Short Sales
Presented by Kim Galvan
Keller Williams Realty, Waco
What is a short sale?
• Homeowner owes more on their property
than the property is actually worth
• Bank agrees to accept less than what is
owed as payment in full
• Foreclosure process is far more expensive
than the discount the bank takes on a Short
Sale
Why do banks accept short sales?
• Win-win solution for all parties to the
transaction
1. Homeowner avoids devastation of foreclosure on
their record
2. Bank avoids time & expense of foreclosure
process & holding property on books until it sells
3. Buyer buys property below market value & walks
in with immediate equity
4. Realtor receives a commission for negotiating on
behalf of client
What is short sale process?
• Varies depending on loan type
Lead
Qualification (via phone)
Listing Appointment
Short Sale Package to Bank
FHA
VA/Conventional
FHA Short Sale Process
Short Sale Package to Bank
Appraisal
Acceptance into program
MLS
Offer
Offer Approval
Closing
VA/Conventional Short Sale Process
Short Sale Package to Bank
MLS
Offer
Appraisal
Offer Approval
Closing
FHA vs. VA/Conventional
FHA
Short Sale Package to Bank
Appraisal
VA/Conventional
Short Sale Package to Bank
MLS
Acceptance into program
Offer
MLS
Appraisal
Offer
Offer Approval
Closing
Offer Approval
Closing
Who qualifies for a short sale?
The homeowner…
• is in default with their mortgage lender
AND
• has little to no equity in the property
AND
• has a legitimate hardship
What is considered “in default”?
• Homeowner is at least 30 days past last day
of lender’s grace period for making mortgage
payment
Example: Payment due April 1st
Bank extends 15-day grace period
In default 30 days after April 15th
In default beginning May 15th
What are legitimate hardships?
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Temporary or permanent loss of job
Significant cut in pay
Divorce
Illness or death in family
Increase in property taxes
Increase in payment due to ARM resetting
What documents are required
in Short Sale Package?
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Authorization to Release Information Form
Hardship Letter
Financial Worksheet
Copies of Tax Returns (last 2 years)
Copies of All Bank Statements (last 2 months for all borrowers)
Copies of Pay Stubs (last 2 pay periods for all borrowers)
Application for Pre-Foreclosure Sale Program (if FHA)
Homeownership Counseling Form (if FHA)
Purchase Offer (if there is one yet)
Estimated HUD-1 Settlement Statement (if submitting purchase
offer)
• Comparable Market Analysis (CMA)
Authorization to Release
Information Form
• Gives authorization by homeowner to bank
for bank to discuss any details of loan with
you, the Realtor
• Without this form, bank is legally prohibited
from discussing any details related to
mortgage with you or any other third party
(i.e. title company)
Hardship Letter
• Sympathetically portrays homeowner’s
situation
• Should contain trigger points to get bank’s
attention
• Homeowner must be prepared to support
whatever is portrayed in hardship letter
(i.e.—divorce…divorce decree; loss of
job…letter of dismissal; death in
family…death certificate or obituary)
Financial Worksheet
• Lists borrowers’ name, date of birth, SS#,
phone #s, and address
• Also includes all income (detailed), all
expenses (detailed), account balances, and
any additional assets
• Used to show that expenses exceed income
and assets that could be liquidated to make
up missing payments
Listing Agreement
• Must include two specific clauses in Special
Provisions
• Must check box to indicate home will not be
placed in MLS until after communication has
been established with lender
Waiting to put listing in MLS until after short
sale is approved will save you an enormous
amount of time and frustration!
Copies of Tax Return
• Returns for last 2 years for all borrowers
• If unavailable, bank requires the homeowner
to submit a sheet of paper stating that this
particular document is unavailable
• If return has not been filed, bank may require
copies of all W-2s and 1099s for year(s)
return not filed
Copies of Bank Statements
• Statements for last 2 months for all
borrowers on loan
• Statements for all bank accounts
• If unavailable, bank requires homeowner to
submit a sheet of paper stating that this
particular document is unavailable
Copies of Pay Stubs
• Copies of last 2 pay stubs for all jobs worked
by all borrowers on the loan
• If homeowner(s) is/are not working and
therefore do not have any pay stubs, bank
requires that homeowner submit a sheet of
paper stating that this particular document is
unavailable
For FHA only…
• Application for Pre-Foreclosure Sale
Program (HUD form 90036)
• Homeownership counseling Form (HUD form
90038)
• Homeowner will be required to call a HUDapproved counselor to discuss all PreForeclosure Assistance Programs available
• Phone numbers for HUD-approved
counselors on website www.hud.gov
Purchase Offer
• If there is no Offer, go ahead and submit
Short Sale Package without the Offer in effort
to establish communication with bank
Estimated HUD-1 Statement
• Very important to work with closing officer
who is experienced in closing short sales
• First American Title Company, Dora Betts
• Bottom line on Seller’s side of HUD-1 must
ALWAYS net to ZERO
Submitting Short Sale Package
• Utilize Short Sale Fax Cover Letter each time
• Only info that will change is info specific to
individual transaction (loan #, homeowner(s)
name, lender, lender’s fax #)
• Fax it to right person in right department!
• Key to making sure you’re in “short stack” is
to have all paperwork completed and
completed correctly
How much will bank take for payoff?
• Appraisal is most critical piece of information!
– FHA loans insured at 82% of appraised value;
therefore, bank can discount pay-off amount
down to 82% of appraised value
– VA loans guaranteed at 88-91% of appraised
value; therefore, bank can discount pay-off
amount down to 88-91% of appraised value
– Conventional loans tend to be discounted at
anywhere from 85-92% of appraised value
Earnest Money and Option Period
• Recommend no less than $1000 earnest
money
• Bank will typically reject offers with less
earnest money because they consider them
not serious enough to warrant an approval
• Option Period should not exceed 7 days
• The clock is ticking!
Special Provisions
“All parties understand that the subject
property is being sold via a short sale with
the seller’s lender and that all terms of the
purchase offer must be approved by this
lender. The contract will not be executed and
therefore the Option Period will not begin
until approval is received from the seller’s
lender. If all terms are approved, the seller’s
lender will pay certain closing costs on behalf
of the seller, including broker commissions.”
Calculating the MLS list price
• Objective is to list the property at a price that
will generate an offer quickly, achieve the
bank’s required net for the transaction, and
cover all commissions and seller closing
costs
• If set too low, first thing to be cut is agent’s
commission!
Calculating the MLS list price
Discount Thresholds
Conventional
85-92%
FHA Insured
82%
VA Guaranteed
88-91%
Example: Appraised value = $150,000
FHA loan $150,000 x 82%
Conventional loan $150,000 x 85%
VA loan $150,000 x 88%
Gross-up to include seller closing costs and commissions
Calculating the MLS list price
• Next, add real estate commissions and seller
closing costs
Typically 6% for commissions
and 2% for seller closing costs
To gross-up by 8%, divide by the inverse,
which is 92%
Calculating the MLS list price
EXAMPLE
Type of Loan?
FHA
Current market Value (appraisal) $150,000
Lender Threshold?
82%
Real Estate Commissions?
6%
Closing Costs?
2%
Calculation
$150,000 x .82 = $123,000 / .92 = $133,696
This is lowest offer you would take for lender approval to cover costs
Judgments/Liens/Other Costs
• Add any additional amounts due by
homeowner for judgments, liens, delinquent
taxes, HOA dues
• If FHA, add an additional $1000 for Seller
Incentive
• Add some “negotiation room” or a “buffer”
(2-3%)
EXAMPLE
Type of loan?
FHA
Current Market Value?
$150,000
Lender Threshold?
82%
Real Estate Commissions?
6%
Closing Costs?
2%
Judgments/Liens? (Mechanics, IRS, Ppty Tax) $4,200
Seller Incentive?
$1,000
Buffer?
3%
Deficiency Judgment
• Difference between the mortgage balance and the
discounted amount accepted by the bank as a
result of the short sale
• Bank can pursue a deficiency judgment against
homeowner
• FHA and VA are required to waive the deficiency
• As part of negotiations, you should require that
bank waive their right to any future deficiency
judgment against homeowner
Tax Ramifications
• IRS considers shortage on net amount received
by bank versus principal amount due by
homeowner to be “forgiveness of debt”
• IRS deems “forgiveness of debt” to be taxable
income
• Banks required to issue Form 1099 for amount
of debt forgiveness
• Bank CANNOT issue both Form 1099 and
deficiency judgment
Most Common Set-Backs
• Judgments that have attached to the
property
• Clouds on title
• Inexperienced escrow agent
• Disconnected utilities
Thank you for coming!
Please fill out an evaluation
before you leave.