3. Anatomy of a Short Sale
In this chapter:
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3-1
Qualifying sellers
Pricing short-sale listings
Frequently asked questions (FAQs)
Listing agents’ commission
concerns
• Counseling buyers
• Finding short-sale listings for buyer
clients
Qualifying Sellers
• If short sale is best option, agents
must be exacting and thorough in
qualifying homeowner for short
sale.
• Not every owner is a short-sale
candidate and not every owner can
be saved from foreclosure.
3-2
Qualifying Sellers
Agents should confirm:
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3-3
Hardship
Sufficient time for short sale
Finance, tax, and legal professionals
Amount owed on property
Additional liens
Condition of property
Homeowner’s cooperation
Defining Hardship
Lenders will consider short sales for
owners who experience:
• Job loss
• Business failure
• Illness and medical costs
• Divorce or death of a spouse
• Natural disasters
3-4
Note: Loss of equity is NOT a hardship.
Sufficient Time to Accomplish
Short Sale
To calculate:
1. Confirm approximate foreclosure
timeline in your state
2. Subtract # of months that
homeowner has missed payments
3-5
Contracting with Finance, Tax,
and Legal Professionals
• Attorneys who work with
distressed owners may allow for
few fees upfront.
• Visit U.S. Foreclosure Network
(USFN) as possible source:
www.usfn.org
3-6
Contracting with Finance, Tax,
and Legal Professionals
Qualified foreclosure attorney can
help seller determine whether loan is:
• Recourse—borrower is liable for
deficiency after short sale or
foreclosure
• Non-recourse—borrower is not
liable
3-7
Determining What Is Owed
• Critical to have accurate
assessment of what seller’s equity
position is or isn’t
• To facilitate this, consider using
pre-listing worksheet and seller
short-sale checklist in Figures 3.1
and 3.2
3-8
Confirming Property Condition
• Inspect home and document
any damages or items needing
repair
• Contractors should be
consulted for specific repair
estimates
3-9
Pricing Short-Sale Listings
• Price property so seller receives
offer from qualified buyer with
realistic chance of closing
• No standard formula for what
lender will accept
• Per Freddie Mac, target sales price
is 88% of BPO
3-10
Estimating Net Equity
• Carefully estimate net equity
• Once listing is in MLS and offer of
compensation is made, listing
broker could be responsible for
paying compensation even if seller
doesn’t pay listing broker
• See Figure 3.3
3-11
Frequently Asked Questions
• Initial paperwork owners need to
complete?
- Yes, owners complete an
authorization to release financial
information (Figure 3.4)
• This is just beginning of paperwork
required for short sale
3-12
Frequently Asked Questions
• Who should sellers contact?
- “Loss Mitigation”
- “Work-Out”
- “Asset Recovery”
- “Loan Modification”
- “Loan Reinstatement”
3-13
Frequently Asked Questions
• When should real estate agent
contact lender?
- As soon as possible after taking
listing
3-14
Frequently Asked Questions
• What should be asked of lender?
- When should seller submit
short-sale application—now or
with short-sale package?
- Will lender begin short-sale
process by pre-approving the
seller for short sale now or when
agent has a contract?
3-15
Frequently Asked Questions
• What should be asked of lender?
- What is anticipated timeline for
short-sale approval?
- For junior lien holders: Is there a
formula for calculating what is
required to release junior lien?
3-16
Frequently Asked Questions
• What must be disclosed?
- State/federal disclosures are
required
- No confidential information
should be disclosed without
seller’s written permission
- Obtain written authorization to
disclose short sale
3-17
Frequently Asked Questions
• Will seller pay income tax on
forgiven debt?
- Review Mortgage Debt Relief
and Emergency Economic
Stabilization Act of 2008
3-18
- Taxpayers do not pay federal
income tax on forgiven debt,
provided the property is
principal residence only
Frequently Asked Questions
• Is it better for seller to declare
bankruptcy than pursue short sale?
• Should seller stop making
mortgage payments?
• Will seller need liquid assets to
cure a deficiency at closing?
- Beyond scope of real
estate agent to answer
3-19
Listing Agents’ Commission
Concerns
• Lenders not legally responsible for
payment of any commission
• If you disclose in MLS, explain that
reduction in gross commission will
be divided among listing agent and
cooperating agents
3-20
Listing Agents’ Commission
Concerns
• Per Fannie Mae, servicers may NOT
negotiate commissions for short
sales below amount specified in
the listing agreement (if listing
compensation is 6% or less)
3-21
Counseling Buyers
• Ideal buyer candidates:
- Few to no contingencies
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Do not have to sell current home
- Patient and have time to wait
- Have resources for repairs
• Use worksheet and checklist in
Figures 3.5 and 3.6
3-22
Frequently Asked Questions
• How long will this take and what if
buyer changes mind?
- 30 days or less or up to 6
months or longer
- Note: property value may
decline while waiting for lender
3-23
- Contract addendum should
stipulate how long buyer will
wait
Frequently Asked Questions
• What about the earnest money?
- According to terms of written
agreement
- Should be deposited as required
by state license law based on
date contract was signed by
buyer and seller
3-24
Frequently Asked Questions
• When should home inspection and
mortgage application be
completed?
- For home inspection: per
contract
- For mortgage application: short
time frame
3-25
Finding Short-Sale Listings for
Buyer Clients
• If buyer wishes to see potential
short-sale properties, include
“contingent” properties
• “Lender pre-approval”—ask listing
agents what is meant by “preapproved”
3-26
Questions to Ask Listing Agents
1. “Is the short-sale package ready
for submission to lender?”
2. “How many liens are on
property?”
3. “If more than one lien, what are
they?”
4. “What is plan to satisfy all lien
holders?”
3-27
Negotiating the Short-Sale
Contract
• Contract is signed by buyer and
seller—not lender
• Lender only approves contract
• The fact that seller accepts offer
contingent on bank approval does
NOT guarantee bank approval
3-28
Subsequent Offers
• Listing agent must submit all
subsequent offers to seller all the
way to closing – whether or not
subsequent offers are “better”
than first
3-29
Common Negotiating Challenges
• Low earnest money
• Inspections after lender approval
• Low offer issue #1—may put seller
in danger of foreclosure sale
• Low offer issue #2—seller may be
required to pay deficiency for low
offer
• Low interest rate
3-30