some are localbusiness from a
much larger local or regional agent network. Others operate nationwide.
Many charge a flat fee for their service. Others want a percentage of the commission.
contract and all the associated paperwork through the lender’s representatives to a succes
closing.
Because this is arguably the hardest part of the business, requiring great attenand persistence, some agents would rather have someone else do it—for a
Short sale negotiators and servicing companies of all sizes haand focus just on assisting agents in their Market Center. Some generate
TruthSho reat demand—sort Sale Negotiator/Processor is a service in g
much that some agents have developed short sale servicing staffs sothey can do their own and third-party business. Some have become
“negotiators” for other agents as a full-time pursuit.
Market Center Leaders Promote Servicing Programs
he
Benefits of Third-Party Services
Market Center leaders have played an important role in helping agents tackle tcomplexities of short sales.
Team Leader Tasha Manzano, Carlsbad, California, points out that her Market Center madea deliberate commitment early on to use short sale servicers to negotiate details of deals. “It’show we were able to get going quickly in short sales when our market turned,” she says. “Wealigned with a servicer named Justin Ryan and he’s proven to be a great resource for ouragents.”
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Chapter 3: What Is a Short Sale?38
Others have taken new directions, opening up needed services for agents.
iams Realty in
8
Others have taken new directions, opening up needed services for agents.
iams Realty inSon Nguyen, formerly Team Leader for Keller WillSon Nguyen, formerly Team Leader for Keller Will
Riverside, California took a new direction when he became acofounder of Partner First, a short sale and REO education andservicing company.
Partner First certifies agents through its short sale and REO trainingprograms, and offers a network to link distressed property specialistagents with listing opportunities across the country.
Choosing a Negotiation/Servicing Vendor
The abundance of short sale opportunities in markets large and small around
produced a typical entrepreneurial response—hundreds of short sale s
the country has
ervicing providers;ed.
you don’t want tou do?
dors, vetting their results and thested on the
erty Community—an online forum that’s part of Garylington heads
all kinds, and
ale processors are no exception.
rted a short sale negotiation business of her own.in general the smaller providers are a good way to go. Their charges are
they seem to care about the outcome, not just about the fee. Their up-or says they won’t get paid until my team and I
n:
• Fees
• Close rate
• Agent referrals
• Verify specific properties they’ve closed
local, regional, and national (marketing on the Internet) have emerg
The question is if you’re getting involved in short sales and have decidedhandle the complexities of negotiating with the lender, or lenders, what do yo
Keller Williams Realty continually looks at venrecommendations of Keller Williams agents. Recommended vendors are poKeller Williams Distressed PropKeller’s Agent Mountain site. Keller Williams Chief Product Officer Bryon Elthe vendor screening and business relationship process.
Agents network among one another continually about real estate vendors of
short s
Kristina Arias admits to a bias—she has staShe says, “I think more reasonable andfront fees are small. I like it when a negotiatget paid.”
Kristina’s suggestions for due diligence verificatio
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Chapter 3: What Is a Short Sale? 39
Start Your Own Negotiation Business
Short sale negotiators and processors are proliferating around the country. Some are
ing with you who have great skills and persistence inerwork, you may
tina Arias inthe Phoenix area has started a business built from her own short sale practice. She has strongopinions about servicing, and advice for other agents trying to solve the short sale servicingchallenge.
national. Many are local. Their fees vary widely. Some may get as much as 30 percent of the
commission from each side of the deal.If you have someone (or ones) work following through with loss mitigator communication, negotiation, and paphave the foundation for a servicing business.
Some top agents feel offering negotiation services is a great opportunity. Kris
Short Sale Servicing Story
“I was not pleased with the performance I saw from larger nationalshort sale servicing suppliers,” Kristina Arias says. She’s sure she’snot the only agent who feels that way.
“I think local providers are more in touch with their market, and aremuch more likely to care about their relationship with the agent whohires them—and with getting the seller and buyer closed.” she says.Kristina also feels local providers who maintain a modest scope ofbusiness have better trained people working the servicing issues.
Fee structure is a point of difference too. “In our case, we charge amuch more reasonable fee and don’t collect most of what we charge
our servicing clients until the deal closes,” says Kristina.
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Chapter 3: What Is a Short Sale?40
3. Referral Only
Another option is to refer your short sale leads to short sale specialists and let work, while you move on to other business—or generating still more profitable leads. This is
them do the
every bit as viable an option in distressed property as it is in more traditional real estatemarkets.
Referral Success
Kevin Kauffman, a top short sale team member in the Tempe, Arizona, area with hispartner Fred Weaver says, “We’re completing more than 100 short sales a year. We’re taking about five referrals a month in that mix—referrals from other agentsthat become short sales for us. It’s a big part of our business. And the agents gettingreferral fees from us are helping clients without having to commit to the short salespecialty full blown.”
“We got into short sales in part because we have a clear vision of the businessbuilding part of it, “ adds Kevin. “We’re helping people—our own clients andreferral clients—through one of the hardest times in their life,” says Fred. “Coachingand guiding them creates fans, future buyers, and even more referrals along the way.”
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Chapter 4:Criteria for a Short Sale
Remember—a short sale is a negotiated settlement, and the lender is in charge. In a shortsale, a lender is basically forgiving a substantial part of the homeowner’s original mortgage
amount
Lender’s Criteria: Necessary and Possible
loan and accepting, instead, the proceeds of a sale that will return less than theowed.
Truth
Before there can be a short sale, the lender must be persuaded that it isboth necessary and possible.
Here’s what necessary and possible mean, from the lender’s point of view:
make their.
• Possible – Because the lender sees evidence that the home will sell for what thelender considers a reasonable percentage of market value.
In a successful short sale, prequalifying the seller and their circumstances is paramount— an stently mention ascrit
• Necessary – Because there is convincing evidence the owner cannotmortgage loan payments
d must happen before anything else. These are the criteria agents consiical to build a successful short sale:
Truth
A short sale’s selling price is all about the lender’s bottom line— meeting their net proceeds requirements for that property—a
percentage of the current market value.
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Chapter 4: Criteria For a Short Sale42
Homeowner Criteria These criteria relate to the homeowner’s situation, but they are evaluated through the eyes of
ntract for a short sale to be approved, but the final approvingthe agent want to see several things—to feel
appen:
wner’s Personal Involvement
4. Upside Down on Loan-to-Value
both the agent and the lender. The seller must sign the coauthority is the lender. Both the lender andassured a short sale can h
1. The Homeo
2. Documented Hardship
3. Loan in Default
5. Property Is Unaffordable
1. The Homeowner’s Personal Involvement
Homeowners in these circumstances are as angry and upset as anyone stricken by some kindof personal financial disaster. They never considered that home values would decline asmuch as they did in their area. They feel cheated, but—unless they are willing to wait for a
ell, it will haverecovery—they are “stuck” in an unfavorable position. If they are going to sto be a short sale.
Truth The homeowner must be willing to cooperate with the agent, lenderand buyer. The homeowner will have to turn over private documents
and be willing to wait for answers from the lender, while makingnothing in the sale.
Send Them a “Disqualification” Package
Top short sale agent Kevin Kauffman, Phoenix, Arizona, is one of many who advocate notmeeting face-to-face with potential short sellers—but instead sending them w his “disqua
hat Kevin callslification” package.
“First I send them to my website, where they can read what a short sale is about—includinga FAQ section that describes, among other things, what they are going to need to do tomake it happen with me,” Kevin says. “A seller who will take the time and initiative tocomplete all the information the written package requests is a seller we can work with.”
Most top short sale specialists have similar postings on their websites, or on blogs linked totheir websites.
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Chapter 4: Criteria For a Short Sale43
You can help a homeowner feel more comfortable with the short sale proctheir options with them. T You can help a homeowner feel more comfortable with the short sale proctheir options with them. T
ess by discussingop agent Kirk Nace uses the following script in appointments
with potential short sale clients.
closure. Do you
3
ess by discussingop agent Kirk Nace uses the following script in appointments
with potential short sale clients.
closure. Do you“Here’s what your situation is: you’re facing a fore“Here’s what your situation is: you’re facing a fore want to go through the foreclosure and be buried in the property andburied from a credit standpoint for years, and years, and years tocome? Or would you rather find a way to work through that? Hereare your options …”
MAPS Short Sale Coaching
For additional scripts in working with short sale clients, and to putaccountability in place in your business, sign up for MAPS’ Short Sale
coaching program.
2. Documented Hardship
The best way to win a lender’s support for a short sale is to demonstrate hardship. It may bea job transfer
.
xplained in writing—through a hardship letter—and with a well-al statement.
s, which only
due to uncovered medical bills, death of a working spouse, divorce, or even with tough terms
Hardship must be edocumented financi
The letter and statement also must be supported with key financial documentthe seller can provide.
3. Loan in Default
The homeowner is already behind in payments. Different states and different lenders createe principle is a that a homeowner seriously in default generally hasaving a short sale proposal accepted than a homeowner who is not
But, every rule has exceptions, and this one certainly does. Many agents shared stories for
this course of owners not in default who managed to get a short sale approved andcompleted. It happens. It is not common.
varying timelines—but tha much better chance of hin default.
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Chapter 4: Criteria For a Short Sale444
Tip! – FHA Requires Default Tip! – FHA Requires Default
A key exception of this kind happens with FHA loans. When the
homeowner has an FHA loan, an application for short sale may beaccepted by the lender, but the homeowner must be in default beforean accepted offer can be approved.
In a short sale, a homeowner’s financial statement must be accompanied by documentationthat the
nthly basis.
that the seller is in no position to bring money to theey owe!
showing income and expenses that are out of balance. This evidence supportshomeowner simply can no longer afford the home on a mo
Another symptom of “unaffordable” isclosing table to close the gap between market value and what th
4. Upside Down on Loan to Value
A common occurrence these days is the homeowner who finds themselves “upside down”ng more than their home is worth in the current market.
be a factor if a
erse the process,
ement leaves thehomeowner with a sense of helplessness. Eventually, this helpless feeling can turn to fear ifthe declining value situation becomes acute.
The bar chart illustrates how owner equity can disappear—in this illustration, the downpayment was 10 percent and the market shifted down 20 percent.
In the shifted market, the difference between value and debt has become negative equity.
or “underwater”—owi
Whether the homeowner had equity originally, and how much, may NOTlocal market turns down severely.
Upside Down Example
A homeowner may borrow against equity in their home. When appreciating markets arecreating more equity, this seems to make sense. But declining markets rev
and the reversal can happen fast.Unlike refinancing—a personal financial decision—downward market mov
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Chapter 4: Criteria For a Short Sale46
Personal Crises
On top of all this financial and economic shifting personal crises happen, as alare random and personal; some are triggere
ways. Somed by the slowing economy. Common homeowner
e:
s bring financial challenges that may force homeowners to become sellers. Inmarket, an owner who needs to sell is facing trouble that may force a short
Cle y severelylimi lting in recordnum
ayments
lanta arguesoans—with high mortgage payments relative to income from
eclines arerdable from
“teaser” rates
g higher.)
The Fed report estimates that a 1-percentage-point increase in the unemployment rate boosts the chance of a ninety-day delinquency by 10%-20%, and a 10-percentage-point
fall in house prices raises the probability of a default by more than half. A 10-percentage-
point jump in the debt-to-income ratio, meanwhile, increases the chance of a 90-day
delinquency by 7%–11%.
crises includ• Job loss
• Unplanned job transfers
• Death in the family
• Divorce
• Unforeseen large medical expenses
All these eventa downshifting
sale or a foreclosure.
Unemployment
arly, significant value declines can create negative equity and negative equitts whether and how homeowners can sell. But why are borrowers defaubers? The Wall Street Journal (May 29, 2009) offers this perspective:
“Why do borrowers default? Many have assumed it’s because mortgage p
are too high. But a new paper from the Federal Reserve Bank of Atthat unaffordable l
the time they’re originated—are “unlikely to be the main reason that borrowers
decide to default.” Instead, unemployment and future home price d likely to play a bigger role. (The paper looks at loans that are unaffo
the time they’re originated, and not at loans that may start with low
before jumpin
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Chapter 4: Criteria For a Short Sale47
No Short Sale? Pre-foreclosure
Alternatives
ts of reasons why a short sale may not be the best option for a
all their options
their home.process of bankruptcy, has private mortgage insurance
is upon you, you may not be able to complete a short sale,
1. No, for Personal Reasons
There are several sehomeowner—or may not be an option at all:
1. Personal reasons
2. Legal reasons
3. Extreme negative equity—homeowner walks away
Some homeowners, for whatever reason, simply have not thought throughand the consequences of the critical decision they face—to sell their home short, allow it to
be foreclosed, or to do everything possible to keepIf the homeowner has begun the(PMI), or if the foreclosure dateeven if the homeowner meets the other qualification criteria.
Some homeowners in distressed situations are not motivated to pursue the solutionsavailable to them. Their distress may have devastated them emotionally and fipoint where they simply want to be foreclosed, or walk away.
nancially to the
Agents’ Ethical and Fiduciary Responsibility Agents have an absolute ethical and fiduciary duty to advise homeowners whose propertiesare distressed. These potential sellers have other options which include doing whatever theyc
an to keep their home. The question is do they want to.
Truth
As a practical matter, the best solution for those who want to keeptheir home is to try for a mortgage modification with their lender.
The distressed property crisis in America has created plenty of people and firms offering tohelp consumers modify their mortgage loans. Some of these resources are credible andprofessional, others are not. A “buyer bewares” situation has been created.
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Chapter 4: Criteria For a Short Sale48
Your job includes counseling homeowne Your job includes counseling homeowners about their options:
entials and track record of anyone
es to request a loan
ase theirtill a candidate for a short sale. In the process of applying for a
modification, they have probably created most of the documentation their lender will needto approve a sho
8
rs about their options:
entials and track record of anyone
es to request a loan
ase theirtill a candidate for a short sale. In the process of applying for a
modification, they have probably created most of the documentation their lender will needto approve a sho
1. They may be able to keep their property.
2. They should carefully examine the cred
1. They may be able to keep their property.
2. They should carefully examine the cred
offering to help them do so.offering to help them do so.
3. They must be aware they can approach their lender themselv workout or modification.
If the homeowner goes down this road, they may not be successful. In that cproperty is likely s
3. They must be aware they can approach their lender themselv workout or modification.
If the homeowner goes down this road, they may not be successful. In that cproperty is likely s
rt sale.rt sale.
Tip – Pay a Fee for Something You Can Do Yourself? Tip – Pay a Fee for Something You Can Do Yourself?
David Reed, Austin, Texas, is both a lender and a frequentlyinterviewed expert, and author, on the subject of real estate loans. Hehas strong views about the risks consumers may accept when theydecide to have a third-party deal with their lender about a loanmodification.
“These firms offer to take a fee and then negotiate with the lender onyour behalf,” he says. “Typically these companies are in businesslegally, but thet’s no guarantee of that. Sure, a credible experiencedloan modification company may be able to help, but it will cost youfour-figure money—in up-front fees—and there’s no guarantee of apositive reuslt. People should understand they can call their lender
themselves.”
There’s more detail on mortgage modification later in this module— and also in another SHIFT: Tactic 11 Distressed Properties coursemodule, Working with Buyers .
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Chapter 4: Criteria For a Short Sale49
2. No, for Legal Reasons
There are also legal and process reasons why a property may not be a short sale:
e must approvestates, the homeowner is
kruptcy laws. Keep in mind that bankruptcy is a legalshould not dispense legal advice.
es business sense for them. If their potential loss from a
may be willing to do a short sale. If they
In some cases, lenders will forestall foreclosure if the short sale process has been initiated. Ifthe public auction date is less than ks off, you can contact the lender to exploreother options, or to initiate the sh rocess.
Bankruptcy
If the homeowner has filed for bankruptcy, the bankruptcy court or trustetheir entering into a listing agreement. Additionally, in someprotected from foreclosure by banissue. Unless you are also a lawyer, you
Private Mortgage Insurance (PMI)
PMI insures the lender against the homeowner defaulting on their loan. The lender considersshort sales only when it mak
foreclosure exceeds the insured amount, the lenderfeel their loss is covered by insurance, they won’t be interested.
Foreclosure Date Imminent
two weeort sale p
Truth
If the lender will not postpone the foreclosure, you should keep inmind that you may not have enough time to complete a short sale. The
other side of the coin is that, if persuaded by you, the lender canusually postpone the foreclosure process immediately.
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Chapter 4: Criteria For a Short Sale50
3. Extreme Negative Equity—Homeowners May Walk Away
Agents and lenders say many homeowners, unfortunately, feel they must just walk awayhey feel they have no hope of rescue.
t know their
homeowners
it to them.er a down
ave been studying
al and Social
the solutions by the
ortgage
of negativeequity (nearly one-in-five households have mortgages that exceed the value of their
homes) may require some rethinking in addressing the foreclosure crisis.”
Here’s ight be using. It uses aal, rapid ecline as mption:
from their property—especially when t
There can be two main reasons why they do it:
1. Hopelessness, based on lack of information —they simply do nooptions, so they can’t explore them and simply give up.
A deliberate economic calculation —in severely declining markets, somesense, or calculate, that their home’s value has simply fallen too far. The time it will take todig their way out and regain positive equity—even with a rescue—is not worth They calculate they can take a few years to rebuild their position, perhaps gathpayment, and then buy a comparable home again—for less.
Northwestern University and University of Chicago business schools h
the phenomenon of calculated “walking away.” Their 2009 study, Mor
Constraints to Strategic Default on Mortgages, says in part, “Most of
Bush and Obama administrations have tried to address the problem of m
payments that are too large. The authors argue that the growing problem
an illustration of the math a homeowner who walks away mdramatic, but not unusu market d su
Homeowner Math: Why They Walk Away
Value at Original Pur
Curren
chase 200,000
t Value (40 percent $120,000
gin Value at 4 percent Annual Appreciation (Historic
ear
$208,000
oreclosure, theyto buy again in
competitive home after 7 years*
$161,000 ($158,000 plusassumed 2 percent closing
costs)
The 7 years may also haveprovided time for the
consumer to save for alarger down payment than
they originally had.
* = Historic 4 percent market appreciation is discussed in SHIFT: Tactic 11: DistressedProperties: Working with Buyers.
$
market decline)
Time to Regain Ori al After 14 y
Average*)
Cost to purchase a
s Even with f may be able
5–7 years.
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Chapter 4: Criteria For a Short Sale51
Summary: Positive and Negative
Alternatives for Homeowners in Agents risk losing valuable time, and expected income, if they don’t understaalternatives
Distressnd the
to a short sale. Proceeding with a seller, thinking a short sale will happen, andrtbreaking—and avoidable if you
know the rules.
s are both positive and negative. Here’s a breakdown:
being hit with a different outcome like those below is hea
The alternative
Positive Paths
Homeowners have some options that can bring relief. Most of them, however, can’t happen wner is able to tap into a new source of funds to get them out of their
omising positive alternative is mortgage modification.odifications are below.
Forbearance
one or reschedule payments in a way that allows thethe lender’s
ion
ans that, in the
me.
iod
eclosure auction, thehe full amount due and
. In these circumstances,aser at auction gets a refund.
After a screening interview, and some paperwork, a lender may agree to a “work out”solution that has the potential to make the individual’s loan more affordable.
Lending mortgage loan expert David Reed points out there are two types of loanmodification:
1. Rate and Term Change
2. Modification of the Current Note
unless the homeo
position with the lender. The most prDetails on m
Here are the options:
Forbearance is an agreement to postphomeowner to catch up. A mortgage modification is a form of forbearance onpart.
Right of Redempt
A standard feature of the foreclosure process is the right of redemption. It meunlikely circumstance that the seller can come up with the full amount in arrears and bringthe loan current (including any penalties due) the homeowner can keep their ho
Reinstatement Per
In some states, even after a home is taken by the lender and sold at a forhomeowner may have a limited time during which they can pay treclaim the home from the party that purchased the home at auctionthe purch
Mortgage Modification
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Chapter 4: Criteria For a Short Sale52
Loan terms may be remade by the lender. The challenge in these programs ubeen the inclusion of added fees and rates that don’t really give the borroweradvantage. Newer gover
Loan terms may be remade by the lender. The challenge in these programs ubeen the inclusion of added fees and rates that don’t really give the borroweradvantage. Newer gover
ntil recently hasa significant
nment programs are providing cash incentives to lenders to modifyterms.
Hope for Hom
the lender takes the
2
ntil recently hasa significant
nment programs are providing cash incentives to lenders to modifyterms.
Hope for Hom
the lender takes the
loans on more friendlyloans on more friendly
eowners
In the original Hope for Homeowners programs,
eowners
In the original Hope for Homeowners programs,loss to current market value; the borrower gets 10 percent equity atthe new value and agrees to share profits with the lender in anyfuture sale. The program was introduced on a voluntary basis,however, and many banks declined to participate.
Newer programs are now on the scene. The “Homeowner Affordability and Stability Plan” (part of the American Recovery andReinvestment Act signed in February 2009) applies only to Fannie
Mae and Freddie Mac-backed home loans. Here are key terms andconditions of the new programs:
• Thirty-one percent goal: An overall guideline of the program isto find solutions for homeowners that reduce their monthlypayment to no more than 31 percent of gross monthly income.
• “Underwater” Help: “The amount due on the first mortgage isless than 125 percent of the home’s value. In those circumstancesthe homeowner may be able to refinance their loan.
• Second Liens Unaffected: The program also requires“agreement by the lender holding the second mortgage to remain
in second position.” Under the program, only the first mortgageis eligible to be modified.
• Lender Incentives: Lenders are motivated to participate, as inearlier government programs, by cash incentives paid by the U.S.government for each loan they modify.
• Refinancing: The program also offers a refinancing option forqualifying homeowners—as an alternative to loan modification.This part of the program applies only to people who are current on theirmortgage payments. The same standard of “mortgage debt not toexceed 125 percent of value” applies. The refinancing available
converts qualifying loans to 15- or 30-year fixed mortgage loans.
• No Cash Out: The total amount owed by the homeowner is notreduced under either program. Homeowners may be able tofinance closing costs of their new loan under either refinance ormodification, but “cash out’ arrangements are not permitted.
• 2010 Sunset: The program is funded until June 2010. For moreinformation, see www.makinghomeaffordable.gov .
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Chapter 4: Criteria For a Short Sale53
Start
3
Start Tip! – Modification Program Off to Slow Tip! – Modification Program Off to Slow
The Wall Street Journal reported (August 6, 2009) that the
administration-backed mortgage modification guideline and incentiveprogram is off to a slow start. The program was introduced inFebruary 2009. So far, more than 400,000 borrowers have beenoffered help. More than 235,000 borrowers, or roughly 9 percent ofthose eligible for the program and at least sixty days past due,have begun trial mortgage modifications, the first step to gettinga loan reworked. The newspaper also reported that progress amongthe largest lenders is highly variable. Some large firms have initatedprograms with less than 5 percent of defaulting borrowers.
Some lenders report they have initiated other modications “outsidethe program.” The Treasury Department says the program’s next
goal is to have processed 500,000 modifications by November 1,2009.
FHA’s Loan Modification Program
e proportion asmodification
the program are up to $1,250
can reduce theborrower must make loan payments by as much as
r makes thee life of the loan, but is responsible for paying off the full
loan amount when the home is sold or the loan is refinanced.
payment requirement: Homeowners must have missed at least onein order to apply for the program.
f income overall
Negative Paths
Holders of government-backed FHA home loans are in trouble in the samconventional loan holders. The government has announced an FHA loanprogram along the lines of the program described above. Key features and some differencesare:
• Incentives: Incentives to lender to modify under
• Principal reduction: Under the FHA plan, mortgage servicersamount of principal on which the30 percent to get monthly payments to affordable levels. The borrowereduced payments for th
• Missedpayment
• Thirty-one percent goal: The FHA plan has the same 31 percent ogoal as the non-FHA program.
There are a number of negative consequences if a short sale is not workable. Most of theseinvolve a possible “escape” from foreclosure that comes with continued liabilities attachedand/or a missed opportunity to come away in better shape.
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Chapter 4: Criteria For a Short Sale54
Deed in Lieu of Foreclosure
This is an option that some homeowners take, out of despair or because ttheir other choices—including a short sale. Instead of waiting for foreclosure
owners may just give the deed back to the lender and walk away. Deed inForeclosure is not a right of owne
Deed in Lieu of Foreclosure
This is an option that some homeowners take, out of despair or because ttheir other choices—including a short sale. Instead of waiting for foreclosure
owners may just give the deed back to the lender and walk away. Deed inForeclosure is not a right of owne
hey don’t know, property
Lieu ofrs. The lender must agree to it. If they do, there will be noit, or hire an
ement does not protect the homeowner from subsequent judgmentse lender.
a short sale orment—a court order
requiring the bor sale.
Deficiency judgm aking sure thathappens is a key t.
ender’s Approval
4
hey don’t know, property
Lieu ofrs. The lender must agree to it. If they do, there will be noit, or hire an
ement does not protect the homeowner from subsequent judgmentse lender.
a short sale orment—a court order
requiring the bor sale.
Deficiency judgm aking sure thathappens is a key t.
ender’s Approval
short sale. The property becomes bank-owned and the lender may auctionREO listing agent to get it sold for them.short sale. The property becomes bank-owned and the lender may auctionREO listing agent to get it sold for them.
A Deed in Lieu agrelevied against them by th A Deed in Lieu agrelevied against them by th
Deficiency JudgmentDeficiency Judgment
If a property is sold for less than the amount owed on the property—either inin an auction—the lender may decide to pursue a deficiency judg If a property is sold for less than the amount owed on the property—either inin an auction—the lender may decide to pursue a deficiency judg
rower to repay the amount due that was not collected in the
ent power may be “negotiated away” in a short sale—but mprotection an agent should seek for their short sale clien
rower to repay the amount due that was not collected in the
ent power may be “negotiated away” in a short sale—but mprotection an agent should seek for their short sale clien
Tip! – Get Protection for Your Client in the L Tip! – Get Protection for Your Client in the LLetter. The bank should release their lien and settle on the account.If they do not agree to consider a complete settlement, then thelender will typically:
1) Offer to agree to a promissory note for the balance, or somesmaller amount. Often this amount may be as little as 5% to 10% ofthe total short.
2) State that they retain the right to collect the balance of the noteafter closing. Try to avoid this. Negotiate the best possible terms foryour seller!
In the past, lenders have tended to dismiss their right to a deficiencyjudgment in approving a short sale. However, this may be changing. Agents are reporting increasing reluctance on the part of lenders to waive their right to pursue a deficiency judgment later. And, inanother indication of the trend, the FDIC now requires buyers oftheir distressed properties to pledge in writing that their purchase wasan “arm’s length transaction.”
Truth
Be aware of your state laws. Some states limit deficiency judgments inshort sales by law. Other states specifically permit them.
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Chapter 4: Criteria For a Short Sale55
The Price of Indecision
Sometimes sellers may want to change direction—initially applying for a shoswitching gears and deciding to go for a mortgage modification to try to k
The Price of Indecision
Sometimes sellers may want to change direction—initially applying for a shoswitching gears and deciding to go for a mortgage modification to try to k
rt sale and theneep their home.
Sometimes the opposite can happen. Either way the consequences can be negative. Thiskind of switching can put the lender off—and make either resolution more difficult.
5
rt sale and theneep their home.
Sometimes the opposite can happen. Either way the consequences can be negative. Thiskind of switching can put the lender off—and make either resolution more difficult.
Tip! – Risk of Indecision Underscored Tip! – Risk of Indecision Underscored
On the Keller Williams Distressed Property Community online, topshort sale agent and MAPS Coach Knolly Williams has dialogues withagents over this issue. His suggestion, “When applying for a loanmodification, the client has to prove that they CAN afford to keepthe home; and when applying for a short sale the client must provethat they CANNOT afford to keep the home. This can muddy up a
file and create a scenario where the client does not qualify for eitherthe short sale or the loan mod (that’s the worst case scenario).”Knolly continues, “In almost every case, when a client applies for aloan modification, the short sale process is immediately terminated bythe lender. The loss mitigators are looking for any excuse to get thefile off their desk, and this gives them the perfect opportunity. If theclient’s application for a loan modification is denied, and the clientdecides to move forward with a short sale, the entire short salepackage will have to be resubmitted.”
The resubmitted file may be subject to scrutiny by the lender. They will see that the client has gone back and forth between bank
departments and they may perceive this as an attempt to “stall” thelender’s collection activity.
Forgiven Debt
iven amount
and 1099s
In previous years, when a loan was forgiven, the forg could have been considered taxable income by the Internal RevenueService (IRS). The lender may have sent the seller a 1099 or the IRScould have deemed it the seller’s responsibility to report the income.
On December 20, 2007, President Bush signed into law a three-year
temporary tax break for sellers who are able to complete a short sale. This law is often referred to as the Debt Forgiveness Act. Under it,through 2010, the IRS will not treat as income forgiven debt that waspart of a short sale.
However, this tax relief applies only if the home was the seller’s primary residence.Investors are not protected.
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Chapter 4: Criteria For a Short Sale56
Tip! – You Are Not a Tax Expert Tip! – You Are Not a Tax Expert
6
Be forewarned that tax laws do change. Stay abreast of changes to thecodes that affect agents by keeping an eye on real estate news
services, like Inman News.Do not overpromise solutions to your sellers and remember thatunless you are a tax accountant, you should not give your sellers anyadvice about their taxes.
Your Role in Homeowner Choices:
possibilities.e almost always
You can see why, in distressed markets, your role as an adviser and fiduciary toward theseller becomes larger than ever. The already high stakes of sales in normal markets arecompounded by the emotionally and financially distressed condition of consumers facingf
Adviser and Fiduciary The prospect of qualifying for a short sale comes with a complex array ofSellers are most often feeling helpless, frustrated, and embarrassed. They arhurting financially—or worse.
oreclosure.
Truth
Your best chance of representing distressed property owners comes when you can explain what is happening to them, and why.
Do the Right Thing: Build Future Business
Know your buyer’s wishes and needs and understand a seller’s options. When emotions,costs, and demands are running high, you have a great opportunity to bring reason and asolution to your clients.
When you do, you are more likely than ever to win a client for life—whether it’s a shortseller whose property your client bought, or an investor who found a great deal through you.
No one forgets a helping hand—or a great deal.
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Chapter 4: Criteria For a Short Sale57
The Client’s Best Interest The Client’s Best Interest
7
Aaron Rice has been an agent in the Baltimore, Maryland, area for nine years. Likemany agents around the country, his practice has shifted toward distressed property
with the market shift. Now he works on both short sales and REO listings.On short sales, Aaron is a passionate advocate for consumer rights. “There’s a risk ofagents leaping to the short sale option with distressed homeowners they meet. It mayor may not be best for them,” he says.
“Aaron continues, “I pledged to myself at the beginning I would always act in theclient’s best interest. I figure if someone tells me they really want to stay in theirhome and I can point the way to a successful solution, I won;lt have a sale now, but I will have a referring client who’ll be a great addition to my database.”
On the flip side, Aaron is committed to the value of a good short sale too. “My
position is no one in my farm should ever have their home go to foreclosure withouthelp,” he says.
Help Protect Against Fraud
You have another role—helping protect consumers from fraud. The pricemarketing hype around distressed property crea
opportunity andtes opportunities for deception. The market
with people and firms selling expertise to help fearful, stressed homeowners.
Tightening regula sactions is a
new pursuit for l lled “loanmodification cou
Federal
deral Housing Finance
is filled
tion surrounding distressed property advisory work and tran
egislators and regulators. Most of the focus has been on so-canseling.” Here are some developments.
In mid-2008, the U.S. Congress passed the Feand Regulatory Reform Act (Foreclosure Rescue Bill) which includeda provision for the licensing of all loan originators—with course hourrequirements and testing standards.
The Federal Trade Commission (FTC) and the U.S. TreasuryDepartment have also begun a crackdown on fraudulent mortgagemodification and “home rescue” schemes—by stepping upenforcement of existing laws and sending written warnings to someseventy firms “who may be deceptively marketing mortgage loanmodification or foreclosure rescue services.” The FTC is also urginghome mortgage companies to send advisory literature to theirmortgage clients.
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Chapter 4: Criteria For a Short Sale58
State
, and Hawaii
8
State
, and HawaiiIn addition, some states (Illinois, Florida, WashingtonIn addition, some states (Illinois, Florida, Washingtonare examples) have passed consumer protection laws in response to
the fraud trends in these markets. Other state attorney generals havebeen acting on fraud cases under existing laws.
Here are examples of what these laws have tried to address:
• Claims about preventing foreclosure
• Claims about remaking home loans
• Charging fees to complete basic paperwork consumers couldeasily have completed themselves
• Frauds resulting in the homeowner signing over their property toan “adviser”
• Basic definitions about what an agent or adviser must knowabout a homeowner‘s financial situation, and about theirfinancing, before making representations about their situation.
• What agents and advisers can charge for distressed propertyservices
• Defining what a “distressed property consultant” is and knowshow to do for the consumer
Again, the key is to know the law—both federal and in your state and locality—that protectsconsumers from deceptive practices. It should be a key ingredient in the expertise you offer
hat they have theth the company who
Know the Rights of Tenants
to distressed property clients.
Consumer rights advocates and lenders also are quick to remind people tright to contact their own lender and explore new loan terms directly wimade the loan in the first place.
As a distressed property expert agent, you need to be aware of the burgeoning issue offoreclosures’ impact on the rights of tenants who occupy property under a valid lease.
Many tenants are in the dark about the defaulting or foreclosed status of the property they’releasing—until a constable or sheriff comes knocking at their door with an eviction notice!
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Chapter 4: Criteria For a Short Sale59
Tip! – Renter Alert Program Protects Tenan Tip! – Renter Alert Program Protects Tenants
9
ts
The surge in foreclosure volume has raised the profile of thisproblem—so much so that the foreclosure data keeper RealtyTrac
has created a new service for tenants.Now, you can buy a low-priced service that allows tenants to tap intoRealtyTrac’s database of some 1.8 million foreclosures nationwide— to see whether the property you are renting, or the one you are aboutto rent, is in default with a foreclosure pending. It’s called theRealtyTrac Renter Alerts Program.
Issue: Arm’s Length Transaction
bring a special set of
uld be done at “arm’s length.” HUD defines arm’s length this way, addressingthe seller:
“The buyer cann iate, or other favored party.No hidden terms or special understandings can exist between you, the buyer, appraiser, salesagent, or mortgag
Distressed markets mean low, low prices—and low prices cantemptations for buyers, investors, and agents.
Although, as in many areas, different lenders have different attitudes, a good rule of thumbfor ethical practice—and successful closings—is “no insider transactions.”
Transactions sho
ot be a member of your family, a business assoc
ee.”
Tip! – Cover Yourself with a Contract Disclosure
Top short sale agent and MAPS Coach Knolly Williams notes thatsometimes less than arm’s length opportunities come along and theseller, for example, may urgently want it to happen.
“If you decide to go for it under these circumstances,” Knolly says,“be sure to write a disclosure of any relationship between seller andbuyer (for example) in the special provisions section of the contract.”
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Chapter 4: Criteria For a Short Sale60
Issue: St Short sales make
0
Issue: St Short sales make
reamlining Short Sales This is a critical area for all agents to monitor.
reamlining Short Sales This is a critical area for all agents to monitor.
up a clear minority of distressed property sales—but, other thanmortgage loan modification, agents agree they represent the bestalternative for most homeowners in distress who are unable to maketheir payments.
Under the Making Home Affordable program, a new initiative hasbeen launched by the U.S. Treasury Department to:
• Incentivize short sales with payments to both the lender/loanservicer and the homeowner.
• Create standard processes and timelines for key steps of the shortsale to smooth the process and make it clearer
• Protect agent commissions that are “reasonable and customary”
• For the latest details on the program and its implementation,check out http://tinyurl.com/qlbn9m. It will take you to a PDFdocument that describes the program.
Agents are debating how effective these coming policies will be. Lenders like Bank ofsing
sales will benefit. The specifics of program
guidelines are not yet known.
Other agents are reporting that lenders they do business with are considering instituting theirown programs to systematize and e short sales—perhaps including programs toassign groups of approved short sale properties to specific agents for marketing andclo
America have issued statements praising new policies—especially those addressettlements on second liens.
But the jury is definitely out on how much short
streamlin
sing—much in the way many REOs are listed and sold.
Truth
One thing you can count on—if a major private or government
initiative to streamline short sales is successfully introduced andenforced, it is likely to transform the distressed property world.
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Chapter 4: Criteria For a Short Sale61
You Are Their Adviser and Fiduciary You Are Their Adviser and Fiduciary
1
Imagine you were consulting with a homeowner who is “upsidedown” on the loan to value of their home—or in some financial
difficulty that has made it impossible to make their payments.How would you counsel them? List positive paths, and negativeones—and a reason why each is either likely positive or negative.
Most Positive Option Reason Why Positive or NegativeOptions
More Negative Option Reason Why Positive or NegativeOptions
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Chapter 5: Mindsets 63
Chapter 5:Mindsets: Sellers, Buyers,
s
nal real estate business you probably
w is it different? In many ways—ranging from the processes and priorities agents mustlearn to follow to the mindsets of all the players involved.
Understand these mindsets fully and you will have taken a big step toward success in shortsales.
Let’s explore the differences in mindset …
Lenders, and AgentShort sales involve distressed property and the distressed property business might come witha warning label that says: “This is not the traditio
learned!”Ho
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Chapter 5: Mindsets64
Mindset Map: Traditional vs. DiLook first at the overall picture—then at the short sale listing world in detail. Here’s a
summary of some of the top points of differe
stressed
nce between traditional and distressed markets,from a mindset perspective:
Mindset Map: Traditional Markets vs. Distressed Markets
Traditional (Buyer orSeller) Market
Distressed Property Market
ConsumersIn Genera
Generally eager andut buyin
about the “whether to” and “how to”the sale side—and
prices on thebuyer side.
l positive aboselling
g or presented by the market onfeeling urgency to buy at great
Stressed
Sellers Seeking
m
Institutions and consumers seeking eithern escape from
return oninvestment and equpower their next ho
ity toe
whatever they can get, or acrisis
purchase
Buyers ng thnabl
t possibleConsumers seekihome at a reaso
e righte price
Consumers seeking the very besdeal, or a steal
Lenders a
atin policies to
rowin
y tightened;
also taken onrole of sellers of distressed property —either
r after (REO.)
Generally open to m
loans and into creproducts and
king
g
Lending criteria dramaticall
loans hard to get. They have
encourage bor g before foreclosure (short sale) o
Agents ; g nsac
transactiond to coach their
Eager to jump inable to master trabasics
enerallytion
Often poorly informed aboutbasics; often not well-qualifieclients—or unaware of the need to
TransactionProcesses
Taught widely, in realestate schools and bybrokers. Generallyconsistent and usestandard board or MLSdocuments. Timelinesgenerally consistent.
Only recently being taught. More complex, with varying timelines and requirements.Lenders in charge of transaction process. Special documents required by lenders andagents to protect themselves and clients.
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Chapter 5: Mindsets 65
Take a look at each of these viewpoints and mindsets in more detail on thepages—as
followingthey apply specifically to short sales. Then zero in on the short sale transaction
ers
Listing Agents
Buyer Agents and Buyers
Be
process itself:
• Sell
• Lenders
•
•
Sellers
A Tough Place to
Short sales are a distressed property business, and the name fits the sellers“to a T.” Short sellers are usually experiencing a lot of distress, discomfort
in this category —usually long
ents—maybe for months. They often havecollectors—for
re in the situation they’re in because of a personal or family crisis—death,
Short sale agents must recognize that their sellers are in a place in life that’s marked by
r, and anger at their circumstances—and anger at others who they may
ale is to focus
ea, is to avoid a
with distressedoiding a big negative.
Why Choose a Short Sale?
One of the attractions of short sale over foreclosure is that a short sale mitigates or reducesthe impact on the seller’s future ability to buy another home.
Credit scores, time frame to buy and buying terms can all be favorably impacted by sellingshort, rather than being foreclosed.
before you ever contact them.
They have typically missed mortgage paymfinancial distress that means they’re also being pursued by a host of debtcredit card debt and other loans.
Many of them adivorce, job loss, unwanted job transfers, and more.
embarrassment, feafeel are responsible.
One of the best ways to push through and motivate sellers to act on a short son the specific benefits to them in choosing the short sale option.
Avoiding a Negative
The first benefit most people think of, once they understand the short sale idnegative—foreclosure, and the embarrassment and practical difficulty of losing their home.
But smart short sale agents have learned that there’s much more to working short sales candidates than av
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Chapter 5: Mindsets66
A copy of this table that you can use as a handout is in the course tool kit.
Foreclosure Shor
ore 150 points or
t Sale
Credit Score Damageepo
Mark Against Yourd
0 points or m
Permanent record at countyurthouse
less (NOTE:
policy on score
Drops off credit scoring
to Buy Again (FNMA)
years 2 years
Down Payment on Future(FNMA)
10 percent or greater;maybe 20 percent
Less than 10 percent
(based on agent r
rts)
Financial Recor
25
co
credit monitoring agenciesmay change
modification)
system after 7 years
Time to Qualify 5–7
Purchase
LendersTruth
While lenders clearly have common issues when considering a shortsale, top agents stress it’s extremely important to understand the
detailed differences in how short sales are processed from one lenderto the next.
Cost of Foreclosing and Creating an REOIn a recent interview, Gary Keller pointed out, “The big question now is will banks start totake short sales more seriously. It seems like it would be in their best interest—less cost bykeeping it off their books than by taking some hit on the original value they loaned against.”(Gary Keller’s Agent Mountain interview with Michael Soares, March 2009). As mentionedearlier, a foreclosure can end up costing the lender $50,000 or more by the time they finallyget the property off their books.
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Chapter 5: Mindsets 67
Overwhelming Volume of Files
Most agents who do a lot of short sales can testify that they’ve seen the workloads of clerical
en I started doing short sales a few years ago,” says Knolly Williams, “the losstheir desks. Now they have hundreds of
them.”
ents can be overlooked allit them, and
mistakes, or may makejust so they can
• Slow turnaround: Slow response times on pending short sales—whileors—frustrate and anger all the
.
people they deal with in banks growing at a frightening rate.
“Whmitigation people had maybe a few dozen files on
The impact of this file burden ripples through the business:
• Overlooked files: Short sale files submitted by ag together—particularly if the agent doesn’t know how to properly submhow to follow up effectively.
• Errors: Processing people for the lenders can make morepoorly considered decisions and reject an application for short sale—
pass it on to foreclosure and not have to deal with it.
understandable with the workload facing loss litigatother parties—buyers who want to close, sellers who want out from under theirproblems, and agents who want to be paid for their time and effort
Wrestling with Agent Errors: Who’s Responsible?
Agents like to complain that lenders are the ones primarily responsible fobeing completed at a better rate.
r short sales not
Lenders say the truth is that poor documentation, ignorance of the process, and agents’failure to educate their buyers and sellers are the main obstacles in short sales.
Kevin Kauffman and Fred Weaver have done hundreds of short sales in their Phoenix, Arizona, market. Interestingly, they mainly take the side of the lenders on the agentcompetency issue.
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Chapter 5: Mindsets688
Eliminate Errors: Be the Market and Process ExpertEliminate Errors: Be the Market and Process Expert
Kevin Kauffman and Fred Weaver, and their team Group 46:10 based in Tempe,
Arizona, are one of the leading short sale producers in metropolitan Phoenix..Like other top performers, they urge agents to take responsibility for their own shortsale knowledge and conversion rates—and stop looking for faults on the lender/lossmitigator side.
“We agents must take responsibility for our own expertise. We are the real estateexperts—its not the lender’s business, and it certainly isn’t the business of the lossmitigation processor. We know the market, the values, and our clients. Our job is tohave state-of-the-art knowledge and crisp, clear processes to get our deals done,”says Kevin Kauffman.
Kevin and Fred teach the short sale process—in live classes, and through their
website and short sale blog. One of the main messages: Agents must takeresponsibility for closing more deals.
They need to know the process, be detailed and precise, and be greatcommunicators; sharing everything they know that their clients need to know—bothsellers and buyers.
Short Sale P —Loan Modification Application First?olicies
Recent changes in U.S. government policy—from the Treasury
Department, the FDIC, and Fannie Mae and Freddie Mac—mayhave the aggregate effect of smoothing and speeding the short saleprocess.
What may happen? No one knows, but here’s a scenario that sometop agents envision as a step in the right direction. Top agent Kristina Arias provided this scenario.
One of the keys, she suggests, would be IF the government agenciesinvolved, and lenders, would unite in favor of a policy requiringhomeowners in distress to apply for a loan modification first. Theidea: only if loan modification fails would the homeowner thenbecome qualified for a short sale.
The envisioned benefits are two big ones:
• Keep more homeowners in their homes by getting more loanmodification applications going.
• Smooth the path to short sales, for those who don’t qualify, bygetting the prequalification with their lender done through theirloan mod application.
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Chapter 5: Mindsets 69
See the module SHIFT: Tactic 11 Distressed Properties: Working woith Buyers to learn more about a business idea that pairs loanmodification counseling with short sale business.
Truth
Working with lenders to complete short sales is both an art and ascience. There are c n’ts; top agents also say repeatedlear do’s and dosuccess comes only with strong relationship-building and persistent
communication.
Listing AgentsIf you are a listing agent for short sales—even if you are only handling the frodeal—most agree you need certain key
nt end of thequalities:
ner
overwhelmed seller, urging, encouraging, and helping them see their
to a successful conclusion
and a substantial amount of paperwork—in good working order
sist and see the deal through
erty business,s challenge simply.s.
ounselor
1. Psychologist and grief counselor for a financially distressed homeow
2. Advocate for the way, legally, out of a pending foreclosure
3. Master of patience and persistence, seeing short sales
with negotiating skills, clear communication, and a certain willingness to wait—whenthere is no other choice
4. Organized and systems-based, to keep differing lender policies and procedures—
5. Willing to do whatever it takes to per
Brandon Green of Washington DC has worked both types of distressed propthough he now focuses mainly on REO listings. He summarizes the agent’“Neither short sales nor REO are businesses for the faint of heart,” he say
1. Psychologist and Grief C
Most sellers you will deal with are experiencing acute pain—emotional and financial. This ispersonal. It’s impacting their home and family. Many are angry. They see part of their“dream” slipping away and fear the long road back to financial health and stability. Somethink they were duped by their lender, or agent.
It’s a rough mix of emotions and realities. You will find yourself confronting most of themas you qualify and work with these potential sellers.
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Chapter 5: Mindsets70
2. Advocate2. Advocate
0
The flip side is that you have an opportunity to be an advocate for these sellers. Unless they —they need an
They may haverd there is a way out, but they know little or nothing about it. They have rights in the
process, but don’t know what they are. You can help, and they will appreciate it, in most
have given up completely—in which case it’s unlikely you’ll work with them
expert and an ally.
Many do not understand the act of foreclosure and the short sale process.hea
cases.
3. Master of Patience and Persistence
The short sale process is almost always lengthy, and often frustrating—forand buyer—and for you. You need to be a persistent type, and also a person w that, sometimes, you just have to wait for the “wheels to turn” in the p
both the sellerho accepts
rocess.
Insiders say part of the challenge in short sales is that staffs assigned to “loss mitigation”actually often com t. They are often more trained tocollect the larges dness.
e from the lender’s collection department possible amount of money—even at the risk of shortsighte
Tip! – Be Prepared to Argue for Your Client
Fred Weaver of the Group 46:10 in Phoenix, Arizona tells this storyof what he says is a fairly common scenario.
“I argued back and forth yesterday with a senior manager at amortgage company. They previously approved a short sale for us that
was set to close shortly, but the loan program the buyers werequalifying under had changes made to it and now they don't qualify,”Fred reports.
“We got a new buyer at a slightly lower offer price BUT we werenetting the mortgage company the exact same dollar amount orpayoff. They are turning it down because the offer isn't high enough(the first offer had closing cost assistance, the second offer does not,but they both net the bank the same amount of money). I'm not thesmartest person in the world by any means, but the fact they aredenying this short sale is just further proof that there are still peoplehandling large dollar decisions at banks that don't get it.”
Pursuing challenges to the deal is part of any real estate agent’s job.In short sales, this kind of representation gets pushed to new limits.Expect the best result, but prepare for the worst—and your mindset will be in “ready” mode for short sales.
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Chapter 5: Mindsets 71
4. Organized and Systems Based
Success in short sales comes with the ability, taught in The Millionaire Realand systems.
er to close than traditionalpipeline with
d use greatn sense.
g his alreadyd how to organize work with lenders. “We’re
figuring out how to cluster communications—our file status reviews—with lenders so thaton the phone, we use that time very efficiently to update all the
5. Whatever It Takes!
Estate Agent , to boost your profitability by leveraging people
Because short sales are almost always slow transactions (sometimes a lot slower), you need to fill yourenough volume to keep closings flowing over time.
To do that, and to handle the considerable paperwork and relationshipcommunication with loss mitigators and others, you must be able to build ansystems. Being digitally organized is important. But some of it is just commo
One example comes from Tod Barton in Las Vegas. Tod says a key to growinsuccessful business has been to understan
when we do get our contact
files we have with that particular lender,” he says.
Most top agents agree that success in short sales takes plenty of motivation anddete
rmination. Their battle cry is, “Whatever it takes!”
Doing What It Takes
Scott Smith of Indianapolis, Indiana, has years in distressed property—both REOand short sales. He sums up the listing agent’s mission this way, “Just be prepared to
do whatever it takes. Don’t relent in follow-up, negotiations on behalf of your client,or anything else. You have someone’s financial future in your hands. A less than bestservice is a disservice to your client.”
Part of this is coming from a position of authority with the bank. Know market value. Document your arguments and be persuasive. You are the market expert. You’ll hear your share of “no’s.” Never take “no” for an answer. Last of all, whentimes get tough; keep everyone’s point of view in mind.
“And again remember,” says Scott, “once you’re rolling they want the deal tocomplete. They do not want the house back.”
Top short sale agent Kristina Arias has her own description of the spirit and mindset greatshort sale listing agents need. “There are so many foreclosures happening, and so manymore pending, that succeeding in short sales sometimes feels a little like being the kid walking on the beach throwing starfish back into the sea,” she says. “But it feels good, everytime it happens.”
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Chapter 5: Mindsets72
Get a Mentor!
Jeff Gove is Team Leader for Keller Williams Realty highly profitable Roseville,California, Market Center—a Market Center located in the middle of one of the
nation’s distressed property “hot spots,” the Sacramento area. This former top-producing agent encourages the more than 300 agents in his MarketCenter to find a mentor. “Mentors are a known path for agents breaking into REO,” Jeff says, “but they are every bit as important in short sales. I encourage every agenthere who is serious about success in short sales to approach one of our top short salepeople—to get their insights and support. So many of them are willing to help. They’re just busy. You have to ask—nicely. They’ll help you.”
Buyer’s Agents and Buyers The associated course SHIFT: Tactic 11 Distressed Properties: Working w with this in more depth—but basically buyer agents in the distressed propoften “on the hot seat.” Buyers are out there in growing numbers, but agentoften aren’t cle
ith Buyers dealserty arena are
s who find themar about how to really help them buy.
ame buyerxpect, and not counseling buyers
ic requirements for the buyer agent in distressedproperty situations:
It’s not unusual for listing agents in both short sale and REO situations to blagents for being unprepared, not knowing what to eappropriately. It’s clear there are some bas
Teach Buyers and Their Agents the Process The rules are different. In short sales, for example:
• Lender is in charge – The lender makes most of the transaction rultimetables—no one else does!
es and
itted with noea what the seller/lender’s bottom line is for that deal. What do they really want?
They may not even know until your offer and the seller short sale package are beinganother agent
le. Yourclient’s offer will either be accepted or rejected—and you’ll never know the reason why.
All good buyer agents know that having good communication with their buyers is the key toa great buyer business. In short sales there is an even higher priority on doing this.
Why?—because the rules are different, and less buyer friendly, than in traditional real estate.
• Lender’s bottom line is unknown, at first – Offers are often submid
looked at—and followed up with a Broker’s Price Opinion (BPO) byhired by the lender, or by an appraiser.
• There’s little if any negotiation – Offers are rarely, if ever, negotiab
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Chapter 5: Mindsets 73
The best listing agents make a big and visible effort to put the short sale “rules of the road”out there for all to see.
ier Tip! – Offer Tips on Your Website to Make It Eas
Tips for buyer agents are prominently displayed on Group 46:10’s website (Kevin Kauffman and Fred Weaver are the agents in charge). The tips cover things buyer agents must discuss with their clients,including:
• Earnest money —some agents require earnest money of all shortsale buyers—Kauffman and Weaver do with their buyers, to“keep them committed and in the game,” they say.
• Value of a home warranty purchase —property condition canbe at issue and it’s an “as is” purchase.
• Close of escrow process —it can be frustratingly long, with arelatively quick close at the end.
• Covering HOA fees —HOA fees are typically in arrears andbuyers need to be sure this issue is covered in the closing.
Kauffman and Wever’s website lists and explains plenty of tips called“How to Submit a Good, Clean Offer.”
Like other top agents, they go so far as to give buyer agents exactlanguage they’ll need to put on specific lines of the standardcontract form used in their state.
They also supply a downloadable standard Short Sale Addendumrequired in their state.
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Chapter 5: Mindsets744
Make Your Own Short Sale Mindset MapMake Your Own Short Sale Mindset Map
Using the table below, jot down mindset features that distinguish
each of the short sale players. Use key words. Where are they comingfrom?
If you’re working with a partner, take turns reciting your answers inyour own words—coach one another; check each other’s knowledge.
You are in the role of listing agent for this course. Talk abouthow the other players’ mindsets impact what you do.
Player What Do They Need? What Do They Fear?
Homeowner
Lender
Listing Agent
Buyer
Buyer’s Agent
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Chapter 6:The Short Sale Process
is broad framework contains ____ steps that should be locked in your practice as thee cases, being
ble to complete the early steps is a “red flag” that this property is not likely to be a short
uick review, we’ll dive into more detail on each of
Negotiating with the Lender(s)
ion
er has a conventional
Overview: Four Phases Th“must do” items for every short sale transaction. Exceptions are rare. In som
unasale.
There are four key phases—and after a q them:
1. Prequalifying
Gathering and Submitting the Short Sale Package
Closing the Transact
The process described on the following pages assumes the homeown
loan. Later, differences that apply to FHA and VA loans will be covered.
1. Prequalifying
This is the essence of the short sale listing business, according to every top agent.
to sort things out with homeowners who,ort sale, or will never get the deal done.
eed it, want it,imate and very
2. Gathering and Submitting the Package
Inexperienced agents can waste tons of time trying for one reason or another, will not qualify for a sh
It sounds cynical, but the truth is short sales are a business for sellers who nand have problems that make it clear to the lender that selling short is a legitpossible option.
Short sales are document-filled deals. The reason: because in addition to all the normalcontract documents needed to convey property in your state and MLS area, you must pulltogether all the documents you’re going to be sending to the lender—along with an offer— to apply for the lender’s short sale approval.
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Chapter 6: The Short Sale Process76
3. Negotiating3. Negotiating
6
This is where the rubber meets the road on your commission. You are not neg the buyer through the buyer’s agent—you are negotiating with all the lienhold
otiating withers. There may
ged against the
ing out the details described in the HUD-1 document who will pay what closing costs, and who will be paid how much—and for what services—at
ission!
be a second lienholder, or even a third. There may additional obligations charproperty. Each must be dealt with separately.
In negotiation, you are also work
closing. This includes your comm
4. Closing the Transaction
Closings in short sales tend to be more unpredictable than in traditional realinstance, since your seller’s lender is in charge of th
estate sales. Fore process—they and only they decide
when they’re ready to close. Working with a short sale-expert title company helps—but thatcompany was sel dates change. Last-minute delaysare not unusual.
ected by the lender, not by you. Closing Agents and their clients must remain patient.
Tip! – Which Phases Will You Work On?
Remember the earlier section “Your Options for Doing Short SaleBusiness.” If you choose to be a short sale initiating agent andprovide end-to-end service, you’ll be involved in all four phases.
If you choose to hire the services of a negotiator or processor firm tohandle the details of the deal to closing, you will be involved mainly
in phases 1 and 2.
What follows are the very important details of the short sale process you must understand.Study these steps carefully. Short sales are a complex process. Though your goal is tosimplify and standardize as many of the documents and steps as possible, every short saleagent says, “the devil is in the details.”
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Chapter 6: The Short Sale Process 77
Agent Goals in the Short Sale Pro There are a number of versions of this basic process flow, but they are remar
s is th
cesskably similar.
e essence of becoming a successful short saleent. Short sales are a complex process.
s you possibly can.
d communications asnagers’
Stand Out – Top agents understand that success in short sales comes fromprofessional presentation and demonstrated savvy. Make your short sale packagepaperwork neat, clean, and as good-looking as you can. You are what you appear to
The contributions of top short sale agents in Keller Williams Realty were very important tothis chapter. They include Kevin Kauffman, Fred Weaver, Barbara Horan, Scott Smith, TodBarton, Knolly Williams, and Kristina Arias.
Mastering the entire short sale procesoriginating ag
Your goals are to:
1. Get Smart – Know all the steps and how to implement them.
2. Simplify – Simplify the paperwork and processing as much a
3. Standardize – Standardize as many of your work processes anpossible—bearing in mind unique differences in lender or asset marequirements.
4.
be.
Details: Ten Steps to a Short Sale
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Chapter 6: The Short Sale Process78
10 STEPS TO A SHORT SALE
Step 1 ellerPrequalify the S
Step 2 le the Package Assemb
Step 3 omeList the H
Step 4 Obtain an Offer
Step 5 Submit the Package and Offer
Step 6 Follow Up
Step 7 tion Phase/Loss Mitigator Assigned/Negotia
Step 8 isalAppra
Step 9 File Approved
Step 10 Deal Closes
Step 1: Prequalify the Seller
T —becauseprequalification is so vitally important to success in short sales.
his was covered earlier in this course—before the rest of the process steps
Truth
Without a qualified seller the short sale process cannot go forward.
The Interview Technique Top agents are insistent that an essential step within prequalification is putting the sellerthrough an initial interview. Since most agents say they learn that visiting with sellerspersonally is not a good use of their time, they put the onus on the seller to lay out thedetails of their situation in an interview style questionnaire. It takes the place of a personalinterview.
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Chapter 6: The Short Sale Process 79
Top short sale agent and MAPS coach Knolly Williams is one who advocates going throughthings:
ial situation
e process
motivation says a lot about whetheryou’ll get to a successful closing with them.
Here are the components of the interview Knolly recommends:
a well-defined interview process—preferably on paper—that sorts out two
1. Facts of the situation – The facts of the sellers’ personal and financ
2. Homeowner motivation – Whether they are motivated enough to see ththrough
Like prospective buyers and sellers in other markets,
Short Sale Interview Elements
Personal and contact Including the last four digits of their Social Security Number,
information and their Loan Number (for identification purposes with thelender)
Details of their loan y of last statement;copies of any foreclosure notices or documentsMortgage company; amount due; cop
Essential facts of theirhardship
Status of any divorce, medical issues, job loss, etc.
Past home marketing Were they listed; how long; at what price; previous MLSinformation number
Motivation Is the property occupied; what will the owner do after theysell
HOA If there is one, any contact information, fees, and fees due
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Chapter 6: The Short Sale Process80
Use a Questionnaire
Have a questionnaire in your tool kit. Model it on the interview outline a
Use a Questionnaire
Have a questionnaire in your tool kit. Model it on the interview outline above. If you don’t
detailed and.
t sales, mostler will do everything they can to provide
documents and details (including sensitive personal information) that you’ll use to persuadethe lender that a short sale is warranted—and will work!
0
bove. If you don’t
detailed and.
t sales, mostler will do everything they can to provide
documents and details (including sensitive personal information) that you’ll use to persuadethe lender that a short sale is warranted—and will work!
do an interview, ask the seller to return the completed questionnaire to you as soon as
possible, for your review.
do an interview, ask the seller to return the completed questionnaire to you as soon as
possible, for your review.How promptly a seller responds with a completed questionnaire—and how well-documented their answers are—is an early indication of their motivation
Motivation in short sales means a lot, as it does in other transactions. In shoragents say it means even more. A motivated sel
How promptly a seller responds with a completed questionnaire—and how well-documented their answers are—is an early indication of their motivation
Motivation in short sales means a lot, as it does in other transactions. In shoragents say it means even more. A motivated sel
A sample Homeowner Questionnaire is included in the course tool kit.
o the seller right
• We’re partners in this process. I want to help you, but it’s going to take effort and participation from
you. If you
• The proces ng you, thesooner you
Scripts
Learn and use some simple scripts that show your positive, helpful mindset toff the top:
are committed to get this sale done, I can help you.
s takes time; the faster we get all the facts together, the faster I can start helpi can be out from under this problem.
Tip! – Show Empathy, as Personally as You Can
Make your ability to relate to the seller real, in the best way you can.Knolly Williams shares his personal story about avoiding foreclosurehimself when his business was failing—before he entered real estate.
Knolly owned a music production and distribution business. He says,
“When technology for distribution went digital, it happened fast andour business was left behind. We began to lose a lot of money. I fellbehind in my mortgage payments, and was saved by a short sale,” hesays.
He uses his experience often—to help homeowners understand hereally “gets” their situation. “They feel embarassed and alone,” hesays. “I know because I did. If you can find someone who really works to advocate for you, it makes all the difference.”
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Chapter 6: The Short Sale Process 81
What Lenders Will Accept as Hardship
This set of tips was shared by agent Aaron Rice, Baltimore, Maryland, who lebehind MarylandShortSaleTeam.com. It’s a good match with comments made by other top
ads the team
short sale agents. Any of the following circums of them—mayconstitute a legitimate hardship in the eyes of a len
ion
3. Significant income loss
ath of a family member
failure
10. Damage to property
mortgagereseen increase in
r pursuant to ant to present the facts clearly, and above all
ter must be able to prove the situation that caused you toe legitimate and
es the loan is likely tobecome delinquent.”
T tch for.
tances—or a combinationder:
1. Job relocat
2. Unemployment
4. Divorce
5. Separation
6. Excessive medical bills
7. Death of spouse
13. Adjustment inpayment or unfoliving expenses
Aaron adds, “Most mortgage companies or lenders require the hardship letteshort sale. In the hardship letter, it is importa
8. De
9. Business
11. Incarceration
12. Military service
else, be honest. The hardship letfall behind on your payments, and the excuse for falling behind must bprovable. A hardship is defined real and the mortgage company believ
Be Aware of Signs of “No Deal”
op agents say you’ll learn to detect trouble early on, if you now what to wa
Truth
Reluctance to provide information, or a slow response or no response without prompting from you, is a sure sign that things are probably
not going to work out with that homeowner.
Short sales are like any real estate business. In the beginning, you may take risks withreluctant sellers because you are eager to get going. But the truth is, top agents say they’velearned you’re better off moving on to the next seller than spending time trying to urgecooperation that’s just not there.
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Chapter 6: The Short Sale Process82
“Have a pointed conversation on the phone with the seller,” Tod Barton ur what they must provide to you, and how soon. Be sure they know they willyou are not driving to them
“Have a pointed conversation on the phone with the seller,” Tod Barton ur what they must provide to you, and how soon. Be sure they know they willyou are not driving to them
ges. “Tell themcome to you—
. You can often tell by their tone and attitude whether they aregoing to be a real seller, or not.”
2
ges. “Tell themcome to you—
. You can often tell by their tone and attitude whether they aregoing to be a real seller, or not.”
Tip! – Make Them Come to You Tip! – Make Them Come to You
Tod Barton repeats the mantra of many top short sale agents. “Makethem come to you with their documentation,” he says. “You aredoing business in volume, hopefully, and you don’t have time to bedriving around town collecting documents from people. Tell them tobring everything to a single appointment. You’ll find out fast who’smotivated!”
Be Aware of Short Sale Candidates Not in Default
Yes, people who have not defaulted can get a short sale approved. The issue is, are theyabout to default, or extremely likely to do so soon because of their financial s
“People who owe a lot more than the
ituation?
ir home is worth are often considering a businessevin Kauffman.
ition too in upside-downa short sale or
rity to the homeowners most
deeply in default. But other short sales can succeed. It’s all about the numbers.
Scott Smith, Indianapolis, Indiana, points out that asset managers handling huge file loadsare looking now at spreadsheets that help them see what the numbers in a deal will looklike—bottom line for the bank. “Remember this when you are making your case to thebank,” Scott says. “You are speaking to what’s the best deal for them.”
decision about whether to stop paying and try to force a short sale,” says K
Knolly Williams agrees, “The bank is looking at a business propossituations.” At the end of the day, the bank has to decide whether to go forforeclose. Which alternative is best for them?
Make no mistake about it; lenders will always give first prio
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Chapter 6: The Short Sale Process 83
Step 2: Assemble the Package – Eleven Key Ingredients
Here’s a rundown of what you must pull together, with the seller’s help, to assemble an
.
elow constitutesl of a short sale.
itted—along
Below are the elements of the short sale package. They’ll be discussed in more depth in thetransaction itself.
er of Authorization
5. Recent Bank Statements and Tax
Purchase Contract
Agent’s Short Sale
r Preapproval Letter
9. Preliminary HUD-1
10. Your CMA
Fax Cover Sheet
ork, the seller’sccess of the entire short sale document package
you will submit to the lender—with the first offer you receive. The hardship letter must beclear, brief, and persuasive.
Tod Barton points out that short sale is not about what assets the seller may have—it is allabout their current hardship. Hardship is the only real reason why a bank should consideragreeing to terms of a short sale.
effective short sale package—one that will get the lender’s attention. Lenders want to know
that the proposed short sale is doable and as bulletproof as possible for them
It’s called “assemble” the package—not “submit.” The package described byour seller’s application for approva
Whether a short sale happens will only be determined when an offer is subm with the assembled package, or application.
discussion of the The elements of the package are:
1. Hardship Letter
2. Listing Agreement
3. Lett
4. Financial Statement
Returns 11.
6. Fully Executed
7. Listing
Disclosure8. Buye
The following pages examine the package contents item-by-item.
1. Hardship Letter
If prequalifying the seller is the top priority that makes the rest of the deal w hardship letter is a similar lynchpin to the su
A sample Hardship Letter is in the course tool kit.
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Chapter 6: The Short Sale Process84
Format of the Letter
Set up the hardship letter almost like a memorandum from the seller to the len The date, owner’s name, property address, and their loan number and last four
Format of the Letter
Set up the hardship letter almost like a memorandum from the seller to the len The date, owner’s name, property address, and their loan number and last four
der and you.digits of their Social
Security Number (for identification purposes) should be clearly in evidence, right at the top.
point—that’s the bottom line. Here’s an example of a short sale hardshipletter from the files of top agent Knolly Williams. Notice the brevity—just a few sentencesand crisp, clean s
4
der and you.digits of their Social
Security Number (for identification purposes) should be clearly in evidence, right at the top.
point—that’s the bottom line. Here’s an example of a short sale hardshipletter from the files of top agent Knolly Williams. Notice the brevity—just a few sentencesand crisp, clean s
Content of the Letter
Brief and to the
Content of the Letter
Brief and to the
tyle.tyle.
Tip! – Write the Letter for the Seller Tip! – Write the Letter for the Seller
“You should write the hardship letter for the seller,” says Knolly
Williams. “Don’t give them this assignment. Emotions may berunning high. They may not be good writers. You’d don’t want tospend time editing their work. Just mention its critical importance upfront and offer to get it done—as soon as you’ve prequalified them.”
2. Listing Agreement
r standard listing contract form for your MLS and board mustered later.
Lenders must have the seller’s signed authorization to work with you as their agent. Withoutone you won’t be able to get a loan payoff verified, or do any other communicating abouttheir loan an
The Letter of Authorization should be kept very short—identifying the seller, their loannumber and the last four digits of their social security number—for identification purposes.
The signed listing agreement obe included. There are a couple of important tips to note here that will be cov
3. Letter of Authorization
d situation.
A sample Letter of Authorization is in the course tool kit.
Tip! You Can Submit the Letter of Authroization Early
The Letter of Authorization is the one part of the short sale packagethat can be submitted early—before the rest of the documentationand an offer.
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Chapter 6: The Short Sale Process 85
4. Financial Statement
A financial statement from the seller is essential. It is the main numerical evidence of the
Lenders may provide their own financial statement for you to use—but you should have oneof your own that’s a proven winner. If you don’t have one, get one from a successful agent.
seller’s assets, liabilities and budget situation.
A sample Financial Statement is in the course Tool kit.
x Returns
Sellers must provide their most recent bank statement. Most lenders will accept either a copyof the seller’s online banking statement. Two years
urchase contract, is submitted along with the rest
ven consider the seller’s
It’s all about the specifics—and that includes price.
In short sales—in ent from the lender is a bitof a shell game. You know it’s there, but neither you nor the buyer can see it.
Th ysis of theeconom
5. Recent Bank Statements and Ta
of a printed bank statement or a printoutof Federal Income tax returns are usually also required.
6. Fully Executed Purchase Contract
In a short sale an offer, or fully executed pof the “short sale package” of documents.
In the vast majority of cases, without an offer the lender won’t e
application for a short sale.
itially—knowing what price will get an agreem
e lender will take the package and offer and then start their cost benefit analics of the sale.
Tip! – Submitting an Offer Not Fully Executed
Some agents have good results submitting offers to the lender without the seller’s approving initials and signature. Knolly says this isa way of communicating to the lender that you are looking for theirreaction to a price that may not be accepted. This method ofexploring where the lender stands on price works only where youhave an established relationship with the staff (loss mitigators) of aparticular lender. If they know you from past successful deals, andtrust your expertise, you may learn where they stand faster this way.
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Chapter 6: The Short Sale Process86
7. Listing Agent’s Short Sale Disclosure—Signed by Buyer and Buyer
hey use that
es the local “rules of the road” for short sale process and paperwork—to helphe deal for all
ing as much clarity asisclosure will vary, of course, depending on
any rules of your board or MLS—and lender requirements.
ms including:
ides
Standard Required Contract Disclaimers (like “sold as is” and “subject to lenderapproval”).
• How Closing Costs Will Be Handled
Agent
Several top short sale agents described or provided examples of a form t
disclosminimize potential confusion and disappointment that could endanger tinvolved.
This is a disclosure they’ve developed on their own—to help brpossible to the process. The content of this dyour market and
Basically the disclosure should address ite
• Time to Close
• Commissions Typically Paid to Both S
•
A sample Agent’s Short Sale Disclosure is in the course Tool ki
t.
her absolutely essential document. The buyer’s offer must be accompanied byal plus documentation of any cash they plan
sales tend totime consuming enough without risking the deal with a less than fully
The HUD-1 settlement statement—in preliminary form—should always be submitted toshow the lender what the return to them at closing will look like. Have it prepared for you byyour title company.
The lender is totally focused on their net from the deal—and the estimated HUD-1 willshow them their bottom line. Will the short sale produce the dollars they need to justify theadvantage of not going to auction or bank-owned status (most likely the latter)? The HUD-1 will provide the input the lender needs to make their decision.
8. Buyer Pre-Approval Letter
Here’s anotevidence that they can buy—a lender pre-approv to put in the deal (proof of funds).
Top agents have learned to be rigorous and unforgiving about this one. Shortbe complex andqualified buyer.
9. Preliminary HUD-1
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Chapter 6: The Short Sale Process 87
Tip! – Estimate Settlement Amounts for All Lienholders
The HUD-1 prepared by your title company must include estimatedsettlement amounts for all lienholders—including 2nd and 3rd
lienholders—whatever number there are. These additionallienholders will ususally agree to settle—often for somewhere in arange of 5-10 percent of the original debt owed to them. This is notalways the case. Some second lienholders can be difficult.
Truth
Principle number one with the HUD-1 is that the number on Line 803on the seller side must be zero. Remember! One of the key premises of
a short sale is that the seller cannot afford to bring any funds toclosing.
Tip! - HUD-1 and Commission Rates
The HUD-1 provides smart short sale agents with opportunities as well—to designate fees that may provide negotiating room oncommissions.
Some agents add a processing fee at Line 707. Others who operatetheir own servicing companies add a processing fee at Line 1306. Stillother agents set their commission higher at the outset in order tohave negotiating room when talks begin.
Truth
Discuss commissions up front with the lender. Fannie Mae now has a policy protecting commissions on all short sales involving their loans.
Some agents choose not to do business with lenders who try lastminute bullying tactics to reduce commissions.
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Chapter 6: The Short Sale Process88
10. Your CMA
Be extraordinarily thorough and remember you do not know what the bank coright price.” But you must price at a level that will attract offers. The lender w
10. Your CMA
Be extraordinarily thorough and remember you do not know what the bank coright price.” But you must price at a level that will attract offers. The lender w
nsiders “theill do their own
assessment—using an appraiser or a BPO vendor company or agent. You must be preparedto defend your CMA against the bank’s BPO or appraisal numbers that might be different.
8
nsiders “theill do their own
assessment—using an appraiser or a BPO vendor company or agent. You must be preparedto defend your CMA against the bank’s BPO or appraisal numbers that might be different.
Tip! – Schedule Price Reductions and Document Them for the Tip! – Schedule Price Reductions and Document Them for theLender
In short sales, as in shifted markets generally, many top agents areadvocates for setting an aggressive price reduction schedule with theirsellers up front. The strategy: When you keep reducing price—andthat history is documented—that written evidence becomes a veryeffective tool for showing the lender why they should accept the
offer you have submitted!
Tip! - Use Tax Records and Other Sources
Use the MLS as you ordinarily would—but also use tax records.Make sure you are not missing any deals that might be relevant.
“Remember, CMA accuracy and credibility is paramount for you, andnot everything sells through MLS,” short sale expert KevinKauffman says.
For more information on shifted market pricing practices, re-read SHIFTice Ahead of the Market.
11. Fax Cover Sheet
This is the last item on our list but its importance cannot be overstated. There’ll be moreabout t rity, under Step 5: “Submit the
Package and Offer.”
Tactic 7: Pr
hat shortly, and about how to ensure the necessary cla
A sample Fax Cover Sheet is included in the course Tool kit.
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Chapter 6: The Short Sale Process 89
ion and Other Paperwork Must Be Included What Documentatin the Short Sale Package?
List the ingredients in the short sale package—it helps to begin withthe items you will need to collect from the homeowner—and formsyou will provide for completion.
As a short sale expert, you’ll absolutely need to know this list, or yourpackage will likely be ignored or rejected by the lender. Work with apartner. Switch roles and repeat the process.
1. ___________________________________________________________
2. ___________________________________________________________
3. ___________________________________________________________
__________
__________
__________
8. ___________________________________________________________
9. ___________________________________________________________
10. ___________________________________________________________
11. ___________________________________________________________
4. _________________________________________________
5. _________________________________________________
6. _________________________________________________
7. ___________________________________________________________
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Chapter 6: The Short Sale Process90
Step 3: Price and List the HomeStep 3: Price and List the Home
0
When you input the prospective short sale listings in MLS, there are some rules you need to watch for and tips to follow.
Tip! – Don’t List Prematurely – Be Prepared!
FHA sellers must be accepted into FHA’s short sale program before you can correctly list their property as a short sale.
HUD’s process is straightforward and involves the use of specializedforms to apply, to be approved for the program, and to close.
FHA does not require an offer to accept a seller and their property intothe short sale program.
Follow MLS Rules
Short sale properties are listed like any other property—with some key exceimportant to describe the listing as a short sale—within the bounds of any ruthe MLS, or the lender, about how they want the property described.
Be sure you are clear it is a short sale “pending lender approval.” Also, be sure to indicate
ptions. It’sles set by either
commissions are variable, to be split 50/50. Finally, let all comers know that the propertyill set the price and there will be no negotiation. Inspections
e. The seller hasefinition. And the lender is already selling short. They
Provide Instructions for Agents
Include on the M telling thebuyer agents exactly
Supplement the MLS information with a posting on yourwhat they’ll be expected to do, and what the process will look like.
In the course SHIFT: Tactic 11 Distressed Properties:: Working with Buyers ,
will be sold “as is.” The bank w are for buyer information only—not to negotiate repairs. This is a short salno money to bring to closing—by d
will typically not accept any other costs.
LS listing as much information as MLS rules and space allow— how to proceed with any offer.
Website(s) letting buyer agents know specifically
there’s a detailed discussion of how top listing agents communicate with buyer agents—about the short sale process overall and aboutoffer contract details.
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Chapter 6: The Short Sale Process 91
Do a Great CMA—Be the Expert
Top short sale listing agents strongly recommend that although the lender will hire someone
You will do that CMA on the property just the way you normally would. But the final pricingconsiderations are different.
ng Lenders
to do a price opinion (BPO—usually done by an agent for hire) or an appraisal, you should
always submit your own CMA.
Tip! – Lender Standards for Net Return Vary Amoand Across Markets
In listing the property, part of the homework you may want tocomplete is commonly known as “short sale math.” The effectivenessof this tool depends upon your understanding of what lendersoperating in your market will generally accept as a settlement of
conventional mortgage loans.
FHA and VA have their own guidelines on settlements. FHA, forexample, has a tiered system starting at 88 percent of market valueand going down to 84 percent. VA’s standard has been 88 percent.
What lenders accept as a settlement on conventional loans isdefinitely a market-by-market call. Research showed the range canstart as high as 90 percent of value and go down to 70 percent of value. The average is around 85 percent.
Knowing these benchmarks comes with experience—and withmentoring from agents who are getting short sales done in your
market.
Lender Net and “Short Sale
T eel it makes senseies—particularly
the lender, and you!
Math”
o be effective in pricing, some agents and short sale negotiation vendors f to calculate the consequences of a given selling price on the needs of all part
Truth
Listing a short sale property at a price that is both CMA tested andalso has a great chance of meeting the lender’s net requirements is a
big secret to short sales success.
If you think it can be helpful to consider your proposed list price based on what the lendermay accept as their bottom line, here is what you need to consider, and a short example toillustrate how the calculation works.
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Chapter 6: The Short Sale Process92
You are basically working backwards from some solid assumptions—including the price theto accept—to factor in all the fees and costs the sale price must cover.
umbers in the Short Sale
closing costs (industry estimates work here—85 percent of value is standards, for example)
ank—there are different lender thresholds for nettional)
Factor in commissions and closing costs
Use ”Gross up” calculations, working backward from lender minimum net ($170,000).
xpectation standard would be to
hort sale. So, the established value (by appraisal ort of $170,000.
184,800
$184,800 + $3,000 taxes past due = $187,000
ent negotiation buffer) = $193,600
cover costs
3. Then, set list price—and get to work
Other Factors to Consider
1. Sellers must disclose other assets to lender, like 401(k), IRA, etc.
2. There are tax consequences for sellers in a short sale
3. Federal law waives some taxes in mortgage debt forgiveness, so alwayscounsel your seller to contact a tax attorney or the IRS for details.
lender is likely
Here are the steps:
First, Assemble the Critical N
1. Initial list price to bank
2. Initial list price to MLS (may or may not be the same)
3. Net proceeds required by lender
4. Bottom-line amount that will cover bank’s net, plus commissions and seller
for conventional loan
Next, Go Through the Calculation Steps
1. Establish net dollars to b(FHA, VA, Conven
2.
3. Factor in any other fees or costs
4. Leave room for negotiation
Math Example
If this were a typical conventional lender’s deal, their e
receive about 85 percent of value in a sBPO) would be $200,000, creating a minimum ne
$170,000 ÷ .92 (8 percent comm. & closing costs) = $
$187,800 ÷ .97 (3 perc
1. $193,600 is the minimum selling price to
2. Consider comps
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Chapter 6: The Short Sale Process 93
Step 4: Obtain an Offer
Truth With the vast majority of lenders, it is only after an offer is receivedthat you submit the seller’s package you have built—along with that
offer. You are applying for short sale approval based on a specific offer.
Speak to the buyer’s agent first about their offer. Find out how much they know about theshort sale process. Despite your best attempts to educate them, they may not have readanything you posted for their education and benefit—about the offer process. You may be able
rrections that will prevent the lender from ignoring or rejecting the offer.
If you have a good network of investors who work with you from time to time, you can getthei ugh. One of the big challenges in short sales islear
to help them make co
Let Investors Help
r help to create a short sale breakthroning the lender’s bottom line. Here’s one approach some agents use:
Working with Investors on Short Sales
Top agent Chris Heller, from San Diego, California, initiates the conversation withthe lenders by asking one of his investor customers to make an offer. “If it’s a great
deal, they’ll buy it,” he says. This starts the process immediately and lets Chris learn what the lender wants. “If we find another buyer, we know what they need to offer,”he says.
Be aware that lenders know agents may use investors to test the lender’s bottoProceed with caution. Your investor must be ready to perform if the lender ap
m line.proves the
Multiple Offer Strategy
Short sales can be a confusing process for everyone involved. An example would be when anoffer has been submitted to the bank and another offer, or offers, come in.
What do you do? You’re in a challenging spot. You probably do not know whether theoriginal offer you received and submitted has been approved, or even considered. You areeager to help your seller—and get paid.
package. If they don’t, your credibility with the lender is at risk.
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Chapter 6: The Short Sale Process 95
There’s much more information on multiple offers and otherdistressed property offer and negotiation issues in the moduleSHIFT:Tactic 11 Distressed Properties: Working with Buyers.
One Approach to Offers: Submit the Lowest First
Some things in short sales are counterintuitive. Normally, as a listing agent, you’d want toshow your seller rent.
e bank looking at
the very best possible offer from a buyer. Here, it can be diffe
Some top agents, like Knolly Williams, like to get ththe lowest offer they have. Why? For one thing, buyers tend tobecome impatient and walk away from deals. “You don’t want tocome back to the lender with a lower offer the next time around. That way, if the first one fails for whatever reason, I can at least come
back with a better offer than the one they just saw.”
Another reason for the lowest offer first strategy? Imagine that yourmarket is declining and you submit the highest offer—and it isapproved for short sale at that price. If the buyer walks away due toimpatience you may be stuck at an approved price the lender will nolonger do. That would mean taking time to start over—just what youdidn’t want.
egy’s success may depend on whether it fits your market. are between
l be a waste of
Require Non Refundable Earnest Money
Let the buyer agent know the earnest money (a modest amount) will be held for at least 60days. It helps get “buyer skin in the game”—an incentive to wait— while their offer and theseller’s short sale package are being considered by the lender. Kevin Kauffman and Fred Weaver in Tempe, Arizona are one team that uses this strategy consistently.
The other side of the coin—this lowest offer strat How fast is your market declining? The market may dictate how big the gaps
the offers you have. If the lowest offer is a true low ball, submitting it can weleveryone’s time. It will likely be rejected.
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Chapter 6: The Short Sale Process96
Step 5: Submit the Package and OfferStep 5: Submit the Package and Offer
6
Submitting a short sale offer is substantially different from what you would dtraditional real estate deal. For starters, you are submitting the offer—along with the en
o in atire
n package you previously assembled with the seller’s help.
most neglected—according to topencountered one
walked in and saw this huge mound of files on her desk—there must have been 500 ofthem,” Barbara says. “I was astonished. I asked if she was working on all of them. ‘Oh no,’she said. The files were all incomplete. The 50 in another pile were the ones she was workingon.”
short sale documentatio
Submit a Complete File
The most important point is the most obvious—andagents. Barbara Horan teaches her short sale students about something sheday while visiting a loss mitigator friend in the mitigators office.
“I
Truth
Remember: Lenders have different policies and practices, and thelender is omplete file is. Be sure youthe one who decides what a c
kn it.ow what they require—exactly. Then, provide
Tip! – Packages Go to All Lienholders
Although it will be up to the first llienholder to communicate withany secondary lienholders about the settlement, you must be sure tosubmit complete short sale packages to the 2nd lienholder and anyother lienholders.
Important: Bold Cover Sheet and TOC
Knolly Williams teaches his MAPS coaching clients to always put a very cleface cover she
ar and bold type-et on the package when sending it. Knolly suggests, “Urgent: Short Sale
Proposal” in big; bold letters across the top. He also suggests putting all the critical sellerinformation on the cover sheet, and their loan number in large type, plus your own contactinformation.
Other agents follow this idea with another—put a Table of Contents on the cover sheet.Show the loss mitigator exactly where they can find everything they need without diggingthrough the stack!
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Chapter 6: The Short Sale Process 99
A Communication Routine
It’s about routine and relationships. Most agents say the key is to find a happy between calling too often and not enough. The consensus—a couple times a w
smart. Temecula Valley, C
mediumeek seems
alifornia agent Barbara Horan teaches short sales in the Californiaare the all-important questions she says you need to ask up frontoot:
at are the best days and times to call?
• Do you have any special policies or procedures about file follow-up that I need to
p the Buyer Interested!
here is little or nothing to
tience and walking away from the dealprematurely. “Keeping the buyer is the big deal in this business,” says top agent Tod Barton.
ot to stay on top ofe as
ed
Lenders can stop a foreclosure very quickly, but you can’t assume just because they haveyour package—or even later when they approve it—that the foreclosure won’t suddenly
ht expect alender res ale to happen.
Inland Empire region. Hereto get started on the right f
• Who do I need to talk to?
• What is the number I should always call?
• Wh
know?
Kee
The best thing you can do as time passes is to give regular feedback to the buyer’s agentabout your contacts with the lender—even if, as is often the case, treport.
Short sales are notorious for buyers losing pa
“Thirty days to these buyers seems like six months; you’ve g communication with them. In reality, there isn’t much you can do beyond that, except befficient and organized as possible with the lender.”
Remember: Be Sure the Foreclosure Has Been Postpon
“pop up” and spoil everything!
Know the scheduled foreclosure date. If it is happening sooner than you mig ponse, be proactive. Get a postponement to allow your s
TruthForeclosure is not a process that is stopped, except when a sale closes. A postponed foreclosure is usually put off just 30 days. Stay on top of
this postponed date and don’t let it get in the way.
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Chapter 6: The Short Sale Process100
Step 7: Negotiation Phase
When the lender assigns a loss mitigator to the file, you have an official point of contact to
ent is that a short sale makes sense financially for them, they will also orderthe appraisal or BPO—to be done for them by another agent, an appraiser, or a BPO
egotiation stage is where “the rubber meets the road” in short sales. Along withess instanding
The people you are working with k are working hard. They get tired and frustratedjust like you do. Be nice to them, or you may find your file at the bottom of the stack. Why
talk with about details of the process—including negotiation of price and financial terms for
the HUD-1.
The bank begins processing the offer and package through their system to assess thefinancial impact of the proposed deal for them.
If their assessm
servicing company.
Negotiation: What You Must Do
The nprequalifying the seller, it’s one of the lynchpins of a successful deal. And succnegotiation, as in prequalification, begins and ends with a positive and undermindset.
at the ban
ever take that chance?
Truth
Mindset is the first consideration in successful short sale negotiation.Remember, the lender holds the cards. The lender’s loss mitigator
should sense you are their partner, not an adversary. You are seeking a win-win closing.
If the lender hasn’t already revealed their criteria for a sale informally, theynegotiations.
Approach All Lienholders Promptly
will do so in the
If you are working with more than one loan, begin negotiating with both the first and thesecond (or even third) lenders at the same time. If one of the lenders agrees to yourproposal, rush a copy of the acceptance letter over to the other lender right away. It willspeed your negotiations with that lender. Often the lender on the second loan will acceptpennies on the dollar. It is not uncommon for the second lender to take as little as $1,000 fora $15,000–$20,000 loan. If the lender on the second loan agrees, it will add weight to yourproposal with the first lender, even if that lender had appeared to be immoveable.
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Chapter 6: The Short Sale Process 101
Truth
In your negotiations, ask the lender to report the short sale to thecredit bureau as “Paid as Agreed.” You want the lender to report it as
settlement in full, with full release of the lien.
First Lienholder—in the Driver’s Seat
The mortgage lender is the first lienholder and they are trying to recover as much of theirg the short sale ande—the loss
ditional lienholders.
Remember: It’s the primary lienholder that drives the process. Their claim against theproperty is the largest. They have been the primary communicator with the homeownerregarding homeo
gotiation: Put Lien Demands in Writing
default loss as possible in a short sale. When it’s time to discuss qualifyinsetting details of pricing and fees, you’ll be talking with their representativ mitigator. But there may be other parties involved—ad
wner default and the likely pending foreclosure.
Tip! – Ne
Some top agents strongly recommend having first lienholders put in writing the amount they will offer second lienholders. Send the letterto the 2nd, and be prepared to ask to speak to a supervisor if theproblem persists.
Second and Third Lienholders—Smaller Players Can Block the Deal
Dealing with the claims of secondary lienholders is, potentially, one of the moparts of completing some short sales. Here are ground rules:
re complicated
usted other
ording to thepopular Complete Idiot’s Guide to Buying Foreclosures, Second Edition . “They take the step becausethey are unable to collect a debt. They realize there’s a good chance they may never see the
money.” This is a key reality. It means that second lienholders often settle their claims in a short salefor a small percentage of the total due. It’s quite normal for a second lienholder to accept asettlement of as little as 5-10 percent or the amount due, according to top short sale agents.
Secondary lienholders have placed their lien normally because they have exhameans to collect what the homeowner owes them.
“Most lienholders understand exactly what they’re doing by filing a lien,” acc
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Chapter 6: The Short Sale Process102
Truth
Rememb be paid if the propertyer: Junior lienholders will not
forecloses instead of selling short.
Watch Out for HOA Liens
HOA past due amounts can be a real snag in settlement. HOAs know they the first lienholder if the property is foreclosed, so they’re tough to negotiate w won’t hesitate to slap a lien on a property if the homeowner is unresponsive aamount. Be su
will be paid byith. HOAs
bout a past duere you find out about any past due amounts in your initial due diligence. If
there’s money owed, your first option should be to strongly encourage the seller to come up with it somehow, and pay the full balance. It will simplify the sale and keep things moving inthe right direction.
Truth
Successful short sale agents have different views about whether they will take on short sale negotiations with more than two lenders orlienholde ming. Theyrs. Some say it’s just too hard and time consurefer this decision.business. This is an individual agent’s business
ettlement Amounts on HUD-1 Tip! – Account for All Lien S
Be sure to enter values for proposed settlements to all lienholders onthe preliminary HUD-1 you’re including in your short sale package.
Choosing to Outsource Negotiation: Pros and Cons
Negotiating a short sale can be a time-consuming process. It can also be a confusing processif you don’t know all the steps and principles involved. This reality has led to a boom in thenumber of “short sale servicing and negotiation” companies around the nation. Some aresmall and local, others are large and national.
In order to maintain focus on their businesses, some top agents leverage help in thenegotiations. Some choose the third party route because of local or state rules. Here’s whatthose who have outsourced short sale negotiation say about the advantages:
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Chapter 6: The Short Sale Process 103
Third Party Negotiation Benefits
Martin Bouma, top-producing agent from Ann Arbor, Michigan, usesa service that negotiates the ins and outs of a short sale with the
lenders. The service is paid a third of the commission, the listingagent receives a third, and the final third goes to the buyer’s agent.“I’m not getting what I would consider my normal commission,” hesays, “but I am getting the opportunity to help my clients whilesomeone else takes the time to do the negotiations.”
Aaron Rice, a short sale specialist in Baltimore, Maryland, s
ays his state’s rules regardingdetails ofs. In his case,
ave had less success with outsourcing. Many say they find the large short saleservicing vendors impersonal and distant. These companies also charge a substantial amountof their fee up fr s are to actuallyclose the short sa
New service
short sales, “pretty well dictate that an attorney should be used to handle thenegotiation.” So, Aaron and other agents in his area go to third party provider Aaron uses a title company provided service that includes an attorney.
Other agents h
ont, making some agents wonder how motivated these firmle.
Watch this aspect of the short sale industry carefully.providers are coming on line all the time. More real estateprofessionals and business people are understanding the issues thathave blocked and slowed short sales, and they’re looking for bettersolutions. Keller Williams Chief Product Officer Bryon Ellington iscontinually scrutinizing vendors to decide whether to make them a
“Keller Williams Approved Vendor.”
Here’s a summary of pros and cons regarding outsourcing negotiations, gathered ininterviews for this course:
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Chapter 6: The Short Sale Process104
Negotiation Outsourcing Pros and Cons
It Yourself urceDo Outso
Control the process Leverage your personal time forlead generation
Stay close to the players for more deals in yourtransaction pipelineCapacity
Be able to report “ why” ands ler
detail
Control staffing costs“what’s happening” toand buyer agent in
el
Teams with highest close ratesin KWU research handlednegotiation in-house—and
tha
sometimes providedto others.
t service
Pros
Becoming overwhelmed Watch for large up-front fees withdetails
Frustration with processimpacts your mindset
from you,
the deal
Negotiators distantyour market, and the parties to
Added cost of staffing up todelegate negotiation in yourteam
Most close rates reported to beonly slightly better than nationalaverage for all short sales—whichis low
Cons
Challenge of teachingnegotiation skills to others.
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Chapter 6: The Short Sale Process 105
Tip! – IRS and Other Tax Liens
If the property is foreclosed by the IRS, for example, their dollar
claim comes ahead of ALL others.Sometimes IRS tax liens can be removed from a home by submittinga Partial Release of Lien request with the IRS. Why may that beeffective? It’s because IRS liens are placed against all of a person’sproperty—not just their home.
Be sure to ask sellers about any tax liens—IRS or otherwise—upfront. Don’t be surprised when a tax lien pops up in the closingstatement because you didn’t do all your homework!
Also, a good title company partner can often help detect tax liens with a through title review.
Final Thought on Negotiation: Remember Who’s in Charge
Top short sale agent and MAPS Coach Knolly Williams came up with thisinterview about short sale mindset.
“When agents are negotiating with the bank, they get frustrated. Everyone w move faster. It’s human nature to get angry and upset. I tell people to shiftpicture. Su
analogy during an
ants things totheir mind to this
ppose you had taken out a personal loan from your branch bank. You made anumber of payments and suddenly you couldn’t pay. So you went to the bank to ask them toforgive as much of the loan as possible. What do you suppose your plan would be? Would
ll guns blazing? Or would you come in with your hat in your hand,you come in with ahoping for their understanding and help? If you really wanted their help, there’s only oneright choice.”
Step 8: Appraisal
As in traditional sa down to the price. What will thelender accept as a sale price that sufficiently mitigates their loss on the defaulting loan?
les, in short sales it all eventually comes
Truth The critical factor in price agreement is any gap between your CMA and the
appraisal or BPO done for the lender.
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Chapter 6: The Short Sale Process106
Meet the Appriaser or BPO Agent
What the person who’s hired by the bank to make a price determination says
Meet the Appriaser or BPO Agent
What the person who’s hired by the bank to make a price determination says in their reportout
re and diplomacy, they have a chance to influenceyour relationship
o be at the property for the appointment (see Tip below). Share yourCMA with the appraiser or agent. Let them know how eager your seller is to sell. Share thehardship letter w
06
in their reportout
re and diplomacy, they have a chance to influenceyour relationship
o be at the property for the appointment (see Tip below). Share yourCMA with the appraiser or agent. Let them know how eager your seller is to sell. Share thehardship letter w
is critical to you. Agents say it’s amazing how many agents just let this step happen with
getting involved in any way. The best agents understand that, using ca
is critical to you. Agents say it’s amazing how many agents just let this step happen with
getting involved in any way. The best agents understand that, using cathe decision. Be sure to ask when the appraisal is being done. If you’ve worked on with them from the start, they’ll probably tell you.
Make arrangements t
the decision. Be sure to ask when the appraisal is being done. If you’ve worked on with them from the start, they’ll probably tell you.
Make arrangements t
ith them.ith them.
Tip! – Be the Point of Contact for Access Tip! – Be the Point of Contact for Access
Agents don’t all agree about this point, but many will actually removethe lockbox from the property once they know the appraisal isordered. They want to be certain the appraiser or BPO agent mustmeet them at the property to gain access.
The idea is, when you meet the appraiser to bring a copy of yourCMA and any other relevant information, offer it as a professionalcourtesy.
Other agents don’t necessarily meet appraisers at the property, but they do call them aheadof time to share information, or they fax the appropriate documents to the appraiser or BPO
agent.Get to know the their bestside can pay off f to limit contact,so be sensitive to tha
Tip! – Appraisals and BPOs Can Be Appealed
BPO agents and appraisers working in your market. Being onor your sellers and you. New guidelines for appraisers are designedt—but also be persistent.
It is possible to appeal a lender’s appraisal that comes in out of synch with your CMA. Some agents, like Knolly Williams, develop theirown appeal document. Knolly says this helps him move swiftly if helearns that the estimate of value (appraisal or BPO) done for the
lender is significantly different from his own CMA.
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Chapter 6: The Short Sale Process 107
Appraisal Controversy: Standards, Middle Men, and “Wandering
Appraisers”
controversy over Agents, brokers, and lenders are now embroiled in
new standards for appraisals adopted by Fannie Mae and FreddieMac—on an initiative originally taken by the New York State Attorney General.
According to The Wall Street Journal (August 19, 2009), “Since thosetwo companies provide funding for the bulk of U.S. homemortgages, the code, which took effect May 1, 2009,has become thenational standard for most home loans. The code bars loan officers,mortgage brokers or real-estate agents from any role in selectingappraisers.”
The new standards have:
• Made appraisers more conservative in their pricing
• Introduced middle-men (AMC’s or appraisal managementcompanies) that lenders use to select appraisers—the goal is todistance lenders from appraisers decisions on property value.
• Appraisers are tending to seek assignments farther and fartherfrom their home territory to generate more business, as the use ofmiddle men by lenders cuts appraisers profit margins.
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Chapter 6: The Short Sale Process108
Step 9: File Approved by LenderStep 9: File Approved by Lender
08
Only the lender can approve the file. If they do, that means you and your buyer are movingtoward closing. This agreement comes in the form of an Approval Letter from the lender.
nt Language Watch Approval Letters for Deficiency Judgme
Just because a lender agrees to short sale terms does not meanthey’ve given up their right to pursue the selling homeowner formore money later! That claim is called a deficiency judgment.
Many agents report lenders have not pursued deficiency judgments inthe vast majority of short sales. But more recently, lenders seem tobe strengthening the disclaimer in their approval letter that reservestheir right to a deficiency judgment later.
Part of your job is to get the most ironclad commitment from thelender that you can—to protect your client.
Here are a few more im things to check for on approval, ing to top agentKnolly Williams:
portant accord
To Do Done
Closing Date: Check closing date—is there enough time to get
funding and close?
Liens: Be sure all liens are settled
Commissions: Check commissions for last-minute reductions
Costs: Know what costs lender is and is not paying—no last-minutesurprises
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Chapter 6: The Short Sale Process 109
Step 10: Deal Closed
Top agents report one of the last-minute developments you may encounter—idoing your own negotiating—is last-minute efforts by the lender to renegotiate your f
f you areees and
g policies to bar
encies to try to negotiateyour commission. There are sometimes last-minute negotiations on the terms of the HUD-1once the lender r .
ointments
commission. Although Fannie Mae and other large lenders are now adoptinthese reductions, they still happen.
The HUD-1 presents an opportunity to counter any lender tend
ealizes what their actual net proceeds from the sale will be
Tip! – Avoid Last-minute Fee Negotiation Disapp
Adding a negotiating fee or servicing fee to the HUD-1 is a techniquetop agents use to increase the chances they’ll get paid what theyshould. “It gives you something else to negotiate away without losingthe commission you’ve earned,” says agent Scott Smith.
Hurry Up and Wait!
Finally your hard work and patience pays off and you are ready to close the deal, saving yourosing. Some have already
the lender’s
.
t the seller most likely is not in a positionshort sale
be able to pay
4. All Liens are Satisfied -Your preparation in Step 1 of the process should help youto ensure there are no additional liens on the house.
Alert the closing company up front that this deal is a short sale and offer to answer anyquestions they have. Some closing companies may be unfamiliar with short sales. If you haveany input at all (it’s unlikely), be sure the title or title/escrow company has plenty of short
sale experience.
customer from foreclosure! Here are some key points about the clbeen mentioned:
1. 30-Day Window - Typically, the deal must close within thirty days of acceptance. As such, the buyer has to be ready with cash or funding.
2. Seller Need Not Attend - The seller does have to attend the closing
3. Seller Brings No Money - Remember thato bring cash to the closing. If you had the seller and buyer sign adisclosure, everybody should understand that the seller is not going toany of the buyer’s closing costs.
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Chapter 6: The Short Sale Process 111
Top Agents’ High Close Rates Set Them Apart
One of the biggest negatives in the marketplace surrounding short sales“difficult to close.” While there is def
is that they areers two other
ally, and theirew federaltimelines.
ork—and trulyss rates.
s short sale specialist Knolly Williams who has consistentlyhort sale
percent of their
On their Website and in marketing materials, Weaver and Kauffman point out that, in theirmarket, their competitors are closing a little more than 20 percent of their short sales—afigure that meshes with recent na Some agents say they think that number is
initely truth to this, research uncov
important realities:
1. Responsiveness is improving - Lenders’ responsiveness generinterest in completing more short sales, seems to be growing. And nguidelines might eventually spur lenders with a set of recommended
2. Strong, repeatable agent processes work - Top short sale specialist agents andnegotiators who have refined and honed their processes and paperw know the business inside and out—are having excellent closing succe
Two examples are Austin, Texaclosed about 90 percent of his short sale escrows, and the Phoenix, Arizona sspecialist team Fred Weaver and Kevin Kauffman who close more than 80
short sale deals in a very tough market.
tional data.lower.
Truth
The faster ke the short sale process workand more efficiently you mathe mo n make.re time you save—and the more money you ca
ching Graduate Level Short Sale Coa
There’s great short sale help available through MAPS in their ShortSale Coaching program, hosted by top agent Knolly Williams.
Knolly also has a detailed short sale prospecting and processinglearning package available separately. It’s called “7 Days to ShortSales.” For more information you can go to www.sevendayssystems.com
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Chapter 6: The Short Sale Process112
FHA and VA Process DifferencesConventional mortgage loans dominate the marketplace, but you will encounter both FHA
and VA mortgage loans when working with distressed sellers.FHA and VA guidelines for the process are similar, but not iknow and follow the FHA guidelines, you will be in good shape on the VA process.
dentical. Top agents say if you
e things that are important to know about FHA guidelines.Here are som
Background
FHA started establishing the current program for handling short sales back in1990s. In 2000,
the mid-FHA turned over the negotiating process on short sale proposals and offers
to lenders, instead of handling them in-house.
wever, you will likely still negotiate the final settlement directly withIn VA loan situations, hoa VA representative.
“Standard of Practice”
FHA short sales are governed by a booklet issued to all participating lender“Standard of Practice.” Get a copy and read it. If you absorb most of whatagents say, you’ll know as much or more about what to do as the lender’s loyou’ll be working with.
s called theyou read, topss mitigator
“The beauty of FHA short sale deals,” says Knolly Williams, “is that everything is writtenin one place. All deals use standard forms and the net settlement
tly. Your deale offer is right.”
y rules of the road governing FHA deals:
e in an FHA mortgage loan situation, the seller must occupy the
FHA will only pay a total of $2,500 in subordinate lien settlements—period.
Allowable Closing Costs
FHA places a strict limit on closing costs they will pay—limited to “reasonable andcustomary” items like title policy, agent commissions, etc. FHA will not pay any buyer closingcosts. FHA also will not permit the purchase price to be raised to offset additional costs.
down in the process—
guidelines are published. Read the rules, know them, and play by them exacshould sail through—given th
Here are some ke
Non-owner Occupant
To qualify for a short salproperty as their primary residence.
Subordinate Liens
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Chapter 6: The Short Sale Process 113
Standard Forms
There are three standard forms you’ll see and use in every FHA short sale. They are:
or no go” replynot proceed.
c. HUD 90051 – Sales Contract Review – This document will come back to youfrom F the offer.
a. HUD 90038 – Application to Participate – You and your client complete, sign andsubmit it to apply for approval in the program
b. HUD 90045 – Approval to Participate – This is the formal “goyou will receive from FHA. Without it, the deal can
HA, once they’ve reviewed all documents and
Tip! – Consulting Session No Longer Required
For many years, FHA required the seller to go through a consultation with an FHA adviser before a short sale would be approved. Thatrequirement has recently been dropped, although many lenders stillaren’t aware of the change.
Other Features of FHA’s Program
There are additional provisions you need to be aware of. They’re listed below. Butremember, what’s presented here is not a detailed and comprehensive view. For that, you m digest the “Standards of Practice” document from FHA.
ust read and
onventional shorttheir pocket.
centives are tiered down, starting at $1,000, depending on the time required to get toclosing.
ations mustreturns as part of their document package and
application.
Default Rule
FHA will look at short sale proposals from homeowners who have not yet defaulted on apayment. But FHA will not approve and close a short sale unless one or more paymentshave been missed.
Homeowner Incentive
FHA offers a cash incentive to homeowners, paid at closing. So, unlike csales, the FHA seller can actually walk away from closing with a little money in These in
Last Two Years’ Tax Returns
Unlike most conventional loan situations, short sale applicants in FHA situsubmit their last two years’ federal income tax
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Chapter 6: The Short Sale Process114
Do You Know the Ten Steps to a Short Sale?
Knowing the process flow of a short sale is essential—for consulting with
homeowners as well as with buyer agents—and for organizing your own work processes.
Recite the ten steps covered in this chapter. See how many you canrecall before you check back in the material. Knowing all thesesteps is a must—regardless of how you choose to do the business.
___________
2. _______________________________________________________________
3. _______________________________________________________________
4. _______________________________________________________________
___________
___________
___________
8. _______________________________________________________________
9. _______________________________________________________________
10. _______________________________________________________________
1. ____________________________________________________
5. ____________________________________________________
6. ____________________________________________________
7. ____________________________________________________
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Chapter 7:Lead Generation
ntage of them,you to rewrite
ique Selling Proposition) to include—or even to focus on—short sales.afted the messages that position you as an expert who is ready, willing andp owners in distressed situations, here are some of the targets you can aim
Lead Sources and Lead GeneratioLead sources for short sales are everywhere. But, before you can take advanyou must acquire the knowledge and start building the expertise that allows
your USP (UnOnce you’ve cr very able to helthose messages at.
Other Agents
If you want to be a successful short sale agent, top agents agree your primary marketingtarget is likely to be other agents—people whosale opportunitie but you need tomarket to other a FT says) to step
in, and help the right thing happen.
eller Williams
are good lead generators will encounter shorts. They may not want them! That’s where you can step in— gents so they know you are ready, able, and willing (as SHI
Tod Barton, Las Vegas, Nevada, has one of the top K short sale practices in the nation. He built the referral power of hisbusiness through common sense and hard work.
Tod says, “I mastered the short sale business when the short salebusiness was not popular. I educated myself on short sales and howto do them. I had the answers to the questions when agents asked.In the end I offered further help through free classes and pertransaction coaching to help them get the short sales closed.”
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Chapter 7: Lead Generation116
Your Database
Just as in traditional business, marketing to your database with a consistent 33program will generate business and referrals. In some markets, many of tho
sale leads, or sho
Touchse leads are short
rt sale candidates—but you have to get the message out in your touchs need to escape
ber, your database is comprised not just of past clients and “Mets.” It also includespeople you do business with on a regular basis—in your real estate business or your personalbusiness.
program and in your marketing that you have the expertise distressed property owner their real estate troubles.
Remem
Truth
Short sale leads are everywhere—you need to portray your expertise;
explain what you know that can help homeowners with mortgage payment problems.
Flier Idea: Key Questions
Top agent and multiple Market Center owner Rick Geha, Fremont, Californevery agent prospecting their database, or other lead segments, have a simple, bold flier
ia, suggests
?”—to send electronically or to handu
r unwanted p your home?
2. Have you missed one or more mortgage payments?
rth less than the amount you owe on your mortgage?
ing it in front
Your Current Clients
called “Are You Dealing with a Real Estate Problemo t at open houses—that asks these questions:
1. Are you facing a negative life issue (death in the family, divorce, ojob transfer) that’s threatening your ability to kee
3. Is your home wo
Rick says connecting these questions with your contact information—and gettof as many people as possible—will get short sale leads flowing to you.
Don’t miss the obvious—we all do it! Talk with your current clients. Whether or not they areshort sale prospects, these days the odds are they know someone facing a loan modificationor potential short sale situation.
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Chapter 7: Lead Generation 117
Your Own Listing Appointments
In your listing appointments, you may find sellers who are in pre-foreclosurepotential short sale customers. Dick Dillingham, dean of KWU faculty, polite
appointments, “Are you current on all your mortgage loans?” to open this coprepared for anxiety with any “n
and arely asks his
nversation. Beo” answers. Remember that the financially distressed
homeowner is stressed . Be reassuring. If you know of any other houses in the neighborhoodin pre-foreclosure, mention it.that sold
Farming
If you farm a neighborhood, or neighborhoods, be sure your marketing message includesf short sale candidates.
yments?”
ents to helpt sellers.
Son Nguyen, Team Leader in Riverside, California, says his Region’s owners are sharingad databases from lender sources. But, he also says farming is a great way
ple that are at
language that grabs the attention o
“Having trouble making pa
“Has a crisis put your home in jeopardy?”“Facing foreclosure? I can help!”
Short, powerful, and pointed messages like these are used by top short sale ag surface people facing financial crises—likely shor
costs of buying leto go in getting short sale leads. “You need to put out messages that reach peoleast sixty days late with their mortgage payments,” he says.
Expired Listings
People trying to sell who can’t sell come off the market at the end of their listing for multipleingness to face the lower price that will make a sale happen.s a short sale price. Approaching expired listings is a solid
ou prices wereclining
reasons. One of them is unwillOften today, that lower price ishort sale lead generator—particularly in neighborhoods where research tells y recently over inflated. Those owners may have seen their equity vanish with deproperty values.
Expired Short Sale Listings
Short sale listings can expire before any short sale approval has come from the lender. If you
win a listing opportunity with an expired property, be sure to find out what was submitted tothe bank and when it was submitted.
First, try to get a copy of what was submitted by the previous agent. If that fails, get a Letterof Authorization signed by the seller and get it to the lender quickly. You need to find out:
1. Where the process stood with the lender at expiration.
2. What is missing from the documentation package (frequently something is missing).
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Chapter 7: Lead Generation 119
Media Marketing and Promotion
In addition, of course, it make sense to get your short sale expert mesconsumers in all the man
sage in front ofy other ways you may already be marketing your business,
ting
• Print Advertising
ertising
including:
• Online Marke
• Social Networking
• TV and Radio Adv
Relationship Marketing
As in the examples above, marketing you’d normally be doing in your business can be turned
ct some of your marketing time and cost toward very
ss may lead to
e working withople who would
roperties.
• Homeowner Seminars —Just as you can appeal to buyers and sellers generally, or
first-time home buyers, similarly you can appeal to people in financial distress, orpeople very concerned about dropping home prices. Seminars offering advice andple needing
into an effective tool to attract short sale leads. If short sales are the opportunity you arefocused on, you may want to redirelogical targets, including:
• Lenders —A good lender relationship built through traditional businetips on possible short sale business.
• Divorce and Bankruptcy Attorneys —Any legal expert likely to bpeople in times of personal and financial distress probably knows pebenefit from a short sale of their primary residence, or even other p
solutions, well-marketed, may bring you quickly into contact with peoshort sale help.
Truth
It can’t be emphasized enough. Top agents in distressed markets arealmost all great communicators. They have learned to step up theirexpertise and then share it—by educating sellers, buyers, and buyer
agents.
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Chapter 7: Lead Generation120
rt Sales?
20
rt Sales?Do You Have More Lead Generation Ideas for ShoDo You Have More Lead Generation Ideas for Sho
Take a few minutes with a partner to talk through the sources offered
here. Can you think of others not mentioned?Switch roles and repeat. List your additional ideas below:
1. ____________________________________________________
2. ____________________________________________________
3. ____________________________________________________
4. ____________________________________________________
5. ____________________________________________________
6. ____________________________________________________
7. ____________________________________________________
8. ____________________________________________________
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ChapteEvaluate
r 8:
Listing Short Sales
The course mater p for you remains to be done.
e been doing the exercises along the way and a picture has been forming for
ng with your traditional
r you?
s It?
understanding of the mindsets of the other players—distressed homeowners, pressured andoverburdened financial institutions, plus uncertain and sometimes uninformed buyers andbuyer agents.
These realities create critical personal and business demands for a short sale agent. This final chapter is dedicated to helping you evaluate yourself against these demands.
and Youials end here, but the most important ste
In the very first section of this course, this goal was stated:
“To help you evaluate the business opportunities thatdistressed real estate markets represent.”
Hopefully you’v you—and a decision.
Do you plan to actively pursue short sales as the focus of your business, or are you plannito add short sales to your skill set for the long term, as part of a mix
real estate business?
If you are focusing on short sales, which business path within short sales is fo
Wrap-Up: Is There a Fit? What I You’ve learned that a lot of success in short sales starts with your mindset—and your
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Chapter 8: Evaluate Listing Short Sales and You
122
Personal Demands
A big part of the success equation for doing well in short sales is about your own mindset
ation skills to
k you have enough of these qualities to succeed, provided you cana person or persons who’ll bring the missing ingredients you
ing based? Do you believe you can learn and develop in the areas you
and the personal qualities you bring to the business.
• Do you think you have the patience, persistence, and organizsucceed in short sales?
• Do you thinleverage the help ofneed to succeed?
• Are you systems oriented?
• Are you learnknow you’ll need to succeed in short sales?
Business Demands
The other side of the short sale success equation is the business side. It’s clear that—if you
ng agent—one who handles short sales
requalifyshort sale expert
who will see the deal through and pay you a referral fee?
• Will you decide you have the personal skills and business resources to be a short salenegotiation and processing expert—one who helps other agents get short saleprospects accepted by lenders and offers on their property accepted and closed?
want to commit to this business—you need a strategy:
• Will you be what the course calls an originatifrom prospecting all the way through the process to closing?
• Will you be a referring agent—one who knows how to find and pdistressed homeowners, and then turn their information over to a
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Chapter 8: Evaluate Listing Short Sales and You
123
of? Tip! – Multiple Businesses Under One Ro
There are multiple possibilities. Research uncovered several
important facts about how agents do, or do not, combine businessesin declining and distressed markets.
• Concentrate on short sales: The majority of top short saleagents seem to concentrate almost entirely on short sales. They won’t turn traditional business with “equity sellers” aside, butmost of their time is focused on building their short sale pipeline.
• Short sales with a separate negotiation unit that serves otheragents too: Some top short sale agents have successfully turnedtheir negotiation skills into a separate short sale negotiationbusiness that they run alongside their own end-to-end short sale
practice. They leverage their negotiating skills and resources togenerate additional income.
• Short sales and REOs: Some agents do both REO and shortsales. This is pretty common, but become less of a reality whenone or the other of these business lines really takes off andbecomes a volume business for them.
• Distressed and traditional units side-by-side: few agents Amake a purposeful effort to create distressed property andtraditional business units side by side. Their thought is it keepsthem in the game for a return to more balanced markets.
Truth
These choices are yours. Evaluate them. Get some coaching ormentoring to do that. Make a choice, and take action to bring it to life.
Instructions The exercise that follows focuses on your three main paths within short sales—end-to-endshort sales, referral only, and negotiation/processing specialist:
1. Read through the personal and business requirements for each carefully.
2. Mark your preferred path.
3. Cite actions needed to pursue that path and time block them.
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Chapter 8: Evaluate Listing Short Sales and You
124
in Short Sales:
Which Is for You?
Three Options
Option 1
End-to-End Short Sales
Personal Requirements
to manage the negotiation side—doing most of that work yourself in the
rganized. Committed to relationship building with range of
done.
mmunicator.
up to speed with the industry—and to educating others about it.
o be very, very busy.
• Master patience, persistence, and empathy for homeowners’ financial and personaldistress.
• Preparebeginning.
• Extremely focused and olender reps.
• Learn the variations in how deals are
• Be an excellent co
• Commit to staying
• Ready, able, and willing t
Business Requirements
• Short sale market savvy.
• Homeowner qualification skills.
•
• Time blocking and business planning skills.
• Recruit and select the assistance you’ll need to handle volume that will make the businessprofitable at the level you want.
• Marketing skills—ability to target short sale prospects.
Short sale package- building skills.
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Chapter 8: Evaluate Listing Short Sales and You
125
Option 2
Referral Only
Personal Requirements
• Prospecting and qualifying skills to find suitable short sale candidates—making your-after source for short sale agents.referrals a sought
Business Requirements
• Short sale market savvy.
• Marketing skills—ability to target short sale prospects.
• Homeowner short sale qualification skills.
• Transaction processing side of your business remains as is—assuming there is enoughtraditional business for the profitability you want.
ral a low cost option.• Refer
Option 3
Negotiator/Servicer
Personal Requirements
• Short sale market savvy.
ationship building with range of lender reps and dealing variation in
• Extremely focused and organized.
• Committed to relsales are completed.
• Solid negotiator.
• Ready, able, and willing to be very, very busy.
Busi
• Systems and management oriented—prepared to handle volume with tools, people.
• Business planning skills.
• Short sale package building skills.
• Marketing skills, especially in larger agent community.
ness Requirements
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Chapter 8: Evaluate Listing Short Sales and You
126
Which Option Best Suits You?
What Actions do You Need to Take?
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Short Sale Tool Kitents you can use as
e course thatyou can use—either electronically or as printed pages.
Keller Williams documents—to
le Package Documentslines Disclaimer
t
ter
Preliminary HUD-1
ting Documents
The course tool kit of downloadable files contains short sale docummodels to create your own working forms. It also contains a few items from thare formatted as handouts
Here’s the list of tool kit items. They are designed as genericbe customized for your business.
Short SaShort Sale Guide
Financial Statemen
Hardship Let
Letter of Authorization
Fax Cover Sheet
Marke