Foreclosures and Short Sales November 2008


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This is my presentation I used in 2008 to train real estate agents in how to properly manage short sales. The material is a little out of date, but I believe is continues to give a concise overview of how the foreclosure process works in North Carolina.

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Foreclosures and Short Sales November 2008

  1. 1. Foreclosures and Short Sales “Think you own your home? Try missing three payments and you will find out who really owns your home.” John Cummuta, Author Transforming Debt into Wealth
  2. 2. Foreclosures and Short Sales <ul><li>Definitions and Background </li></ul><ul><li>Myths and Facts </li></ul><ul><li>Prospecting </li></ul><ul><li>Listing Distressed Properties </li></ul><ul><li>Marketing Distressed Properties </li></ul><ul><li>Negotiating with Lenders </li></ul>
  3. 3. Definitions and Background <ul><li>Foreclosure (for- kloh -zher). A legal proceeding to terminate a mortgagor’s interest in property, instituted by the lender (mortgagee) either to gain title or to force a sale in order to satisfy the unpaid debt secured by the property. – Black’s Law Dictionary </li></ul>
  4. 4. Foreclosure <ul><li>Foreclosure is a process, not a single event. From the lender’s (and court’s) perspective a homeowner is “in foreclosure” when the bank begins the process to evict the homeowner. </li></ul><ul><li>Most deeds of trust allow foreclosure to begin if the homeowner is fifteen days late on a payment. </li></ul><ul><li>Typically, banks begin the foreclosure process after a homeowner has missed their third payment. </li></ul>
  5. 5. Pre-Foreclosure <ul><li>A misnomer </li></ul><ul><li>A home that is in the foreclosure process, is “in foreclosure” not “pre-foreclosure” </li></ul>
  6. 6. Sub-Prime Loan <ul><li>A loan offered to applicants with less-than-top-quality credit ratings. Such loans typically carry higher interest rates, more discount points, and a lower loan-to-value ratio compared to standard mortgage loans. – Barron’s Dictionary of Real Estate Terms </li></ul>
  7. 7. Short Sale <ul><li>When there are not adequate proceeds from the sale of property to pay off the mortgage, accrued interest, penalties and customary closing costs including Realtor ® fees </li></ul>
  8. 8. Deed of Trust <ul><li>Commonly known as the mortgage. The deed of trust is traditionally recorded immediately after the deed when a property closes. </li></ul><ul><li>The deed of trust contains terms of the loan, dictates how the loan will be repaid and explicitly states how the lender may seize the property in the event of late payment. </li></ul>
  9. 9. Substitute Trustee <ul><li>Appointment of Substitute Trustee is a document recorded at the register of deeds transferring the responsibilities of the original trustee named in the deed to trust (typically the closing attorney) to a newly named trustee. </li></ul><ul><li>Typically, the substitute trustee is an attorney from a law firm based outside of the community. </li></ul><ul><li>The substitute trustee will handle all legal proceedings and notices as part of the foreclosure procedure including auctioning the property of the courthouse steps. </li></ul>
  10. 10. The Foreclosure Process <ul><li>Updated: On August 18, 2008 Governor Easley Signed Into Law House Bill 2623: North Carolina Foreclosure Prevention Project </li></ul><ul><li>HB 2623 Requires Lenders to Give Homeowners and Commissioner of Banks 45 Days Notice Prior to Commencing A Foreclosure Action </li></ul>
  11. 11. The Foreclosure Process <ul><li>HB 2623 Grants relief only to homeowners for primary residences financed with loans classified as Sub-prime </li></ul><ul><li>Some lenders are satisfying HB 2623 by sending the notice when the homeowner misses a second payment </li></ul><ul><ul><li>Does not alter lender’s foreclosure timetable </li></ul></ul><ul><ul><li>Homeowners are on notice of the gravity of the situation </li></ul></ul>
  12. 12. The Foreclosure Process <ul><li>After the homeowner is behind three payments, the lender will appoint a substitute trustee </li></ul><ul><li>The substitute trustee records the notice of the Appointment of the Substitute Trustee at the register of deeds and petitions for a hearing before the clerk of court. </li></ul><ul><li>The homeowner will receive a registered letter stating that they are to appear before the clerk of court. This hearing is typically two to three weeks from date of mailing. </li></ul>
  13. 13. The Foreclosure Process <ul><li>In Buncombe County the Clerk of Court meets with the homeowner and substitute trustee in Room 104. </li></ul><ul><li>If the homeowner does not appear for the hearing or if the homeowner does not state specific actions being taken to satisfy the lender, the clerk sets a date for the property to be sold at auction on the courthouse steps. Auction usually is set for ten to fourteen days from the hearing. </li></ul><ul><li>The Clerk of Courts will usually grant a thirty day extension if requested! </li></ul>
  14. 14. The Foreclosure Process <ul><li>At the auction the substitute trustee stands on the courthouse steps, reads the notice permitting the sale and then auctions the property. </li></ul><ul><li>Starting auction price is typically set as the balance owed on the property, plus any lender incurred legal fees. </li></ul><ul><li>Contrary to popular belief, properties are NOT sold for ten cents on the dollar. Based on the starting price, few properties are actually bid on. If there are no bidders after the starting price is announced, the substitute trustee simply leaves. </li></ul>
  15. 15. The Foreclosure Process <ul><li>After the auction, the ten day upset/period of redemption begins </li></ul><ul><li>The homeowner may redeem themselves by paying all amount due </li></ul><ul><li>Anyone may place an upset bid by submitting a bid to the clerk of court providing the amount exceeds the highest bid by 5% </li></ul><ul><li>If an upset bid is received, the ten day period begins again </li></ul><ul><li>FYI In northern industrial states the period of redemption is typically six months </li></ul>
  16. 16. The Foreclosure Process <ul><li>After the redemption period has ended, the lender receives title to the property </li></ul><ul><li>If the former homeowner has not vacated, the sheriff will evict the family from the property. This activity is commonly referred to as “A Lock Out.” </li></ul>
  17. 17. REO Property <ul><li>Real Estate Owned: Foreclosed properties held by lenders or specialty holding companies of the lenders or pooled investors </li></ul><ul><li>Marketed on the MLS as Corporate Owned or Owner of Record properties and typically handled by agents who specialize in REO listings </li></ul><ul><li>Currently, few banks want to add to their REO balance sheets. </li></ul>
  18. 18. BPO: Broker’s Price Opinion <ul><li>A “Poor Man’s” Appraisal </li></ul><ul><li>Lenders will often hire as many as three Realtors ® to confirm the pricing of a home as the property heads towards foreclosure or when considering a short sale </li></ul>
  19. 19. Buncombe County Statistics October 2008 <ul><li>843 Homeowners were in the foreclosure process, an increase of 47% compared to 2007 </li></ul><ul><li>214 Families have lost their home due to foreclosure, an increase of 65% compared to 2007 </li></ul>
  20. 20. Myths and Facts <ul><li>Myth: The Homeowner must be in default before the lender will consider as short sale </li></ul><ul><li>Fact: As long the agent can demonstrate a hardship and an inability to pay the shortfall, a short sale can be successfully negotiated regardless of the loan status </li></ul>
  21. 21. Myths and Facts <ul><li>Myth: The current financial crisis is due to lenders writing too many sub-prime loans </li></ul><ul><li>Fact: Many families whose loans are not categorized as sub-prime are at risk of losing their homes </li></ul><ul><ul><li>Many of the homeowners are behind in their mortgage due to unexpected healthcare costs </li></ul></ul>
  22. 22. Myths and Facts <ul><li>Myth: Working short sales is easy </li></ul><ul><li>Fact: Working short sales requires a diligent effort on the agent’s part. The volume of paperwork and documentation is greater than a standard transaction and every date should be considered “ Time is of the Essence.” </li></ul>
  23. 23. Myths and Facts <ul><li>Myth: Working short sales is hard </li></ul><ul><li>Fact: As long as the agent is organized, the work flow is fairly simple. Since the property will be priced at market, open houses, flyers and mailings should not be required. </li></ul>
  24. 24. Myths and Facts <ul><li>Myth: Short Sale properties are bargain priced </li></ul><ul><li>Fact: Short Sale properties should be priced at market. We are removing the hurdle of excess debt that is preventing the property from selling for market value. </li></ul>
  25. 25. Myths and Facts <ul><li>Myth: Short Sale and Foreclosure can be used interchangeably </li></ul><ul><li>Fact: Short Sale is when there are not adequate proceeds to payoff the mortgage and closing costs due to a lack of equity. Foreclosure is the process to terminate a borrower’s interest in a property </li></ul>
  26. 26. Prospecting Short Sales <ul><li>You HAVE to want to help these families </li></ul><ul><li>Understand and respect that the homeowners still have rights under their deed of trust </li></ul><ul><li>Be prepared to keep thorough documentation and notes </li></ul><ul><li>Do not relinquish control to the lender or the buyer’s agent </li></ul>
  27. 27. Prospecting <ul><li>Most “foreclosure” websites or foreclosure lead generating firms have stale information at best: By the time these sites have the information, it is too late </li></ul><ul><li>Go out and find your own leads </li></ul>
  28. 28. Prospecting <ul><li>Sphere </li></ul><ul><li>Churches </li></ul><ul><li>Advertising </li></ul><ul><ul><li>Signs </li></ul></ul><ul><ul><li>Classified Ads </li></ul></ul><ul><li>Actively Searching Register of Deeds </li></ul>
  29. 29. Register of Deeds <ul><li> </li></ul><ul><li>Select “property deeds” from the lower left menu; login </li></ul><ul><li>Search for Sub TR using Date Range Search </li></ul><ul><li> </li></ul><ul><li>Search for S/T </li></ul>
  30. 30. Register of Deeds
  31. 31. Register of Deeds
  32. 32. Register of Deeds
  33. 33. Register of Deeds
  34. 34. Register of Deeds <ul><li>While most Substitute Trustees recorded involve the foreclosure process, some are for other internal bookkeeping practices of lenders </li></ul><ul><li>Look for Substitute Trustees recorded by law firms specializing in foreclosures or language regarding foreclosure sales in the body of the document </li></ul><ul><ul><li>Shapiro and Ingle </li></ul></ul><ul><ul><li>Kellam and Pettit </li></ul></ul><ul><ul><li>Brock and Scott </li></ul></ul>
  35. 35. Register of Deeds <ul><li>Search the names of the homeowner in the register of deeds </li></ul><ul><li>Beware of homeowners who have several substitute trustees </li></ul><ul><li>Search for the deed of trust referenced in the substitute trustee </li></ul><ul><li>The address of the subject property usually can be found on page 4 of the deed of trust </li></ul>
  36. 36. Register of Deeds
  37. 37. Final Check <ul><li>Search the MLS for this Address </li></ul><ul><li>If it is currently listed, you should not solicit the homeowner </li></ul><ul><li>Check in a few days to see if the listing is withdrawn from the MLS as some firms will not market homes that are approaching foreclosure </li></ul>
  38. 38. Contacting the Homeowner <ul><li>Approach 1: Knock On the Door </li></ul><ul><ul><li>If not home, leave a letter </li></ul></ul><ul><li>Approach 2: Send the Letter </li></ul>
  39. 39. The Letter <ul><li>The homeowner will be receiving dozens of letters from various individuals offering “assistance” </li></ul><ul><li>Homeowners report that “investors” will walk the property at all hours and ask to tour the home on the assumption the house is lost </li></ul><ul><li>The Realtor ® must quickly differentiate themselves from everyone else. </li></ul>
  40. 40. The Bottom Feeder
  41. 41. The Sample Letter
  42. 42. The Sample Letter <ul><li>Paragraph 1: You are sympathetic and want help, not simply profit from their misfortune </li></ul><ul><li>Paragraph 2: There are four strategies to offer assistance. You would like to review them face to face </li></ul><ul><li>Paragraph 3: You are different. You will not be trying to buy their home or seek any payment in advance </li></ul><ul><li>Paragraph 4 & 5: Calls to action </li></ul>
  43. 43. The Four Strategies <ul><li>1. Refinance: If they have equity in the home and their reason for falling behind was short term and resolved </li></ul><ul><li>2. Chapter 13 Bankruptcy: Will stop foreclosure immediately, but if the underlying problem has not been resolved the lender will more swiftly if the homeowner misses another payment after exiting bankruptcy protection </li></ul>
  44. 44. The Four Strategies <ul><li>3. Deed In Lieu of Foreclosure: You can offer guidance for simply turning the home over to the lender. </li></ul><ul><li>4. List the Property for Sale and negotiate with the lender to, if necessary, accept a short sale when the property sells. This is the only strategy where the Realtor ® receives any fee </li></ul>
  45. 45. Is Success Guaranteed? <ul><li>No. </li></ul><ul><li>While the current environment is the most favorable for negotiating with the lenders, we cannot give 100% assurance that we will be successful. </li></ul><ul><li>Additionally, there may be tax consequences for the forgiveness of debt or collection attempts for unpaid balances after the sale closes. </li></ul><ul><li>Mortgage Forgiveness Debt Relief Act eliminates tax consequences for primary personal residences for 2007, 2008 and 2009. </li></ul>
  46. 46. How Do I Protect Myself? <ul><li>Homeowner is advised that your Realtor® is negotiating with your lender(s) in an attempt to reach an agreement where the lender(s) will accept less money upon the sale of the home than currently owed. This procedure is commonly known as a “Short Sale.” Realtor® can make no guarantees that these negotiations will conclude successfully. Additionally, homeowner is advised to consult an attorney regarding collection attempts by lender(s) for unpaid balances after the close of the transaction and to consult with an accountant regarding tax implications of any forgiven debt. </li></ul>
  47. 47. Pricing the Property <ul><li>Prepare a “Black and White” CMA. What price would have this property under contract in 30 days? </li></ul><ul><li>Using this price, would there be any equity for the homeowner after paying off the mortgage(s) and standard closing costs? </li></ul><ul><li>If there is a short fall for a home with a single mortgage, a short sale with the lender receiving $0.75 to the $1.00 should be possible </li></ul><ul><li>If there is a short fall for a home with a first and second mortgage a short sale with the first being paid in full and the second receiving $0.18 to the $0.99 should be possible </li></ul>
  48. 48. Pricing the Property <ul><li>If there are short falls in debt payoff greater than the previous examples, you still may be able to negotiate the short sale. You certainly will be able to buy the homeowners some time </li></ul>
  49. 49. Listing Distressed Properties <ul><li>Prepare Letter Authorizing You To Talk with Lender(s): Sellers should sign AND date authorization </li></ul><ul><li>Prepare Hardship Letter, Be Succinct </li></ul><ul><li>List the Property using our Standard ERS for a minimum period of SIX months with Coldwell Banker Kasey & Associates receiving our standard fee. Paragraph 18 of ERS include “Property being sold “As Is”. Sale Subject to Lender(s) Approval” </li></ul>
  50. 50. Listing Distressed Properties <ul><li>Sellers to Fill Out NC Residential Property Disclosure as “No Representation” </li></ul><ul><ul><li>Agent is still responsible to disclose any material facts </li></ul></ul><ul><li>Include on the MLS “Property Being Sold As Is, Subject to Lender’s Approval” </li></ul>
  51. 51. Marketing Distressed Properties <ul><li>Have on office tour </li></ul><ul><li>The home MUST be available for showings </li></ul><ul><li>Any materials should read “Being Sold As Is, Subject to Lender’s Approval” </li></ul><ul><li>Use the Bulletin Feature on the MLS to Announce “Short Sale” or “Subject to Lender’s Approval” </li></ul><ul><li>You want to attract buyer’s agents as the lenders will be suspicious if you represent both sides of the transaction </li></ul>
  52. 52. The Geldhof Rule for Pricing Properties <ul><li>If after two weeks you have had no showings, mark down the price </li></ul><ul><li>If you have had eight showings, but no offers, mark down the price </li></ul>
  53. 53. Negotiating with Lenders <ul><li>How much time do you have to market the property? Has a date been set for the Clerk of Court’s hearing. Has the auction sale date been set? </li></ul><ul><li>Is this a Short Sale or can the lender expect to be paid in full? </li></ul>
  54. 54. Documentation Prep <ul><li>If this is a Short Sale, in addition to the hardship and lender authorization letters, you will also need from the seller the past two year’s tax returns (first and second page), two month’s bank statements and two recent pay stubs. </li></ul>
  55. 55. Documentation Prep <ul><li>You will need the most recent payment notice from the lender </li></ul><ul><li>You should also get the seller’s social security number as the last four digits are often the sole access through the lender’s telephone menus </li></ul>
  56. 56. Documentation Prep <ul><li>Lenders do not understand net sheets. Prepare a HUD-1 (Seller’s side only) showing the proceeds from a sale. Include all transfer fees, Realtor ® commissions, document preparation and property tax and HOA/POA pro-rations </li></ul><ul><li>If this is a Short Sale, the seller will receive nothing from the sale </li></ul>
  57. 57. Documentation Prep <ul><li>Do Not wait until you have an offer; you are trying to build a rapport with the lender ASAP </li></ul><ul><li>Prepare cover letter with all documentation </li></ul><ul><li>STRESS That This Property is a Diminishing Asset: It Is Worth Less Every Day! </li></ul><ul><li>Include Account Numbers for every document </li></ul><ul><li>Overnight package to lender, ideally addressed to the Loss Mitigation Department </li></ul>
  58. 58. Talking with the Lender <ul><li>Two business days after the package is sent, call the lender </li></ul><ul><li>Navigate through the menu maze and try to get to the Loss Mitigation Department </li></ul><ul><li>Once you have a person on the phone, identify yourself, on whose behalf you are calling and that you have forwarded the client’s signed authorization for you to speak with them. Ask for the name of the person and write it down </li></ul>
  59. 59. Talking with the Lender <ul><li>Make notes for all conversations including date, time and individual </li></ul><ul><li>Ask if they received your package? It is likely they will have no knowledge of such a package. </li></ul><ul><li>If they do not acknowledge the package, ask if you could fax it to them </li></ul><ul><li>Ask how long it will take to log in the package </li></ul>
  60. 60. Talking with the Lender
  61. 61. Following Up With Lender <ul><li>Strive to find someone who is assigned to this account in the Loss Mitigation Department (sometimes called Home Retention Department) </li></ul><ul><li>Avoid working with the collection department; they usually have no authority to make decisions and are often most unhelpful </li></ul><ul><li>Always be business like and refer to the individuals by name </li></ul>
  62. 62. Countrywide <ul><li>Countrywide use to be the most reasonable lender to work with, but since their purchase by Bank of America, they are very difficult </li></ul><ul><li>Countrywide will have no conversation with anyone until there is a contract. </li></ul><ul><li>The timetable is 60 days from contract submission to approval or denial </li></ul><ul><li>Solution: Do not report that you lost “Buyer A”, but let the process proceed so that you can close with “Buyer B” </li></ul>
  63. 63. Following Up with the Lender <ul><li>At this point, we are simply asking the lender to consider the sale and to allow us enough time to market the property </li></ul><ul><li>Never take “No” for an answer </li></ul><ul><li>Ask “What more information can I provide you to help with the decision process?” </li></ul><ul><li>If it appears to be a dead end, ask who else you may speak to. </li></ul>
  64. 64. The Lender and The Seller <ul><li>Ideally, the lender will begin to deal directly and only with the Realtor ® </li></ul><ul><li>Instruct your client, however, not to ignore any calls from the lender. If the lender calls, the seller should reiterate that they are working with you to get the property sold </li></ul><ul><li>Make certain your client gives you copies of any correspondence received from the lender </li></ul>
  65. 65. When You Receive An Offer <ul><li>For short sales, unless the offer is full price, ALWAYS counter with a higher amount. Even if we lose that buyer, we need to demonstrate to the lender that we are doing our best to get them as much as possible </li></ul><ul><li>Make certain the offer explicitly states that the property is being purchase “as is” and that the repair contingency is reasonably large: ideally 2% of purchase price or more </li></ul>
  66. 66. Accepting an Offer <ul><li>Have seller sign offer and formalize as any offer, but make certain the buyer has included “Subject to Seller’s Lender’s Approval” </li></ul><ul><li>Buyer may proceed with inspections and other due diligence </li></ul><ul><li>Assuming the existing lender is one of the larger mortgage companies you should be be able to close in 21 to 45 days </li></ul>
  67. 67. Presenting the Offer to Lender <ul><li>Prepare new Seller’s Side of the HUD-1 using contracted close date with all pro-rations accurately calculated </li></ul><ul><li>Prepare cover letter for lender and explain how hard it was to find this buyer </li></ul><ul><li>Recap what the payoff status would be for the loan(s) </li></ul><ul><li>Fax or overnight to the contact you have been working with </li></ul>
  68. 68. Working Towards Close <ul><li>In today’s environment, payoff letters are being received weeks in advance of close </li></ul><ul><li>Speak with the lender regularly, even if you receive the payoff letter early, keep them in the loop </li></ul><ul><li>Assure your seller and the buyer’s side and keep them informed </li></ul><ul><li>Work with the closing attorney to coordinate payoffs. </li></ul><ul><li>It often assures lenders to have a separate attorney prepare the seller docs </li></ul>
  69. 69. The Lender and Your Fee <ul><li>In a Short Sale, the lender may suggest that you cut your fee </li></ul><ul><li>Stress how hard you have worked marketing the property and how hard it was to find and keep the buyer </li></ul><ul><li>If the lender continues to push for a reduction, state that you need to get your BIC’s approval for any reduction </li></ul>
  70. 70. Conclusion <ul><li>Who will these clients recommend in the future: </li></ul><ul><li>The real estate agent who sends them a postcard once a month claiming to be a “real estate expert” or… </li></ul><ul><li>The agent who helped them through one of the most difficulties periods of their lives? </li></ul>