On the heels of Jaded’s excellent post I have my own Seller underwater scenario to recount. I had a listing close escrow on Thursday. The home was one of Monterey Development Group’s courtyard homes located in the Village at Somersett Town Center. I took the listing in February of this year. The Sellers had previously listed it with another agent for $475,000. After receiving no interest in the property, the Sellers dismissed their first agent and then came to me. After discussing the asking price with me, my clients decided to go with $449,900. This price was higher than the number I had recommended, but I conceded and took the listing anyway under the condition that we would revisit the price in 30 days, if needed. One month later, after seeing little or no interest in their property, my clients became more realistic and reduced their asking price to $409,000. This was in March.
With the new price things started to pick up. I began holding weekly open houses, sometimes on both Saturday and Sunday. My plan was to try to capture some of the traffic coming through the Village and heading to Monterey Development Group’s sales office. This strategy worked well. I had many visitors stop by my open houses. Additionally, I picked up a few leads and even a couple new clients. However, no one submitted an offer.
Then one Sunday afternoon in late April, I received a call from a guy who had seen my For Sale sign in the property’s front yard. This prospect was from California and was looking to relocate to Reno. He had spent the previous day viewing the new inventory from builders throughout Somersett. On this day he was driving around Somersett picking up flyers from the resale properties. I showed him the property; he liked what he saw; and within three days he had submitted an offer. Negotiations between the Buyer and Seller went through three rounds of counter offers before both parties finally agreed on a sales price of $382,500. On May 4th we opened escrow with a 30-day close.
With most transactions, receiving an offer and signed acceptance is usually the most challenging task. Little did I realize the fun was only about to begin. A few days after signing the acceptance the Sellers informed me that there was “no way” they were going to be able to make up the difference between what was owed on their mortgages and what the sales price was. I asked them how much they thought they would be short and they replied, “All of it.”
It should be noted that until now the Sellers had assured me that they would be able to cover the expected shortage. However, upon receiving the settlement statement they immediately realized they were in trouble. Part of their predicament stemmed from the price reductions and, lower still, final sales price. Another contributing factor arose from the fact that their home did not sell as quickly as they had anticipated, and because they had purchased another home, they were carrying two mortgages and depleting what reserves they once had.
This set into motion a “short sale” situation. The Sellers, who by now had relocated out of state, were faced with asking their lender to forgive a portion (or all) of their debt in order to enable closing the deal. Using Jaded’s format from yesterday’s post, let’s look at the Seller’s situation:
05 May 2006 purchased for $419,500
1st $335,424, 2nd $41,928, 90% w/ 1st National Lending Services
06 June 2006 the 2nd was either sold or refinanced, with National City Mortgage, to the tune of $92,000.
It appears that later these mortgages were sold/transferred to other lenders. The 1st went to Washington Mutual and the 2nd to Bank of America.
I’ll spare the breakdown of the closing costs associated with this transaction but with closing costs, transfer fees, and commissions the Sellers were short over $89,000. The debt owed to Washington Mutual was going to get paid off by the proceeds of the sale. Bank of America, on the other hand, was only going to receive about $3,000 from the sale. This was because they were 2nd in line. It became immediately obvious to us that Bank of America was the lender with whom we would be negotiating this short sale.
You may be asking, why would a lender allow a sale to proceed and accept less than the amount of the outstanding debt? Well, faced with the alternative option of foreclosure Bank of America would receive nothing. I have seen reports that estimate the after-cost proceeds obtained from a foreclosure sale amount to 50 – 70 cents on the dollar. In that scenario, not only would BofA receive nothing, but Washington Mutual would also take a sizable hit. That being said, what were the chances that BofA would simply write off the remaining $86,000 owed to them? I was about to find out.
My Sellers’ case was assigned to one of BofA’s Loss Mitigators. On the first day our case worker informed us that he personally had 90 cases sitting on his desk at that moment. Things were not starting off well for us. My Sellers and I decided right there that it was imperative we stay on this guy’s radar and that our file stay at the top of his stack. So, over the next five weeks the Sellers and I were in almost daily contact with this case worker.
The bullet points below outline the sequence of events that occurred on our road to approval.
• Demonstrate that the Sellers made a good-faith attempt at achieving the highest price possible for their home. BofA wanted to know: how many days has the property been listed; what has been the price history of the property during this time; how many offers have been received and when were they received; what was the outcome of each; how long has the property been under contract; and did the Sellers negotiate hard? In my clients’ case, they had received only one offer during the entire listing. And that offer came after nearly four months of listing their property for the first time. I have heard from other agents who have been involved in short sale transactions that some lenders will not even consider the case until the property has been listed for a minimum of 90 days.
• Demonstrate that the offer was consistent with the going market price. I spent considerable time researching, analyzing and providing data to Bank of America explaining precisely what the housing market was like in Reno, Somersett, and the Village at Town Center; and why the offer was a strong offer; and why BofA was not likely to receive another offer. I included comps, solds, trends, builder inventory levels, medians, the competition, and projections. I documented everything and sent it all to the Loss Mitigator.
• Show that the Buyer was sound. BofA wanted verification that the Buyer was pre-approved and had a loan commitment from his lender. Providing this information was not a problem, as this is (or should be) performed in any real estate transaction, short-sale or not.
• Re-appraise the property. Although the Buyer’s lender had recently appraised the property as part of the Buyer’s loan process, BofA sent its own appraiser to perform another appraisal. The intent, again, was to validate the offer price.
• Run the appraised value and the offer price through BofA’s calculator and make a determination. This was a part of the process over which my clients and I had no control. Furthermore, no details of the formula were given to us.
• Negotiate with all parties. After BofA determined what amount of loss would be acceptable to them they set out to receive concessions from each of the interested parties (including the Broker) in an attempt to reach that amount. Because Chase International, my Broker, was representing both the Buyer and the Seller we were asked to reduce our commission two points. On a $382,500 sale, that concession amounted to a $7,650. Of course, BofA also determined an amount that the Seller’s were required to contribute, as well.
• Obtain Approval letter from BofA. After all of BofA’s requirements and concessions were met we held our breath as the file was sent to BofA Management for approval. There are no guarantees in the process. The file may be denied at any point during the short-sale approval process. Fortunately for my clients, BofA approved the short sale.
• Close escrow and record. After we received the letter approving the short sale, our escrow officer was able to release the transaction to be recorded. That was Thursday.
So, after much effort and cooperation by all parties involved, we finally reached a closed sale.
Although I would prefer to not involve myself in another short-sale transaction, I realize this is an unrealistic wish. Short sales are common today and will increase in numbers. To our readers who are real estate agents, it’s not a question of “if”, but “when” you will encounter a short sale situation. For this reason, I’d like to share my lessons learned with the other real estate agents out there:
• Allow for a much longer closing period than the standard 30-day close. I’d say 60 days is a minimum. Setbacks and delays are commonplace. And you will be unable to hurry the process along. The lender considering the approval of a short sale has an established process in place, and they will follow it to a T.
• Keep in mind that your Buyer will likely be unable to lock a rate for as long as this whole process may take. Although rate lock extensions may be obtainable, they can be very costly; usually one point per 30 day extension. Using the above transaction as an example, a rate lock extension would cost over $3,000. And then who pays for this? Buyer or Seller?
• Stay in constant contact with the person assigned to your transaction. Daily phone calls, emails and faxes can become tiresome for you and annoying for the receiving party, however you do not want to get lost in deluge of short sales happening in this market. And remember the bigger the lender the greater the number of files they are handling at the moment. And so what if the number of calls you’re making border on annoying; you may very well expedite the handling of your case simply because the case worker wants the calls to stop.
• Remember there are no guarantees that the lender will approve the sale. Additionally, even if they approve, they can change their mind anytime prior to close. If you are representing the Buyer, be sure to build in safeguards into the contract to cover your Buyer’s upfront costs (appraisal, inspections, etc) in the event the sale is denied. For example, having the Seller (rather than the Buyer) pay for the inspections might be a good idea. If you are representing the Seller, be sure to build in safeguards into the contract to protect your Seller against claims for failing to perform should the sale be denied.
• Be present at the lender’s appraisal. Provide the appraiser with your market research (comps, inventory levels, etc.) and analysis. Although an appraiser’s market value determination should be independent, your contributions can’t hurt.
• And finally, be prepared to be asked to reduce your commission. I have talked to other agents who have gone through short sales and all have reported having to reduce their commission. No agent with whom I spoke reported a (total) commission over 5% being allowed. If you were asked, what would you do? Ethically, can you refuse to cooperate at the risk of derailing your client’s transaction over your commission? Talk to your Broker.
• When concessions are being asked for, remember that funds can come from anywhere. The lender doesn’t care what the source is; they’re simply attempting to minimize their loss. Be creative when thinking of sources for additional funds. Is there a 1st mortgage holder involved in this transaction who may be willing to chip in? What do they stand to gain from a successful sale of the property? More importantly, what do they stand to lose if the sale is denied and then goes to foreclosure? Can the Seller borrow funds from relatives, employer, etc? Is the Buyer willing to contribute additional funds? Don’t worry if the amounts you obtain seem small. They all add up and you’d be surprised at what a difference they might make.
• And don’t forget to keep your escrow officer in the loop with every new development. Each time a concession is made or any amount changes during the course of the transaction your escrow officer will need to draw up a new settlement statement and you will need to forward that updated document to your case worker. I lost count of how many settlement statements were calculated for this short sale. But at the end of the day we got it done.
