Short Sales: Assessing Viability and Compiling the Package. Outline of Topics. Assessing Viability

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1 Short Sales: and Compiling the Package Presented by Karen G. Courtney Managing Attorney Short Sale Coordination Department Attorneys Title Guaranty Fund, Inc. Betsy Green Short Sale Coordinator Short Sale Coordination Department Attorneys Title Guaranty Fund, Inc. Outline of Topics Assessing the Viability of Your Client s Short Sale Compiling Your Client s Short Sale Package How Can ATG s Short Sale Coordination Department Help? 1

2 What is a short sale? A short sale allows a Seller whose property is underwater (mortgage debt exceeds the value of the home) to transfer the property for a price that is less than the amount needed to pay all liens, encumbrances, and closing costs. Who are the players in the short sale approval process? Loan Servicers Investors Mortgage Insurance Companies Subordinate Lien Holders All of these parties must agree to accept a loss on an outstanding debt, which complicates the short sale approval process and may result in a longer processing time. Written approval from all lien holders, including payoff amounts, must be obtained prior to closing. 2

3 Compile a list of pre-screening questions to ask your clients to help you assess short sale viability. Sample Short Sale Pre-Screening Questions Set reasonable expectations with the Seller. Help clients set reasonable expectations regarding the viability of the short sale at the beginning of the process. Liquid funds should be in Seller s possession to pay for disapproved costs or possible required Seller contribution. 3

4 Set reasonable expectations with the Seller. Each investor has guidelines for approving short sales, and not all short sales will be approved. Lenders are not obligated to agree to a short sale; a short sale is a request, not an obligation on lender s part. Set reasonable expectations with the Seller. Prepare the Seller to consider alternatives and possibly the loss of their property to foreclosure in the event that the short sale is not approved. The lender may ask for a cash contribution or promissory note from the Seller as part of the short sale agreement. Some transaction costs may not be approved, which may result in a required financial contribution from the Seller. Numbers The closing statement is one of the biggest factors lenders look at when determining whether to approve a short sale. 4

5 Numbers Always ask the Seller how much is the debt amount. Debt/net ratios of much less than $0.50 on the dollar are less appealing for investors/loan servicers who desire full payoff. Other substantial debts must be factored into the debt/net ratio, such as junior liens, municipal liens, real estate taxes, etc. Numbers If the net is estimated to be $0.20 on the dollar, the short sale is more likely to be rejected. Deals with selling price much below $100, are long shots for this reason. Is the Seller in default / has foreclosure commenced? Loan generally must be in default for at least days or default must be likely or imminent, although some lenders will consider a short sale even if the loan remains current. 5

6 Is the Seller in default / has foreclosure commenced? If foreclosure has been commenced, there must be enough time to structure and process a short sale. This is difficult if loan has been in default much more than 10 months. Loan servicers who are already burdened feel less urgency. Is the Seller in default / has foreclosure commenced? Please keep in mind that as long as the loan is current, the loan servicer still has their source of income. As time progresses, much effort and costs have already been incurred. It is common practice for lenders to make attempts to reduce transaction costs, which are substantial when real estate professionals are involved. Is the Seller in bankruptcy? Short sale approval will not be granted by the short sale lender if the Seller is in bankruptcy unless an order authorizing the sale of the property is obtained from the bankruptcy court. 6

7 Arm s length transaction? Lender will require the parties to demonstrate that the contract is an arm s length transaction (negotiated by unrelated parties at a price based upon fair market value). Is house listed and will real estate commission be paid? If not, the deal will be for scrutinized for indications that it is not an arm s length transaction. Is the Seller facing financial hardship? Seller generally must be able to demonstrate financial hardship and inability to continue to pay the mortgage. Loan servicers/investors screen for events that are out of the Seller s control and financial and would explain why the Seller cannot pay the mortgage. This is a very gray area and, therefore, full of surprise results that are remarkably inconsistent. Fair market value offer? Sale price ideally should be within market value of the property. Short sale lender will order a broker price opinion (BPO) or appraisal to verify that the sale price is reasonably related to market value. It is best to have a motivated buyer, but the seller/real estate broker must also consider that BPO/appraisal issues could arise for offers much below market. 7

8 Property Factors Condition? Maintain and protect condition. Marketability? Occupied or vacant? Occupied is preferred. Property Factors Well maintained? Property flaws and defects should be revealed during offer submission. That way, any property flaws and defects can be factored into the value when offers are below comparable recent sales. Cooperation and Teamwork All parties and real estate professionals must cooperate and work together to obtain a successful short sale result. 8

9 Cooperation and Teamwork Seller Seller must respond to document requests on a timely basis. It is best to work with a capable, motivated seller who has access to electronic, timely methods of communication. Cooperation and Teamwork Buyer Patient and Motivated Short sale may take months to complete. Buyers must be prepared to wait for short sale approval to be obtained. Flexible Increase in purchase price may be needed if short sale lender counters the price. Buyers may be asked to cover some closing costs. Cooperation and Teamwork Buyer Financially Qualified Require Proof of Funds on bank letterhead or written Mortgage Pre-Approval Letter from a reputable lender. Proof of Funds or a Mortgage Pre-Approval Letter required by lender as part of the short sale approval process. 9

10 Cooperation and Teamwork Listing Agent and/or Attorney Willing to gather documents efficiently and review for errors before submission. Title Company Assists with preparation of the preliminary HUD-1 Settlement Statement. Valuable resource for resolving title issues and closing problems. Cooperation and Teamwork Short Sale Coordinator Highly organized with a keen attention to detail. Vast knowledge and experience in resolving distressed real estate. Top Negative Factors Debt too high (well over 2 times the value of the property). Severe property condition issues resulting in decreased home value. Winterized, locked down, vacant, missing appliances. Otherwise, occupancy status will not be given and appraisers cannot complete their review. Recent loan/re-finance 2010 or later. 10

11 Top Negative Factors Recent or pending homeowner s insurance claim. Often, homeowner policies state that mortgage default renders the policy null and void. Sometimes, banks are notified and will obtain a policy on their own for this reason. Earnest money and/or buyer s proof of funds or pre-approval not collected by listing agent. Contracts must be accompanied by proof of funds or pre-approval. Collection of earnest money should be verified. Compiling the Package Compiling the Package Submit Authorization to Release Information (a/k/a Third Party Authorization) to all lien holders. Authorizes lien holders to release information about Seller s account to a third party. First step in the process of negotiating the short sale with the lender. Confirm lender s receipt and acceptance of Authorization. 11

12 Compiling the Package Find out what documentation lender requires to approve short sale. Check the website for short sale lender to see if lender has short sale package posted online. Call the short sale lender to request short sale package or list of documents required to be submitted with Seller s short sale request. Compiling the Package Be prepared with the following documents: Contract Short Sale Addendum Do not use the term Owner of Record or its abbreviation OOR in lieu of the name of the Seller(s) in the contract documents. Correct contract documents to show the full name(s) of the Seller(s) and initialed by both parties. Compiling the Package Be prepared with the following documents: Listing Agreement with stated commissions Must not expire before short sale is approved. Allow at least 6-12 months. Must be signed by Managing Broker. MLS Listing Sheet Hardship Letter Two (2) most recent pay stubs Two (2) most recent bank statements 12

13 Compiling the Package Be prepared with the following documents: Signed income tax returns for previous two (2) years Request for Individual Tax Return Transcript (IRS Form 4506-T) W-2s from the previous two (2) years Buyer s Mortgage Pre-Approval Letter or Proof of Funds on bank letterhead Compiling the Package Be prepared with the following documents: Preliminary HUD-1 reflecting all fees and costs to be paid out of closing as of the projected closing date and the net short payoff amount each lien holder will receive. Ask title company to prepare preliminary HUD-1. Seller must net zero. Estimate costs that can change as of projected closing date (at least 90 days forward). Double-check the contract for closing cost credits to Buyer and other costs to be paid by the Seller. Compiling the Package Prior to submission to lender, review short sale package for errors or omissions and to ensure financial documents are current. 13

14 Compiling the Package Submit complete Short Sale Package to lender. Confirm lender s receipt of Short Sale Package to avoid delays in the short sale approval process. Compiling the Package Subsequent Document Requests from Lender After submission of the initial short sale request, the lender is likely to follow up with additional requests for further documentation, corrections, etc. Respond in a timely manner. Common Problems that Delay Closings Disapproved Fees Last-Minute Name Changes Compliance Problems Regarding Short Sale Approval Conditions Morning closings are preferred in the event that the closing is scheduled on the date the short sale approval letter expires. This allows sufficient time to comply with approval conditions (such as wiring of payoff funds and delivery of original documents) before expiration of approval. Unresolved Judgments/Liens 14

15 Sample Short Sale Approval Letter 1 (page 1 of 5) Sample Short Sale Approval Letter 1 (page 2 of 5) Sample Short Sale Approval Letter 1 (page 3 of 5) 15

16 Sample Short Sale Approval Letter 1 (page 4 of 5) Sample Short Sale Approval Letter 1 (page 5 of 5) Sample HUD-1 Settlement Statement (page 1 of 2) 16

17 Sample HUD-1 Settlement Statement (page 2 of 2) Sample Letter of Direction for Payment of Closing Costs from Seller Incentive Short Sale Restriction on Transfer Restriction on Transfer of the Property after Closing Lenders often impose restrictions on the Buyer s ability to transfer of the property after closing. Restrictions typically range from thirty (30) to ninety (90) days after the closing date or date of deed. Restrictions can be found in the short sale approval letter, closing instructions that are issued with the HUD approval and/or short sale/arm s length affidavit. 17

18 Short Sale Restriction on Transfer Restriction on Transfer of the Property after Closing Lenders have recently started including a condition in short sale approval letters/closing instructions/short sale affidavits requiring the following restriction to be added to the deed to the Buyer: Short Sale Restriction on Transfer GRANTEE HEREIN IS PROHIBITED FROM CONVEYING THE PROPERTY DESCRIBED HEREIN FOR ANY SALES PRICE FOR A PERIOD OF 30 DAYS FROM THE DATE OF THIS DEED. AFTER THIS 30 DAY PERIOD, GRANTEE IS FURTHER PROHIBITED FROM CONVEYING THE PROPERTY FOR A SALES PRICE GREATER THAN [INSERT AMOUNT EQUAL TO 120% OF THE PURCHASE PRICE] UNTIL 90 DAYS FROM THE DATE OF THIS DEED. THESE RESTRICTIONS SHALL RUN WITH THE LAND AND ARE NOT PERSONAL TO THE GRANTEE. Short Sale Restriction on Transfer Restriction on Transfer of the Property after Closing Sellers and Settlement Agents are often required to demonstrate compliance with this condition by returning a copy of the deed to the short sale lender after closing. 18

19 Short Sale Restriction on Transfer Restriction on Transfer of the Property after Closing ATG requires the following Schedule B exception relating to this deed restriction to be added to the title commitment: Short Sale Restriction on Transfer The final Owner s Policy shall be subject to the following restriction contained in the Deed dated *, and recorded *, as Document No. *, executed by *, as Grantor, and given to *, as Grantee: GRANTEE HEREIN IS PROHIBITED FROM CONVEYING THE PROPERTY DESCRIBED HEREIN FOR ANY SALES PRICE FOR A PERIOD OF 30 DAYS FROM THE DATE OF THIS DEED. AFTER THIS 30 DAY PERIOD, GRANTEE IS FURTHER PROHIBITED FROM CONVEYING THE PROPERTY FOR A SALES PRICE GREATER THAN [INSERT AMOUNT EQUAL TO 120% OF THE PURCHASE PRICE] UNTIL 90 DAYS FROM THE DATE OF THIS DEED. THESE RESTRICTIONS SHALL RUN WITH THE LAND AND ARE NOT PERSONAL TO THE GRANTEE. Sample Short Sale Approval Letter 2 (page 1 of 4) 19

20 Sample Short Sale Approval Letter 2 (page 2 of 4) Sample Short Sale Approval Letter 2 (page 3 of 4) Sample Short Sale Approval Letter 2 (page 4 of 4) 20

21 Sample Short Sale Affidavit (page 1 of 4) Sample Short Sale Affidavit (page 2 of 4) Sample Short Sale Affidavit (page 3 of 4) 21

22 Sample Short Sale Affidavit (page 4 of 4) How Can ATG s Short Sale Coordination Department Help? How Can ATG s Short Sale Coordination Department Help? Short sales are difficult to complete. The short sale process is inefficient and labor intensive. We handle the administrative tasks involved in obtaining short sale approvals so you can focus on doing what you do best representing your client. 22

23 Services We Perform We work directly with the Seller s attorney, listing agent, and homeowner to assemble and submit documentation in an efficient and timely manner to persuade the lender to agree to the short sale. The Seller s attorney or listing agent should be designated to collect documentation directly from the Seller. Services We Perform We partner with the Seller s attorney to prepare and submit the HUD-1 Settlement Statement to the short sale lender. We quickly process any HUD changes required by the lender throughout the short sale approval process. Seller s attorney should review and approve the HUD before submission to the short sale lender. Services We Perform We communicate with lenders and servicers throughout the short sale process, saving you valuable time. 23

24 Services We Perform We ensure that the short sale payoff letter meets underwriting approval and that compliance has been made with any conditions contained in the short sale payoff letter. Prevents closing delays and helps ensure a smooth closing. Services We DO NOT Perform We don t render legal advice to the Seller This includes, but is not limited to, explaining the terms and conditions or consequences of the payoff letter to the Seller or any other party. We require any Seller we work with to be represented by legal counsel before we provide any short sale coordination services. Services We DO NOT Perform We don t render tax advice to the Seller. We recommend Sellers seek advice from a tax professional regarding tax consequences of a short sale. 24

25 Services We DO NOT Perform We don t handle title clearance for prior unreleased mortgages or for other title exceptions not being coordinated as part of the short sale approval. Example: An unreleased mortgage belonging to a prior owner. ATG Member is responsible for obtaining a hold harmless letter from the prior title company or a recordable release. Services We DO NOT Perform We don t handle title clearance for prior unreleased mortgages or for other title exceptions not being coordinated as part of the short sale approval. Example: Paid assessment letter from condominium or homeowners association. Contact ATG s Underwriting Department at for assistance with title clearance or other underwriting questions. Services We DO NOT Perform We don t perform services customarily handled by other ATG departments. Examples: Title Orders Later Date Searches Closing Protection Letters Scheduling Requests for Closings, etc. ATG Member must handle all title and closing related tasks through the appropriate departments at ATG. 25

26 Services We DO NOT Perform We don t perform services customarily handled by other ATG departments. Exception: Entry of Seller s figures for short sale, which is handled solely by the ATG Short Sale Coordination Department. Buyer s figures, including fees charged by Buyer s lender and attorney, are entered by our Closing Services Department/RESPA operators or by the ATG member closer. Use ATG to Help You Coordinate Your Clients Short Sales For more information, please contact us: shortsales@atgf.com or