Kwu Shift Dp Listing Short Sales Manual V3.2

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Slide 1: SHIFT: Tactic 11 Distressed Properties: Listing Short Sales Roger Higle > Helping Sellers When They Need to Sell < Slide 2: Acknowledgments The author gratefully acknowledges the assistance of the following individuals in the creation of this course. These busy agents, leadership, and KWRI leaders and staff gave generously of their precious time to provide insights, data, quotes, and editing time to this project. The distressed properties phenomenon has created a unique set of conditions, while also posing stark contrasts with more traditional markets—in practices, systems, economics, and learning opportunities. The sellers are both distressed individual homeowners and institutions under immense economic pressure from shareholders and the government. The buyers are homeowners seeking move ups, first time buyers, and investors with all levels of expertise. Many of the top distressed property specialist agents who participated have literally invented their businesses while building them. Some have practiced in previous distressed markets. Others are newly arrived agents who have boldly pioneered much of what is taught here— about how to survive and thrive in unusual times. Gary Keller Fred Weaver Barbara Horan Mona Covey Martin Bouma Tod Barton David Reed Bruce Hardie Mary Keith Trawick Katie Nelms Steve Mangelson Knolly Williams Scott Smith Sharon Hamilton Bryon Ellington Kirk Nace Son Nguyen Aaron Rice Stacia Thompson Jeff Ryder Deborah Stafford Debbie Zois Kevin Kauffman Tony DiCello Chris Heller Jay Papasan Wendy Shaw Alexis McIntyre Gene Rivers Rick Geha Tamara Hurwitz Shirley Mantynen Kristina Arias Slide 3: Notices While Keller Williams Realty, Inc. (KWRI) has taken due care in the preparation of all course materials, we do not guarantee its accuracy now or in the future. KWRI makes no warranties either expressed or implied with regard to the information, programs presented in the course, or in this manual, 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 exercises that are designed to help you understand how Keller Williams calculates profit sharing contributions and distributions under the MORE System, how Keller Williams determines agents compensation under the Keller Williams Compensation System, and how other aspects of a Keller Williams Market Center’s financial results are determined and evaluated. Any exercises are entirely hypothetical. They are not intended to enable you to determine how much money you are likely to make as a Keller Williams Licensee or to predict the amount or range of sales or profits your Market Center is likely to achieve. Keller Williams therefore cautions you not to assume that the results of the exercises bear any relation to the financial performance you can expect as a Keller Williams Licensee and not to consider or rely on the results of the exercises in deciding whether to invest in a Keller Williams Market Center. If any part of this notice is unclear, please contact Keller Williams’ legal department. Materials based on the Recruit-Select-Train-Manage-Motivate™ (RSTMM™) system and the Winning Through Selection™ course have been licensed to Keller Williams Realty, Inc. by Corporate Consulting. KWRI has the exclusive right within the real estate industry to market and present material from RSTMM™, Winning Through Selection™, and any derivatives owned by or created in cooperation with Corporate Consulting. Material excerpted from The Millionaire Real Estate Agent and SHIFT: How Top Real Estate Agents Tackle Tough Times appears courtesy of The McGraw-Hill Companies. The Millionaire Real Estate Agent is copyright © 2003–2004 Rellek Publishing Partners LTD. SHIFT: How Top Real Estate Agents Tackle Tough Times is copyright © 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 any form or by any means without the prior permission of Keller Williams Realty, Inc. Slide 4: Table of Contents CHAPTER 1: WHAT YOU WILL LEARN ................................................................ 7 Series Objectives.........................................................................................................................7 Listing Short Sales Objectives ..................................................................................................8 Graduate Study: Where to Look Next ....................................................................................9 “Watch Out” Alerts .................................................................................................................10 Tips for You..............................................................................................................................10 Course References....................................................................................................................10 Tool Kit .....................................................................................................................................11 CHAPTER 2: DISTRESSED PROPERTY TIMELINE .................................................. 13 Personal Shift—Through the Homeowner’s Eyes..............................................................13 The Distressed Property Process—Before and After Foreclosure...................................18 Know Your State Laws and Regulations ..............................................................................18 Distressed Property Timeline .................................................................................................19 CHAPTER 3: WHAT IS A SHORT SALE?............................................................... 27 An Option Before Foreclosure ..............................................................................................27 A Settlement..............................................................................................................................28 What Short Sales Accomplish ................................................................................................29 Specific Benefits for Sellers.....................................................................................................30 Win-Win Solution for Everyone ............................................................................................32 A Business Building Opportunity..........................................................................................34 Short Sales Are Just Plain Different ......................................................................................35 Your Options for Short Sale Business ..................................................................................36 CHAPTER 4: CRITERIA FOR A SHORT SALE......................................................... 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 Slide 5: Issue: Streamlining Short Sales...............................................................................................60 CHAPTER 5: MINDSETS: SELLERS, BUYERS, LENDERS, AND AGENTS ................. 63 Mindset Map: Traditional vs. Distressed ..............................................................................64 Sellers .........................................................................................................................................65 Lenders ......................................................................................................................................66 Listing Agents ...........................................................................................................................69 Buyer’s Agents and Buyers .....................................................................................................72 CHAPTER 6: THE SHORT SALE PROCESS............................................................ 75 Overview: Four Phases............................................................................................................75 Agent Goals in the Short Sale Process..................................................................................77 Details: Ten Steps to a Short Sale..........................................................................................77 FHA and VA Process Differences ..................................................................................... 112 CHAPTER 7: LEAD GENERATION ...................................................................... 115 Lead Sources and Lead Generation.................................................................................... 115 CHAPTER 8: EVALUATE LISTING SHORT SALES AND YOU ............................. 121 Wrap Up: Is There a Fit? What Is It?................................................................................. 121 Evaluate and Act: Which Path to Follow?.......................Error! Bookmark not defined. SHORT SALE TOOL KIT .................................................................................... 127 Short Sale Package Documents........................................................................................... 127 Marketing Documents.......................................................................................................... 127 Miscellaneous Documents ................................................................................................... 127 Slide 7: Chapter 1: What You Will Learn 7 Chapter 1: What You Will Learn This guide is one of three in a series from Keller Williams University (KWU) called SHIFT: Tactic 11 Distressed Properties. The courses in the series are: 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, Foreclosures, and REOs which was released in late 2007. SHIFT: Tactic 11 Distressed Properties provides an overview of how the distressed 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 business you want. These markets have grown dramatically and they have evolved—and so has Keller Williams Realty expertise. Now you will learn from the top agents succeeding in this market as they share their experience and their wisdom. Series Objectives The series of three self study guides titled SHIFT: Tactic 11 Distressed Properties is meant to help you learn how to pursue your real estate business differently—to succeed with buyers and sellers of distressed properties. These courses will show you the following: • • • • 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 property business Action steps to take now, to propel your business forward Canadian Distressed Properties Research calls were made to Keller Williams agents and leadership in Canada. Their comments, and data generated in SHIFT 2 Tour research in early 2009, showed that distressed 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. Slide 8: 8 Chapter 1: What You Will Learn Listing Short Sales Objectives At the conclusion of this guide, Listing Short Sales, you will: 1. See the Opportunity: Understand the power and scope of the short sale listing opportunity in distressed properties. Grasp the Market Background and Distressed Property Timeline: Have a working understanding of distressed markets, how they came to be, and how they affect agents and consumers. Be able to effectively consult about this with homeowners. Know What Changes to Expect: Learn where to watch for information on new industry trends and government policies that will change your market. Understand Sellers’ Mindset and Motivation: Understand where consumers are coming from—and the options they have. Be prepared to consult effectively. Know Lenders’ and Asset Managers’ Mindset and Motivation: Understand where the ultimate sellers are coming from—why they do what they do, and how to work most effectively with them. Know the Short Sale Process: Know all the steps, from qualifying the seller and preparing the short sale package to submitting the offer and package, negotiation, and closing. Know How to Work Effectively with Buyer Agents: Learn the importance of educating and creating a winning mindset in cooperation with buyer agents. Know How to Improve Offer Acceptance and Close Rates: Learn helpful tips to ensure 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 will focus on—is working with buyers the best option for you? Slide 9: Chapter 1: What You Will Learn 9 Graduate Study: Where to Look Next These three guides are not the last word on any of these topics. They are offered as strong “undergraduate level” material. They help you define and build your foundation in distressed property. So where do you go to take your learning to the next level? The following are paths you can take to further your education after taking this course: To hone and fine-tune your skills pursue MAPS Coaching programs for short sales and REOs. Offerings you’ll want to check out include: • • Short Sale Coaching with Knolly Williams Working with Buyers with Shon Kokoszka There are a number of vendors—including some Keller Williams agents— who offer certifications and designations connected with courses you can purchase and programs you can attend. Look for Keller Williams approved vendors on KW.com and on the KW Distressed Property Community site. The KW Distressed Property Community is a web-based information center where agents can ask and answer questions of their fellow agents and experts of Keller Williams Realty Inc., (KWRI). If you have a distressed property question that you want answered or addressed, it’s the place to go—to communicate with other agents 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 and trends report for agents called “This Month in Real Estate.” Keep an eye on this report for analysis of new developments in distressed property markets. “This Month in Real Estate” is available in both video and PowerPoint. Slide 10: 10 0 Chapter 1: What You Will Learn “Watch Out” Alerts Distressed property markets, like all markets, are always changing. In distressed property markets, agents need to be especially watchful of changes. Watch for this symbol throughout the guides. It flags an area where you need to monitor change carefully. Wherever possible, we’ll point 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 and possible solutions for homeowners being foreclosed upon. Industry Regulations: Your local real estate board and MLS’s standards for listing, marketing, and closing distressed property sales. Market Trends: Be especially watchful for important turns of events that impact market pricing and sales volume. For example, are defaults in your market increasing or decreasing? Your Business Mix: Default trends may be especially important to you if your business is currently built mainly on listing and selling short sales, or if you are balancing a mix of traditional 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 in other guides in this series, or in other courses offered through Keller Williams University. Slide 11: 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. Slide 13: Chapter 2: Distressed Property Timeline 13 Chapter 2: Distressed Property Timeline Truth To be effective with buyers and listing agents, you must understand the timeline of distressed properties—from beginning to end—and what happens 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 Distressed Properties series. Why? Because these guides are stand alone self study courses, and whichever course you pick up first, a good basic understanding of what happens to distressed properties is essential—from the time a homeowner faces a missed payment until the property is foreclosed and moved to a new owner in some way. The fundamental process at work that creates distressed inventory is foreclosure. Foreclosure is a legal process that happens on a timeline. Some things happen before it begins. Some happen after it ends. Foreclosure happens because homeowners—for a wide variety of reasons—stop paying back their loans, and their lender declares them in default. If they do not find another option, they lose their home. Let’s examine all parties and all steps involved in the process, from beginning to end. You’ll get an appreciation for how distressed properties come to exist—both the legal side and the personal and emotional side of it. You’ll see where buyer interest arises. Personal Shift—Through the Homeowner’s Eyes What’s happening in distressed property markets today is, more than anything, about circumstances 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 economic root causes behind distressed property markets goes a long way toward building your credibility. Slide 14: 14 4 Chapter 2: Distressed Property Timeline Four Primary Causes of Personal Shift As has become common in this market, a homeowner has an event in their life that causes a “personal shift.” The primary causes of this personal shift, which lead to distressed situations, are: 1. 2. 3. 4. Negative Equity from Market Shifts Unemployment Personal Crisis Consumer Overconfidence In any of these events or situations, foreclosure is a deeply personal experience. An Agent’s Own Foreclosure Story Knolly Williams is one of the top short sale agents in Texas, and Keller Williams Realty nationally. He and his small team have a very high closing success rate (near 95 percent). Knolly offers short sale coaching through MAPS and is developing additional learning material for agents. His own personal experience with foreclosure led him into the short sale business. “I had a music business for years,” he says. “When digital recording and distribution exploded, we did not change our business model fast enough. Revenue plummeted and I found myself in default on my home. Eventually a short sale was negotiated for me. It allowed me to get on with my life,” he recalls. Knolly turned to real estate as his next career—and short sales as his specialty. “It was a natural,” he says. “I’ll never forget how it felt to get 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 my story with them. It helps them be more open with me and get past some of their embarrassment and awkwardness.” Knolly has closed hundreds of short sales since he made his career decision, just a few years ago. Let’s explore the causes one at a time. Slide 15: Chapter 2: Distressed Property Timeline 15 1. Negative Equity from Market Shifts A negative equity situation arises when a homeowner finds the market value of their property is less that the amount they owe on their mortgage. When a homeowner purchases with a very high percentage of debt, a relatively small downward shift in market value can wipe out their equity. A homeowner with significant equity can borrow against that equity. When appreciating markets are increasing overall value (and equity), this seems to make sense. But declining markets reverse the process. Unlike refinancing—a personal financial decision—downward market movement leaves the homeowner with a sense of helplessness. Eventually, this helpless feeling can turn to fear if the declining value situation becomes acute. This bar chart illustrates how owner equity can disappear. In this illustration, the down payment was 10 percent and the market shifted down 20 percent. In the shifted market, the difference between value and debt has become negative equity. 100 90 80 70 60 50 40 30 20 10 0 -10 Before Here’s what changed in the chart example: Before Value Debt Arbitrarily set at 100 Set at 90—property was purchased with 10 percent cash down Value was 100 minus 90 owed leaving 10 in equity Value Debt Equity Shifted Shifted Market declined 20 percent; value now 80 Most mortgages pay interest first and principal later; debt is virtually the same in early years Equity Turned from positive 10 to negative 10 Slide 16: 16 Chapter 2: Distressed Property Timeline 2. Unemployment Triggers Mortgage Delinquencies Clearly, significant value declines can create negative equity and negative equity severely 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 payments are too high. But a new paper from the Federal Reserve Bank of Atlanta argues that unaffordable loans—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.” Instead, unemployment and future home price declines are likely to play a bigger role. (The paper looks at loans that are unaffordable from the time they’re originated, and not at loans that may start with low “teaser” rates before jumping higher.) Here’s a summary of their findings. Market Factor Unemployment Debt to Income Ratio Home Prices Factor Movement 1 percentage point increase (i.e. 8 percent to 9 percent) 10 percent increase 10 percent decline in home prices Impact on 90-Day Delinquency 10 percent to 20 percent more delinquencies 7 percent to 11 percent more delinquencies 50 percent greater probability of default By the way, the U.S. Department of Labor reports the length of people’s unemployed stretches (measured in weeks) is getting longer. Here’s the picture from 1940 to 2010. Slide 17: Chapter 2: Distressed Property Timeline 17 3. Personal Crises On top of all this financial and economic shifting, personal crises happen, as always. Some are about health and family; some are triggered by the slowing economy. Common homeowner crises include: • • • • • Unforeseen large medical expenses Unplanned job transfers Death in the family Divorce Job loss All these events bring financial challenges that may force homeowners to become potential foreclosures in a shifted market. 4. Consumer Confidence Plays Both Ways In these times, many are writing about what role confidence, or lack of it, plays in distressed markets and foreclosure. Here are two views you may hear in the marketplace. 1. Naive Confidence Can Help Much is being written in these times about the role of consumer confidence in down and distressed markets—and in market recovery. Experts seem to agree that there is some level of consumer confidence, or exuberance, which is the hallmark of recovering and rising markets. Writers in major news organizations have taken to call this mindset “naïve confidence”—the willingness to overlook risks in favor of rewards in markets. 2. Overconfidence Can Hurt In a shifted market that has become distressed, opinions abound about why people made the choices they made that contributed to the result. One example of this opinion appeared in The San Diego Union-Tribune, and has been reprinted in other major daily 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 State University titled “Generation Me.” Quoting the book, “People were very overconfident about what size mortgage they could afford and the same thing affected the bankers who were giving the loans. Everybody was overconfident and didn’t anticipate the downside, so when the downside came it was worse than anyone imagined.” Now that you have a better understanding from the homeowners’ view, let’s look at the complete timeline of events. Slide 18: 18 8 Chapter 2: Distressed Property Timeline The Distressed Property Process—Before Property and After Foreclosure Foreclosure is a process that happens over varying timelines, depending on local laws. Local timeline differences can have a big impact on important details of distressed sales—so you must know your local foreclosure timeline, and what governs it. The process begins with the point where a homeowner first misses a payment—or knows they are about to do so—and ends after foreclosure, with the sale of bank-owned properties and the possible transfer of properties to the Federal Deposit Insurance Corporation (FDIC) when banks fail. This process is described on a timeline, with definitions, that appear on the following pages. It includes both pre-foreclosure and post-foreclosure events. Truth Knowing the foreclosure process overall is a great first step. And to do distressed property business in your community, you must know all the relevant local rules and regulations as well. Know Your State Laws and Regulations The timeline of the process can be different in some states, so be sure to know your own state laws and regulations, and seek answers if you need them. The foreclosure legal process can be completed in as little as 90–120 days. In others, it may extend to as long as twelve months or more. The foreclosure process and state and local laws governing how it happens are a full day class in their own right. Check around. Chances are local title companies, your local board, or real estate schools are offering a foreclosure course. Tip! – Taking a Course? Always Seek Local Knowledge. If you decide to take a foreclosure course from a national vendor, be alert to whether they have modified it to include steps that are the right ones for your local market. If they have not, you’ll need to get that information from a highly reliable local source—your Team Leader, an expert agent in your Market Center, or a title company are your best bet. Slide 19: Chapter 2: Distressed Property Timeline 19 Distressed Property Timeline Personal Shift Market Shift How to Read the Timeline The timeline chart summarizes the critical details you must learn to be a distressed property expert. Though this course focuses on short sales, this chapter addresses all steps in the timeline. Make note of how many steps’ terminology or internal timeline vary according to local law or regulation of some kind. The description of the timeline establishes three categories for the items that appear: 1. Personal Shift (PS) –Things that involve or impact the homeowner directly. For example, 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 the institution that holds the loan. For example, the market changes, home values decline, lending regulations change, inventory increases, etc. Slide 20: 20 Chapter 2: Distressed Property Timeline b. Buyer Interest (BI) – Points in time when buyers become aware of distressed property that’s available—on the Internet, through MLS, or from other sources. Buyer interest arises at a number of different points along the way, indicated by the “group of buyers” icon. The items in each category are numbered PS, MS, BI, so you can refer back and forth to the diagram and the descriptions. 1. Personal Shift (PS) 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 residence. The first sign of trouble comes when the homeowner misses a mortgage payment. Homeowners miss payments for any number of reasons. Typically, it happens because of: • • Personal crisis – job loss, unwanted and expensive job relocation, divorce, death in the family, or illness resulting in high medical bills Market shift – market value declines to the point where the home is worth less than 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 done to make the situation right. Lenders often prefer not foreclose if a better option can be found. PS-2: Notice of Default Depending on the lender, and local foreclosure laws, the homeowner will receive a Notice of Default within 60–90 days after one or more payments are missed. The notice is a formal letter from the lender advising the homeowner that their loan and ownership are in jeopardy. Default is what causes lenders to trigger the 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. One course is swift, but risky. The other is slower, but can allow the homeowner to stay in their home. Slide 21: Chapter 2: Distressed Property Timeline 21 • Deed in Lieu – This is very legal—but may also be very risky for the owner in default. Why? A deed in lieu of foreclosure does not necessarily clear away all other judgments against a property owner. The former owner may think they have escaped further demands only to find other parties (not part of the deed in lieu deal) coming after them for other money they owe. Deed in lieu of foreclosure agreements usually only happen if the parties can agree the property being signed over has value equal to the amount of the debt! • Loan Modification – The U.S. government is acting to provide new financial incentives to lenders to remake loan terms with distressed homeowners. Some of the early programs failed because the incentive or terms were inadequate. Now the government is helping lenders remake loans in cases where home value may be as much as 25 percent under the current loan balance. Watch for more changes in these programs as the government works to keep more homeowners out of foreclosure and in their homes. • Short Sale – This is the homeowner’s other option—a good one that will be covered in 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 certain date. PS-5: Foreclosure A representative of the lender posts a foreclosure notice on the outside of the property, stating that the lender has taken possession and all inquiries until further notice must be directed to them. PS-6: Eviction If no sale has been arranged, and if the homeowner has not walked away from the property before foreclosure, they will be forcibly evicted on order of the lender. A local sheriff or constable typically enforces the eviction. PS-7: Redemption/Reinstatement In some states there are provisions for homeowners to escape foreclosure by making repayment 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 extend beyond the foreclosure date and even beyond a trustee or sheriff’s sale (auction) of the property. In these rare situations, if the homeowner completes catch-up arrangements, a person who bought the home at auction may even have to give it back to the owner. The auction winner gets their money back. Slide 22: 22 Chapter 2: Distressed Property Timeline 2. Market Shift (MS) These are things relating to the status of the property itself of the institution that holds the loan. MS-1: Conventional Loan A mortgage deed is a contract that states the amount due on a loan to buy the property, the term of the loan, the rate of interest charged, and how payments on the balance are to be made. It usually also says what will happen if the payments are not made! Conventional loans come in many different types and sizes—though not as many as before the current distressed property crisis. MS-2: FHA or VA Loan Homeowners can also get mortgage loans from the U.S. government’s Federal Housing Administration or Veterans Administration. The loans often have different (frequently tighter) requirements about down payments and property condition than conventional loans. Another difference: FHA and VA will not approve a short sale unless the homeowner has actually defaulted. Some conventional lenders will approve a short sale without a default. MS-3: Short Sale A short sale is basically a negotiated settlement between the lender and homeowner in which the lender agrees to accept a buyer’s offer for less than the homeowner’s total loan balance. MS-4: Trustee Sale The trustee sale or sheriff’s sale is a common vehicle for getting foreclosed properties sold to buyers—frequently to investors who are regulars at these auctions. The buyers typically must pay cash for their winning bid—either on the spot or very shortly afterward. The sales are often referred to as “courthouse steps” sales. MS-5: Prelist Auction This is another auction format—usually arranged by a lender that holds foreclosed property. A professional auctioneer is hired and property to be auctioned is listed for “preview” on the Internet. Sometimes the preview properties are held open briefly so interested parties can go inside. MS-6: Assignment to Asset Manager If there’s no short sale, and no auction sale of any kind, the property will remain bankowned. The bank will typically turn the property over to either its own asset management arm, or a third-party asset manager. Their job is to manage and market the property (you will sometimes hear the term “M and M Firm” used to describe them.) They may list property directly for sale. These are the people who typically turn to specialized REO listing agents to list and sell lender-owned homes. Slide 23: Chapter 2: Distressed Property Timeline 23 MS-7: REO Listing with Agent Listing bank-owned real estate (REO) can be a big business for distressed property specialist agents, albeit with low profit margins. It is, along with auctions and short sales, one of the three main ways distressed properties are marketed and sold. Listing REO properties is the subject of an entire guide in this series. 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 MLS and are sold, usually, with the same standard contract approved by your local real estate board or MLS—with some very important exceptions and additions. MS-9: Bank Fails; FDIC Takes Possession On relatively rare occasions, banks fail. If they are federally chartered, they are taken over by the chartering authority, under the direction of the Federal Deposit Insurance Corporation (FDIC). The FDIC then seeks real estate brokers to help sell the properties, or the FDIC may return to the prelist auction step and try to sell properties before seeking the help of brokers and agents. Buyer Interest Buyers have multiple opportunities along the way to learn about and look at distressed properties for sale. The timeline chart identifies six of these situations: BI-1: Pre-foreclosure Sales Buyers can search the Internet and local legal advertising and records to identify properties that have started down the foreclosure road, but are not yet foreclosed. BI-2: Short Sales 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 as such when they are first listed. Short sales, like REOs, have unique features. One of the main things—short sale buyers, like the agents themselves, will not know initially what price the bank or lender’s asset manager may accept for a sale. There are other complications too. Refer to the companion course for more information on short sales, SHIFT: Tactic 11: Distressed Properties: Listing Shirt Sales. Slide 24: 24 4 Chapter 2: Distressed Property Timeline BI-3: Trustee Sale This “courthouse steps” auction sale is open to the public. Investors who seek to buy who property before it gets further in the process often frequent it. These are cash sales. BI-4: Prelist Auction This is another buyer opportunity. Prelist auctions can be large scale and well-attended if they are well-promoted by an experienced auction company. BI-5: REO Listed with an Agent Like short sales, these listings go on MLS and are typically noted as REO (real estate owned), bank-owned, institutional sales, or some similar designation. REOs listed by an agent on behalf of a bank or asset manager is the 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 manage these properties, or it will go back to the prelist step first and try to sell that way before going the listing route. Slide 25: Chapter 2: Distressed Property Timeline 25 How Well Can You Explain the Timeline to a Homeowner? Using the timeline chart as a tool, get with a partner, and you as the agent explain the timeline clearly to your partner who is the potential seller. Switch roles and repeat. The chart is detailed. How would you simplify or streamline it for a client. Which points would you emphasize for a short sale client and why? Critical Step or Point Selected Reason You Selected It Your “Headline” for the Client on This Point Slide 27: Chapter 3: What Is a Short Sale? 27 Chapter 3: What Is a Short Sale? 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 shifted rapidly into a “dot com bust” just a few years later, in the early 2000s. The economic shift connected with that business cycle, and real estate cycle that followed it, were localized. It was felt mainly in regions where high technology companies had exploded to life—the Northern California Bay Area, Boston’s Route 128 Loop, the “Golden Triangle” in North Carolina, and the Central Texas metropolitan areas around Austin, for example. Now, a few years later, larger economic issues have created much more widespread market shifts and short sales are increasingly common across the country. A short sale is a proactive settlement between the homeowner in distress and their lender. An Option Before Foreclosure The threat of foreclosure is triggered by default—the homeowner fails to make one or more payments to the holder of the note, or mortgage loan, on their property. There are some alternate paths that can unfold when a home loan goes into default. One of the best options is a short sale. A Proactive Step Any time a homeowner recognizes they are about to have trouble making their mortgage loan payment—or are already missing one or more payments—they have choices. Short sales happen, most of the time, during the time when a homeowner has been notified they are in default—and before the property is actually foreclosed on by the lender—the pre-foreclosure stage of the process. It’s this way most of the time, but not always—because a homeowner might be able to apply for 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 real estate agent/consultant plays a vital role in that process. Slide 28: 28 8 Chapter 3: What Is a Short Sale? A Settlement The short sale concept is not new. It’s been around for years, but has garnered plenty of attention as one of the key forms taken by the distressed property “Market of the Moment.” A short sale is basically a settlement agreement in which the lender buys into a seller’s proposal that the lender accept 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 at closing—thus the term “short sale.” Truth A short sale is a contract between the buyer and seller—with at least one contingency—that the deal is approved by the seller’s lender. The seller’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 key complication can arise, for example, if the lender decides afterward to pursue some or all of the remaining balance on the original loan—by seeking a deficiency judgment against the seller. 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. A foreclosure 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 to the seller’s lender, and the lender’s position is summed up nicely by David Reed, Austin, Texas—a lender, commentator, and author. David has consulted with Keller Williams Realty on lending issues and 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 of foreclosing on the property than reselling it, then a short sale might not be in your future. If, however, the bank sees that a short sale offer is reasonable and you (the seller) are not making money on the property, then your short sale request will likely be approved.” Slide 29: Chapter 3: What Is a Short Sale? 29 What Short Sales Accomplish In 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 a Keller 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. Monitor Short Sale Trends: Watch the market carefully to monitor trends. One of them is the trend toward short sales. To succeed you must monitor short sale trends and guidelines. Lenders and the U.S. government are all getting more involved in trying to facilitate short sales. Why? Short sales are an important part of the distressed property landscape—because they provide an avenue that allows consumers to avoid foreclosure while protecting their 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 releases consumers from homeownership debt. Their home is sold and their lender forgives most, if not all, of their debt. 2. Lender Liability Avoidance – They are a way for lenders to regain a substantial amount of what is owed them—without taking the property on as a bank-owned liability 3. Lender Cost Reduction – The cost of a short sale to the lender is typically significantly less than the cost of taking the property on as bank–owned. 4. Business Building Opportunity for Agents – Solving a personal and financial crisis issue for a homeowner can position the agent who assisted as a lifetime resource for that homeowner, their family, and their friends. Slide 30: 30 Chapter 3: What Is a Short Sale? Specific Benefits for Sellers Residential foreclosures are dominating the U.S. economy in unprecedented numbers. In spring 2009, the real estate industry data tracking firm RealtyTrac announced that one in every 374 homes received a foreclosure notice in one month—342,000 households! It was the 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 continue in many markets through 2012. The consequences of foreclosure make it something to avoid. Real estate agents have an opportunity to assist consumers—with good advice and short sale expertise. Truth Only a minority of households that receive a notice of default from their lender find a way to avoid foreclosure. A number of things can happen when property becomes distressed, but distressed sellers’ primary options are: 1. Modification – Re-make or modify their mortgage somehow 2. Short Sale – Apply for and complete a short sale. 3. Foreclosure – Be foreclosed and lose their home, credit, and ability to buy again anytime soon. The U.S. government and the real estate industry are both focused on advising consumers to help them find the best path for them. Slide 31: Chapter 3: What Is a Short Sale? 31 Ten Reasons to Avoid Foreclosure Keller Williams Realty short sale specialist Aaron Rice, Baltimore, Maryland provides consumers a list of issues and challenges they will face if their home is foreclosed. He has posted his list on the Keller Williams Distressed Property Community site. This summary was assembled from his list, and other agent input. This list can become a great flier to use with potential short sale candidates facing foreclosure. See the course tool kit for a sample handout you can use. 1. Foreclosure Follows You – Homeowners will always have to disclose that they have had a foreclosure on any mortgage application and (many job applications) that they submit in the future. This can have an adverse affect on their future mortgage rates. This is a credit item that is asked about specifically in credit inquiries. There is no seven-year time limit on this item. Credit Score Negative Impact – Credit scores will be lowered by 300-plus points (per loan). Along with bankruptcy, a foreclosure is one of the most devastating credit issues you can have in relation to future credit availability. Ineligibility for a Government Insured Loan – The homeowner will be ineligible for a government insured loan for 5-7 years (only two years in a short sale). A Foreclosure is the one credit report item that is almost impossible to have repaired. Possibility of Deficiency Judgment – Your lender can seek a deficiency judgment against you and collect any amount they do not recuperate at bank sale. Negative in Employment Credit Checks – Many employers run credit checks on prospective employees. Foreclosure is one of the top items that will put a potential new hire in jeopardy. Potentially Damaging in Current Employment – Many current employers run credit checks. A foreclosure can put a current position in jeopardy. Negative on Security Clearances – Security clearances and government positions— including but not limited to military and law enforcement—can be jeopardized by a foreclosure. Revocation of security clearance can result in job reassignment or loss. Lower Tax Liability than Foreclosure – The tax liability in a foreclosure may be much higher than in a properly negotiated short sale since canceled debt will be higher in a foreclosure. You Have Alternatives – As your expert, I will explore every option with you and work toward the best resolution. 2. 3. 4. 5. 6. 7. 8. 9. 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 that you did everything you could to avoid this devastating financial consequence that so many people face today. Slide 32: 32 2 Chapter 3: What Is a Short Sale? 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 for all parties involved. Although foreclosed bank-owned property volume has dominated the news media, short sales seem to be coming on as a valid alternate solution that can reduce price pressure on markets over time. 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 foreclosure and loss of their property 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 the short sale itself. Foreclosure is an automatic substantial hit to a credit rating and stays on the report for 7-10 years; a short sale’s impact on credit scores may be less, depending on how the lender reports it. Note that the credit score impact of a short sale is reportedly under review by credit rating agencies and may change. Bargain for Buyers Buyers almost always end up owning a property they wanted—at a significantly discounted price, compared to what they might otherwise have paid for a comparable property. This means, even in a downshifted market, the buyer’s chances of seeing an early positive return on their investment is improved. Lenders’ Liability Reduced Lenders see the benefits of a short sale in financial terms. It is expensive for lenders to foreclose on a home. Slide 33: Chapter 3: What Is a Short Sale? 33 Truth According to the report by the Joint Economic Committee of Congress on April 11, 2007, “Sheltering Neighborhoods from the Subprime Foreclosure Storm,” each foreclosure costs lenders approximately $50,000. That figure is now approaching $60,000 by some estimates. These costs include the following items: • • • • • • • Legal fees Possible eviction costs Taxes Insurance Maintenance Neighborhood association dues Selling costs If the lender does foreclose on a home, that property (now an REO) shows up as a liability on 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 can enjoy the satisfaction of knowing that they have helped people in crisis. Develop your skills in this niche and you can be a prime target for referrals from associates who are unfamiliar with short sales. Additionally, if you save a client from foreclosure, you are likely going to be their top-of-mind agent for life. They Need My Expertise 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 this market. That’s what I bring.” Slide 34: 34 4 Chapter 3: What Is a Short Sale? A Business Building Opportunity It just makes common sense. If you have the skill and tenacity to win a short sale approval, and get an offer accepted and closed for a distressed client, there’s a good chance you will be remembered 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 Tod Barton, Las Vegas, Nevada, lives in what some of his associates call “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 com entrepreneur 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 model for distribution. That was going to be expensive, so I got out.” Like some other top distressed property agents in Keller Williams Realty today, Tod says he doesn’t really know any other market. “When I got started, the market here was just turning south—and it happened 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 sale success. Tod and three others he brought on board do more than 100 short sales a year, and they have plans to ramp up higher. “It’s a negotiation and systems business,” Tod says. “Now that we’re doing this much volume, homeowners are coming to us for help—and we are perfecting our systems for dealing with the lenders in a planned, scheduled way. I never thought I’d be here, but here I am.” Slide 35: Chapter 3: What Is a Short Sale? 35 Short Sales Are Just Plain Different Like REO, these transactions are significantly different from traditional sales. Here’s a summary of key points of difference. Phase Defaulting or defaulted loan Pricing responsibility Traditional Conventional, FHA, or VA Listing agent, CMA, and seller Short Sale Conventional, FHA, or VA BPO or appraisal contracted by bank; listing agent CMA REO Conventional Bank sets value, based on listing agent BPO or an appraisal. BPOs updated Bank direct marketing and/or listing agent. Marketing reports updated HUD FHA HUD Marketing Listing agent Listing agent HUD or a HUD management and marketing (M&M) vendor HUD contract Contracting MLS contract MLS contract, with bank addendum MLS contract with bank addendum, or bank contract only By MLS contract; sometimes by bank contract 24–48 hours before closing Bank Date usually certain. Bank’s title company Offers By MLS contract By MLS contract; sometimes by bank contract 24–48 hours before closing Seller and Bank Date may be postponed. Listing agent’s or Bank’s title company By online closed bidding 7–10 days before closing HUD Date certain. HUD’s title company Financing required Acceptance Closing 24–48 hours before closing Seller Date certain. Title/escrow company choice negotiated by parties Slide 36: 36 6 Chapter 3: What Is a Short Sale? The other two courses in the SHIFT: Tactic 11 Distressed Properties: series—Listing REOs and Working with Buyers—delve more deeply into the REO and HUD-related markets, and the listing and selling process differences they present. _ Your Options for Short Sale Business Handling short sales, especially in volume, can be lucrative and satisfying. But it’s not a business for everyone. Fortunately, there’s more than one way to be involved. These are the options. Knolly Williams, a top short sale agent in Austin, Texas says, “Really in short sales you should think about having only two choices—learn it, or master it.” His point: Short sales have become a Market of the Moment option that’s too big to ignore in many markets. Whether you choose to know enough to steer prospects you meet to the experts, or become an expert yourself, is your call. Your choices are: 1. 2. 3. End-to-End Short Sale Agent – Handling the short sale business end to end. Processor/Negotiator – Handling the tough negotiating phase with lenders and other lienholders, and bringing the deal to closing. Referral Only – Focusing on prospecting for leads, qualifying distressed sellers for short sale, preparing a document package and offer—then turning the rest over to a processor/negotiator to complete the transaction. 1. End-to-End Short Sale Agent This means doing the business from “soup to nuts”—all of it. It means you are prospecting for the leads, prequalifying the promising ones, and then taking the deal all the way through the process, from assembling and submitting the application package and offer, through negotiation and closing. Truth Most agents who decide to go full bore and do end-to-end short sales are driven by a desire to truly help distressed sellers. They have done their homework and believe no one is better qualified to represent sellers in lender negotiations than they are. Slide 37: 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 a contract and all the associated paperwork through the lender’s representatives to a successful closing. Because this is arguably the hardest part of the business, requiring great attention to detail and persistence, some agents would rather have someone else do it—for a fee. Short sale negotiators and servicing companies of all sizes have sprung up—some are local and focus just on assisting agents in their Market Center. Some generate business 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. Truth Short Sale Negotiator/Processor is a service in great demand—so much that some agents have developed short sale servicing staffs so they 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 Market Center leaders have played an important role in helping agents tackle the complexities of short sales. Benefits of Third-Party Services Team Leader Tasha Manzano, Carlsbad, California, points out that her Market Center made a deliberate commitment early on to use short sale servicers to negotiate details of deals. “It’s how we were able to get going quickly in short sales when our market turned,” she says. “We aligned with a servicer named Justin Ryan and he’s proven to be a great resource for our agents.” Slide 38: 38 8 Chapter 3: What Is a Short Sale? Others have taken new directions, opening up needed services for agents. Son Nguyen, formerly Team Leader for Keller Williams Realty in Riverside, California took a new direction when he became a cofounder of Partner First, a short sale and REO education and servicing company. Partner First certifies agents through its short sale and REO training programs, and offers a network to link distressed property specialist agents with listing opportunities across the country. Choosing a Negotiation/Servicing Vendor The abundance of short sale opportunities in markets large and small around the country has produced a typical entrepreneurial response—hundreds of short sale servicing providers; local, regional, and national (marketing on the Internet) have emerged. The question is if you’re getting involved in short sales and have decided you don’t want to handle the complexities of negotiating with the lender, or lenders, what do you do? Keller Williams Realty continually looks at vendors, vetting their results and the recommendations of Keller Williams agents. Recommended vendors are posted on the Keller Williams Distressed Property Community—an online forum that’s part of Gary Keller’s Agent Mountain site. Keller Williams Chief Product Officer Bryon Ellington heads the vendor screening and business relationship process. Agents network among one another continually about real estate vendors of all kinds, and short sale processors are no exception. Kristina Arias admits to a bias—she has started a short sale negotiation business of her own. She says, “I think in general the smaller providers are a good way to go. Their charges are more reasonable and they seem to care about the outcome, not just about the fee. Their upfront fees are small. I like it when a negotiator says they won’t get paid until my team and I get paid.” Kristina’s suggestions for due diligence verification: • • • • Fees Close rate Agent referrals Verify specific properties they’ve closed Slide 39: 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 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) working with you who have great skills and persistence in following through with loss mitigator communication, negotiation, and paperwork, you may have the foundation for a servicing business. Some top agents feel offering negotiation services is a great opportunity. Kristina Arias in the Phoenix area has started a business built from her own short sale practice. She has strong opinions about servicing, and advice for other agents trying to solve the short sale servicing challenge. Short Sale Servicing Story “I was not pleased with the performance I saw from larger national short sale servicing suppliers,” Kristina Arias says. She’s sure she’s not the only agent who feels that way. “I think local providers are more in touch with their market, and are much more likely to care about their relationship with the agent who hires them—and with getting the seller and buyer closed.” she says. Kristina also feels local providers who maintain a modest scope of business have better trained people working the servicing issues. Fee structure is a point of difference too. “In our case, we charge a much more reasonable fee and don’t collect most of what we charge our servicing clients until the deal closes,” says Kristina. Slide 40: 40 Chapter 3: What Is a Short Sale? 3. Referral Only Another option is to refer your short sale leads to short sale specialists and let them do the work, while you move on to other business—or generating still more profitable leads. This is every bit as viable an option in distressed property as it is in more traditional real estate markets. Referral Success Kevin Kauffman, a top short sale team member in the Tempe, Arizona, area with his partner 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 agents that become short sales for us. It’s a big part of our business. And the agents getting referral fees from us are helping clients without having to commit to the short sale specialty full blown.” “We got into short sales in part because we have a clear vision of the business building part of it, “ adds Kevin. “We’re helping people—our own clients and referral clients—through one of the hardest times in their life,” says Fred. “Coaching and guiding them creates fans, future buyers, and even more referrals along the way.” Slide 41: Chapter 4: Criteria for a Short Sale Remember—a short sale is a negotiated settlement, and the lender is in charge. In a short sale, a lender is basically forgiving a substantial part of the homeowner’s original mortgage loan and accepting, instead, the proceeds of a sale that will return less than the amount owed. Lender’s Criteria: Necessary and Possible Truth Before there can be a short sale, the lender must be persuaded that it is both necessary and possible. Here’s what necessary and possible mean, from the lender’s point of view: • • Necessary – Because there is convincing evidence the owner cannot make their mortgage loan payments. Possible – Because the lender sees evidence that the home will sell for what the lender considers a reasonable percentage of market value. In a successful short sale, prequalifying the seller and their circumstances is paramount— and must happen before anything else. These are the criteria agents consistently mention as critical 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. Slide 42: 42 Chapter 4: Criteria For a Short Sale Homeowner Criteria These criteria relate to the homeowner’s situation, but they are evaluated through the eyes of both the agent and the lender. The seller must sign the contract for a short sale to be approved, but the final approving authority is the lender. Both the lender and the agent want to see several things—to feel assured a short sale can happen: 1. 2. 3. 4. 5. The Homeowner’s Personal Involvement Documented Hardship Loan in Default Upside Down on Loan-to-Value Property Is Unaffordable 1. The Homeowner’s Personal Involvement Homeowners in these circumstances are as angry and upset as anyone stricken by some kind of personal financial disaster. They never considered that home values would decline as much as they did in their area. They feel cheated, but—unless they are willing to wait for a recovery—they are “stuck” in an unfavorable position. If they are going to sell, it will have to be a short sale. Truth The homeowner must be willing to cooperate with the agent, lender and buyer. The homeowner will have to turn over private documents and be willing to wait for answers from the lender, while making nothing in the sale. Send Them a “Disqualification” Package Top short sale agent Kevin Kauffman, Phoenix, Arizona, is one of many who advocate not meeting face-to-face with potential short sellers—but instead sending them what Kevin calls his “disqualification” package. “First I send them to my website, where they can read what a short sale is about—including a FAQ section that describes, among other things, what they are going to need to do to make it happen with me,” Kevin says. “A seller who will take the time and initiative to complete 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 to their websites. Slide 43: 43 3 Chapter 4: Criteria For a Short Sale You can help a homeowner feel more comfortable with the short sale process by discussing their options with them. Top agent Kirk Nace uses the following script in appointments with potential short sale clients. “Here’s what your situation is: you’re facing a foreclosure. Do you want to go through the foreclosure and be buried in the property and buried from a credit standpoint for years, and years, and years to come? Or would you rather find a way to work through that? Here are your options …” MAPS Short Sale Coaching For additional scripts in working with short sale clients, and to put accountability 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 be due to uncovered medical bills, death of a working spouse, divorce, or even a job transfer with tough terms. Hardship must be explained in writing—through a hardship letter—and with a welldocumented financial statement. The letter and statement also must be supported with key financial documents, which only the seller can provide. 3. Loan in Default The homeowner is already behind in payments. Different states and different lenders create varying timelines—but the principle is a that a homeowner seriously in default generally has a much better chance of having a short sale proposal accepted than a homeowner who is not in default. 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 and completed. It happens. It is not common. Slide 44: 44 4 Chapter 4: Criteria For a Short Sale 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 be accepted by the lender, but the homeowner must be in default before an accepted offer can be approved. In a short sale, a homeowner’s financial statement must be accompanied by documentation showing income and expenses that are out of balance. This evidence supports that the homeowner simply can no longer afford the home on a monthly basis. Another symptom of “unaffordable” is that the seller is in no position to bring money to the closing table to close the gap between market value and what they owe! 4. Upside Down on Loan to Value A common occurrence these days is the homeowner who finds themselves “upside down” or “underwater”—owing more than their home is worth in the current market. Whether the homeowner had equity originally, and how much, may NOT be a factor if a local market turns down severely. Upside Down Example A homeowner may borrow against equity in their home. When appreciating markets are creating more equity, this seems to make sense. But declining markets reverse the process, and the reversal can happen fast. Unlike refinancing—a personal financial decision—downward market movement leaves the homeowner with a sense of helplessness. Eventually, this helpless feeling can turn to fear if the declining value situation becomes acute. The bar chart illustrates how owner equity can disappear—in this illustration, the down payment was 10 percent and the market shifted down 20 percent. In the shifted market, the difference between value and debt has become negative equity. Slide 45: 45 100 90 80 70 60 50 40 30 20 10 0 -10 Before Chapter 4: Criteria For a Short Sale Value Debt Equity Shifted Here’s what changed in the chart example: Before Value Debt Arbitrarily set at 100 Set at 90—property was purchased with 10 percent cash down Value was 100 minus 90 owed leaving 10 in equity Shifted Market declined 2%; value now 80 Remained virtually the same Equity Turned from positive 10 to negative 10 The resulting fast transition results in a dramatic change in the homeowner’s position—from a seemingly comfortable amount of equity to low equity, no equity—or worst of all negative equity. A negative equity situation arises when a homeowner finds the market value of their property is less that the amount they owe on their mortgage. Slide 46: 46 Chapter 4: Criteria For a Short Sale Personal Crises On top of all this financial and economic shifting personal crises happen, as always. Some are random and personal; some are triggered by the slowing economy. Common homeowner crises include: • • • • • Job loss Unplanned job transfers Death in the family Divorce Unforeseen large medical expenses All these events bring financial challenges that may force homeowners to become sellers. In a downshifting market, an owner who needs to sell is facing trouble that may force a short sale or a foreclosure. Unemployment Clearly, significant value declines can create negative equity and negative equity severely 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 payments are too high. But a new paper from the Federal Reserve Bank of Atlanta argues that unaffordable loans—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.” Instead, unemployment and future home price declines are likely to play a bigger role. (The paper looks at loans that are unaffordable from the time they’re originated, and not at loans that may start with low “teaser” rates before jumping 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-percentagepoint jump in the debt-to-income ratio, meanwhile, increases the chance of a 90-day delinquency by 7%–11%. Slide 47: 47 Chapter 4: Criteria For a Short Sale No Short Sale? Pre-foreclosure Alternatives There are several sets of reasons why a short sale may not be the best option for a homeowner—or may not be an option at all: 1. 2. 3. Personal reasons Legal reasons Extreme negative equity—homeowner walks away Some homeowners, for whatever reason, simply have not thought through all their options and the consequences of the critical decision they face—to sell their home short, allow it to be foreclosed, or to do everything possible to keep their home. If the homeowner has begun the process of bankruptcy, has private mortgage insurance (PMI), or if the foreclosure date is upon you, you may not be able to complete a short sale, even if the homeowner meets the other qualification criteria. 1. No, for Personal Reasons Some homeowners in distressed situations are not motivated to pursue the solutions available to them. Their distress may have devastated them emotionally and financially to the point where they simply want to be foreclosed, or walk away. Agents’ Ethical and Fiduciary Responsibility Agents have an absolute ethical and fiduciary duty to advise homeowners whose properties are distressed. These potential sellers have other options which include doing whatever they can to keep their home. The question is do they want to. Truth As a practical matter, the best solution for those who want to keep their 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 to help consumers modify their mortgage loans. Some of these resources are credible and professional, others are not. A “buyer bewares” situation has been created. Slide 48: 48 8 Chapter 4: Criteria For a Short Sale Your job includes counseling homeowners about their options: homeowners 1. 2. 3. They may be able to keep their property. They should carefully examine the credentials and track record of anyone offering to help them do so. They must be aware they can approach their lender themselves to request a loan workout or modification. If the homeowner goes down this road, they may not be successful. In that case their property is likely still 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 need to approve a short sale. Tip – Pay a Fee for Something You Can Do Yourself? David Reed, Austin, Texas, is both a lender and a frequently interviewed expert, and author, on the subject of real estate loans. He has strong views about the risks consumers may accept when they decide to have a third-party deal with their lender about a loan modification. “These firms offer to take a fee and then negotiate with the lender on your behalf,” he says. “Typically these companies are in business legally, but thet’s no guarantee of that. Sure, a credible experienced loan modification company may be able to help, but it will cost you four-figure money—in up-front fees—and there’s no guarantee of a positive 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 course module, Working with Buyers. Slide 49: 49 2. No, for Legal Reasons Chapter 4: Criteria For a Short Sale There are also legal and process reasons why a property may not be a short sale: Bankruptcy If the homeowner has filed for bankruptcy, the bankruptcy court or trustee must approve their entering into a listing agreement. Additionally, in some states, the homeowner is protected from foreclosure by bankruptcy laws. Keep in mind that bankruptcy is a legal issue. Unless you are also a lawyer, you should not dispense legal advice. Private Mortgage Insurance (PMI) PMI insures the lender against the homeowner defaulting on their loan. The lender considers short sales only when it makes business sense for them. If their potential loss from a foreclosure exceeds the insured amount, the lender may be willing to do a short sale. If they feel their loss is covered by insurance, they won’t be interested. Foreclosure Date Imminent In some cases, lenders will forestall foreclosure if the short sale process has been initiated. If the public auction date is less than two weeks off, you can contact the lender to explore other options, or to initiate the short sale process. Truth If the lender will not postpone the foreclosure, you should keep in mind 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 can usually postpone the foreclosure process immediately. Slide 50: 50 Chapter 4: Criteria For a Short Sale 3. Extreme Negative Equity—Homeowners May Walk Away Agents and lenders say many homeowners, unfortunately, feel they must just walk away from their property—especially when they feel they have no hope of rescue. There can be two main reasons why they do it: 1. Hopelessness, based on lack of information—they simply do not know their options, so they can’t explore them and simply give up. A deliberate economic calculation—in severely declining markets, some homeowners sense, or calculate, that their home’s value has simply fallen too far. The time it will take to dig their way out and regain positive equity—even with a rescue—is not worth it to them. They calculate they can take a few years to rebuild their position, perhaps gather a down payment, and then buy a comparable home again—for less. Northwestern University and University of Chicago business schools have been studying the phenomenon of calculated “walking away.” Their 2009 study, Moral and Social Constraints to Strategic Default on Mortgages, says in part, “Most of the solutions by the Bush and Obama administrations have tried to address the problem of mortgage payments that are too large. The authors argue that the growing problem of negative equity (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 an illustration of the math a homeowner who walks away might be using. It uses a dramatic, but not unusual, rapid market decline assumption: Homeowner Math: Why They Walk Away Value at Original Purchase Current Value (40 percent market decline) Time to Regain Original Value at 4 percent Annual Appreciation (Historic Average) Cost to purchase a competitive home after 7 years $200,000 $120,000 After 14 years $208,000 Even with foreclosure, they may be able to buy again in 5–7 years. The 7 years may also have provided time for the consumer to save for a larger down payment than they originally had. $161,000 ($158,000 plus assumed 2 percent closing costs) * = Historic 4 percent market appreciation is discussed in SHIFT: Tactic 11: Distressed Properties: Working with Buyers. Slide 51: 51 Chapter 4: Criteria For a Short Sale Summary: Positive and Negative Alternatives for Homeowners in Distress Agents risk losing valuable time, and expected income, if they don’t understand the alternatives to a short sale. Proceeding with a seller, thinking a short sale will happen, and being hit with a different outcome like those below is heartbreaking—and avoidable if you know the rules. The alternatives are both positive and negative. Here’s a breakdown: Positive Paths Homeowners have some options that can bring relief. Most of them, however, can’t happen unless the homeowner is able to tap into a new source of funds to get them out of their position with the lender. The most promising positive alternative is mortgage modification. Details on modifications are below. Here are the options: Forbearance Forbearance is an agreement to postpone or reschedule payments in a way that allows the homeowner to catch up. A mortgage modification is a form of forbearance on the lender’s part. Right of Redemption A standard feature of the foreclosure process is the right of redemption. It means that, in the unlikely circumstance that the seller can come up with the full amount in arrears and bring the loan current (including any penalties due) the homeowner can keep their home. Reinstatement Period In some states, even after a home is taken by the lender and sold at a foreclosure auction, the homeowner may have a limited time during which they can pay the full amount due and reclaim the home from the party that purchased the home at auction. In these circumstances, the purchaser at auction gets a refund. Mortgage Modification 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 loan modification: 1. 2. Rate and Term Change Modification of the Current Note Slide 52: 52 2 Chapter 4: Criteria For a Short Sale Loan terms may be remade by the lender. The challenge in these programs until recently has been the inclusion of added fees and rates that don’t really give the borrower a significant advantage. Newer government programs are providing cash incentives to lenders to modify loans on more friendly terms. Hope for Homeowners In the original Hope for Homeowners programs, the lender takes the loss to current market value; the borrower gets 10 percent equity at the new value and agrees to share profits with the lender in any future 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 and Reinvestment Act signed in February 2009) applies only to Fannie Mae and Freddie Mac-backed home loans. Here are key terms and conditions of the new programs: • Thirty-one percent goal: An overall guideline of the program is to find solutions for homeowners that reduce their monthly payment to no more than 31 percent of gross monthly income. “Underwater” Help: “The amount due on the first mortgage is less than 125 percent of the home’s value. In those circumstances the 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 mortgage is eligible to be modified. Lender Incentives: Lenders are motivated to participate, as in earlier government programs, by cash incentives paid by the U.S. government for each loan they modify. Refinancing: The program also offers a refinancing option for qualifying homeowners—as an alternative to loan modification. This part of the program applies only to people who are current on their mortgage payments. The same standard of “mortgage debt not to exceed 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 not reduced under either program. Homeowners may be able to finance closing costs of their new loan under either refinance or modification, but “cash out’ arrangements are not permitted. 2010 Sunset: The program is funded until June 2010. For more information, see www.makinghomeaffordable.gov. • • • • • • Slide 53: 53 3 Chapter 4: Criteria For a Short Sale Tip! – Modification Program Off to Slow Start The Wall Street Journal reported (August 6, 2009) that the administration-backed mortgage modification guideline and incentive program is off to a slow start. The program was introduced in February 2009. So far, more than 400,000 borrowers have been offered help. More than 235,000 borrowers, or roughly 9 percent of those eligible for the program and at least sixty days past due, have begun trial mortgage modifications, the first step to getting a loan reworked. The newspaper also reported that progress among the largest lenders is highly variable. Some large firms have initated programs with less than 5 percent of defaulting borrowers. Some lenders report they have initiated other modications “outside the 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 Holders of government-backed FHA home loans are in trouble in the same proportion as conventional loan holders. The government has announced an FHA loan modification program along the lines of the program described above. Key features and some differences are: • • Incentives: Incentives to lender to modify under the program are up to $1,250 Principal reduction: Under the FHA plan, mortgage servicers can reduce the amount of principal on which the borrower must make loan payments by as much as 30 percent to get monthly payments to affordable levels. The borrower makes the reduced payments for the life of the loan, but is responsible for paying off the full loan amount when the home is sold or the loan is refinanced. Missed payment requirement: Homeowners must have missed at least one payment in order to apply for the program. Thirty-one percent goal: The FHA plan has the same 31 percent of income overall goal as the non-FHA program. • • Negative Paths There are a number of negative consequences if a short sale is not workable. Most of these involve a possible “escape” from foreclosure that comes with continued liabilities attached and/or a missed opportunity to come away in better shape. Slide 54: 54 4 Chapter 4: Criteria For a Short Sale Deed in Lieu of Foreclosure This is an option that some homeowners take, out of despair or because they don’t know their other choices—including a short sale. Instead of waiting for foreclosure, property owners may just give the deed back to the lender and walk away. Deed in Lieu of Foreclosure is not a right of owners. The lender must agree to it. If they do, there will be no short sale. The property becomes bank-owned and the lender may auction it, or hire an REO listing agent to get it sold for them. A Deed in Lieu agreement does not protect the homeowner from subsequent judgments levied against them by the lender. Deficiency Judgment If a property is sold for less than the amount owed on the property—either in a short sale or in an auction—the lender may decide to pursue a deficiency judgment—a court order requiring the borrower to repay the amount due that was not collected in the sale. Deficiency judgment power may be “negotiated away” in a short sale—but making sure that happens is a key protection an agent should seek for their short sale client. Tip! – Get Protection for Your Client in the Lender’s Approval Letter. The bank should release their lien and settle on the account. If they do not agree to consider a complete settlement, then the lender will typically: 1) Offer to agree to a promissory note for the balance, or some smaller amount. Often this amount may be as little as 5% to 10% of the total short. 2) State that they retain the right to collect the balance of the note after closing. Try to avoid this. Negotiate the best possible terms for your seller! In the past, lenders have tended to dismiss their right to a deficiency judgment 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, in another indication of the trend, the FDIC now requires buyers of their distressed properties to pledge in writing that their purchase was an “arm’s length transaction.” Truth Be aware of your state laws. Some states limit deficiency judgments in short sales by law. Other states specifically permit them. Slide 55: 55 5 The Price of Indecision Chapter 4: Criteria For a Short Sale Sometimes sellers may want to change direction—initially applying for a short sale and then switching gears and deciding to go for a mortgage modification to try to keep their home. Sometimes the opposite can happen. Either way the consequences can be negative. This kind of switching can put the lender off—and make either resolution more difficult. Tip! – Risk of Indecision Underscored On the Keller Williams Distressed Property Community online, top short sale agent and MAPS Coach Knolly Williams has dialogues with agents over this issue. His suggestion, “When applying for a loan modification, the client has to prove that they CAN afford to keep the home; and when applying for a short sale the client must prove that they CANNOT afford to keep the home. This can muddy up a file and create a scenario where the client does not qualify for either the short sale or the loan mod (that’s the worst case scenario).” Knolly continues, “In almost every case, when a client applies for a loan modification, the short sale process is immediately terminated by the lender. The loss mitigators are looking for any excuse to get the file off their desk, and this gives them the perfect opportunity. If the client’s application for a loan modification is denied, and the client decides to move forward with a short sale, the entire short sale package 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” the lender’s collection activity. Forgiven Debt and 1099s In previous years, when a loan was forgiven, the forgiven amount could have been considered taxable income by the Internal Revenue Service (IRS). The lender may have sent the seller a 1099 or the IRS could 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 was part of a short sale. However, this tax relief applies only if the home was the seller’s primary residence. Investors are not protected. Slide 56: 56 6 Chapter 4: Criteria For a Short Sale Tip! – You Are Not a Tax Expert Be forewarned that tax laws do change. Stay abreast of changes to the codes that affect agents by keeping an eye on real estate news services, like Inman News. Do not overpromise solutions to your sellers and remember that unless you are a tax accountant, you should not give your sellers any advice about their taxes. Your Role in Homeowner Choices: Adviser and Fiduciary The prospect of qualifying for a short sale comes with a complex array of possibilities. Sellers are most often feeling helpless, frustrated, and embarrassed. They are almost always hurting financially—or worse. You can see why, in distressed markets, your role as an adviser and fiduciary toward the seller becomes larger than ever. The already high stakes of sales in normal markets are compounded by the emotionally and financially distressed condition of consumers facing foreclosure. 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 a solution to your clients. When you do, you are more likely than ever to win a client for life—whether it’s a short seller 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. Slide 57: 57 7 The Client’s Best Interest Chapter 4: Criteria For a Short Sale Aaron Rice has been an agent in the Baltimore, Maryland, area for nine years. Like many 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 of agents leaping to the short sale option with distressed homeowners they meet. It may or may not be best for them,” he says. “Aaron continues, “I pledged to myself at the beginning I would always act in the client’s best interest. I figure if someone tells me they really want to stay in their home 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 without help,” he says. Help Protect Against Fraud You have another role—helping protect consumers from fraud. The price opportunity and marketing hype around distressed property creates opportunities for deception. The market is filled with people and firms selling expertise to help fearful, stressed homeowners. Tightening regulation surrounding distressed property advisory work and transactions is a new pursuit for legislators and regulators. Most of the focus has been on so-called “loan modification counseling.” Here are some developments. Federal In mid-2008, the U.S. Congress passed the Federal Housing Finance and Regulatory Reform Act (Foreclosure Rescue Bill) which included a provision for the licensing of all loan originators—with course hour requirements and testing standards. The Federal Trade Commission (FTC) and the U.S. Treasury Department have also begun a crackdown on fraudulent mortgage modification and “home rescue” schemes—by stepping up enforcement of existing laws and sending written warnings to some seventy firms “who may be deceptively marketing mortgage loan modification or foreclosure rescue services.” The FTC is also urging home mortgage companies to send advisory literature to their mortgage clients. Slide 58: 58 8 Chapter 4: Criteria For a Short Sale State In addition, some states (Illinois, Florida, Washington, and Hawaii are examples) have passed consumer protection laws in response to the fraud trends in these markets. Other state attorney generals have been 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 could easily have completed themselves Frauds resulting in the homeowner signing over their property to an “adviser” Basic definitions about what an agent or adviser must know about a homeowner‘s financial situation, and about their financing, before making representations about their situation. What agents and advisers can charge for distressed property services Defining what a “distressed property consultant” is and knows how to do for the consumer • • Again, the key is to know the law—both federal and in your state and locality—that protects consumers from deceptive practices. It should be a key ingredient in the expertise you offer to distressed property clients. Consumer rights advocates and lenders also are quick to remind people that they have the right to contact their own lender and explore new loan terms directly with the company who made the loan in the first place. Know the Rights of Tenants As a distressed property expert agent, you need to be aware of the burgeoning issue of foreclosures’ 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’re leasing—until a constable or sheriff comes knocking at their door with an eviction notice! Slide 59: 59 9 Chapter 4: Criteria For a Short Sale Tip! – Renter Alert Program Protects Tenants Tenants The surge in foreclosure volume has raised the profile of this problem—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 into RealtyTrac’s database of some 1.8 million foreclosures nationwide— to see whether the property you are renting, or the one you are about to rent, is in default with a foreclosure pending. It’s called the RealtyTrac Renter Alerts Program. Issue: Arm’s Length Transaction Distressed markets mean low, low prices—and low prices can bring a special set of temptations for buyers, investors, and agents. Although, as in many areas, different lenders have different attitudes, a good rule of thumb for ethical practice—and successful closings—is “no insider transactions.” Transactions should be done at “arm’s length.” HUD defines arm’s length this way, addressing the seller: “The buyer cannot be a member of your family, a business associate, or other favored party. No hidden terms or special understandings can exist between you, the buyer, appraiser, sales agent, or mortgagee.” Tip! – Cover Yourself with a Contract Disclosure Top short sale agent and MAPS Coach Knolly Williams notes that sometimes less than arm’s length opportunities come along and the seller, 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 and buyer (for example) in the special provisions section of the contract.” Slide 60: 60 0 Chapter 4: Criteria For a Short Sale Issue: Streamlining Short Sales This is a critical area for all agents to monitor. Short sales make up a clear minority of distressed property sales—but, other than mortgage loan modification, agents agree they represent the best alternative for most homeowners in distress who are unable to make their payments. Under the Making Home Affordable program, a new initiative has been launched by the U.S. Treasury Department to: • • • • Incentivize short sales with payments to both the lender/loan servicer and the homeowner. Create standard processes and timelines for key steps of the short sale 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 PDF document that describes the program. Agents are debating how effective these coming policies will be. Lenders like Bank of America have issued statements praising new policies—especially those addressing settlements on second liens. But the jury is definitely out on how much short 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 their own programs to systematize and streamline short sales—perhaps including programs to assign groups of approved short sale properties to specific agents for marketing and closing—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 and enforced, it is likely to transform the distressed property world. Slide 61: 61 1 Chapter 4: Criteria For a Short Sale You Are Their Adviser and Fiduciary Imagine you were consulting with a homeowner who is “upside down” 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 negative ones—and a reason why each is either likely positive or negative. Most Positive Options Option Reason Why Positive or Negative More Negative Options Option Reason Why Positive or Negative Slide 63: Chapter 5: Mindsets 63 Chapter 5: Mindsets: Sellers, Buyers, Lenders, and Agents Short sales involve distressed property and the distressed property business might come with a warning label that says: “This is not the traditional real estate business you probably learned!” How is it different? In many ways—ranging from the processes and priorities agents must learn 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 short sales. Let’s explore the differences in mindset … Slide 64: 64 Chapter 5: Mindsets Mindset Map: Traditional vs. Distressed Look 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 difference between traditional and distressed markets, from a mindset perspective: Mindset Map: Traditional Markets vs. Distressed Markets Traditional (Buyer or Seller) Market Consumers In General Generally eager and positive about buying or selling Seeking return on investment and equity to power their next home purchase Distressed Property Market Stressed about the “whether to” and “how to” presented by the market on the sale side—and feeling urgency to buy at great prices on the buyer side. Institutions and consumers seeking either whatever they can get, or an escape from crisis Sellers Buyers Lenders Consumers seeking the right Consumers seeking the very best possible home at a reasonable price deal, or a steal Generally open to making loans and into creating products and policies to encourage borrowing Lending criteria dramatically tightened; loans hard to get. They have also taken on role of sellers of distressed property—either before foreclosure (short sale) or after (REO.) Agents Eager to jump in; generally Often poorly informed about transaction able to master transaction basics; often not well-qualified to coach their basics clients—or unaware of the need to Taught widely, in real estate schools and by brokers. Generally consistent and use standard board or MLS documents. Timelines generally consistent. Only recently being taught. More complex, with varying timelines and requirements. Lenders in charge of transaction process. Special documents required by lenders and agents to protect themselves and clients. Transaction Processes Slide 65: Chapter 5: Mindsets 65 Take a look at each of these viewpoints and mindsets in more detail on the following pages—as they apply specifically to short sales. Then zero in on the short sale transaction process itself: • • • • Sellers Lenders Listing Agents Buyer Agents and Buyers Sellers A Tough Place to Be Short sales are a distressed property business, and the name fits the sellers in this category “to a T.” Short sellers are usually experiencing a lot of distress, discomfort—usually long before you ever contact them. They have typically missed mortgage payments—maybe for months. They often have financial distress that means they’re also being pursued by a host of debt collectors—for credit card debt and other loans. Many of them are in the situation they’re in because of a personal or family crisis—death, divorce, job loss, unwanted job transfers, and more. Short sale agents must recognize that their sellers are in a place in life that’s marked by embarrassment, fear, and anger at their circumstances—and anger at others who they may feel are responsible. One of the best ways to push through and motivate sellers to act on a short sale is to focus on 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 idea, is to avoid a negative—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 with distressed short sales candidates than avoiding a big negative. Why Choose a Short Sale? One of the attractions of short sale over foreclosure is that a short sale mitigates or reduces the 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 selling short, rather than being foreclosed. Slide 66: 66 Chapter 5: Mindsets A copy of this table that you can use as a handout is in the course tool kit. Foreclosure Credit Score Damage (based on agent reports) Mark Against Your Financial Record 250 points or more Short Sale 150 points or less (NOTE: credit monitoring agencies may change policy on score modification) Drops off credit scoring system after 7 years Permanent record at county courthouse Time to Qualify to Buy Again (FNMA) Down Payment on Future Purchase (FNMA) 5–7 years 10 percent or greater; maybe 20 percent 2 years Less than 10 percent Lenders Truth While lenders clearly have common issues when considering a short sale, top agents stress it’s extremely important to understand the detailed differences in how short sales are processed from one lender to the next. Cost of Foreclosing and Creating an REO In a recent interview, Gary Keller pointed out, “The big question now is will banks start to take short sales more seriously. It seems like it would be in their best interest—less cost by keeping 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 mentioned earlier, a foreclosure can end up costing the lender $50,000 or more by the time they finally get the property off their books. Slide 67: 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 people they deal with in banks growing at a frightening rate. “When I started doing short sales a few years ago,” says Knolly Williams, “the loss mitigation people had maybe a few dozen files on their desks. Now they have hundreds of them.” The impact of this file burden ripples through the business: • Overlooked files: Short sale files submitted by agents can be overlooked all together—particularly if the agent doesn’t know how to properly submit them, and how to follow up effectively. Errors: Processing people for the lenders can make more mistakes, or may make poorly considered decisions and reject an application for short sale—just so they can pass it on to foreclosure and not have to deal with it. Slow turnaround: Slow response times on pending short sales—while understandable with the workload facing loss litigators—frustrate and anger all the other parties—buyers who want to close, sellers who want out from under their problems, 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 for short sales not being completed at a better rate. 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 agent competency issue. Slide 68: 68 8 Chapter 5: Mindsets Eliminate 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 short sale knowledge and conversion rates—and stop looking for faults on the lender/loss mitigator side. “We agents must take responsibility for our own expertise. We are the real estate experts—its not the lender’s business, and it certainly isn’t the business of the loss mitigation processor. We know the market, the values, and our clients. Our job is to have 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 take responsibility for closing more deals. They need to know the process, be detailed and precise, and be great communicators; sharing everything they know that their clients need to know—both sellers and buyers. Short Sale Policies—Loan Modification Application First? Recent changes in U.S. government policy—from the Treasury Department, the FDIC, and Fannie Mae and Freddie Mac—may have the aggregate effect of smoothing and speeding the short sale process. What may happen? No one knows, but here’s a scenario that some top 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 agencies involved, and lenders, would unite in favor of a policy requiring homeowners in distress to apply for a loan modification first. The idea: only if loan modification fails would the homeowner then become qualified for a short sale. The envisioned benefits are two big ones: • • Keep more homeowners in their homes by getting more loan modification applications going. Smooth the path to short sales, for those who don’t qualify, by getting the prequalification with their lender done through their loan mod application. Slide 69: Chapter 5: Mindsets 69 See the module SHIFT: Tactic 11 Distressed Properties: Working woith Buyers to learn more about a business idea that pairs loan modification counseling with short sale business. Truth Working with lenders to complete short sales is both an art and a science. There are clear do’s and don’ts; top agents also say repeated success comes only with strong relationship-building and persistent communication. Listing Agents If you are a listing agent for short sales—even if you are only handling the front end of the deal—most agree you need certain key qualities: 1. 2. 3. Psychologist and grief counselor for a financially distressed homeowner Advocate for the overwhelmed seller, urging, encouraging, and helping them see their way, legally, out of a pending foreclosure Master of patience and persistence, seeing short sales to a successful conclusion with negotiating skills, clear communication, and a certain willingness to wait—when there is no other choice Organized and systems-based, to keep differing lender policies and procedures— and a substantial amount of paperwork—in good working order Willing to do whatever it takes to persist and see the deal through 4. 5. Brandon Green of Washington DC has worked both types of distressed property business, though he now focuses mainly on REO listings. He summarizes the agent’s challenge simply. “Neither short sales nor REO are businesses for the faint of heart,” he says. 1. Psychologist and Grief Counselor Most sellers you will deal with are experiencing acute pain—emotional and financial. This is personal. 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. Some think they were duped by their lender, or agent. It’s a rough mix of emotions and realities. You will find yourself confronting most of them as you qualify and work with these potential sellers. Slide 70: 70 0 Chapter 5: Mindsets 2. Advocate The flip side is that you have an opportunity to be an advocate for these sellers. Unless they have given up completely—in which case it’s unlikely you’ll work with them—they need an expert and an ally. Many do not understand the act of foreclosure and the short sale process. They may have heard 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 cases. 3. Master of Patience and Persistence The short sale process is almost always lengthy, and often frustrating—for both the seller and buyer—and for you. You need to be a persistent type, and also a person who accepts that, sometimes, you just have to wait for the “wheels to turn” in the process. Insiders say part of the challenge in short sales is that staffs assigned to “loss mitigation” actually often come from the lender’s collection department. They are often more trained to collect the largest possible amount of money—even at the risk of shortsightedness. Tip! – Be Prepared to Argue for Your Client Fred Weaver of the Group 46:10 in Phoenix, Arizona tells this story of what he says is a fairly common scenario. “I argued back and forth yesterday with a senior manager at a mortgage company. They previously approved a short sale for us that was set to close shortly, but the loan program the buyers were qualifying 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 were netting the mortgage company the exact same dollar amount or payoff. 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 the smartest person in the world by any means, but the fact they are denying this short sale is just further proof that there are still people handling 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. Slide 71: Chapter 5: Mindsets 71 4. Organized and Systems Based Success in short sales comes with the ability, taught in The Millionaire Real Estate Agent, to boost your profitability by leveraging people and systems. Because short sales are almost always slower to close than traditional transactions (sometimes a lot slower), you need to fill your pipeline with enough volume to keep closings flowing over time. To do that, and to handle the considerable paperwork and relationship communication with loss mitigators and others, you must be able to build and use great systems. Being digitally organized is important. But some of it is just common sense. One example comes from Tod Barton in Las Vegas. Tod says a key to growing his already successful business has been to understand how to organize work with lenders. “We’re figuring out how to cluster communications—our file status reviews—with lenders so that when we do get our contact on the phone, we use that time very efficiently to update all the files we have with that particular lender,” he says. 5. Whatever It Takes! Most top agents agree that success in short sales takes plenty of motivation and determination. Their battle cry is, “Whatever it takes!” Doing What It Takes Scott Smith of Indianapolis, Indiana, has years in distressed property—both REO and 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 best service 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, when times get tough; keep everyone’s point of view in mind. “And again remember,” says Scott, “once you’re rolling they want the deal to complete. They do not want the house back.” Top short sale agent Kristina Arias has her own description of the spirit and mindset great short sale listing agents need. “There are so many foreclosures happening, and so many more 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, every time it happens.” Slide 72: 72 Chapter 5: Mindsets 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 Market Center 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 agent here who is serious about success in short sales to approach one of our top short sale people—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 with Buyers deals with this in more depth—but basically buyer agents in the distressed property arena are often “on the hot seat.” Buyers are out there in growing numbers, but agents who find them often aren’t clear about how to really help them buy. It’s not unusual for listing agents in both short sale and REO situations to blame buyer agents for being unprepared, not knowing what to expect, and not counseling buyers appropriately. It’s clear there are some basic requirements for the buyer agent in distressed property situations: 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 rules and timetables—no one else does! Lender’s bottom line is unknown, at first – Offers are often submitted with no idea 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 being looked at—and followed up with a Broker’s Price Opinion (BPO) by another agent hired by the lender, or by an appraiser. There’s little if any negotiation – Offers are rarely, if ever, negotiable. Your client’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 to a 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. Slide 73: 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. Tip! – Offer Tips on Your Website to Make It Easier 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 short sale 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 can be at issue and it’s an “as is” purchase. Close of escrow process—it can be frustratingly long, with a relatively quick close at the end. Covering HOA fees—HOA fees are typically in arrears and buyers 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 exact language they’ll need to put on specific lines of the standard contract form used in their state. They also supply a downloadable standard Short Sale Addendum required in their state. Slide 74: 74 4 Chapter 5: Mindsets Make 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 coming from? If you’re working with a partner, take turns reciting your answers in your own words—coach one another; check each other’s knowledge. You are in the role of listing agent for this course. Talk about how 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 Slide 75: Chapter 6: The Short Sale Process Overview: Four Phases This broad framework contains ____ steps that should be locked in your practice as the “must do” items for every short sale transaction. Exceptions are rare. In some cases, being unable to complete the early steps is a “red flag” that this property is not likely to be a short sale. There are four key phases—and after a quick review, we’ll dive into more detail on each of them: 1. Prequalifying Gathering and Submitting the Short Sale Package Negotiating with the Lender(s) Closing the Transaction The process described on the following pages assumes the homeowner has a conventional 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. Inexperienced agents can waste tons of time trying to sort things out with homeowners who, for one reason or another, will not qualify for a short sale, or will never get the deal done. It sounds cynical, but the truth is short sales are a business for sellers who need it, want it, and have problems that make it clear to the lender that selling short is a legitimate and very possible option. 2. Gathering and Submitting the Package Short sales are document-filled deals. The reason: because in addition to all the normal contract documents needed to convey property in your state and MLS area, you must pull together 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. Slide 76: 76 6 Chapter 6: The Short Sale Process 3. Negotiating This is where the rubber meets the road on your commission. You are not negotiating with the buyer through the buyer’s agent—you are negotiating with all the lienholders. There may be a second lienholder, or even a third. There may additional obligations charged against the property. Each must be dealt with separately. In negotiation, you are also working 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 closing. This includes your commission! 4. Closing the Transaction Closings in short sales tend to be more unpredictable than in traditional real estate sales. For instance, since your seller’s lender is in charge of the process—they and only they decide when they’re ready to close. Working with a short sale-expert title company helps—but that company was selected by the lender, not by you. Closing dates change. Last-minute delays are not unusual. Agents and their clients must remain patient. Tip! – Which Phases Will You Work On? Remember the earlier section “Your Options for Doing Short Sale Business.” If you choose to be a short sale initiating agent and provide 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 to handle 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 to simplify and standardize as many of the documents and steps as possible, every short sale agent says, “the devil is in the details.” Slide 77: Chapter 6: The Short Sale Process 77 Agent Goals in the Short Sale Process There are a number of versions of this basic process flow, but they are remarkably similar. Mastering the entire short sale process is the essence of becoming a successful short sale originating agent. Short sales are a complex process. 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 as you possibly can. 3. Standardize – Standardize as many of your work processes and communications as possible—bearing in mind unique differences in lender or asset managers’ requirements. 4. Stand Out – Top agents understand that success in short sales comes from professional presentation and demonstrated savvy. Make your short sale package paperwork neat, clean, and as good-looking as you can. You are what you appear to be. Details: Ten Steps to a Short Sale The contributions of top short sale agents in Keller Williams Realty were very important to this chapter. They include Kevin Kauffman, Fred Weaver, Barbara Horan, Scott Smith, Tod Barton, Knolly Williams, and Kristina Arias. Slide 78: 78 Chapter 6: The Short Sale Process 10 STEPS TO A SHORT SALE Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 Prequalify the Seller Assemble the Package List the Home Obtain an Offer Submit the Package and Offer Follow Up Negotiation Phase/Loss Mitigator Assigned/ Appraisal File Approved Deal Closes Step 1: Prequalify the Seller This was covered earlier in this course—before the rest of the process steps—because prequalification is so vitally important to success in short sales. 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 seller through an initial interview. Since most agents say they learn that visiting with sellers personally is not a good use of their time, they put the onus on the seller to lay out the details of their situation in an interview style questionnaire. It takes the place of a personal interview. Slide 79: Chapter 6: The Short Sale Process 79 Top short sale agent and MAPS coach Knolly Williams is one who advocates going through a well-defined interview process—preferably on paper—that sorts out two things: 1. Facts of the situation – The facts of the sellers’ personal and financial situation 2. Homeowner motivation – Whether they are motivated enough to see the process through Like prospective buyers and sellers in other markets, motivation says a lot about whether you’ll get to a successful closing with them. Here are the components of the interview Knolly recommends: Short Sale Interview Elements Personal and contact information Including the last four digits of their Social Security Number, and their Loan Number (for identification purposes with the lender) Details of their loan Mortgage company; amount due; copy of last statement; copies of any foreclosure notices or documents Essential facts of their hardship Past home marketing information Motivation Status of any divorce, medical issues, job loss, etc. Were they listed; how long; at what price; previous MLS number Is the property occupied; what will the owner do after they sell HOA If there is one, any contact information, fees, and fees due Slide 80: 80 0 Chapter 6: The Short Sale Process Use a Questionnaire Have a questionnaire in your tool kit. Model it on the interview outline above. If you don’t above. 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 detailed and 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 short sales, most agents say it means even more. A motivated seller will do everything they can to provide documents and details (including sensitive personal information) that you’ll use to persuade the lender that a short sale is warranted—and will work! A sample Homeowner Questionnaire is included in the course tool kit. Scripts Learn and use some simple scripts that show your positive, helpful mindset to the seller right off the top: • • We’re partners in this process. I want to help you, but it’s going to take effort and participation from you. If you are committed to get this sale done, I can help you. The process takes time; the faster we get all the facts together, the faster I can start helping you, the sooner you 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 foreclosure himself 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 and our business was left behind. We began to lose a lot of money. I fell behind in my mortgage payments, and was saved by a short sale,” he says. He uses his experience often—to help homeowners understand he really “gets” their situation. “They feel embarassed and alone,” he says. “I know because I did. If you can find someone who really works to advocate for you, it makes all the difference.” Slide 81: 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 leads the team behind MarylandShortSaleTeam.com. It’s a good match with comments made by other top short sale agents. Any of the following circumstances—or a combination of them—may constitute a legitimate hardship in the eyes of a lender: 1. Job relocation 2. Unemployment 3. Significant income loss 4. Divorce 5. Separation 6. Excessive medical bills 7. Death of spouse 8. Death of a family member 9. Business failure 10. Damage to property 11. Incarceration 12. Military service 13. Adjustment in mortgage payment or unforeseen increase in living expenses Aaron adds, “Most mortgage companies or lenders require the hardship letter pursuant to a short sale. In the hardship letter, it is important to present the facts clearly, and above all else, be honest. The hardship letter must be able to prove the situation that caused you to fall behind on your payments, and the excuse for falling behind must be legitimate and provable. A hardship is defined real and the mortgage company believes the loan is likely to become delinquent.” Be Aware of Signs of “No Deal” Top agents say you’ll learn to detect trouble early on, if you now what to watch for. 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 with reluctant sellers because you are eager to get going. But the truth is, top agents say they’ve learned you’re better off moving on to the next seller than spending time trying to urge cooperation that’s just not there. Slide 82: 82 2 Chapter 6: The Short Sale Process “Have a pointed conversation on the phone with the seller,” Tod Barton urges. “Tell them what they must provide to you, and how soon. Be sure they know they will come to you— you are not driving to them. You can often tell by their tone and attitude whether they are going to be a real seller, or not.” Tip! – Make Them Come to You Tod Barton repeats the mantra of many top short sale agents. “Make them come to you with their documentation,” he says. “You are doing business in volume, hopefully, and you don’t have time to be driving around town collecting documents from people. Tell them to bring everything to a single appointment. You’ll find out fast who’s motivated!” 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 they about to default, or extremely likely to do so soon because of their financial situation? “People who owe a lot more than their home is worth are often considering a business decision about whether to stop paying and try to force a short sale,” says Kevin Kauffman. Knolly Williams agrees, “The bank is looking at a business proposition too in upside-down situations.” At the end of the day, the bank has to decide whether to go for a short sale or foreclose. Which alternative is best for them? Make no mistake about it; lenders will always give first priority 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 loads are looking now at spreadsheets that help them see what the numbers in a deal will look like—bottom line for the bank. “Remember this when you are making your case to the bank,” Scott says. “You are speaking to what’s the best deal for them.” Slide 83: 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 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 below constitutes your seller’s application for approval of a short sale. Whether a short sale happens will only be determined when an offer is submitted—along with the assembled package, or application. Below are the elements of the short sale package. They’ll be discussed in more depth in the discussion of the transaction itself. The elements of the package are: 1. 2. 3. 4. 5. 6. Hardship Letter Listing Agreement Letter of Authorization Financial Statement Recent Bank Statements and Tax Returns Fully Executed Purchase Contract 8. 9. 7. Listing Agent’s Short Sale Disclosure Buyer Preapproval Letter Preliminary HUD-1 10. Your CMA 11. Fax Cover Sheet 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 work, the seller’s hardship letter is a similar lynchpin to the success of the entire short sale document package you will submit to the lender—with the first offer you receive. The hardship letter must be clear, brief, and persuasive. Tod Barton points out that short sale is not about what assets the seller may have—it is all about their current hardship. Hardship is the only real reason why a bank should consider agreeing to terms of a short sale. A sample Hardship Letter is in the course tool kit. Slide 84: 84 4 Chapter 6: The Short Sale Process Format of the Letter Set up the hardship letter almost like a memorandum from the seller to the lender and you. The date, owner’s name, property address, and their loan number and last four digits of their Social Security Number (for identification purposes) should be clearly in evidence, right at the top. Content of the Letter Brief and to the point—that’s the bottom line. Here’s an example of a short sale hardship letter from the files of top agent Knolly Williams. Notice the brevity—just a few sentences and crisp, clean style. 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 be running high. They may not be good writers. You’d don’t want to spend time editing their work. Just mention its critical importance up front and offer to get it done—as soon as you’ve prequalified them.” 2. Listing Agreement The signed listing agreement or standard listing contract form for your MLS and board must be included. There are a couple of important tips to note here that will be covered later. 3. Letter of Authorization Lenders must have the seller’s signed authorization to work with you as their agent. Without one you won’t be able to get a loan payoff verified, or do any other communicating about their loan and situation. The Letter of Authorization should be kept very short—identifying the seller, their loan number and the last four digits of their social security number—for identification purposes. 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 package that can be submitted early—before the rest of the documentation and an offer. Slide 85: 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 seller’s assets, liabilities and budget situation. Lenders may provide their own financial statement for you to use—but you should have one of your own that’s a proven winner. If you don’t have one, get one from a successful agent. A sample Financial Statement is in the course Tool kit. 5. Recent Bank Statements and Tax Returns Sellers must provide their most recent bank statement. Most lenders will accept either a copy of a printed bank statement or a printout of the seller’s online banking statement. Two years of Federal Income tax returns are usually also required. 6. Fully Executed Purchase Contract In a short sale an offer, or fully executed purchase contract, is submitted along with the rest of the “short sale package” of documents. In the vast majority of cases, without an offer the lender won’t even consider the seller’s application for a short sale. It’s all about the specifics—and that includes price. In short sales—initially—knowing what price will get an agreement from the lender is a bit of a shell game. You know it’s there, but neither you nor the buyer can see it. The lender will take the package and offer and then start their cost benefit analysis of the economics 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 is a way of communicating to the lender that you are looking for their reaction to a price that may not be accepted. This method of exploring where the lender stands on price works only where you have an established relationship with the staff (loss mitigators) of a particular lender. If they know you from past successful deals, and trust your expertise, you may learn where they stand faster this way. Slide 86: 86 Chapter 6: The Short Sale Process 7. Listing Agent’s Short Sale Disclosure—Signed by Buyer and Buyer Agent Several top short sale agents described or provided examples of a form they use that discloses the local “rules of the road” for short sale process and paperwork—to help minimize potential confusion and disappointment that could endanger the deal for all involved. This is a disclosure they’ve developed on their own—to help bring as much clarity as possible to the process. The content of this disclosure will vary, of course, depending on your market and any rules of your board or MLS—and lender requirements. Basically the disclosure should address items including: • • • • Time to Close Commissions Typically Paid to Both Sides Standard Required Contract Disclaimers (like “sold as is” and “subject to lender approval”). How Closing Costs Will Be Handled A sample Agent’s Short Sale Disclosure is in the course Tool kit. 8. Buyer Pre-Approval Letter Here’s another absolutely essential document. The buyer’s offer must be accompanied by evidence that they can buy—a lender pre-approval plus documentation of any cash they plan to put in the deal (proof of funds). Top agents have learned to be rigorous and unforgiving about this one. Short sales tend to be complex and time consuming enough without risking the deal with a less than fully qualified buyer. 9. Preliminary HUD-1 The HUD-1 settlement statement—in preliminary form—should always be submitted to show the lender what the return to them at closing will look like. Have it prepared for you by your title company. The lender is totally focused on their net from the deal—and the estimated HUD-1 will show them their bottom line. Will the short sale produce the dollars they need to justify the advantage 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. Slide 87: Chapter 6: The Short Sale Process 87 Tip! – Estimate Settlement Amounts for All Lienholders The HUD-1 prepared by your title company must include estimated settlement amounts for all lienholders—including 2nd and 3rd lienholders—whatever number there are. These additional lienholders will ususally agree to settle—often for somewhere in a range of 5-10 percent of the original debt owed to them. This is not always the case. Some second lienholders can be difficult. Truth Principle number one with the HUD-1 is that the number on Line 803 on 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 to closing. 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 on commissions. Some agents add a processing fee at Line 707. Others who operate their own servicing companies add a processing fee at Line 1306. Still other agents set their commission higher at the outset in order to have 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 last minute bullying tactics to reduce commissions. Slide 88: 88 8 Chapter 6: The Short Sale Process 10. Your CMA Be extraordinarily thorough and remember you do not know what the bank considers “the right price.” But you must price at a level that will attract offers. The lender will do their own assessment—using an appraiser or a BPO vendor company or agent. You must be prepared to defend your CMA against the bank’s BPO or appraisal numbers that might be different. Tip! – Schedule Price Reductions and Document Them for the Lender In short sales, as in shifted markets generally, many top agents are advocates for setting an aggressive price reduction schedule with their sellers up front. The strategy: When you keep reducing price—and that history is documented—that written evidence becomes a very effective 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, and not everything sells through MLS,” short sale expert Kevin Kauffman says. For more information on shifted market pricing practices, re-read SHIFT Tactic 7: Price 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 more about that shortly, and about how to ensure the necessary clarity, under Step 5: “Submit the Package and Offer.” A sample Fax Cover Sheet is included in the course Tool kit. Slide 89: Chapter 6: The Short Sale Process 89 What Documentation and Other Paperwork Must Be Included in the Short Sale Package? List the ingredients in the short sale package—it helps to begin with the items you will need to collect from the homeowner—and forms you will provide for completion. As a short sale expert, you’ll absolutely need to know this list, or your package will likely be ignored or rejected by the lender. Work with a partner. Switch roles and repeat the process. 1. ___________________________________________________________ 2. ___________________________________________________________ 3. ___________________________________________________________ 4. ___________________________________________________________ 5. ___________________________________________________________ 6. ___________________________________________________________ 7. ___________________________________________________________ 8. ___________________________________________________________ 9. ___________________________________________________________ 10. ___________________________________________________________ 11. ___________________________________________________________ Slide 90: 90 0 Chapter 6: The Short Sale Process Step 3: Price and List the Home 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 specialized forms to apply, to be approved for the program, and to close. FHA does not require an offer to accept a seller and their property into the short sale program. Follow MLS Rules Short sale properties are listed like any other property—with some key exceptions. It’s important to describe the listing as a short sale—within the bounds of any rules set by either the 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 commissions are variable, to be split 50/50. Finally, let all comers know that the property will be sold “as is.” The bank will set the price and there will be no negotiation. Inspections are for buyer information only—not to negotiate repairs. This is a short sale. The seller has no money to bring to closing—by definition. And the lender is already selling short. They will typically not accept any other costs. Provide Instructions for Agents Include on the MLS listing as much information as MLS rules and space allow—telling the buyer agents exactly how to proceed with any offer. Supplement the MLS information with a posting on your Website(s) letting buyer agents know specifically what they’ll be expected to do, and what the process will look like. In the course SHIFT: Tactic 11 Distressed Properties:: Working with Buyers, there’s a detailed discussion of how top listing agents communicate with buyer agents—about the short sale process overall and about offer contract details. Slide 91: 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 to do a price opinion (BPO—usually done by an agent for hire) or an appraisal, you should always submit your own CMA. You will do that CMA on the property just the way you normally would. But the final pricing considerations are different. Tip! – Lender Standards for Net Return Vary Among Lenders and Across Markets In listing the property, part of the homework you may want to complete is commonly known as “short sale math.” The effectiveness of this tool depends upon your understanding of what lenders operating in your market will generally accept as a settlement of conventional mortgage loans. FHA and VA have their own guidelines on settlements. FHA, for example, has a tiered system starting at 88 percent of market value and going down to 84 percent. VA’s standard has been 88 percent. What lenders accept as a settlement on conventional loans is definitely a market-by-market call. Research showed the range can start 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 with mentoring from agents who are getting short sales done in your market. Lender Net and “Short Sale Math” To be effective in pricing, some agents and short sale negotiation vendors feel it makes sense to calculate the consequences of a given selling price on the needs of all parties—particularly the lender, and you! Truth Listing a short sale property at a price that is both CMA tested and also 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 lender may accept as their bottom line, here is what you need to consider, and a short example to illustrate how the calculation works. Slide 92: 92 Chapter 6: The Short Sale Process You are basically working backwards from some solid assumptions—including the price the lender is likely to accept—to factor in all the fees and costs the sale price must cover. Here are the steps: First, Assemble the Critical Numbers in the Short Sale 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 closing costs (industry estimates work here—85 percent of value is standard for conventional loans, for example) Next, Go Through the Calculation Steps 1. Establish net dollars to bank—there are different lender thresholds for net (FHA, VA, Conventional) 2. Factor in commissions and closing costs 3. Factor in any other fees or costs 4. Leave room for negotiation Math Example Use ”Gross up” calculations, working backward from lender minimum net ($170,000). If this were a typical conventional lender’s deal, their expectation standard would be to receive about 85 percent of value in a short sale. So, the established value (by appraisal or BPO) would be $200,000, creating a minimum net of $170,000. $170,000 ÷ .92 (8 percent comm. & closing costs) = $184,800 $184,800 + $3,000 taxes past due = $187,000 $187,800 ÷ .97 (3 percent negotiation buffer) = $193,600 1. $193,600 is the minimum selling price to cover costs 2. Consider comps 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 always counsel your seller to contact a tax attorney or the IRS for details. Slide 93: 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 received that 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 the short sale process. Despite your best attempts to educate them, they may not have read anything you posted for their education and benefit—about the offer process. You may be able to help them make corrections that will prevent the lender from ignoring or rejecting the offer. Let Investors Help If you have a good network of investors who work with you from time to time, you can get their help to create a short sale breakthrough. One of the big challenges in short sales is learning 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 with the 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 bottom line. Proceed with caution. Your investor must be ready to perform if the lender approves the package. If they don’t, your credibility with the lender is at risk. Multiple Offer Strategy Short sales can be a confusing process for everyone involved. An example would be when an offer 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 the original offer you received and submitted has been approved, or even considered. You are eager to help your seller—and get paid. Slide 94: 94 Chapter 6: The Short Sale Process Truth Most top agents say under no circumstances should second or third offers be submitted to the lender when one offer is already in their hands. It will only cause confusion and delay. In a short sale situation, what is the best advice for listing agents? The consensus of top agents: 1. One contract at a time: Do not submit more than one offer to the lender at a time 2. Take backup offers: Do hold other offers in reserve, as backups, just as you would in a traditional sale. The first deal may fail, and you’ll be ready to keep the seller’s hopes alive by immediately showing the lender another offer. This is just another area where short sales are different from traditional sales. Here’s a summary of the rationale, in typical multiple offer scenarios: Multiple Offer Strategy Comparison Situation Approval Traditional View In traditional real estate, a bidding war can be great for your seller. You should encourage it. You advise your seller that it’s well below your CMA and they’ll want to counter the low first offer aggressively. You can’t ethically override the first offer until your seller accepts or rejects the first offer. Your board may have a formal multiple offer procedure, with accompanying paperwork. You need to advise the buyer’s agent(s) of the situation and encourage “highest and best” offers. Short Sale View This is not traditional real estate in that both your seller and their lender must approve a contract for a sale to happen. There are no bidding wars. The lender has calculated the net bottom line needed for their business. If the offer is too low, the lender will just ignore it—or return it to the listing agent—and pass the property to the REO department. You know the lender will be happy with this offer, if they receive it. Make it a backup. Be sure the buyer agent knows why, and what your plan is. The lender’s process to react to offers takes time. Once they reject the low first offer, immediately contact the loss mitigator and submit the new, better offer—with the original homeowner documentation package. A Low First Offer A Second Offer That’s Better Slide 95: Chapter 6: The Short Sale Process 95 There’s much more information on multiple offers and other distressed property offer and negotiation issues in the module SHIFT: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 to show your seller the very best possible offer from a buyer. Here, it can be different. Some top agents, like Knolly Williams, like to get the bank looking at the lowest offer they have. Why? For one thing, buyers tend to become impatient and walk away from deals. “You don’t want to come 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 your market is declining and you submit the highest offer—and it is approved for short sale at that price. If the buyer walks away due to impatience you may be stuck at an approved price the lender will no longer do. That would mean taking time to start over—just what you didn’t want. The other side of the coin—this lowest offer strategy’s success may depend on whether it fits your market. How fast is your market declining? The market may dictate how big the gaps are between the offers you have. If the lowest offer is a true low ball, submitting it can well be a waste of everyone’s time. It will likely be rejected. Require Non Refundable Earnest Money Let the buyer agent know the earnest money (a modest amount) will be held for at least 60 days. It helps get “buyer skin in the game”—an incentive to wait— while their offer and the seller’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. Slide 96: 96 6 Chapter 6: The Short Sale Process Step 5: Submit the Package and Offer Submitting a short sale offer is substantially different from what you would do in a traditional real estate deal. For starters, you are submitting the offer—along with the entire short sale documentation package you previously assembled with the seller’s help. Submit a Complete File The most important point is the most obvious—and most neglected—according to top agents. Barbara Horan teaches her short sale students about something she encountered one day while visiting a loss mitigator friend in the mitigators office. “I walked in and saw this huge mound of files on her desk—there must have been 500 of them,” 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 working on.” Truth Remember: Lenders have different policies and practices, and the lender is the one who decides what a complete file is. Be sure you know what they require—exactly. Then, provide it. Tip! – Packages Go to All Lienholders Although it will be up to the first llienholder to communicate with any secondary lienholders about the settlement, you must be sure to submit complete short sale packages to the 2nd lienholder and any other lienholders. Important: Bold Cover Sheet and TOC Knolly Williams teaches his MAPS coaching clients to always put a very clear and bold typeface cover sheet 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 seller information on the cover sheet, and their loan number in large type, plus your own contact information. 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 digging through the stack! Slide 97: Chapter 6: The Short Sale Process 97 Share History of Pricing That Brought the Offer In brief, a great marketing and pricing strategy for short sale listings is like one advocated in the book SHIFT. Convince your seller to agree to regular periodic price reductions. Track the results of any interest and showings after those reductions—create a paper trail for the lender that proves why the offer you are sending them is set at the right price! Pricing and Waiting Kristina Arias of Tempe, Arizona has built a very successful short sale business in just three years—in a sharply declining market. She has used a policy of dropping the price on her short sale listings 10 percent every two weeks. She says she starts at “the very bottom of market value.” Kristina also reports, as many short sale agents do, that first offers frequently don't end up being the winning offer in short sales. Because lenders review times can be protracted (weeks or even months), the first offering buyer often gives up—either because they lose patience or because they weren’t properly forewarned by their own agent. A Source of Delays: Investors Make Decisions, Not Loan Servicers The investor who actually holds the note with the seller is the ultimate decision maker when you are dealing with a servicing company. This adds a layer of complexity. It’s rare to be able to communicate with underlying investors. The asset manager is their agent, but without the final power to decide the short sale price. Tip! - Create an Evidence Trail: Record the Sending Fax Number When submitting a package, having a record for the lender of the fax number you sent from is a great way to help lender find the package you’ve faxed to them. Packages “go missing” a lot. Be ready to re-send them, and help the lender locarte them. Slide 98: 98 8 Chapter 6: The Short Sale Process Step 6: Follow-up Short sale processing is all about follow-up. You must always ask questions, and be clear about the rules. Truth Never assume anything—except that if you don’t ask the question you won’t get the answer. Ask questions from day one, and don’t stop! What Is Your Procedure from Here? Tod Barton recommends asking this question—no matter what, even if you have recently done business with this lender. “Banks are re-staffing and re-organizing to handle the volume,” he says. “You can’t assume anything, even though you think you know their process.” The First 30 Days This is the time period when the lender does their homework on the economics of the proposed deal. Does this deal make sense by their standards? Nothing will happen on the deal during this time. You want to be sure they are looking at your file. Knolly Williams recommends during this initial period, agents should call every 2-3 days— until it is confirmed that the file has been assigned to a loss mitigator. “Then I believe you can slow down a little and call once a week consistently,” Knolly adds. Tip! – What the Lender Considers Once They Have the Package Remember! The lender is trying to determine whether the short sale at a given price is a better deal for them than foreclosing and going through auction—and probable marketing, maintenance and sale as a bank-owned property, or REO. Banks have standard financial spreadsheet calculations that they run each proposed deal through to make their evaluation. Whatever time it takes for that particular lender to assign someone to run the process and communicate the results is the time you will wait for any response. Slide 99: 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 medium between calling too often and not enough. The consensus—a couple times a week seems smart. Temecula Valley, California agent Barbara Horan teaches short sales in the California Inland Empire region. Here are the all-important questions she says you need to ask up front to get started on the right foot: • • • • Who do I need to talk to? What is the number I should always call? What are the best days and times to call? Do you have any special policies or procedures about file follow-up that I need to know? Keep the Buyer Interested! The best thing you can do as time passes is to give regular feedback to the buyer’s agent about your contacts with the lender—even if, as is often the case, there is little or nothing to report. Short sales are notorious for buyers losing patience and walking away from the deal prematurely. “Keeping the buyer is the big deal in this business,” says top agent Tod Barton. “Thirty days to these buyers seems like six months; you’ve got to stay on top of communication with them. In reality, there isn’t much you can do beyond that, except be as efficient and organized as possible with the lender.” Remember: Be Sure the Foreclosure Has Been Postponed Lenders can stop a foreclosure very quickly, but you can’t assume just because they have your package—or even later when they approve it—that the foreclosure won’t suddenly “pop up” and spoil everything! Know the scheduled foreclosure date. If it is happening sooner than you might expect a lender response, be proactive. Get a postponement to allow your sale to happen. Truth Foreclosure 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. Slide 100: 100 Chapter 6: The Short Sale Process Step 7: Negotiation Phase When the lender assigns a loss mitigator to the file, you have an official point of contact to 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 the financial impact of the proposed deal for them. If their assessment is that a short sale makes sense financially for them, they will also order the appraisal or BPO—to be done for them by another agent, an appraiser, or a BPO servicing company. Negotiation: What You Must Do The negotiation stage is where “the rubber meets the road” in short sales. Along with prequalifying the seller, it’s one of the lynchpins of a successful deal. And success in negotiation, as in prequalification, begins and ends with a positive and understanding mindset. The people you are working with at the bank are working hard. They get tired and frustrated just like you do. Be nice to them, or you may find your file at the bottom of the stack. Why 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, they will do so in the negotiations. Approach All Lienholders Promptly If you are working with more than one loan, begin negotiating with both the first and the second (or even third) lenders at the same time. If one of the lenders agrees to your proposal, rush a copy of the acceptance letter over to the other lender right away. It will speed your negotiations with that lender. Often the lender on the second loan will accept pennies on the dollar. It is not uncommon for the second lender to take as little as $1,000 for a $15,000–$20,000 loan. If the lender on the second loan agrees, it will add weight to your proposal with the first lender, even if that lender had appeared to be immoveable. Slide 101: Chapter 6: The Short Sale Process 101 Truth In your negotiations, ask the lender to report the short sale to the credit 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 their default loss as possible in a short sale. When it’s time to discuss qualifying the short sale and setting details of pricing and fees, you’ll be talking with their representative—the loss mitigator. But there may be other parties involved—additional lienholders. Remember: It’s the primary lienholder that drives the process. Their claim against the property is the largest. They have been the primary communicator with the homeowner regarding homeowner default and the likely pending foreclosure. Tip! – Negotiation: Put Lien Demands in Writing Some top agents strongly recommend having first lienholders put in writing the amount they will offer second lienholders. Send the letter to the 2nd, and be prepared to ask to speak to a supervisor if the problem persists. Second and Third Lienholders—Smaller Players Can Block the Deal Dealing with the claims of secondary lienholders is, potentially, one of the more complicated parts of completing some short sales. Here are ground rules: Secondary lienholders have placed their lien normally because they have exhausted other means to collect what the homeowner owes them. “Most lienholders understand exactly what they’re doing by filing a lien,” according to the popular Complete Idiot’s Guide to Buying Foreclosures, Second Edition. “They take the step because they 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 sale for a small percentage of the total due. It’s quite normal for a second lienholder to accept a settlement of as little as 5-10 percent or the amount due, according to top short sale agents. Slide 102: 102 Chapter 6: The Short Sale Process Truth Remember: Junior lienholders will not be paid if the property forecloses instead of selling short. Watch Out for HOA Liens HOA past due amounts can be a real snag in settlement. HOAs know they will be paid by the first lienholder if the property is foreclosed, so they’re tough to negotiate with. HOAs won’t hesitate to slap a lien on a property if the homeowner is unresponsive about a past due amount. Be sure 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 in the right direction. Truth Successful short sale agents have different views about whether they will take on short sale negotiations with more than two lenders or lienholders. Some say it’s just too hard and time consuming. They refer this business. This is an individual agent’s business decision. Tip! – Account for All Lien Settlement Amounts on HUD-1 Be sure to enter values for proposed settlements to all lienholders on the 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 process if you don’t know all the steps and principles involved. This reality has led to a boom in the number of “short sale servicing and negotiation” companies around the nation. Some are small and local, others are large and national. In order to maintain focus on their businesses, some top agents leverage help in the negotiations. Some choose the third party route because of local or state rules. Here’s what those who have outsourced short sale negotiation say about the advantages: Slide 103: Chapter 6: The Short Sale Process 103 Third Party Negotiation Benefits Martin Bouma, top-producing agent from Ann Arbor, Michigan, uses a service that negotiates the ins and outs of a short sale with the lenders. The service is paid a third of the commission, the listing agent receives a third, and the final third goes to the buyer’s agent. “I’m not getting what I would consider my normal commission,” he says, “but I am getting the opportunity to help my clients while someone else takes the time to do the negotiations.” Aaron Rice, a short sale specialist in Baltimore, Maryland, says his state’s rules regarding short sales, “pretty well dictate that an attorney should be used to handle the details of negotiation.” So, Aaron and other agents in his area go to third party providers. In his case, Aaron uses a title company provided service that includes an attorney. Other agents have had less success with outsourcing. Many say they find the large short sale servicing vendors impersonal and distant. These companies also charge a substantial amount of their fee up front, making some agents wonder how motivated these firms are to actually close the short sale. Watch this aspect of the short sale industry carefully. New service providers are coming on line all the time. More real estate professionals and business people are understanding the issues that have blocked and slowed short sales, and they’re looking for better solutions. Keller Williams Chief Product Officer Bryon Ellington is continually 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 in interviews for this course: Slide 104: 104 Chapter 6: The Short Sale Process Negotiation Outsourcing Pros and Cons Do It Yourself Pros Control the process Stay close to the players Be able to report “ why” and “what’s happening” to seller and buyer agent in detail Teams with highest close rates in KWU research handled negotiation in-house—and sometimes provided that service to others. Outsource Leverage your personal time for lead generation Capacity for more deals in your transaction pipeline Control staffing costs Cons Becoming overwhelmed with details Frustration with process impacts your mindset Added cost of staffing up to delegate negotiation in your team Challenge of teaching negotiation skills to others. Watch for large up-front fees Negotiators distant from you, your market, and the parties to the deal Most close rates reported to be only slightly better than national average for all short sales—which is low Slide 105: 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 submitting a Partial Release of Lien request with the IRS. Why may that be effective? It’s because IRS liens are placed against all of a person’s property—not just their home. Be sure to ask sellers about any tax liens—IRS or otherwise—up front. Don’t be surprised when a tax lien pops up in the closing statement 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 this analogy during an interview about short sale mindset. “When agents are negotiating with the bank, they get frustrated. Everyone wants things to move faster. It’s human nature to get angry and upset. I tell people to shift their mind to this picture. Suppose you had taken out a personal loan from your branch bank. You made a number of payments and suddenly you couldn’t pay. So you went to the bank to ask them to forgive as much of the loan as possible. What do you suppose your plan would be? Would you come in with all guns blazing? Or would you come in with your hat in your hand, hoping for their understanding and help? If you really wanted their help, there’s only one right choice.” Step 8: Appraisal As in traditional sales, in short sales it all eventually comes down to the price. What will the lender accept as a sale price that sufficiently mitigates their loss on the defaulting loan? Truth The critical factor in price agreement is any gap between your CMA and the appraisal or BPO done for the lender. Slide 106: 106 06 Chapter 6: The Short Sale Process Meet the Appriaser or BPO Agent What the person who’s hired by the bank to make a price determination says in their report is critical to you. Agents say it’s amazing how many agents just let this step happen without getting involved in any way. The best agents understand that, using care and diplomacy, they have a chance to influence the decision. Be sure to ask when the appraisal is being done. If you’ve worked on your relationship with them from the start, they’ll probably tell you. Make arrangements to be at the property for the appointment (see Tip below). Share your CMA with the appraiser or agent. Let them know how eager your seller is to sell. Share the hardship letter with them. Tip! – Be the Point of Contact for Access Agents don’t all agree about this point, but many will actually remove the lockbox from the property once they know the appraisal is ordered. They want to be certain the appraiser or BPO agent must meet them at the property to gain access. The idea is, when you meet the appraiser to bring a copy of your CMA and any other relevant information, offer it as a professional courtesy. Other agents don’t necessarily meet appraisers at the property, but they do call them ahead of time to share information, or they fax the appropriate documents to the appraiser or BPO agent. Get to know the BPO agents and appraisers working in your market. Being on their best side can pay off for your sellers and you. New guidelines for appraisers are designed to limit contact, so be sensitive to that—but also be persistent. Tip! – Appraisals and BPOs Can Be Appealed It is possible to appeal a lender’s appraisal that comes in out of synch with your CMA. Some agents, like Knolly Williams, develop their own appeal document. Knolly says this helps him move swiftly if he learns that the estimate of value (appraisal or BPO) done for the lender is significantly different from his own CMA. Slide 107: Chapter 6: The Short Sale Process 107 Appraisal Controversy: Standards, Middle Men, and “Wandering Appraisers” Agents, brokers, and lenders are now embroiled in controversy over new standards for appraisals adopted by Fannie Mae and Freddie Mac—on an initiative originally taken by the New York State Attorney General. According to The Wall Street Journal (August 19, 2009), “Since those two companies provide funding for the bulk of U.S. home mortgages, the code, which took effect May 1, 2009,has become the national standard for most home loans. The code bars loan officers, mortgage brokers or real-estate agents from any role in selecting appraisers.” The new standards have: • • Made appraisers more conservative in their pricing Introduced middle-men (AMC’s or appraisal management companies) that lenders use to select appraisers—the goal is to distance lenders from appraisers decisions on property value. Appraisers are tending to seek assignments farther and farther from their home territory to generate more business, as the use of middle men by lenders cuts appraisers profit margins. • Slide 108: 108 08 Chapter 6: The Short Sale Process Step 9: File Approved by Lender Only the lender can approve the file. If they do, that means you and your buyer are moving toward closing. This agreement comes in the form of an Approval Letter from the lender. Watch Approval Letters for Deficiency Judgment Language Just because a lender agrees to short sale terms does not mean they’ve given up their right to pursue the selling homeowner for more money later! That claim is called a deficiency judgment. Many agents report lenders have not pursued deficiency judgments in the vast majority of short sales. But more recently, lenders seem to be strengthening the disclaimer in their approval letter that reserves their right to a deficiency judgment later. Part of your job is to get the most ironclad commitment from the lender that you can—to protect your client. Here are a few more important things to check for on approval, according to top agent Knolly Williams: To Do 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-minute surprises Done Slide 109: Chapter 6: The Short Sale Process 109 Step 10: Deal Closed Top agents report one of the last-minute developments you may encounter—if you are doing your own negotiating—is last-minute efforts by the lender to renegotiate your fees and commission. Although Fannie Mae and other large lenders are now adopting policies to bar these reductions, they still happen. The HUD-1 presents an opportunity to counter any lender tendencies to try to negotiate your commission. There are sometimes last-minute negotiations on the terms of the HUD-1 once the lender realizes what their actual net proceeds from the sale will be. Tip! – Avoid Last-minute Fee Negotiation Disappointments Adding a negotiating fee or servicing fee to the HUD-1 is a technique top agents use to increase the chances they’ll get paid what they should. “It gives you something else to negotiate away without losing the 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 your customer from foreclosure! Here are some key points about the closing. Some have already been mentioned: 1. 30-Day Window - Typically, the deal must close within thirty days of the lender’s 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 that the seller most likely is not in a position to bring cash to the closing. If you had the seller and buyer sign a short sale disclosure, everybody should understand that the seller is not going to be able to pay any of the buyer’s closing costs. 4. All Liens are Satisfied -Your preparation in Step 1 of the process should help you to 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 any questions they have. Some closing companies may be unfamiliar with short sales. If you have any input at all (it’s unlikely), be sure the title or title/escrow company has plenty of short sale experience. Slide 110: 110 10 Chapter 6: The Short Sale Process What If the Lender Rejects the Deal The lender may reject the offer and package and not tell you why. If the lender does not accept your proposal, request a reason in writing. There are five common reasons for a lender to reject a proposal: 1. 2. 3. 4. Dollar Net Not Met - It may not meet the lender’s criteria. Perhaps the lender was not going to net a required percentage of the BPO. Too Little Time - Perhaps your time frame did not allow enough time for the lender’s internal processes, and they weren’t able to evaluate the proposal. Missing Information - Information that the lender wanted may have been missing from the proposal. Internal Transfers - The proposal could have been submitted to someone who, at one time, was the decision maker in Loss Mitigation. That person may have been transferred to another position. New Lender - The loan could have been sold. Tip! – It’s Not Over Till It’s Over—Dispute and Appeal! Your negotiations are not over if the proposal is not accepted. You could still close this deal! You might just have to compile additional market or other information and resubmit it. Your challenge is to get the loss mitigator to reveal why the deal was turned down. How far apart is the offer from the number the lender will accept? Are there other concerns not related to price? If you believe the lender’s BPO is out of line on the high side, submit a formal appeal letter along with your CMA and any other proof your valuation is correct. 5. What If The Buyer Walks Away There are many instances of buyers walking away from short sale offers, frustrated by the delay in getting a response. Even when the buyer walks, the lender may ultimately approve the deal. When that happens, top agent Martin Bouma of Ann Arbor, Michigan advises, “Get the listing back in MLS and indicate that it is “a lender pre-approved short sale at whatever the offering price was. That’s sure to attract more offers.” Slide 111: 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 is that they are “difficult to close.” While there is definitely truth to this, research uncovers two other important realities: 1. Responsiveness is improving - Lenders’ responsiveness generally, and their interest in completing more short sales, seems to be growing. And new federal guidelines might eventually spur lenders with a set of recommended timelines. 2. Strong, repeatable agent processes work - Top short sale specialist agents and negotiators who have refined and honed their processes and paperwork—and truly know the business inside and out—are having excellent closing success rates. Two examples are Austin, Texas short sale specialist Knolly Williams who has consistently closed about 90 percent of his short sale escrows, and the Phoenix, Arizona short sale specialist team Fred Weaver and Kevin Kauffman who close more than 80 percent of their short sale deals in a very tough market. On their Website and in marketing materials, Weaver and Kauffman point out that, in their market, their competitors are closing a little more than 20 percent of their short sales—a figure that meshes with recent national data. Some agents say they think that number is lower. Truth The faster and more efficiently you make the short sale process work the more time you save—and the more money you can make. Graduate Level Short Sale Coaching There’s great short sale help available through MAPS in their Short Sale Coaching program, hosted by top agent Knolly Williams. Knolly also has a detailed short sale prospecting and processing learning package available separately. It’s called “7 Days to Short Sales.” For more information you can go to www.sevendayssystems.com Slide 112: 112 Chapter 6: The Short Sale Process FHA and VA Process Differences Conventional 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 identical. Top agents say if you know and follow the FHA guidelines, you will be in good shape on the VA process. Here are some things that are important to know about FHA guidelines. Background FHA started establishing the current program for handling short sales back in the mid1990s. In 2000, FHA turned over the negotiating process on short sale proposals and offers to lenders, instead of handling them in-house. In VA loan situations, however, you will likely still negotiate the final settlement directly with a VA representative. “Standard of Practice” FHA short sales are governed by a booklet issued to all participating lenders called the “Standard of Practice.” Get a copy and read it. If you absorb most of what you read, top agents say, you’ll know as much or more about what to do as the lender’s loss mitigator you’ll be working with. “The beauty of FHA short sale deals,” says Knolly Williams, “is that everything is written down in the process—in one place. All deals use standard forms and the net settlement guidelines are published. Read the rules, know them, and play by them exactly. Your deal should sail through—given the offer is right.” Here are some key rules of the road governing FHA deals: Non-owner Occupant To qualify for a short sale in an FHA mortgage loan situation, the seller must occupy the property as their primary residence. Subordinate Liens 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 and customary” items like title policy, agent commissions, etc. FHA will not pay any buyer closing costs. FHA also will not permit the purchase price to be raised to offset additional costs. Slide 113: 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: a. HUD 90038 – Application to Participate – You and your client complete, sign and submit it to apply for approval in the program b. HUD 90045 – Approval to Participate – This is the formal “go or no go” reply you will receive from FHA. Without it, the deal cannot proceed. c. HUD 90051 – Sales Contract Review – This document will come back to you from FHA, once they’ve reviewed all documents and the offer. 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. That requirement has recently been dropped, although many lenders still aren’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. But remember, what’s presented here is not a detailed and comprehensive view. For that, you must read and digest the “Standards of Practice” document from FHA. Homeowner Incentive FHA offers a cash incentive to homeowners, paid at closing. So, unlike conventional short sales, the FHA seller can actually walk away from closing with a little money in their pocket. These incentives are tiered down, starting at $1,000, depending on the time required to get to closing. Last Two Years’ Tax Returns Unlike most conventional loan situations, short sale applicants in FHA situations must submit their last two years’ federal income tax returns 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 a payment. But FHA will not approve and close a short sale unless one or more payments have been missed. Slide 114: 114 Chapter 6: The Short Sale Process 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 can recall before you check back in the material. Knowing all these steps is a must—regardless of how you choose to do the business. 1. _______________________________________________________________ 2. _______________________________________________________________ 3. _______________________________________________________________ 4. _______________________________________________________________ 5. _______________________________________________________________ 6. _______________________________________________________________ 7. _______________________________________________________________ 8. _______________________________________________________________ 9. _______________________________________________________________ 10. _______________________________________________________________ Slide 115: Chapter 7: Lead Generation Lead Sources and Lead Generation Lead sources for short sales are everywhere. But, before you can take advantage of them, you must acquire the knowledge and start building the expertise that allows you to rewrite your USP (Unique Selling Proposition) to include—or even to focus on—short sales. Once you’ve crafted the messages that position you as an expert who is ready, willing and very able to help owners in distressed situations, here are some of the targets you can aim those messages at. Other Agents If you want to be a successful short sale agent, top agents agree your primary marketing target is likely to be other agents—people who are good lead generators will encounter short sale opportunities. They may not want them! That’s where you can step in—but you need to market to other agents so they know you are ready, able, and willing (as SHIFT says) to step in, and help the right thing happen. Tod Barton, Las Vegas, Nevada, has one of the top Keller Williams short sale practices in the nation. He built the referral power of his business through common sense and hard work. Tod says, “I mastered the short sale business when the short sale business was not popular. I educated myself on short sales and how to do them. I had the answers to the questions when agents asked. In the end I offered further help through free classes and per transaction coaching to help them get the short sales closed.” Slide 116: 116 Chapter 7: Lead Generation Your Database Just as in traditional business, marketing to your database with a consistent 33 Touch program will generate business and referrals. In some markets, many of those leads are short sale leads, or short sale candidates—but you have to get the message out in your touch program and in your marketing that you have the expertise distressed property owners need to escape their real estate troubles. Remember, your database is comprised not just of past clients and “Mets.” It also includes people you do business with on a regular basis—in your real estate business or your personal business. 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, California, suggests every agent prospecting their database, or other lead segments, have a simple, bold flier called “Are You Dealing with a Real Estate Problem?”—to send electronically or to hand out at open houses—that asks these questions: 1. 2. 3. Are you facing a negative life issue (death in the family, divorce, or unwanted job transfer) that’s threatening your ability to keep your home? Have you missed one or more mortgage payments? Is your home worth less than the amount you owe on your mortgage? Rick says connecting these questions with your contact information—and getting it in front of as many people as possible—will get short sale leads flowing to you. Your Current Clients Don’t miss the obvious—we all do it! Talk with your current clients. Whether or not they are short sale prospects, these days the odds are they know someone facing a loan modification or potential short sale situation. Slide 117: Chapter 7: Lead Generation 117 Your Own Listing Appointments In your listing appointments, you may find sellers who are in pre-foreclosure and are potential short sale customers. Dick Dillingham, dean of KWU faculty, politely asks his appointments, “Are you current on all your mortgage loans?” to open this conversation. Be prepared for anxiety with any “no” answers. Remember that the financially distressed homeowner is stressed. Be reassuring. If you know of any other houses in the neighborhood that sold in pre-foreclosure, mention it. Farming If you farm a neighborhood, or neighborhoods, be sure your marketing message includes language that grabs the attention of short sale candidates. “Having trouble making payments?” “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 agents to help surface people facing financial crises—likely short sellers. Son Nguyen, Team Leader in Riverside, California, says his Region’s owners are sharing costs of buying lead databases from lender sources. But, he also says farming is a great way to go in getting short sale leads. “You need to put out messages that reach people that are at least 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 multiple reasons. One of them is unwillingness to face the lower price that will make a sale happen. Often today, that lower price is a short sale price. Approaching expired listings is a solid short sale lead generator—particularly in neighborhoods where research tells you prices were recently over inflated. Those owners may have seen their equity vanish with declining property 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 to the 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 Letter of 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). Slide 118: 118 Chapter 7: Lead Generation Bottom line: If you want this expired listing, be prepared to submit an entirely new package. FSBOs What’s true of expired listings’ owners is also often true of owners selling without an agent. Their reasoning: the margin between what they owe and what they hope to sell for is so small they’re afraid of having to pay a real estate commission. This is a strong indicator that their property may well be a candidate for a short sale. Notice of Default Lists Notices of default are recorded with the county clerk at the county recorder’s office. You can search these records for free. Kirk Nace, top agent from Fort Myers, Florida, knocks on potential customers’ doors as soon as they receive a Notice of Default. He says, “By being there early, we can provide them with more help than if we wait, because every day counts. There are some states where the whole foreclosure process can happen in a matter a weeks. By getting there early, you can do the best possible job to assist these distressed sellers.” Public Notices of Auction You can look for Public Notices of Auction at the county recorder’s office as well. Alternately, you can search your local newspapers for this information, or one of the many online services that aggregate this information, like www.foreclosure.com. Be aware that your time to work a short sale may be foreshortened if you find a customer through a Public Notice of Auction. Unless the lender stops the foreclosure process, your deadline for completing the short sale will be the public auction date. Delinquent Property Tax Lists Local government tax offices—usually at the county level—keep updated lists of property owners whose real estate taxes are delinquent. It’s no guarantee, but unpaid property taxes can be a sign of a property owner in financial distress—a possible short sale. After the local required period of delinquency, these properties are typically taken and sold by the government in a tax sale. Title Companies Many title companies collect foreclosure notice data and make it available to agents as part of their marketing for agent relationships. Slide 119: Chapter 7: Lead Generation 119 Media Marketing and Promotion In addition, of course, it make sense to get your short sale expert message in front of consumers in all the many other ways you may already be marketing your business, including: • • • • Online Marketing Social Networking Print Advertising TV and Radio Advertising Relationship Marketing As in the examples above, marketing you’d normally be doing in your business can be turned into an effective tool to attract short sale leads. If short sales are the opportunity you are focused on, you may want to redirect some of your marketing time and cost toward very logical targets, including: • • Lenders—A good lender relationship built through traditional business may lead to tips on possible short sale business. Divorce and Bankruptcy Attorneys—Any legal expert likely to be working with people in times of personal and financial distress probably knows people who would benefit from a short sale of their primary residence, or even other properties. 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, or people very concerned about dropping home prices. Seminars offering advice and solutions, well-marketed, may bring you quickly into contact with people needing short sale help. • Truth It can’t be emphasized enough. Top agents in distressed markets are almost all great communicators. They have learned to step up their expertise and then share it—by educating sellers, buyers, and buyer agents. Slide 120: 120 20 Chapter 7: Lead Generation Do You Have More Lead Generation Ideas for Short Sales? 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. ____________________________________________________ Slide 121: Chapter 8: Evaluate Listing Short Sales and You The course materials end here, but the most important step for you remains to be done. In the very first section of this course, this goal was stated: “To help you evaluate the business opportunities that distressed real estate markets represent.” Hopefully you’ve been doing the exercises along the way and a picture has been forming for you—and a decision. Do you plan to actively pursue short sales as the focus of your business, or are you planning to add short sales to your skill set for the long term, as part of a mix with your traditional real estate business? If you are focusing on short sales, which business path within short sales is for you? Wrap-Up: Is There a Fit? What Is It? You’ve learned that a lot of success in short sales starts with your mindset—and your understanding of the mindsets of the other players—distressed homeowners, pressured and overburdened financial institutions, plus uncertain and sometimes uninformed buyers and buyer 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. Slide 122: 122 Chapter 8: Evaluate Listing Short Sales and You Personal Demands A big part of the success equation for doing well in short sales is about your own mindset and the personal qualities you bring to the business. • • Do you think you have the patience, persistence, and organization skills to succeed in short sales? Do you think you have enough of these qualities to succeed, provided you can leverage the help of a person or persons who’ll bring the missing ingredients you need to succeed? Are you systems oriented? Are you learning based? Do you believe you can learn and develop in the areas you know 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 want to commit to this business—you need a strategy: • • Will you be what the course calls an originating agent—one who handles short sales from prospecting all the way through the process to closing? Will you be a referring agent—one who knows how to find and prequalify distressed homeowners, and then turn their information over to a short 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 sale negotiation and processing expert—one who helps other agents get short sale prospects accepted by lenders and offers on their property accepted and closed? • Slide 123: Chapter 8: Evaluate Listing Short Sales and You 123 Tip! – Multiple Businesses Under One Roof? There are multiple possibilities. Research uncovered several important facts about how agents do, or do not, combine businesses in declining and distressed markets. • Concentrate on short sales: The majority of top short sale agents seem to concentrate almost entirely on short sales. They won’t turn traditional business with “equity sellers” aside, but most of their time is focused on building their short sale pipeline. Short sales with a separate negotiation unit that serves other agents too: Some top short sale agents have successfully turned their negotiation skills into a separate short sale negotiation business that they run alongside their own end-to-end short sale practice. They leverage their negotiating skills and resources to generate additional income. Short sales and REOs: Some agents do both REO and short sales. This is pretty common, but become less of a reality when one or the other of these business lines really takes off and becomes a volume business for them. Distressed and traditional units side-by-side: A few agents make a purposeful effort to create distressed property and traditional business units side by side. Their thought is it keeps them in the game for a return to more balanced markets. • • • Truth These choices are yours. Evaluate them. Get some coaching or mentoring 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-end short sales, referral only, and negotiation/processing specialist: 1. 2. 3. Read through the personal and business requirements for each carefully. Mark your preferred path. Cite actions needed to pursue that path and time block them. Slide 124: 124 Chapter 8: Evaluate Listing Short Sales and You Three Options in Short Sales: Which Is for You? Option 1 End-to-End Short Sales Personal Requirements • • • • • • • Master patience, persistence, and empathy for homeowners’ financial and personal distress. Prepare to manage the negotiation side—doing most of that work yourself in the beginning. Extremely focused and organized. Committed to relationship building with range of lender reps. Learn the variations in how deals are done. Be an excellent communicator. Commit to staying up to speed with the industry—and to educating others about it. Ready, able, and willing to be very, very busy. Business Requirements • • • • • • Short sale market savvy. Homeowner qualification skills. Short sale package- building skills. Time blocking and business planning skills. Recruit and select the assistance you’ll need to handle volume that will make the business profitable at the level you want. Marketing skills—ability to target short sale prospects. Slide 125: 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 referrals a sought-after source for short sale agents. 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 enough traditional business for the profitability you want. Referral a low cost option. Option 3 Negotiator/Servicer Personal Requirements • • • • • Short sale market savvy. Extremely focused and organized. Committed to relationship building with range of lender reps and dealing variation in sales are completed. Solid negotiator. Ready, able, and willing to be very, very busy. Business Requirements • • • • 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. Slide 126: 126 Chapter 8: Evaluate Listing Short Sales and You Which Option Best Suits You? What Actions do You Need to Take? Slide 127: Short Sale Tool Kit The course tool kit of downloadable files contains short sale documents you can use as models to create your own working forms. It also contains a few items from the course that are formatted as handouts you can use—either electronically or as printed pages. Here’s the list of tool kit items. They are designed as generic Keller Williams documents—to be customized for your business. Short Sale Package Documents Short Sale Guidelines Disclaimer Financial Statement Hardship Letter Preliminary HUD-1 Letter of Authorization Fax Cover Sheet Marketing Documents Handout: Why Choose a Short Sale? Handout: 10 Reasons to Avoid Foreclosure FAQ for Homeowners FAQ for Agents Miscellaneous Documents Homeowner Application for Consideration Third Party Negotiator Referral Agreement