As part of our series on Short Sales, we posed some questions to the Linked In community and I thought the questions and answers were worth sharing.
As we have discussed, short sales can be a positive solution by helping one avoid foreclosure. Owners facing foreclosure have some hope and a way to relieve some of the stress. Many of our clients tell us they will be able to sleep better knowing that this situation is being handled. Moreover, buyers can oftentimes get a good deal when they buy short sales. Lastly, lenders can minimize their losses when they approve legitimate short sales. I call this the “win/win/win” formula.
On the other hand, especially when folks are operating on partial information or, even worse, wrong information, then short sales can be extremely frustrating. In addition, some lenders have poor policies, inadequately resourced departments, and/or other priorities (like keeping the doors open and the FDIC at bay) that can cause long processing times. Let’s illuminate the truth about short sales from the many interested parties commenting from Linked In: seller, buyer, lender, mortgage insurance carrier, investor, attorney, and broker.
Comment from a Linked In participant: Brokers receive no guidance from the Lender on listing price of the property and list price is rarely accurate. Brokers list the property at a low price, receive a full list price offer, only to have the lender counter with a higher price. A buyer broker may try to avoid a short sale property because of the wear and tear caused by their buyer and may be looking at months of phone calls to a lender who is unresponsive and unhelpful.
The Alaris Response: This is a common experience depending on the type of loan the seller has and/or short sale program the seller is using. Oftentimes, brokers do not know what the bank’s value will be and they certainly have little to no control over how the value comes in. On the other hand, experienced brokers do their own BPO and have a pretty good idea of value, and can price the home in the “ball park”. Also, experienced listing brokers help buyer’s agents understand that the bank may counter so that the buyer can be prepared for this possibility. Another problem comes into play when there are non-obvious repairs, structural issues, etc. that affect value. This is why it is critical for the listing broker to work with the bank’s appraiser or agent who is preparing the BPO so that all parties have complete information. As a buyer’s broker, I try to ask questions to see if the listing agent knows what they’re doing. If they do, then I am way more comfortable on the buyer-side of the transaction. Also, it is critical that the listing agent or short sale processor provides regular updates to all parties. We provide short sale updates to all interested parties every Thursday on every short sale we are processing.
Next Comment: Why are so many short sales declined?
Alaris Response: Our experience is that the vast majority of short sales are approved; however, we have learned that there are many technical requirements that must be met. For example, when a lender requests documents, one typically must supply those documents within 48 hours. In addition, lenders require copies of bank statements and tax returns. We must provide all pages and all schedules. Many of our clients have a difficult time understanding why they have to provide lenders with pages that only have the blank reconciliation sheets. Nonetheless, they are required. It is important to understand that underwriters are reviewing these documents, and they are trained to review all pages and all schedules. If one were to withhold any documents or to provide incomplete documents and to supply documents late, he runs the risk of having the short sale declined and/or the file closed.
Next Comment: Buyers are resistant to purchase homes in need of repair, which is often the case for short sale homes.
Alaris Response: Short sales come in all shapes and sizes. We have some short sale properties that are in perfect condition, while others are upside down because of damage. We had one property that was originally appraised at $1.6 Million, and sold for $510,000, due to bentonite damage. On the other hand, we have sold some short sale properties for under fair market value with absolutely no damage and no deferred maintenance. There are all kinds of buyers, some do not mind repairing a home in exchange for a good deal. In many cases, short sales are excellent deals.
The longevity of the sales cycle may also take from 2 -3 months for bid approval then another 30 days to close. Buyers then feel taken for a ride when they offer full listing price, only to have the lender counter offer for a higher amount.
Alaris Response: Here is what we tell our clients and buyers’ brokers: “It is our experience that it takes approximately 90 days to receive an approval on a short sale. This time period can be shorter or longer, depending on the negotiator and requirements of the underlying investor. Lately, we have seen short sales taking less time to process. As you no doubt are aware, there are a number of critical steps through the process. Once the lender has reviewed all the documents and determined they have a complete package, they will order a BPO or appraisal on the property – this can take up to 30 days to complete this task. Once the BPO or appraisal is in their system, they will determine whether the offer is sufficient, and there can sometimes be negotiations. This phase can go quickly depending on the value as represented by the value they obtained. Once everyone agrees on the numbers, they will submit the short sale for upper management (or investor) approval. This last step before approval can take up to 30 days. Once we receive an approval, we will have 30 days to close.”
With that said, our fast approval came in 7 days. Our average is about 45 days. If there are damage issues or other complications, we can see much longer processing times.
Next Comment: Seller’s credit score is negatively affected, but not as much as a foreclosure. When approaching a short sale option, sellers may want to consider a real estate attorney with experience getting short sale property to settlement. Sellers are also often a pawn in the waiting process.
Alaris Response: I recommend sellers hire a reputable credit repair agency to assist them after the short sale. Of course, a short sale and a foreclosure are both considered derogatory reports on ones credit. However, the damage can be controlled and a credit report can be dramatically improved if one follows the rules. In addition, I recommend sellers educate themselves on the consequences of loan modifications, short sales, and foreclosures so that they do not become pawns. No one is a victim who takes responsibility to learn what he or she must learn.
Next Comment: Lenders have the right to sue for loss – difference between what is owed and the net amount they agree to accept. Even if forgiven, the IRS will nab you for taxes paid on the “income”. The seller’s lender has all the time in the world. They are also often so overloaded with the influx of business, they take exorbitant amounts of time to negotiate.
Alaris Response: It is very important for the seller to understand whether they are receiving a “full release” from the lender. This information is usually contained in the short sale approval letter. I recommend that a seller demand a full release and push back if the lender or mortgage insurance company says no. In the end, it is the seller who must decide if they want to agree to something less than a full release. Oftentimes, sellers can offer and some banks even demand a promissory note in addition to their net proceeds. Make sure that, if you agree to sign a promissory note, you receive a full release once the promissory note is paid in full. Also, consult with your tax professional as to whether you can take advantage of the Mortgage Debt Relief Act and exclude any 1099 income that could result from the short sale. Here is a link to the IRS website that contains information on this wonderful Act:
The bottom line is that a seller may not owe taxes on the amount forgiven if they qualify for the tax relief provided in the Act. I recommend consulting with your attorney and tax professional to understand these issues.
Next Comment: I had a short sale declined because the seller filed bankruptcy.
Alaris Response: We have not had the experience where a lender declined a short sale because of a bankruptcy; however, most title companies and many lenders require an order from the bankruptcy court “abandoning” the asset. In a couple instances, we were able to obtain a letter from the US Trustee indicating that the bankruptcy estate had no interest in the property. It is vital that one not accept as true everything a lender’s negotiator says. We find that many negotiators are clueless, and we have to escalate in order to obtain the correct response. We recently had a lender tell us a seller could not participate in HAFA (http://www.makinghomesaffordable.org/home-affordable-foreclosure-alternatives.html) because they had filed bankruptcy and bankruptcy would not allow them to receive the $3000 HAFA incentive. That was obviously inaccurate and we had to escalate the matter to the lender’s legal department to get the negotiator to process the short sale under HAFA.
Last comment: If all parties can go into the short sale process with eyes wide open, the process can be more manageable. Be prepared and in a position to wait it out.
Alaris Response: Agreed. Also, make sure the seller’s short sale processor knows the lender’s timeline, and knows how to escalate the file if the lender exceeds that timeline. Sometimes it is important to call the lender every day to keep the process moving.
If you have questions, remember that the Alaris Properties team is here to help you.