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How a short sale listing can become like a quicksand trap

When real estate professionals take on a short sale listing without understanding the constantly changing rules and incentives programs, it can feel much like quicksand as it becomes overwhelming and difficult to navigate.

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Have you ever stepped in quicksand? While I’ve never been near quicksand, I’ve certainly seen my fair share of it in cartoons and movies throughout the years. Those depictions make it seem like once you are in, it’s nearly impossible to get out. Taking a short sale listing without being aware to all of the different aspects of the short sale process may be a bit like drowning in quicksand.

Understanding the HAFA Program

In the last week or so, I’ve met up with two different agents that felt that they were drowning in quicksand—because they didn’t have all the correct information about the Treasury’s short sale incentive program, HAFA (Home Affordable Foreclosure Alternatives).

Let me tell you a little bit about this program. First off, any short sale seller can investigate whether they can sell their home through the HAFA program. However, just because the short sale seller learns that his first lien holder participates in the program does not mean that the seller’s loan is eligible for the program. There’s a difference there; a tiny one, but an important one just the same.

What are the benefits of HAFA? (Read the entire Treasury HAFA Bulletin.)

  • Short sale sellers who participate will receive $3000 in relocation assistance at closing.
  • A HAFA short sale releases the seller from any future liability on the mortgage note(s). (Depending upon the state where the property is located, this may be more or less important.)
  • There is the opportunity to obtain a pre-approved price for the short sale of your home.

Eligibility Requirements*

  • Seller lives in the home or vacated in the last 12 months.
  • Seller has a documented financial hardship.
  • Seller has not purchased a new home within the last 12 months.
  • First mortgage amount is less than $729,750.
  • Loan was obtained prior to 1/1/09.

*Note that the eligibility list is for guidance only. Certain loans are not eligible, despite the fact that the servicer participates in the program.

What If the Seller Has a Second Mortgage?

If the seller has a second mortgage, the second lien holder must agree to accept what is being offered by the first lien holder (currently no more than $6000, but soon to be changing). The second lien holder also must agree to waive the right to pursue deficiency. If the second lien holder will not release the lien under these terms, then the short sale seller may still participate in a short sale BUT will be ineligible for the HAFA program.

And, that, my friends is the quicksand, which has been stepped in by many short sale agents. If the seller wants to participate in HAFA, but the second lien holder will not agree to the terms, then the entire short sale is not eligible for HAFA. No ifs, ands or buts. Time to figure out a way to pull yourself out of that muddy mess, and get that short sale moving along towards a successful closing.

 

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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Residential

Short sales: the top 3 title insurance troubles

Short sales are not without challenges, but knowing the answers to the most common obstacles and questions can aide in a less stressful transaction.

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The importance of title insurance

When my husband and I purchased our first home, I was very young and very green. At the closing, our agent passed us our title insurance policy and said, “Put this in a safe place, and do not EVER throw it away.” At the time, I had absolutely no clue about title insurance, why it was important, and how it could save you from a world of trouble.

Decades later, working short sales, it’s the title reports and those dreaded liens that seem to be what gets us into all sorts of trouble. In fact, most of the reader questions that I received this past week related to title woes.

Three common short sale questions

Question: When I run the Statement of Information for my seller, it comes up with a child support lien and a mechanic’s lien. My seller says that he is aware of those liens, but has no money to make good on those debts. What should I do?

Answer: In short sales, the first lien holder will authorize funds from the proceeds to pay off a variety of expenses associated with the sale. These include commission, settlement fees, title insurance fees, and other mortgage liens. However, it is extremely uncommon for the short sale lender to offer to pay off a seller’s personal debts. Before you spend months and months processing the short sale, I’d strategize to ascertain whether you will be able to help the seller make good on these debts prior to closing. Otherwise, you should probably run like the wind.

Question: I am dealing with the IRS on a tax lien that needs to be released prior to short sale closing, and the IRS won’t budge. What should I do?

Answer: First off, it’s always a good idea to get non-institutional liens released early. At the time that you take a short sale listing, work with the title company to run a Statement of Information on the property owners. That way, if something comes up (like an IRS lien), you have plenty of time to work it out.

Generally, the IRS and the state tax authorities have mechanisms in place to remove these liens from title at no charge, since there is no equity coming from the sale. A tax attorney can guide you through the process. However, ask your title officer or title representative if they can work with you on this problem. The good news is that some title companies can help agents and you can avoid working with the IRS.

Question: I have a second lien on title with Chase Bank. Yet, when I contact Chase Bank, they tell me that the loan has been charged off and I need to contact the company where they transferred the loan. However, they do not have a record of where it was transferred. I’m between a rock and a hard place. What do I do?

Answer: This kind of chaos happens all the time with short sales, and it is very frustrating. Generally, if you contact the executive offices at the bank where the loan was held originally (in this case, Chase Bank), they can have their research department obtain information about where to call.

Another option might be to ask the lender for a “zero demand”. If they charged off the loan and show a balance of zero, then maybe they will send a zero demand and not further short sale negotiation would be necessary for this lien. Hey… without a second lien on title, maybe this won’t even be a short sale any longer!

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Coaching

How to avoid short sale buyer frustrations

Minimizing the frustrations that come with a short sale is often seen as a mythical possibility, but with these simple tips, any short sale transaction can go more smoothly.

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stress

Short sale frustration all around

Representing a buyer in a short sale can often be very frustrating. Primarily, that’s because of the unknowns associated with the short sale transaction. For one, nobody knows how long it’s going to take to obtain short sale approval. Actually, you don’t even know if you will get short sale approval. Not only that, but you also have to wait a fairly long time to learn the approved terms of the purchase. It’s frustrating to wait and wait, and then learn that the direction of the short sale is not the direction that the buyer is interested in taking.

Good communication is the key to short sale success. It’s vital for short sale listing agents to make communication with the buyer’s agent a regular and systematic part of the week. No matter how insignificant the short sale task, it is important to communicate with the buyer and the buyer’s agent and let them know that there are baby steps towards short sale approval.

One significant step towards short sale approval often comes after the bank’s valuation (BPO) when the bank makes a counter offer. Depending upon the short sale lender, this counter offer can come via email (in an email message), via telephone, or through an online platform such as Equator.

And then there are the counter offers…

Buyer’s agents and buyers often request to see the counter in writing. However, depending upon the short sale lender, this is often just not possible. Bank negotiators have contacted the short sale agent via phone, reviewed the settlement statement, and alerted the short sale agent as to what they will approve and what minimum net they might take accept in order to move forward with the short sale.

Since these counter offers usually do not come in writing, it’s important for the buyer’s agent to set the buyer expectations accordingly. Make buyers aware that there is lots of ‘verbal’ back and forth during the process. Many times it is only the short sale approval letter, the document that allows them to close, which comes in writing.

If buyers are willing to wait and keep the faith and understand that this process is a little more challenging and unique then most, they may find that they are getting a great deal on a wonderful property—often in better condition than the abandoned REO down the street.

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Coaching

Short sale: are there situations when agents can’t earn a commission?

Short sale: are there actually situations where an agent would not get paid? There are some complicated situations when it comes to short sales, and we address one here today.

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short sale agent
A short sale listing agent recently reached out to me to ask whether an agent principal can earn commission in a short sale transaction. This agent, Agent Alice*, was told that there are certain situations where licensees cannot earn a commission when buying a short sale.

The question:

Agent Alice received an offer on her listing from Agent Alex. Agent Alex is both the buyer and the principal. Agent Alice wanted to know whether the bank would pay a commission to Agent Alex at closing, since he is both the buyer and a principal.

The answer:

All of the major lenders including Fannie Mae and Freddie Mac employ some sort of arm’s length affidavit in which the buyers, the sellers, and the agents acknowledge (often in front of a Notary Public) that none has a business or familial relationship with another party outside of the transaction. Between this affidavit and investor guidelines for short sale commission, it is uncommon for the short sale lender to permit a commission to be earned by an agent principal.

Agent Alice then asked me whether Alex’s Broker, Broker Bob, could represent Agent Alex and earn a commission. While I do not work for the short sale lenders and cannot predict each short sale lender’s response, I’d say that it would be best to avoid this scenario, since the two have a business relationship outside of the transaction.

My two cents:

When I recently posed these scenarios to a group of agents, many shared creative ways to obtain a commission for Agent Alex. Remember that any creative solution whereby Agent Alex earns commission must also show his commission on the HUD-1 that is approved by the short sale lender prior to closing. As such, it is highly unlikely that there is a legitimate workaround for this problem.

The solution:

The easiest and safest way for Agent Alex to purchase Agent Alice’s listing is to seek representation outside of his brokerage. Not only will this assure that the buyer’s agent earns a commission, but it will also assure that all parties comply with the requirements of most lender short sale addenda.

 

*The names of the agents and the brokers in this post are pure fiction. Any relation to real listing or buyer’s agents is merely coincidental.

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