Sarahiously Speaking

As a short sale listing agent, I get asked a plethora of questions regarding this difficult and frustrating transaction.  One of the most popular questions is the key to success when listing a short sale.  I wish there was an easy answer.  I wish there was one thing I could tell agents and consumers that would help them get through the short sale successfully.  There is no simple answer to this question.  A successful short sale is dependent on several different variables. 

First, short sales are successful when honesty and competence exist.  A short sale seller needs to know exactly where they stand with their bank.  It is very difficult to sell a short sale listing when it is days away from the foreclosure auction block.  The most desirable short sale candidate will be less than 2 months delinquent.  A short sale seller needs to be honest with themselves and with their REALTOR(R) when discussing their situation.  Digging your head in the sand won’t do anyone any good.  The more honest the seller is, the more accurate the information will be that they will be giving the REALTOR(R).  This process can be embarrassing for a seller.  It is important to remember that your REALTOR(R) is here to help you, not judge you.  REALTORS(R) work with so many numbers they will forget all about yours once the transaction is over; sellers need to be candid about their financial situation.  The seller and the REALTOR(R) have the same goal: a successful closing.  Your REALTOR(R) needs to be honest with you when helping price the home.  Pricing too high can be detrimental and can send a property to the auction block.  Under pricing the home may require that the bank negotiate the terms of the contracts they receive.  Some sellers are not good candidates for short sales.  That’s the truth.  More REALTORS(R) need to be honest with sellers when analyzing the seller’s short sale candidacy.  I can’t say it enough, competency is key to a successful short sale.  The competence rests on your REALTORS(R) ability to find a suitable buyer and navigate through the banks rules and regulations.  Real estate agents need to be trained in short sales and constantly be updated on the short sale process.  If your real estate agent isn’t up-to-date on short sale information, the harder it will be to have a successful transaction.  Your REALTOR(R) needs to have an understanding of Virginia law when it comes to foreclosures.  They also need to be able to direct you to good real estate attorneys and tax advisers.  There are consequences for short selling a home.  The REALTOR(R) needs to be competent enough to explain these consequences and help you find out the specifics for your situation.  

The keys that the banks are looking for are pretty simple.  Banks want to mitigate their losses.  They can only mitigate losses if the short sale contracts they are presented with allow the bank to lose less money than taking the property into foreclosure.  Fannie Mae reports that 3 out of 4 short sale transactions do not close.  So, 3 out of 4 contracts that are presented to banks don’t make economic sense to the banks.  Who is responsible for getting the banks acceptable contracts?  Well, the seller and the listing agent.  Sellers and listing agents need to list short sale properties at market value.  Sellers and listing agents should not be ratifying ridiculously low offers.  Ridiculously high offers are dangerous too.  The home must meet bank criteria for loss mitigation and they must appraise for the buyer to receive a loan.  This is difficult water to tread. 

What it all boils down to is that there is no one way to conduct a short sale.  There are no laws on how banks and consumers have to handle this type of transaction.  We have to apply laws for traditional transactions to this very nontraditional transaction.  Bank employees are also not trained on the real estate laws for each state.  In a time where even our foreclosures are being outsourced, you can not rely on the bank employees to really know what they are talking about.  They have scripts and a short leash that may or may not allow them to help you.  We are relying on inadequately trained employees to make huge financial and economic decisions.  The current way that short sales are being negotiated isn’t working.  However, it’s all we have right now.  Being aware of the basics of short sale approval is a great way to map out your short sale transaction.

I never set out to become a short sale listing agent.  You would have to be absolutely crazy to purposely pursue this line of work.  However, my business partner and I have found that we are better than average at getting this type of transaction to the closing table.  However, not every REALTOR(R) is equipped to handle listing a short sale.  It is a difficult transaction to learn because the rules are always changing.  There are no rules to play by.  Each bank has their own agenda and their own process.  You need to be able to play hardball with certain banks and be “Suzy Sunshine REALTOR(R)” with others.  Learning to handle multiple lien holders in a single transaction can be tricky.  After two years of servicing short sale listings, I’ve come up with 8 questions a consumer should ask any REALTOR(R) they are thinking of hiring to list their home as a short sale.

1.  How many short sales have you listed? – All REALTORS(R) need to cut their teeth on their first short sale, but do you want their first short sale listing to be yours?  If your home will be their first short sale listing, be sure that their broker has a system in place that will help the agent navigate the short sale world.  You may also want to ask how many short sale listings the broker has represented and closed successfully. 

2.  How many short sales have you helped buyers purchase? – Understanding both sides of the short sale process goes a long way.  The buying side of a short sale transaction is very stressful.  An agent’s ability to use knowledge from both sides of a short sale transaction can help during negotiations with the bank(s). 

3.  How many of the short sales you represented closed? – It’s easy to list a short sale.  Heck, it’s easy to get a contract on a short sale.  It is much harder to negotiate a short sale with a bank and successfully get it to closing. 

4.  How will the short sale affect my credit score? – This is a tricky question.  I’ve seen some credit scores hit as little as 90 points.  I’ve seen others hit a couple of hundred points.  It will really depend on how the bank will report the short sale to credit agencies and how delinquent you already are on your mortgage payments.  An agent experienced agent will know that this is a case-by-case answer and won’t make any guarantees or promises. 

5.  Besides my credit score going down, what are some other ramifications of a short sale? – Many banks are now trying to mitigate their losses by having the defaulting party sign a promissory note.  Each promissory note is different, there are no standards.  Your agent may be able to help you negotiate your way out of signing a promissory note.  It will depend on your situation.  We’re not quite sure how lenders will look at credit histories with short sales on them.  Some people  may be able to obtain a home mortgage in as little as a year; others will have to wait much longer than that.  There could also be tax penalties for short selling your home.  Your agent should recommend a good real estate attorney to you, as well as an accountant to go over all the pitfalls of short sales.   

6.  Which banks have you worked with before and which ones were you successful at working with?- Ask this question before you tell them which bank(s) hold your lien.  It is always best if they have worked with your lien holder before.  Sometimes they will have special phone numbers and email addresses because of the prior relationship.  At the very least, the agent will be familiar with how the bank handles short sales.  Again, each bank has a different process.  And each bank hates when the REALTOR(R) doesn’t follow their process.  You don’t want an angry bank! 

7.  How long will it take to get short sale approval? – This is always a loaded question.  Each bank works on their own timeline.  That’s right, they don’t care what your contract says the close date will be.  They review your paperwork when they get it.  Traditionally smaller banks have shorter timelines.  However, some larger banks are beginning to streamline their process and their approval times are getting shorter.  Anyone participating in a short sale should expect 4-6 months for approval and be happy if it comes in early.  Some agents and sellers may decide that turning in straw contracts will speed up this process.  Well, if you get caught, you could be guilty of mortgage fraud.  Avoid fraud.  If there is a 2nd lien holder involved, each bank will need at least 3 months to come to a decision. 

8.  What documents do you need from me to start the process? – This will vary with each banking institution.  The first document you will need is authorization your REALTOR(R) to talk to the bank on your behalf.  Even without this letter, the agent should be able  to call your bank and ask what the short sale package should contain.  Some banks require extensive documentation; others want as little paperwork as possible.  Your agent should have a broad idea of the documents you should find and have ready for when an offer is ratified. 

Being a short sale listing agent is never boring.  It triggers migraines, anxiety, and hysterical laughter, but it is never boring.  I found myself discussing an unlawful re-key by a large bank this week with several of said bank’s employees. (A re-key happens to a property when the bank takes possession of a property through foreclosure.  The bank sends a contractor out to re-key the doors, thus preventing the defaulting seller from accessing the property.  The bank is also allows to re-key a property if the property is being used for illegal activity or the property has been abandoned.  None of the scenarios applied to my listing).

It must be said that when you call into almost any bank’s loss mitigation department you are guaranteed to be put on hold for at least 30 minutes and transferred to at least 3 different departments.  This bank is no exception.  I was not entertained by elevator music or bad 80′s love ballads while I was on hold.  Silence always leaves you questioning whether you are actually on hold or the line has been disconnected.  I guess TARP funds don’t cover hold music, only executive bonuses.  (Yes, that was a snarky comment).  Inevitably I got transferred to 4 departments each claiming a different reason for the unlawful re-key.  All of the reasons they give me do not apply in Virginia.  Finally, I am transferred to the Foreclosure Dept.  The End-All-Be-All of loss mitigation departments.   And this is when the phone call got interesting. 

Two minutes into re-explaining my re-keying problemto the foreclosure officer, he informed me that everything the bank’s employees informed me of in my previous conversations was false.  The only person I had talked to in the last 3 months that had any accurate information was him.  He explained this phenomenon by saying that some people in this world make good grades and some people make bad grades.  The amount of information these people are given and the amount of skill these people have depends on their grades.  Everyone else I had talked to had made bad grades.  He made good grades.  I should only go by his answers.  So… I can call into a bank and talk to someone who flunked bank training?  I could talk to someone who hasn’t been trained properly to handle the questions they have been hired to answer?  Banks hire D- students and rely on them to fix the real estate mess?  To continue the analogy, this bank rep saidthat some bank employees are good at subjects like English and other employees are good at subjects like medicine.  He was a “medicine” employee.  I countered by saying that I hadn’t called a writer and asked for him to perform open heart surgery on me.  I called a bank and expected the bank employees who answered the phones to be able to answer simple bank policy questions.  There was silence on the other end of the phone. 

What’s the moral of this tale?  Well, banks hire D- students.  The consumer has to rely on D- employees to get necessary and urgent information to the representatives that make the final decision regarding their short sale.  I might as well strap the short sale documents to my cat and give her a bus ticket and directions to the bank’s headquarters.  Consumers need to hire a REALTOR(R) who is well versed in short sales and the art of dealing with loss mitigation departments.  What have I learned from this phone call?  I will continue to make multiple phone calls to the short sale banks of the houses I have listed.  I will continue to document all of these phone calls and be sure to get the name of the person I have talked to.  I will also continue to verify all information I am given by a bank employee, just in case the bank hires nothing but D- students.

Well, banks are at it again.  Let me clarify, banks with a well documented history of predatory lending are at it again.  They have come up with new ways to hold the unsuspecting consumer down.  Let me rephrase that, these banks have come up with new ways to manipulate the system and get defaulting borrowers in even more trouble.

The most brilliant part of all of this is that the government has made it possible.  Every so often the Feds come up with new requirements for banks so they can continue to receive TARP funds.  One such requirement is for banks that have heavy numbers of foreclosures and short sales on their books to modify defaulting loans.  In essence, these banks are taking loans, usually these loans can be classified as predatory, and adjusting the terms to save the homeowner from foreclosure.  Each bank addresses loan modifications differently.  With some banks, the consumer needs to contact the bank and ask if they qualify for a loan modification.  This seems like the logical way to approach loan modifications.  But let’s remember, banking institutions are not known for being logical.  My favorite bank approach to loan modifications is for the bank to send a blanket letter to all defaulting borrower’s stating that they have investigated the loan and the likelihood that the loan can be modified and the loan can not be modified.  (Hmmmm… interesting approach.  I would love to see the information banks used to come to this conclusion since they have not asked the borrower for any personal information or for changes in information since the loan was obtained).  I guess banks figured that as long as they “tried” to modify each and every loan that was in default, then they can still get access to stimulus money. 

But, not so fast, in walks the government, again.  Rules have changed and they have told the banks to loosen the requirements for loan modifications.  Loosing the requirements could be good for some banks and some (few) borrowers.  Once the loan is modified the bank stands a better chance of being able to sell it to another bank.  Now, this loan is someone else’s problem.  Brilliant!  However, there could be a snag to the loan modification tango.  Many defaulting consumers who have been told that they do not qualify for loan modification have put their homes on the market as a short sale.  Once the seller finds a buyer and they ratify a contract, the seller can not modify any liens on the property.  (If you’ve ever been to a closing/ settlement table you should remember the settlement agent ask the seller if they have made any decisions about any an existing lien or caused a new lien to be placed on the property since the contract was ratified).  Many banks are ignoring this and contacting defaulting borrowers after the short sale process is started and offering to modify loans.  This infuriates most real estate agents.  Why?  Well, the banks are in possession of a ratified contract from a seller and a buyer.  The bank is aware that the property is being sold as a short sale and their approval is needed to make the sale go through.  The bank should know that the seller is not allowed to modify any existing loans on the property if it is under contract.  Now, there is a seller who has been given hope that they can save their house, a buyer who has their heart set on purchasing the house, a bank that has interfered with the sale for its own advantage, and two real estate brokerages that have worked very hard on a transaction that may not get paid now. 

 A seller in this situation should contact an attorney immediately.  I’m serious.   Stop reading and contact a real estate attorney immediately!  You are treading on dangerous waters.  If a seller accepts the loan modification, they could find themselves in default.  Default could cost them more than a short sale or foreclosure.  As a buyer, you should contact a real estate attorney immediately.  Buyers in this situation need to learn what remedies are available to them as a result of a seller taking a loan modification and refusing to sell the home.  As a bank trying to modify the seller’s loan, be careful.  Now that two parties to the transaction have contacted an attorney, every one knows the bank has torturously interfered with a ratified contract.  That’s not good.  The bank’s loan modification representatives should expect a few phone calls from unhappy attorneys.  As a real estate agent who finds their transaction going down the drain, there is recourse.  The real estate brokerages should contact their attorneys and find out what recourses are available to them.  The seller could find that they still owe real estate commissions even though they are now refusing to sell the property. 

I don’t know how many times I’ve said it before, but apparently it must be said again; if it sounds too good to be true, it usually is.  I have never known a bank institution to do something altruistically.  They don’t care about keeping a borrower in their home.  Lending institutions care about protecting their investments.  They care about staying in business.  They care about Federal investigations into their lending practices.  Any decision a bank makes is a decision in the bank’s best interest, not the consumer’s.

Short sales are probably the hardest residential transaction to get to the closing table.  The short sale process is not uniform among banks and inevitably changes halfway through the transaction.  All in all, short sales are a source of REALTOR (R) headaches.  However, they are a way of life in this area.  My partner and I have found that we are actually quite good at handling the short sale system and manuevering through the red tape.  But, there seems to be a new road block.  This was first reported to me by Derek Massey, President of Mid-Atlantic Settlement Services.  

When a bank accepts a short sale, they issue a Short Sale Approval Letter that outlines the conditions in which the bank will accept the short sale.  These conditions include a closing date, parties to the contract, sales price, commission for REALTORs (R), minimum proceeds to the bank, and that the seller is to receive no proceeds from the sale including escrow reimbursements.  The newest trend in these Short Sale Approval Letters is to include a condition that “the bank has the unlimited right to revoke this short sale payoff approval within 30 days of receiving purchase documents.”  If this condition appears in your Short Sale Approval Letter, most settlement companies can NOT issue title insurance. 

Title insurance is an insurance policy against financial loss from title defects to real property and from the invalidity or unenforceability of mortgage liens.  It helps protect an owner’s and/or a lender’s financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy.  Lenders require title insurance be purchased to insure their loan amount.  Owner’s title insurance is optional.  (I always recommend getting owner’s title insurance, it is worth the money, especially when you need to use it!)  If title insurance can not be issued then the lender will not release the purchaser’s loan, therefore the buyer can not close on the property.  The title insurance company will only issue title insurance once the condition that permits the reversal of the transaction is removed.      

This new bank provision is making it even more important to read over all bank documents carefully.

My initial thoughts when seeing the April report was that we were seeing February prices finally closing in April and that I would see quite a few short sales and foreclosures on the list. 

In April we had 15 homes sell in Fredericksburg City (22401).  Of these, 4 were short sales and 5 were foreclosures.  4 of these contracts were written in February or earlier.  4 settlements were also for cash.

Stafford County sold 128 homes in April.  18 homes were short sales and 66 homes were foreclosures.  That means that 44 homes were most advertised as traditional seller sales.  Believe it or not, that’s not too shabby.  42 contracts that settled were written in February or earlier.  14 closings were cash offers.

Spotsylvania County sold 156 homes in April.  19 homes were short sales and 95 were foreclosures.  The lower price range dominated these alternative markets.  42 homes were listed as traditional seller sales.  57 contracts were written in February or earlier.  A few contracts dated as far back as early December.  20 closings were for cash.   

What does all this mean?  It looks as though short sales are getting to the settlement table in a timely manner.  There could be several explanations for this.  For one, many banks have streamlined their short sale approval process.  Secondly, more agents are better trained at handling short sales successfully.  Even though many banks have streamlined their short sale process, we still have a ways to go to make it a truly effective alternative to foreclosure.  Many associations in areas hard hit by predatory lending are offering numerous opportunities for agents to be trained on the ins and outs of short sales.  Some agents are now being recognized as being experts in this niche market.  However, sellers are not required to disclose their short sale status until they are in substantive conversations with a buyer.  This means that not all short sales are disclosed in MLS. So, although the majority of our transactions were foreclosures and short sales, I think there were a few more than what shows up on the report.

I do think that the sales prices were accurate, but you have to look at it in context.  It is taking longer to get to the closing table than it used to.  We are seeing January and February prices closing in April.  We are also seeing investors jumping back into the market.  They are being lured by low prices and a hot and heavy rental market.  Many of these investors are able to pay cash which can help a buyer get a house much cheaper than list price.  From experience though, I can honestly say that there has not been alot to choose from in the most popular price ranges, predominately $250,000-$350,000.  There are many more buyers in today’s market than good housing options.  We are seeing more and more escalation clauses and sellers digging their heels in and holding out for a better offer.  I believe we are getting to a point where it is inevitable that the scales start to tip in the other direction.  It’s still a long way to recovery, but with low interest rates, the $8000 buyer tax credit, investors jumping back into the marketplace, and buyer confidence on an increase, we just may turn this ship around.  (But still give it another 4 years).

The real estate market is beginning to see a trend in the time it takes to close on a property.  Unfortunately, it is taking longer to close than it has in the recent past.  Gone are the days of 15-21 day closing periods.  We are now seeing closing periods of 45-60 days on average.  However, buyers in this market usually don’t have 45 days to wait to move into a home.  Many times buyers need housing in 14-30 days.  Combine longer closing periods with an abundance of short sales.  Even though we are being told that banks are streamlining the short sale process, short sales are still taking upwards of 6 months to get approval.  So, where does this leave today’s buyer when it comes to housing between the sale of one home and moving into the new home, or waiting out the short sale approval period?  Many buyers have begun to reexamine pre-occupancy. 

For those of you not familiar with pre-occupany, it is the act of a buyer taking possession of a property before settlement for an agreed upon fee.  The buyer typically pays a security deposit to the seller and a monthly fee, much like a rental payment.  I’m here to tell you that pre-occupancy is a bad idea in this market for a number of reasons.

The seller is a bank in a foreclosure transaction.  I have yet to have a foreclosure bank agree to pre-occupancy.  Why?  If a buyer moves in to a foreclosure before they settle and then realize that there may be more work involved with the property than they originally thought, the buyer may be tempted to move out, default on the contract, and refuse to settle.  Banks are also not equipped to be landlords.  Foreclosure banks already sell properties “as-is.”  What happens if something breaks while the buyer is pre-occupying?  Who is going to fix the problem?  The Virginia Landlord Tenant Act requires some repairs to be made by landlords, banks don’t make repairs.  Pre-occupying a foreclosure isn’t compatible with the way foreclosure banks do business. 

Short sale pre-occupy is an even worse idea.  The sale of the home is contingent on third-party approval.  This approval can take up to 6 months; I’ve seen it take 9 months.  What happens when a buyer pre-occupies a home and then 4 months later the short sale bank denies the short sale?  The buyer gets to move out of the property and into temorary housing while they look for another home.  Or even better, the short sale/foreclosure bank evicts the would-be buyer.  What a headache!  Pre-occupancy agreements involve paying monthly fees, rent payments, for the time the buyer moves in to the time the buyer settles.  Most short sale sellers are already not paying their mortgage.  As a REALTOR, I can not reccomend that any of my buyers pay money to a short sale seller and hope that the seller actually pays their mortgage with it.  Again, it just doesn’t make sense.    

Believe me, I know moving is stressful, especially when you are afraid you aren’t going to have a place to move to.  I’ve would never recommended pre-occupancy, no matter what the market looks like, but pre-occupying a foreclosure or short sale is not the best solution and may cause more problems than you are equiped to deal with.  Talk to your REALTOR about available alternatives to pre-occupancy.  Also, make sure you begin your new home search in time to meet your moving deadline.

Here are some tips to remember when you are starting the Short Sale process and interviewing potential Listing Agents.

1.  Your first step if you are facing a possible Short Sale on your home is to contact The Homeownership Preservation Foundation.  This is a non-profit organization set up to help families facing foreclosures.  Their hotline is open 24 hours a day/ 7 days a week.  This is one of the most helpful resources available to families in financial crisis.

2.  Try to stay no more than 2 payments delinquent.  Some sort of payment is better than no payment.  Keeping the lines of communication open with your mortgage company can pay off in the long run.   

2.  Interview several REALTORS!  Not all Listing Agents are created equal!  You need to have choices during this stressful time.   

3.  Do not disclose personal financial information unless you know you are going to hire that REALTOR.  The information you tell a REALTOR during an interview is NOT confidential.  If you do not hire that REALTOR they can use the information against you is they happen to have a buyer that wants to look at or make an offer on your house.

4.  Hire a REALTOR who has experience in Short Sales.  Many of the local real estate associations are offering agents free and low cost Short Sale training.  Your Listing Agent should have at least 12 hours in Short Sale training; that is only 4 classes!  The Short Sale process is constantly changing and your agent should have all of the up-to-date information at their disposal!  You should request proof of classes taken, as well as, proof that the REALTOR has successfully closed Short Sales. 

5.  Hire a REALTOR with experience.  There are not many instances where I say that time in the business matters, but this is one instance when it actually does.  REALTORS who have been in the business more than 4 years have seen a high and low negotiation market.  Negotiations are a part of today’s real estate market.  Your REALTOR needs to understand and be comfortable with the process of win-win negotiations. 

6.  Understand who ratifies a contract in the state of Virginia.  This is where most inexperienced REALTORS go wrong.  Even though the bank has to approve a contract on a Short Sale property, the Seller and the Buyer are the only parties to the contract.  The Seller should sign off on the contract and ratify it before they send the contract to the bank for approval.  The bank is a third-party.  They are a contingency, just like a home inspection.

7.  Hire an attorney!  You can also hire a Settlement Company that has an attorney on staff that can conduct the closing for the Seller; the Buyer can still choose their own Settlement Company.  The attorney will help you with all of the paperwork the bank is going to ask for before they agree to the Short Sale.  The attorney can also help  facilitate the Short Sale in a timely manner. 

8.  Explore your future housing options with your REALTOR.  Your lower credit score will effect your ability to rent a home.  You need to decide your best course of action. 

9.  Be patient.  Short Sales are a waiting game!