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Much Ado About Settlement Statements



Short Sale PackageMy apologies to William Shakespeare for butchering the title of his famous work. No iambic pentameter here! It’s just time to clear the air about settlement statements in short sale transactions. Last week, I wrote an exciting and stimulating post about how to make the mathematical calculations for the short sale settlement statement that goes to the bank with the short sale package.

The settlement statement (HUD-1) is a component of real estate transactions. It outlines the terms for disbursement—reviews the fees and shows who is paying for what. Essentially it is a break down of how all the funds in a real estate transaction are being disbursed (including commission). Each and every agent should review an estimated settlement statement well before the closing date. It doesn’t matter whether the transaction is a short sale or a cash deal on a home owned outright. All parties involved in the transaction should make sure that the numbers crunch correctly.

In the past, it was common for agents to have a very cavalier attitude with regard to the settlement statement. If something was amiss, it could be taken care of at the eleventh hour.

But, with regard to short sales, the generation of the settlement statement is required by the bank months in advance of the short sale closing. Agents, title officers, and escrow employees need to think long and hard about what that final settlement statement is going to look like. Sometimes you have to see six months into the future. Will there be an HOA lien? What will be the cost of the property taxes? All of the fees that are necessary to close the transaction need to be presented to the bank at the beginning of the transaction. So, if your crystal ball is a little foggy, clean it off. You must see well into the future and note all of the fees that will be required in order to close the transaction.

The bank will use that statement (yes, it could be from five months prior) in order to generate the short sale approval letter. So, it is really important that the crystal ball is clear and you get all the numbers right.

You do not have to create the settlement statement yourself.

While I am not necessarily advocating that agents prepare their own settlement statements, it is vital that the agent understand how the statement is prepared and review it with a fine tooth comb. Agents (especially those doing the short sale negotiating themselves) need to be involved in assuring that the settlement statement has all of the correct information. The explanation of how the short sale settlement statement is prepared is a primer for those that are a little bit fearful. I’m here to tell you that you need to overcome those fears and pay careful attention to this aspect of the transaction. If not, it may cost you! It is definitely not Much Ado About Nothing!

Photo: flickr creative commons by ell_brown

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®, and Chief Executive Officer of Transaction 911. Before landing in real estate, she had careers in education and publishing. Most recently, she has been able to use her teaching and organizational skills while traveling the world over—dispelling myths about the distressed property market, engaging and motivating real estate agents, and sharing her passion for real estate. When she isn’t speaking or writing, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.

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  1. Fred Romano

    February 1, 2011 at 8:19 am

    Since when do agents prepare HUD’s??? That is the job of the attorney. Why would the agent be involved with this at all??? Here in CT the attorney handles the entire closing process. In fact, they even deal with the bank during a short sale.

  2. Sheila Rasak

    February 1, 2011 at 8:59 am


    Just yesterday something didn’t seem to add up in my HUD. i asked my transaction coordinator to sit with me while we plugged the numbers in and it not only unmasked the one problem we felt was wrong, but called to light that the taxes had been miscalculated as well.

    Three weeks ago I caught an error on the short sale lenders’ part. It was minor, by my standards, but if it creates a hiccup, my client is no longer protected.

    Never assume that the documents you review are correct until you’ve had the opportunity to do the calculations and make certain the dates for COE, taxes, HOAs, etc. are in line.



  3. Melissa Zavala

    February 1, 2011 at 12:23 pm

    This is obviously something that varies from state to state. In California, no attorney is used in a real estate transaction.

    • Fred Romano

      February 1, 2011 at 12:46 pm

      I find it difficult to understand why attorneys would not be used to “legally” protect buyers and sellers in what most agent’s consider “the biggest financial purchase most people will make” !!! Agents are not lawyers and should not be involved in conducting the legal aspects of a real estate transaction, like contracts, title, and closing documents. Just unbelievable!!!

  4. MH for Movoto

    February 1, 2011 at 6:01 pm

    I mean, certainly the requirements on this do vary from state to state, but it seems like a glance from an experience real estate attorney could never NOT be a good idea.

    • Melissa Zavala

      February 1, 2011 at 6:12 pm

      Absolutely. Consulting an attorney is really an important part of any real estate transaction–even in states that handle their closings without the use of an attorney.

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Disputing a property’s value in a short sale: turn a no into a go

During a short sale, there may be various obstacles, with misaligned property values ranking near the top, but it doesn’t have to be a dealbreaker!



magic eight ball

magic eight ball

It’s about getting your way

Were you on the debate team in high school? Were you really effective at convincing your parent or guardian to let you do things that you shouldn’t have been doing? How are your objection-handling skills? Can you flip a no into a go?

When working on short sales, there is one aspect of the process that may require those excellent negotiation or debate skills: disputing the property value. In a short sale, the short sale lender sends an appraiser or broker to the property and this individual conducts a Broker Price Opinion or an appraisal, using special forms provided by the short sale lender.

After this individual completes the Broker Price Opinion or the appraisal, he or she will return it to the short sale lender. Shortly thereafter, the short sale lender will be ready to talk about the purchase price. Will the lender accept the offer on the table or is the lender looking for more? If the lender is seeking an offer for a lot more than the one on the table, mentally prepare for the fact that you will need to conduct a value dispute.

Value Dispute Process

While each of the different short sale lenders (including Fannie Mae) has their own policies and procedures for value dispute, all these procedures have some things in common. Follow the steps below in order to conduct an effective value dispute.

  1. Inquire about forms. Ask your short sale lender if there are specific forms that you need to complete in order to conduct a value dispute. Obtain those forms if necessary.
  2. Gather information. Your goal is to convince the lender to accept the buyer’s offer, so you need to demonstrate that your offer is in line with the value of the property. Collect data that proves this point, such as reports from the MLS, Trulia, Zillow, or your local title company.
  3. Take photos. If there are parts of the property that are substandard and possibly were not revealed to the lender by the individual conducting the BPO, take photos of those items. Perhaps the kitchen has no flooring, or there is a 40-year old roof. Take photos to demonstrate these defects.
  4. Obtain bids. For any defects on the property, obtain a minimum of two bids from licensed contractors. For example, obtain two bids from roofers or structural engineers if necessary
  5. Write a report. Think back to high school English class if necessary. Write a short essay that references your information, photos, and bids, and explains how these items support your buyer’s value. This is not something that you whip up in five minutes. Spend time preparing a compelling appeal.

It is entirely possible that some lenders will not be particularly open-minded when it comes to valuation dispute. However, more times than not, an effective value dispute leads to short sale approval.

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Short sale standoffs: how to avoid getting hit

The short sale process can feel a lot like a wild west standoff, but there are ways to come out victorious, so let’s talk about those methods:



short sales standoff

short sales standoff

What is a short sale standoff?

If you are a short sale listing agent, a short sale processor, or a short sale negotiator then you probably already know about the short sale standoff. That’s when you are processing a short sale with more than one lien holder and neither will agree to the terms offered by the other. Or… better yet, each one will not move any further in the short sale process until they see the short sale approval letter from the other lien holder.

Scenario #1 – You are processing a short sale with two different mortgage-servicing companies. Bank 1 employees tell you that they will proceed with the short sale, and they will offer Bank 2 a certain amount to release their lien. You call Bank 2 and tell them the good news. Unfortunately, the folks at Bank 2 want more money. If Bank 1 and Bank 2 do not agree, then you are in a standoff.

Scenario #2 – You are processing a short sale with two different mortgage-servicing companies. Bank 1 employees tell you that they cannot generate your approval letter until you present them with the approval letter from Bank 2. Bank 2 employees tell you the exact same thing. Clearly, in this situation, you are in a standoff.

How to Avoid the Standoff

If you are in the middle of a standoff, then you are likely very frustrated. You’ve gotten pretty far in the short sale process and you are likely receiving lots of pressure from all of the parties to the transaction. And, the lenders are not helping much by creating the standoff.

Here are some ideas for how to get out of the situation:

  • Go back to the first lien holder and ask them if they are willing to give the second lien holder more money.
  • Go to the second lien holder and tell them that the first lien holder has insisted on a maximum amount and see if they will budge.
  • If no one will budge, find out why. Is this a Fannie Mae or Freddie Mac loan? If so, they have a maximum that they allow the second. And, if you alert the second of that information, they may become more compliant.
  • Worst case: someone will have to pay the difference. Depending on the laws in your state, it could be the buyer, the seller, or the agents (yuck). No matter what, make sure that this contribution is disclosed to all parties and appears on the short sale settlement statement at closing.
  • In Scenario #2, someone’s got to give in. Try explaining to both sides where you are and see if one will agree to generate their approval letter. If not, follow the tips provided in this Agent Genius article and take your complaint to the streets.

One thing about short sales is that the problems that arise can be difficult to resolve merely because of the number of parties involved—and all from remote locations. Imagine how much easier this would be if all parties sat at the same table and broke bread? If we all sat at the same table, then we wouldn’t need armor in order to avoid the flying bullets from the short sale standoff.

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Short sale approval letters don’t arrive in the blink of an eye

Short sale approval letters may look like they’ve been obtained simply by experts, but it takes time and doesn’t just happen with luck.



short sales

short sale approval

Short sale approval: getting prepared, making it happen

People always ask me how it is that I obtain short sale approval letters with such ease. The truth is, that while I have more short sale processing and negotiating experience than most agents and brokers, I don’t just blink my eyes like Jeannie and make those short sale approval letters appear. I often sweat it, just like everyone else.

Despite the fact that I do not have magical powers, I do have something else on my side—education. One of the most important things than can lead to short sale success for any and all agents is education.

Experience dictates that agents that learn about the short sale process
have increased short sale closings.

Short sale education opportunities abound

There are many ways to become educated about the short sale process and make getting short sale approval letters look easy to obtain. These include:

  • Classes at your local board of Realtors®
  • Free short sale webinars and workshops
  • The short sale or foreclosure specialist designations

As the distressed property arena grows and changes, it is important to always stay abreast of policy changes that may impact how you do your job and how you process any short sale that lands on your plate.

The most important thing to do is to read, read, read. Follow short sale specialists and those who blog about short sales on AGBeat, Google+, facebook, and twitter. Set up a Google Alert for the term ‘short sale’ and you will receive Google’s top short sale picks daily in your email inbox. Visit mortgagor websites to read up on their specific policies and procedures.

Don’t take on too much

And, when you get a call from a prospective short sale seller, make sure that you don’t bit off more than you can chew. Agents in most of America right now are clamoring for listings since we are in the midst of a listing shortage. But, if you are going to take on a short sale, be sure that it is a deal that you can close. And, if you have your doubts, why not partner up with a local agent that can mentor your and assist you in getting the job done? After all, half a commission check is better than none!

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