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Negotiating The Short Sale
 

A short sale occurs when a homeowner needs to sell at a price that is less than what is owed to the bank and the lender has agreed to the sale. The home owner does not necessarily have to be in default but a lender is under more pressure to agree to a short sale if a Notice of Default has already been filed and foreclosure is imminent. At that point, the lender’s only options are foreclosure, restructuring or forbearance of the loan, obtaining a deed-in-lieu-of-foreclosure, or a short sale.  

If the lender chooses to foreclose and sell the property at an auction, there would be no bidders if the market value of the property is less than the minimum bid, which will be equal to the amount owed the lender plus foreclosure costs. In this case, the lender would get the property back. The lender will now incur all of the holding costs of owning the property. Some of these costs can include property upkeep, evicting the former owner, property damage caused by the former owner, and trustee fees. Banks are not in the real estate business and foreclosure is not an attractive option. 

Restructuring the loan or granting a forbearance will not work in situations where the home owner has to sell, for example, due to job relocation. The deed-in-lieu-of-foreclosure option is also unattractive. In this case, the home owner simply signs the deed of trust over to the bank. Senior lien holders are unlikely to allow this because all junior liens will still remain in place. 

The remaining option is the short sale. Lenders will often agree to a short sale if the short sale appears to provide the best monetary return of all available options. This is the main objective of negotiating the short sale with the lender. The five main negotiating points to convince the lender that the short sale is in their best interest are as follows: 1) Show the lender that they have already made money from the property; 2) Detail exactly how high the bank’s total holding costs for the property will be; 3) Convince the lender that the market value of the property is low as possible; 4) Explain how the home owner’s current unfortunate situation is due to unforeseeable circumstances that were beyond the owner’s control and occurred after the current loan was put in place;  and 5) Prove to the lender that the potential buyer can complete the transaction and has a personal interest in the property. 

The lender’s profit is the interest paid. A loan that has been in place for several years is sure to have provided a significant amount of interest to the lender. That is easy to calculate. Next, make a detailed list of all of the bank’s expected holding costs. Items on this list would include property taxes, insurance, repairs, maintenance, trustee fees, marketing costs, and lost income on loans. The next step is to prove that the property’s market value is as low as possible. Get several bids for repairs. These should be as high as reasonably possible. If possible, obtain a proper appraisal validating the property’s low market value. The loan officer or buyer’s agent should prepare a HUD-1 to submit to the existing lender. This HUD-1 should include the 6% commission and all fees that will be paid to all third parties, including contractors who perform repairs. Finally, the HUD-1 should show a zero balance due to the seller and the short sale proceeds paid to the existing lender. 

The bank will evaluate the potential buyers as well. The agent and loan officer working on behalf of the buyers will need to provide the bank with the buyers’ income, asset, and credit information. The buyers should have a full approval in hand from their lender at the start of the process. This will be submitted to the existing lender as well. Banks in short sale situations are more receptive to buyers who can demonstrate a personal interest in the property. First-time buyers and friends of the current owner are high on banks’ preferred buyer list. Create a Financial Hardship Letter that will be sent to the lender that describes how the homeowners’ circumstances have changed for the worst after the existing loan was put in place. 

Before submitting an offer for a short sale to the bank, the buyer and buyer’s agent must do lots of homework. It is very important to determine who the actual decision maker and negotiate only with that person. Locating that person is not always easy. Sometimes banks will contract out this kind of work. If the bank keeps the work in-house, that person will be working for a department with a name something like Work-out Department or Loan Reinstatement Department. When the correct person has been located, request from him or her the “Short Sale Packet.” All documentation should be sent in at one time because that one person will likely have an overwhelming number of cases working concurrently.  

Before submitting the offer to the lender, it is often a good idea to contact the lender to find out what is the lowest offer price they will consider. Senior lienholders will often take losses up to 10% to 15%. Junior lienholders have to be negotiated with as well. Junior lienholders will often take $0.10 to $0.15 per $1.00 owed because they have no other options. They actually have the same legal options as the first lienholder but their subordinate lien position greatly diminishes their clout. If the loan has PMI, the PMI company must agree to the short sale as well.  

If the lender accepts the offer, it is important to get the lender’s written agreement to pay commissions to the real estate agents involved. If the lender rejects the offer, it may be possible to renegotiate some of the fees with the buyer paying more and the agents accepting lower commissions. If the difference between what the bank wants and what the buyers offer is small, the bank might be willing to make a small unsecured loan to the buyer to cover this difference. 

Certain legalities need to be following during this whole process. If a Notice of Default has already been filed, additional Section 1695 disclosure and contractual requirements exist. The MLS listing and purchase contract must state: Subject to lender’s approval. The new buyer must also be aware that the  IRS will consider the lender’s allow price reduction as taxable income. Forgiven Of Debt is taxable income and the new buyer will receive a 1099-C at year-end with the price reduction listed as taxable income. Before beginning the offer submission process, the buyer and buyer’s agent should consult a real estate attorney specialized in this area for advice.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Mark Harmon, Realtor
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USA Realty and Loans

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