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UPDATE FROM THE ATG SHORT SALE COORDINATION DEPARTMENT

A Key Step in the Short Sale Process: Early Viability Assessment

by Karen G. Courtney, Managing Attorney, Short Sale Coordination
and Betsy Green, Short Sale Coordinator

The short sale continues to be a common alternative to foreclosure for the distressed homeowner whose property is "underwater" (mortgage debt exceeds the value of the home) and must be sold due to financial or other demonstrable hardship. A short sale allows the homeowner to transfer the property for a price that is less than the amount needed to pay all liens, encumbrances, and closing costs. However, the short sale process is complicated and lengthy. All the players in the short sale approval process (loan servicers, investors, mortgage insurance companies, and junior lien holders) must agree to accept a loss on an outstanding debt. Distressed homeowners often experience frustration with the short sale approval process because many lenders do not respond to the homeowner's request for a short sale in a timely manner. Many short sales fail when buyers walk away due to their unwillingness to wait the many months it often takes to obtain short sale approval. Therefore, it is best to assess the viability of the transaction early in the process, decide if it makes sense to move forward, and counsel your client accordingly.

Begin to assess short sale viability by discussing the following questions with your clients.

Are the Seller's expectations realistic?

Help clients set reasonable expectations regarding the viability of the short sale at the beginning of the process and explain these points to them:

1. Each investor has guidelines for approving short sales; not all short sales will be approved.
2. Lenders are not obligated to agree to a short sale; a short sale is a "request," not an obligation on the lender's part.
3. If the short sale is not approved, the Sellers may lose their property to foreclosure—but there may be alternatives.
4. The Sellers should have some liquid funds available (if possible) to pay for disapproved closing costs or possible required seller cash contribution.
   • The lender may ask for a cash contribution or promissory note from the Seller as part of the short sale agreement.
   • Some transaction costs may not be approved, which may result in a required financial contribution from the Seller.

Do the Sellers understand the lender's position?

Lenders closely review the figures on the HUD-1 Settlement Statement and consider it to be one of the biggest factors when determining whether to approve a short sale.

1. Determine how much the Sellers currently owe on their mortgage(s) and any other judgments or liens.
2. Understand debt/net ratios. Ratios of much less than $0.50 on the dollar are less appealing for investors/loan servicers who desire full payoff. Closing costs reduce the net payoff amount the lender will receive, and lenders will consider the potential return from a foreclosure sale when determining whether to approve the short sale.

   If the net is estimated to be $0.20 on the dollar, the short sale is more likely to be rejected, and the home will likely go to public auction if it is in foreclosure.

3. Consider the relationship between property value and closing costs. Transactions involving homes with values below $100,000.00 often have closing costs that are a higher percentage of the value. Therefore, the net short payoff amount the lender can expect to receive is less and increases the likelihood of short sale rejection and public auction.
4. Know that lenders want to stem costs. As time progresses, the short sale lender has already put forth substantial effort and incurred substantial costs. It is common practice for lenders to make attempts to reduce transaction costs (as their legal costs in the foreclosure rise), which are substantial, when real estate professionals are involved.

Is the Seller in default; has foreclosure commenced?

1. The loan generally must be in default for at least 60-90 days, or default must be likely or imminent.

   Note: Some lenders may approve short sales in the absence of payment default, but such a determination is made on a case-by-case basis.

2. If a foreclosure has been filed, there must be enough time to structure and process a short sale. This is difficult if loan has been in default for more than ten months.
3. Please keep in mind, as long as the loan is active, the loan servicer still has its source of income.

Is the Seller in bankruptcy?

The short sale lender will not grant short sale approval if the Seller is in bankruptcy, unless an order authorizing the sale of the property is obtained from the bankruptcy court.

Is the sale an "arm's length" transaction?

The lender will require the Seller to demonstrate that the contract is an "arm's length transaction," i.e., negotiated by unrelated parties at a price based upon fair market value.

Most lenders will require the parties and their brokers to sign an "Affidavit of Arm's Length Transaction" confirming that the sale is an arm's length transaction with no hidden terms or agreements among the parties or their brokers.

Is the Seller facing financial hardship?

Seller generally must be able to demonstrate financial hardship and inability to continue to pay the mortgage.

Loan servicers/investors screen for events that are out of the Seller's control, of a "financial" nature, and would explain why the Seller cannot pay the mortgage. This is a very gray area and therefore, full of surprise results.

In addition to raising the questions listed above, continue to assess short sale viability by discussing these important topics with your clients:

Fair Market Value

1. Sale price should be within market value of the property.
2. The short sale lender will order a broker price opinion (BPO) or appraisal to verify that the sale price is reasonably related to market value.
3. It is best to have a motivated buyer, but the Seller and real estate broker must also consider that BPO or appraisal issues could arise for offers much below market.

Property Factors

1. What is the condition of the property?
   • It is crucial for the homeowner to maintain and protect the condition of the property while the short sale request is being considered.
   • Homeowners must reveal property flaws and defects when submitting the offer so the flaws and defects are factored into the value when offers are below comparable recent sales.
2. Is the property occupied or vacant?

   Occupied property is preferred. When property is vacant, many serious issues can arise that could affect the closing of the short sale, such as missing appliances, squatters, and other structural property conditions due to maintenance neglect. If the property cannot be safely occupied, occupancy status will not be granted and appraisers cannot complete their review.

Cooperation and Team Work

All parties and real estate professionals must work together to obtain a successful short sale result.

1. Attorney

   Thorough. Make sure both parties execute the contract and initial any addenda and riders, and confirm that the earnest money has been collected and deposited by the appropriate real estate professional.

2. Sellers
   • Responsive. Must respond to document requests on a timely basis and return documents in the form requested.
   • Motivated. It is best to work with capable, motivated Sellers who have access to electronic, timely methods of communication.
3. Buyers
   • Patient. The short sale may take months to complete. Buyers must be prepared to wait for short sale approval.
   • Flexible. It may be necessary to increase the purchase price if the short sale lender counters the price. Also, buyers may be asked to cover some closing costs.
   • Financially qualified. The lender requires proof of funds or a mortgage pre-approval letter as part of the short sale process.
4. Listing Agent and/or Attorney

   Thorough. Willing to gather documents efficiently and review for errors before submission.

5. Title Company
   • Supportive. Helps prepare preliminary HUD-1 Settlement Statement.
   • Resourceful. Resolves title issues and closing problems.
6. Short Sale Coordinator
   • Organized. Keeps the project moving, demonstrates keen attention to detail.
   • Knowledgeable. Draws on experience in resolving distressed real estate.

Top Negative Factors

1. Debt too high. If it is more than twice the value of the property approval is unlikely.
2. Neglect resulting in decreased home value.

   If property condition is so severe that the property cannot be occupied, occupancy status will not be given and appraisers cannot complete their review.

3. Recent loan/refinance – 2010 or later.
4. Recent paid or pending homeowner's insurance claim.

   Homeowner policies often state that mortgage default renders the policy null and void. Sometimes, banks are notified and will obtain a policy on their own for this reason.

5. Earnest money and/or buyer's proof of funds or pre-approval not collected by listing agent.
   • Accompany the contract with proof of funds or loan pre-approval to screen for fickle or unqualified buyers.
   • Verify the collection of earnest money.

It can be difficult to predict whether a short sale will be approved. However, by assessing viability and setting the expectations of the parties in the beginning of the process, you can help homeowners choose the most viable alternative for resolving distressed property.

EDITOR'S NOTE: In the event that this communication is disseminated to the consumer in connection with ATG's Short Sale Coordination Services, the consumer is hereby provided with the following disclosures in compliance with the Mortgage Assistance Relief Services Rule (16 C.F.R. Part 322) promulgated by the Federal Trade Commission:

IMPORTANT NOTICE

1. You may stop doing business with us at any time. You may accept or reject the offer of mortgage assistance we obtain from your lender [or servicer]. If you reject the offer, you do not have to pay us. If you accept the offer, you will have to pay us an amount equal to one percent (1%) of the purchase price, or a minimum of $2,000.00, whichever is greater, for our services.
2. ATG is not associated with the government, and our service is not approved by the government or your lender.
3. Even if you accept this offer and use our service, your lender may not agree to change your loan.
4. If you stop paying your mortgage, you could lose your home and damage your credit rating.

[Last update: 9-25-13]

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