Apr
1
10 Myths and Misconceptions About Short Sales
Posted by jscheller under For Buyers, For Sellers, General Information
10 Myths and Misconceptions About Short Sales
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Misconception #1: Lenders will not accept short sales unless the client is behind on their payments. You can complete a short sale even if you are not behind in your payments. We hear success stories all the time from families who have successfully completed short sales who haven’t missed a single payment–they’re current on their mortgage, on their credit cards, and on all other debts. Even if their credit is completely clean, their short sale can go off without a hitch. The important thing is to remember when doing a short sale, is that the homeowner must show a valid hardship AND that you WILL eventually begin to miss payments if they do not short sale the property now. The reasons why can vary from, out of area job transfer, adjustable payment (which the lender will not agree to modify) or simply you do not earn enough and your savings will be used up by a certain date in the near future. Misconception #2: Lenders will not accept an offer that is below fair market value. It’s a common misconception that if the fair market value of a property is $400,000, and the homeowner owes $500,000, that the lender won’t accept anything less than $400,000. Lenders will accept offers that are well below fair market value–many times as low as 15% or more below the CURRENT market value. It’s all about framing the offer to look like it is in the lender’s best interest and that it would make the most sense for them to accept it rather than the alternative of foreclosure. Misconception #3: Lenders will never accept $40,000 on a $100,000 loan. Never say never! It all depends on the situation–and even more importantly, how you frame the hardship and set up the file. Most people think that lenders care about loss severity more than they actually do. Now, don’t get us wrong, lenders do care about loss severity and a $40,000 recovery on a $100,000 is a loss severity of 60 which is substantial. The degree of loss severity a bank is willing to accept all depends on the situation, and again–we can’t stress this enough– it is how you explain and document the hardship. Consider a property that has a fair market value of $45,000, and the homeowner owes $100,000. No matter which way you look at it, the lender is going to take a significant loss, but they might accept an offer of $40,000 to avoid the hassle and uncertainty of letting the house of into foreclosure and then having to resell it as an REO. First-position liens rarely see a loss severity as high as 50%, although it happens. Interestingly, a loss severity of 99% is not uncommon is second-position or other junior liens. Misconception #4: A second-position lien will sign off on the short sale even if you offer them nothing. Sorry, there are no second-position liens–or any junior liens for that matter–that will accept nothing. Everybody wants at least something in order to take the time to do the paperwork and incur the expense of closing out their position, even if they have no chance in getting a penny if the home is taken to foreclosure by the first position lien. To successfully complete a short sale, you need to satisfy all liens, and if a lender is taking a loss, you need to make sure that the amount you offer to each lender is enough to get them to allow you to sell the property. You can’t force second-position lien that stands to lose $50,000 to take only $1,000, but they will take something. Be sure to negotiate with EVERY junior lien, otherwise you will not be able to close the short sale and remember, one dollar to a lien holder is better than nothing. Misconception #5: The lender will never accept your offer if the person you negotiated with at the lender turned it down. If your offer gets turned down, and you know it was a good offer, or at least a better option for the lender than foreclosure, then most likely it is a lower level employee at the lender that does not have the big picture (for the lender) in mind or enough authority to make the hard choice for the lender. Instead of submitting a new offer, or worse, accepting defeat, escalate your negotiations to the next level and talk to a supervisor or senior loss mitigator or the AVP that is over that negotiator if all else fails. We can’t stress this enough–90% of the time, if you’re having a problem, it’s because you are talking to the wrong person. The solution is simple: talk to someone else with more authority at the lender. Misconception #6: The Lender requires my house be listed for 60 days at the amount I owe on the mortgage. A lender will agree to a short sale because you helped them understand that it is in their best interest to get the property sold quickly and as close to current market price as possible. The current market price can be determined by looking at the selling price of comparable properties that have sold recently and by looking at the asking price of properties that are currently listed. Misconception #7: Lenders don’t care about accepting a short sale and would rather foreclose than accept a short sale. Due to the fact that most agents nationwide only close 10% of their short sales, this myth has spread like wildfire. Now let us be fair and explain why most agents fail 90% of the time; they simply don’t know what they are up against, who to talk to, what to submit or how/when to follow up on the short sale. In today’s market, lenders don’t want to hold on to anything. When you have a loss mitigator tell you that the lender is going to foreclose, even though you have a great offer, you should know that you are talking to someone at the lender who just doesn’t understand what is best for the lender. In these cases it is often necessary to ESCALATE in order to talk to someone who understands the upper management’s philosophy. Misconception #8: A Home Equity Line of Credit (HELOC) is a typical second-position lien. A HELOC is not comparable to a traditional closed end second-position lien and must be negotiated differently. A HELOC is not only a note that is tied to a piece of collateral like a traditional mortgage, but has revolving credit characteristics–like a credit card–and the lender can legally seek to recover the deficiency of the principal balance even after a foreclosure sale and the ‘collection process’ may go on for up to 20 years. For example, If you owe $80,000 on your HELOC and you offer them $1,000, the lender is likely going to turn you down; they know the power the hold with a HELOC and will be able to get more through smart debt collection efforts including attaching properties purchased in the future! Misconception #9: Lenders MUST see that the property was listed at full market value for at least a little while. The lender does not care that the house was listed at “full payoff”; they want to make sure your offer submitted is at or close to current full market value. So you really don’t need to list the property at full market value before making a short sale offer for less than full payoff. Misconception # 10 You can’t submit a hardship package without an offer and an estimated HUD. If you hold off on submitting your initial hardship paperwork until you actually get an offer, you’re going to drag out that escrow by an extra four to eight weeks just to get your file processed; we’ve seen deals with some of the lenders or loan servicers that easily take six to eight weeks to actually set up and order the BPO from the time they received a file with an offer. You can shorten this time-frame considerably by sending in your paperwork without having an offer. The key is you have to follow-up repeatedly and be working on getting an offer quickly. You are responsible for keeping up on the status of your file and making sure the bank is moving forward at a reasonable pace. |
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