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Blog by Debra Allen
Glendale, Arizona
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Posted at Debra Allen Real Estate Blog by Debra Allen
Sep. 28, 2007
Starred by: 3 Members
Basic Contents of a Short Sale Package
Declining home prices are great for buyers, but for highly leveraged sellers who bought in the last years of the boom, falling home values can mean they owe more on their mortgages than the home's current appraised value. Other sellers may find themselves unable to meet higher loan payments as adjustable-rate mortgages and other "creative" loans rebalanced to a higher monthly payment. If you're working with sellers who are one of these difficult situations, you may have to scramble to help them make a viable deal. One increasingly widespread option is a so-called short sale. I have created a Short Sale Division and here are some of my guidelines to share.
The following is a basic outline of what you want to include in a successful short sale package:
Cover Letter to Bank attention Workout department/Loss and Mitigation
· Authorization to Release Information
· Sellers Hardship Letter - make sure to have your clients sign and date everything
· Seller's Financial information - most banks have a form for this however I use my own use
Supporting Financial Information
2 years w2's
2 months pay stubs
2 months bank statements
Supporting Hardship info - for example HOA liens, medical statements, disability statements
· Repair Estimate for the property
· Comps for the property and pictures of the Subject Home
· Contract
· Net Sheet- HUD 1
· Additional information that may be asked for:
The first mortgage holder may ask for a payoff amount from the 2nd
The second mortgage holder may ask for a payoff amount from the 1st
Initial Title Report/Prelim - I have had one bank ask for this
Cover Letter
The cover letter should be clear and concise giving the needed information to the bank. The information that I include is an overview of the homeowner’s situation, what they owe on the property, what it is really worth and mention the amount of the needed repairs. I also state what my offer to the bank is. I conclude my cover letter with all of my contact information and state that I hope we can work together to resolve this issue for the homeowner.
Authorization to Release Information
I have a standard Authorization form that I use and in most cases this works fine. There are a few banks that require their own form for this. GMAC, EMC, Aurora are just some that will require that you use their form and it must be signed and dated sometimes the original must be sent back in.
Seller's Hardship Letter
I typically ask my sellers to make this one page letter. The goal if this letter is to simply have the homeowner explain their situation to the bank. This will include key items such as job loss, medical issues, divorce, health issues, etc. If the seller is considering bankruptcy you can have them include that, however it typically doesn't scare the bank into acting faster.
Seller's Financial Information
The bank wants to know what is the incoming and outgoing that the seller has each month and what other expenses and assets they have. I have two standard forms that I have my seller's fill out, personal information and financial information.
In most cases these forms will work, however there are times that the bank will request that the homeowner complete the standard forms that the Bank issues or you can download it from the banks webpage.
Supporting Financial Information
These items are typically the same required by a borrower when applying for a loan:
· 2 years w2's
· 2 months pay stubs
· 2 months bank statements
I always tell my sellers that in order for the bank to evaluate considering taking less than what is owed on their property they need provide the same type of information they did when they applied for a loan, however they are now showing they can't do this financially at this time.
Supporting Hardship Info
In order to paint the full picture to the bank of the homeowner’s situation it can help to provide additional documents showing the hardship. This can include medical bills, accident reports, layoff notice, etc.
Repair Estimate For The Property
Providing the bank with a detailed repair estimate from a reputable contractor will assist greatly in getting your short sale accepted. The bank doesn't want to own property and especially not property that needs a complete overhaul. Showing this by presenting what needs to be done and the cost is very helpful.
Comps For The Property
You definitely want to do your homework and provide the bank with at least 3 to 5 comps of properties in the area that have sold in the last 6 months, preferably the last 4months in this changing market. In doing this you want to try to get as close to the subject property that you can and ensure that you provide the lowest comps that you can. I have found that it is also helpful to be able to show the number of days on market and any and all down payment assistance or seller concessions given in the sale.
Contract
As an investor most of the time when working a short sale your goal is to purchase that property in some form. This could be a purchase for your personal portfolio, a fix-n-flip or even a double closing. In order to do this you will need a contract.
I also include the following clauses:
Buyer Shall be entitled access to the property to show partners, lenders, inspectors, contractors and other interested parties prior to closing
Buyer is purchasing "AS IS"
Contingent on the mortgage holder(s) accepting a short sale
Contingent on a clean title search being performed for liens and/or other judgments against property
Net Sheet
Banks want to see how much money they are going to net with your offer. Providing a Net Sheet/HUD 1 with your offer will provide the bank with the numbers they need to see - what will we get. I have found a great tool that I use for generating a preliminary net sheet to submit with my offers - If you are the listing agent make sure to open escrow when you list the home and order you’re Prelim and have them make sure there are no other outstanding leans.
Additional Information
Typically if a bank requires additional information they will let you know what it is. The most common that I have seen so far is the request for the payoff amounts from the other lien or mortgage holders on the property.
If you are working with a homeowner with an FHA or a VA loan then you will have to include additional forms with your short sale package.
VA
If the homeowner has a VA loan then they can apply for a Compromise Sale Package - this package can be found at http://www.vba.va.gov/ro/roanoke/rlc/va-forms-warehouse.html#CompSale
Short Sale -
Short Sale is when the lender agrees to accept less than what is owed for full payoff of the loan. Typically, Lenders will only consider Short Sales from their borrowers who need to sell their home because they can no longer afford to keep the payments current and are experiencing financial hardship. Many lenders will postpone or delay the Foreclosure Sale and give you some time to sell your house, if you initiate the Short Sale process with them as far in advance of the Trustee Sale Date as possible.
There are Tax Implications or Penalties you need to know about" Phantom Tax" the deficiency that the lender will take on the loan, and issue you a 1099 on the difference the following year to claim as part of your income. "Phantom Tax" has been recently revised please make sure to look up the current status on this bill and consult legal advice from your CPA . (December 2007)
You MAY also be responsible for the loss. Depending on your situation and state, you may be responsible.
Deed in Lieu of Foreclosure - In a deed in lieu of foreclosure, the lender agrees to release the debtor from any liability on the loan itself. This agreement is usually reached only when the debtor transfers his or her property to the name of the lender. It will show on your credit like a Foreclosure’s looked at the Wells Fargo investor guidelines regarding short sale and it is viewed as a foreclosure due to the fact that the original note obligation was not fulfilled. If the person is going to obtain future conventional financing - at least 5-years must have elapsed since the foreclosure and they must show that they have re-established good credit (no lates). On FHA loans the time frame is 3 years, but regardless of the type of loan, they must show that they have re-established themselves credit wise.
Click below to see where I was referenced in one of NAR's Online Articles:
The content of this article is owned by Author Debra Allen/ Copywriten.
Please feel free to read my success story in Dec 2008 issue of Realtor magazine.
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1. RE: Short Sales doing it the right way
Great Job Debra! THis info is so timely and helpful. Thanks. I really appreciate all you do....you are a true role model.