The Art of the Deal: The Short Sale

Things I learned about "short sales" (definition below) today from Palmdale Realtor Donna Oehler:

--Most Realtors Don't Like Them: Most Realtors don't like to handle short sales, and there are good reasons: The commission, at 5%, is lower, the transaction is complicated, there is more paperwork, and months of hard work can be erased in a heartbeat if the bank or lender vetoes the sale.

--No Fire Sales, Yet: Even in the Antelope Valley, there are no fire sale prices on short sales. Buyers are often investors looking to remodel and resell quickly. And banks are not yet accepting real lowball offers.

--Mystery Sellers: Banks are playing their cards close to the vest. How much are they willing to lose on a house to avoid foreclosure? That's the key question, and banks usually won't say up front.

--No Staging, Please: If you're the listing agent, you don't want the "short sale" house to look perfect. If it looks too good, the bank is likely to believe the house is worth more and veto the short sale. "Dead grass helps," Donna told me. That is, it helps convince the bank that they ought to accept a "short sale" offer.

Read on for InmanWiki's definition of a short sale (What's an InmanWiki? Read on for that too).

Short sales: (From InmanWiki):

"In real estate, a short sale refers to the sale of a property in which the sale price is insufficient to pay off all encumbrances and pay the expenses of sale. If the lender is convinced that the owner, for various reasons, is unable to continue making the payments the lender will often agree to take less that the full amount owed to allow the sale to close escrow. The incentive for the bank to approve a short sale is to have the property sell before the loan becomes a problem account on their books."

What's InmanWiki? The real estate news and information site Inman.com's reader-generated Real Estate encyclopedia. Check it out here.

Comments

[lol]

lol

[Michael Spickes with America's Home Rescue]

Short Sales: Knowing Lender Thresholds for VA, FHA, and Conventional Loans = Saving Your Commission!!!

In working Short Sales, there are some numbers and calculations that are especially critical and knowing how to run these calculations will ultimately save you many headaches in the long-run. For instance, the initial list price for the Listing Agreement that is submitted to the bank, the initial list price for MLS, the net amount that banks typically require in a Short Sale given the type of loan, the bottom-line offer that will be necessary to cover the bank's required net, as well as all broker commissions and Seller closing costs. In addition, you need to know how the numbers are affected if there are multiple mortgages on the property. All of these numbers are critical for you to facilitate the transaction effectively, gain credibility with the bank, and best represent your client.

Determine the Lender's Discount Threshold

Banks have a threshold at which they will accept or reject on offer in a Short Sale. And knowing these approximate discount thresholds is imperative in determining your list price for MLS, so that you are able to generate an offer that will meet the bank's requirements, as well as cover all the Seller closing costs and protect your commission. When we refer to the banks "discount threshold", we are referring to the net amount that the bank requires in the transaction after all approved closing costs and commissions have been paid in the transaction. As a reminder, when it comes time to go active on the market in MLS, you need to adjust the price in the Listing Agreement and have your client initial off on this price change.

Calculating the initial list price for MLS is a critical part of setting up the Short Sale. We all know that when considering market comparables for a specific area, if the price per square foot of your client's property is equal to or higher than any other property in the neighborhood, your chances of getting an offer quickly are pretty slim and the whole goal in a Short Sale is generating an offer quickly so that the house doesn't go to foreclosure. In many states, the foreclosure process is a very aggressive one, so knowing how to calculate your initial list price for MLS is imperative. To do this, you must know what kind of loan you are shorting and have a good idea as to what the lender's discount thresholds are for each type of loan.

Currently...

FHA loans are insured at 82% of the current market appraised value

VA loans are guaranteed at 88-91% of the current market appraised value

Conventional and Home Equity lenders expect net proceeds of no less than 85-92% of the current market appraised value.

Note: These thresholds represent a percentage of current market value, not the loan balance. Currently, the Conventional threshold is 85-92% of current market value. This threshold fluctuates with the market and is lender-specific. We have been working Short Sales for almost 5 years and FHA and VA thresholds have not changed during this time. Know that changes in market conditions, bank policy and/or the passing of legislation can effect these thresholds. If the market takes a turn for the worse and property inventory increases for lenders, you will most likely find that Conventional thresholds will decrease.

Know the numbers, save your commission, and enjoy building a commission-generating machine in Short Sales!

The Team at America's Home Rescue
Short Sale Resources & Education for Real Estate Agents
www.ShortSaleSolutions.biz

[Robert Aldana]

I invite you to view my interview with CPA Manuel Alvarez on my television show "Let's Talk Real Estate!" as we discuss the tax consequences of a Short Sale and Foreclosure. You can view the show online at:

http://www.letstalkrealestate.com/ltretelevision.htm

It is also available in Spanish. Best of luck!

Robert Aldana
REALTOR and Host of TV & Radio's "Let's Talk Real Estate!"
www.letstalkrealestate.com

[Luis Montejano]

A little FYI for someone feeling lost ....
Make sure that you elect someone thouroughly familiar in this process to help you, whether a Realtor or Agency, you should be in know about the pros and cons.
The timeline of the process is important as well as the possible 1099 for the coming year. There will be a possibility that you will need help with your 1099 form when filing taxes if you have had a Shortsale.

Log on to http://www.DrShortsaleLosAngeles.com
for a visulal timeline of the Short Sale process and where you might be.

Shortsale process is as follows;
pre-lien, lien, Notice of Default or N.O.D., Notice of Sale, Trustee Sale- If unsold it will go to REO.

It may not be too late!
Done correctly you can negotiate with your lender to stay
in your home while you let a Pre-Foreclosure Expert lead the way.
-First step is filing out a Foreclosure help form then one of our specialists thoroughly evaluate your information. Time can sometimes be sensitive in these situations. The best time would be after a notice of default from the bank.
Having a professional in your corner makes all the difference.
Proficiency in this pre-foreclosure process is extremely important as several weeks can be lost if details are overlooked at submitting offers and information to lender.

A Shortsale expert's job should not end at the close of escrow- It still means advising your client for potential tax consequences and the best way to handle them.

Luis Montejano
The Foreclosure Expert for www.DrForeclosureLosAngeles.com

[Joseph... the Real Estate Guy]

Short sales are easy...most banks are eager to accept a "Short Sale", and avoid the hassles and expenses of Foreclosure.

As far as I know, the president just signed the bill, where Short Sale Sellers don't have to pay taxes on their debt relief. Ask your CPA.

The main factor for Banks is weather the "Borrower" has any means ($) to continue making the payments.

[LeavinLA]

Somebody blathered: "Conventional and Home Equity lenders expect net proceeds of no less than 85-92% of the current market appraised value."

Wrong.

I just completed a short sale where the HELOC holder accepted 1 (one) percent of the amount they were owed. And that's not the first time they've done that (it's a healthy major bank that is often mentioned on this blog).

There are no hard and fast rules for short sales at this point.

[Luis Montejano]

I regards to an earlier post I would like to clarify information- Yes, president Bush did pass the Debtness Forgiveness Act on Nov. of 2007. I would advise all to really know what this is and who it's meant for. If you have a HELOC you have some questions for your CPA. Any Realtor that tells you you're home free- BE CAREFUL.
.. and yes banks would prefer to do a shortsale but dont know if they are eager about it. Actually a bank I will not mention has recently implemented new obstacles and consequences for sellers in shortsales. Recently I was a week from closing my clients escrow and they threw me a curve ball. They wanted my client to sign a prommisory note, yikes! In the end it got handled properly.
Shortsales are becoming more prevelent and listing your home early before it's too late makes a difference.
Comps on neighborhoods are taking a toll and banks many times do not want to approve because the loss is so great. There are ways around high priced BPO's and closing to a happy conclusion.

[Thomasina]

Are the threshold percentage still the same in 2008 for Conventional and HELOC loans? 85-92%. Lender won't say?