Short Sales and the Listing Agent JF031215.pptx

C.E. Course
CE.5958000-RE
3 Hours General
Copyright 2021 Real Estate School of Nevada, Inc. All Rights Reserved. 1

“Short Sale and the Listing Agent”
What is a Short Sale?
 also referred to as a “pre-foreclosure”
 a sale of real estate in which the proceeds from the sale fall
short of the balance owed on a loan
 a transaction where the seller (in a hardship situation)
needs to sell, but owes more on the mortgage than the
home is worth
 A negotiation is required for the bank to allow the payoff
amount to be reduced to a “shorter” balance.

What is a Short Sale?
 The homeowner/debtor sells the mortgaged property for less
than the outstanding balance of the loan and turns over any
proceeds of the sale to the lender.
 Unless the bank has agreed upfront to accept a short sale, which
is rare, no one knows for certain if a short sale offer will be
accepted or rejected by the bank.
 Simply because a listing is advertised as a short sale does not
mean it is a short sale. Basically, it means all parties hope it will
sell as a short sale and the bank will accept the offer.

Who would qualify for a short sale?
 No definite answer to this question
 The bank/lender agrees to discount a loan balance
because of a “hardship” (causing an economic crisis) on
the part of the mortgagor.
 Negotiations are through bank's loss mitigation, short
sale, or workout department
 Banks are coming up with new departments all the time
to handle their short sales so the licensee handling the
short sale is often shuffled around prior to reaching the
appropriate department.

Who would qualify for a short sale?
 The lender has the right to approve or disapprove a proposed sale.
 Many circumstances influence whether or not banks will discount a
loan balance. These circumstances are usually related to:
 the current real estate market
 the seller’s specific hardship and financial situation
 A typical short sale candidate would have a specific hardship
situation, would need to sell, and would require all banks’ and all
lien holders’ approval.
 A short sale typically is executed to prevent a home from
foreclosure, but the decision to proceed with a short sale is
predicated on the most economic way for the bank to recover the
amount owed on the property.

 Each lender is different and has varying systems for short
sales and mitigated losses.
 Many lenders have pre-determined criteria for accepting a
short sale.
 Most often, a bank will allow a short sale if they believe
that it will result in a smaller financial loss than foreclosure.
There are carrying costs and other expenses that are
associated with a foreclosure.
 Some lenders may allow any reasonable offer subject to a
loss mitigator's approval.
 Multiple levels of approvals and conditions are very
common with short sales.
 Junior liens - such as second mortgages, home equity or
HELOC lenders, and home owners associations (special
assessment liens) - may need to approve the short sale.

 Frequent objectors to short sales include tax lien holders (income,
estate or corporate franchise tax) and mechanic's lien holders.
 It is possible for junior lien holders to prevent the short sale.
 If the lender required mortgage insurance on the loan, the
mortgage insurance company will likely also be a party to
negotiations as they may be asked to pay out a claim to offset the
lender's loss in the short sale.
 The vast array of variables including parties involved, parameters,
and processes in a short sale, makes it a highly specialized type of
real estate transaction. This is why short sale deals have a high
failure rate.
 Often, these transactions do not close on time to save
homeowners from foreclosure.
 Short sales should be handled by a knowledgeable and
experienced professional.

Qualifying the Seller:
 There are other “qualifications” that will come into play other
than the lender allowing the “shorter” payoff.
 The seller also has to agree to specific terms. In some cases:
 may be asked the bring money to the table (often seen in 2nd
loan situations)
 may be asked to execute a promissory note agreeing to make
payments
 will have to agree to the credit terms or how the short sale is
listed on the approval letter
 There may be other liens on the property or attached to the seller
preventing the home from passing clear title.

Elements of a Probable and Proper
Short Sale
 The property is worth less than is owed
 The seller has some hardship that makes it impossible or extremely
impractical to keep the property
 The seller is cooperative and willing to work with a real estate broker to
package the short sale
 The lender is contacted and expresses willingness to entertain a short sale
 The property is listed, with appropriate caveats and protections for the
seller, properly priced, and effectively marketed
 The lender is presented with an offer, accepted by the seller, along with a
completed short sale package and narrative explaining why the short sale
is necessary and desirable
 The lender approves the offer and escrow closes as usual
 No proceeds go to the seller

 Prior to accepting a listing contract on a potential short sale, the agent
needs:
 to be skilled in short sales
 know the brokerage policies
 understand federal, state, and local laws
 abide by MLS rules and the REALTOR® Code of Ethics involving short sale
transactions
 know general short sale procedures along with timelines regarding
foreclosure
 Keep in mind that succeeding in the short sale is the major responsibility of
the agent.
 The agent should be continuously learning and staying on top of current
events, laws, and updates about short sales, via:
 Internet
 REALTOR® press
 government news on short sales
 articles and advice distributed by the brokerage, etc.
Listing a Short Sale Listing

 beware the number of illegitimate, ineffective, and
illegal approaches to short sales
 remember your fiduciary responsibilities to the client
 a short sale transaction should be treated no less than a
“normal” transaction, nor should the seller
Listing a Short Sale Listing

Research
 Prior to meeting with the potential client, the listing agent should
gather as much information about the property as possible.
 Research may determine the “qualification” of the short sale as well
as pricing and obstacles that may prevent the transaction from
closing.
 It is important to be aware of the exact amount owed on the
property and whether the seller is in default on any mortgage liens,
taxes, or association dues.
 Sources to verify the total debt, any arrears, or penalties include the
tax assessor, title company, and community associations.
 Run a competitive market analysis or BPO on the property and
present at the listing appointment. In many cases it takes a lot of
proof to show the seller why they can’t afford to sell their home or
would be in a short sale situation if they did.

Documents
 It is mandatory to obtain all necessary financial documents from
the seller that may influence the lender’s decision.
 Keep in mind that the seller (especially one facing personal and
financial hardship) may not know what to provide.
 You should ask the seller for copies of
 the most recent mortgage statement(s)
 statements for second mortgages and lines of credit
 the most recent property tax statement
 association dues bill
 You should inquire about any liens the seller may be aware of
and if any legal action has been taken.
 There could be liens or judgments that the seller may not even
be aware of, so a title and internet check will be required.

The Paperwork
 The listing contract usually does not differ between a potential short
sale listing and a “regular” listing.
 There are many additional documents and disclosures that must be
added to the listing (see section on short sale documents).
 These documents and disclosures protect the brokerage as well as
explain the definitions, details, and consequences regarding a short
sale listing.
 It should also be stated on the listing agreement that the sale of the
property is subject to the lender’s approval.
 Counteroffers should state similar verbiage.
 The bank may (and probably will) reduce the broker’s commission
later, but in the beginning, commission is agreed upon between seller
and broker.
 It is suggested that any brokerage material or guides created for
understanding the short sale are delivered to the seller at this time.
The seller needs to completely understand the process and their role
in the transaction.

Pricing the Property
 Carefully create an accurate CMA or BPO using the most recent
comparative sales.
 Due to pending foreclosure, it is not wise to price the property
at the highest recent sale and “chase the market.”
 A short sale situation takes an aggressive pricing strategy.
 That being said, the bank will want to see a valiant effort to
obtain fair market value.
 Remember, the lender will be deciding between a short sale or a
foreclosure.
 The goal in pricing is to obtain a qualified buyer as quickly as
possible and get the bank an acceptable price.
 It is possible for the bank to “counter” the buyer during the
negotiation stage.

Interview and Qualify the Seller
 Is the seller aware that they have insufficient equity?
 Is the seller aware that after paying closing costs, commissions,
and other fees required to close the transaction, they are a
potential short sale?
 Does the seller have a valid hardship?
 The seller must be made aware:
 in writing, of the consequences and details regarding short sales.
 that the agent is not an accountant, attorney, or credit counselor and
is unable to give professional advice in those areas.
 to consult with these professionals prior to and during the short sale
process.

 The sales price will probably be significantly lower than they
expected.
 They may have several potential buyers prior to the closing.
 There may be tax consequences.
 The lenders (lien holders) may ask for some money to be brought
to closing.
 The lenders (lien holders) may ask for a note agreeing to payoff a
deficiency judgment.
 Their credit will somehow be negatively affected.
 They may still lose the home to foreclosure.
A discussion should be held about the potential
outcome of the transaction such as:

Give the Seller Options
 The seller should also be told of their options prior to
determining if a short sale is best for them.
 Their options should include:
 Keep the Property: If the seller is unhappy that the property
value is less than the loan balance, but is otherwise under no
pressure to sell, keeping the property can be the best solution.
 Even if there is some short-term financial distress, it need not
result in loss of the property.
 Ask if there is family or other resources that can carry the seller
through if there is some financial stress.
 Because of the lack of equity, a refinance may not be possible,
but be aware of any special “hardship refinance” programs a
particular lender may offer. These change frequently.
 If the sellers must move, could they rent the property (even at a
negative cash flow) and sell it later in a better market?

Sell the Property and Bring Cash to Closing
 This might not sound appealing, but it can be a good choice
for sellers who are in a financial position to pay a deficiency
from other liquid assets.
 This approach avoids the credit damage that even a
successful short sale will cause.
 An alternative in some circumstances is for the seller to
agree to convert any deficiency into a personal note, or a
note on another property owned by the seller.
 Licensees should always advise sellers to consult appropriate
legal and tax professionals before considering such a note.

Attempt a Loan Modification
 Lenders are increasingly interested in helping financially
distressed homeowners stay in their homes.
 In some cases, they have been willing to reduce or roll back
interest rates, or reduce the allowable payment, to help sellers
avoid short sales and foreclosures.
 also known as a “workout”
 It is not generally advisable for the agent to take the lead in
representing a property owner in a workout.
 Workouts are not real estate transactions.
 They are complex contract modifications, and to date, relatively
few homeowners in distress have been able to come to a
permanent agreement with their lender.
 The homeowner should be advised to consult an attorney if this
is the option they choose.

“Deed in Lieu of Foreclosure”
 If the seller:
 owes more than the property is worth
 is unable to make payments
 is likely to lose the property in foreclosure in the near future . . .
offering to trade the property to the lender in exchange for the
cancellation of the note might make sense.
 This approach is more likely to be successful in states with very long
foreclosure timelines.
 The lender can obtain the property much sooner and may feel that
the mitigation of loss is worth the cancellation of the note.
 Like a loan modification, this is a contract negotiation, and should
be undertaken only after consulting with an attorney.

Important Short Sale Documents
 Short Sale Listing Addendums:
 Short sales have a unique issue in that the lender may pursue
the seller after the close of escrow for the short fall of the
payment.
 This is a great potential liability for any listing salesperson.
 That is why an Addendum To Listing Agreement for Short
Sales is strongly recommended on all short sale listings.
 This important addendum to the Listing Agreement warns
the seller of tax, legal and other consequences of the short
sale.

The Hardship
 The seller must demonstrate some hardship that makes it impossible or
extremely impractical for the seller to keep the property.
 What are hardships as defined by most lenders?
 Most lenders focus on and require “changed financial circumstances:”
 Loss of job
 Unusual medical costs
 Death of an owner
 Natural disasters
 Even extended military service for reservists
 There should be a relationship between the hardship and the need to
sell.
 A job loss leading to a problem paying the mortgage is obvious, but an
illness might require a family to move closer to specialized medical
help, so even without an unbearable financial hardship, the
homeowner simply cannot stay.
 Lenders do not consider a decline in value alone to be a hardship.

The Hardship Package
 Every lender is different, and each short sale package can be different as
well.
 An agent can choose to submit most of the package to the lender upon
obtaining the listing and then submit any offers . . .
 . . . or wait until an offer is obtained to submit a complete package.

Some will be required, and some are “advisable” because they help explain to
the lender why the short sale is a good alternative to foreclosure:
 A hardship letter
 written by the seller, describing the seller’s circumstances
 The seller should be as persuasive as possible in describing why the seller is in no
position to continue with his or her financial obligations to the lender.
 This letter can make or break the short sale.
 The reasons given by the seller should be compelling and, the seller should be
both honest and frank in disclosures to the lender.
 Include corroborating material.
 If the seller was fired, include the termination letter.
 If the seller has medical bills, summarize them.
 If the seller is ill or disabled, the seller should explain how it is impossible to keep the
property.
 If there are tax problems, the seller should describe and document them.
 If the property was damaged and not covered by insurance, as in several recent natural
disasters, the seller should document the damage and the denial of the claim.
Common Elements of a Short Sale

 A copy of the purchase contract and all supporting documents signed by both the
buyer and seller
 Written proof of the buyer's ability to purchase the property, i.e., a completed
loan application, pre‐approval by a lender or evidence of cash on hand (a current
bank statement)
 A copy of the certified escrow instructions
 An estimated net/closing statement (HUD1) certified by an escrow officer who is
acceptable to the lender. It is very important that this estimate be as complete and
accurate as possible. Many lenders will reference the closing statement in their
acceptance or rejection. An approval may state “Lender will accept net proceeds of
no less than $273,565 no later than November 30, 2013”. If the estimate of net
proceeds is wrong for any reason, there may need to be an attempt to renegotiate
with the lender.
 A completed and signed IRS Form 4506, "Request for Copy of Tax Form”

 A completed and signed personal financial worksheet; this will include
assets such as other real estate, stocks, bonds, 401Ks, etc.
 Tax returns for the previous two years
 Employment paycheck stubs for the past two months
 Profit and Loss statement (if the seller is self‐employed)
 Bank statements for the past two to three months
 A completed Short Sale Application if the lender provides one; many
don’t
 A CMA/BPO with supporting sales data to show that the offer presented
is the best market price offer the lender is likely to receive

 A short narrative
 written by the listing agent
 about the market and market trends in the immediate area
 highlight such data as average time on the market, number of
short sale and REO listings in the MLS and price trends
 Support your conclusions with material such as recent economic
data and newspaper articles. The decision maker may well be in
another state and will not necessarily understand why the
property is suddenly worth less than the loan.
 Marketing history, showings, and feedback. Here again, it is needed
to show the lender that a real effort has been made to get fair
market value. They must understand that they could not have
gotten a higher price themselves or with another agent.

Marketing a Short Sale
 It is not only an aid to sell the home, but it is also the ethical thing to
do
 Marketing a short sale transaction is the same as a “typical”
transaction
 Many quality pictures should be obtained
 If a virtual tour is normally created, it should be here as well
 If ads are normally run, websites are built, yard signs are placed, and
so on, so should it be here
 The bank will want to see that every effort was made to market the
property and obtain the best price possible.

The Offer
 If the property is priced right, offers or multiple offers should be received.
 The same multiple counters should be sent to all parties with verbiage
that protects the seller as stated in the listing contract section or
according to the brokerage policies.
 The buyers should be approved – not just prequalified – with the seller’s
preferred lender or major lender
 not just a pre-approval letter
 if it’s cash, proof should be obtained
 After the multiple counters are returned, have the seller review and
choose the highest and best (qualifications count!) and accept one.
 The rest can be placed in back up if desired.
 It does not hurt to ask the buyer’s agent if the buyer is willing to come up
should the bank counter.
 Get the earnest money requested on the MLS and have the buyer open
escrow.
 Send the offer to the lender with the hardship package.
 Using the appropriate disclosures allows the seller to submit subsequent
offers.

The lender is contacted and expresses
willingness to entertain a short sale.
 Once the bank receives the offer and the short sale package,
they begin their procedure.
 They will order what they call “Values.”
 The values are usually obtained by two reports
 The first is a standard appraisal. The appraiser will valuate the property
based on the condition and nearby sales.
 The second is a Brokers Price Opinion, more commonly know as a BPO.
The BPO is ordered from a non-affiliated real estate agent. In most cases,
especially if the property is occupied, they will only do a “drive by”
obtaining exterior pictures and statistics for the bank.
 The bank will then assign these values to a negotiator.
 The negotiator will then determine if the offer is acceptable.
 An internet search will generally provide the lender’s “loss
mitigation or short sale” department contact information.

 Each time a call is made; a record should be taken of who the
representative was, the time and date of discussion, and the resolve,
update or actions required.
 An authorization letter from the seller verifying agent and brokerage
permission to speak with the lender on the seller’s behalf is required.
 The lender should be made aware of the situation and your
proposed short sale solution.
 Some lenders have a hardship package in their documentation that
they require; others will take the standard package.
 If there is more than one loan subject to a shortfall, this process
must be repeated with each.
 Some lenders are proactive and will immediately send the short sale
requirements. Others will be non‐committal. Unless the lender
indicates that it will categorically refuse a short sale under any
circumstance (a rare occurrence), the process may continue.

The Approval and Closing
 Once all lenders have submitted a written
approval, and the seller accepts –
the closing process begins.
 Due diligence is under way
 The buyers loan process can be finalized
 CC&Rs delivered and accepted
 All parties sign – and then the process is a completed:
Short Sale.

 Once the short sale package is submitted, it is very
important to stay in touch as much as possible.
 At least once a week (more if possible), a conversation
should be had with the lender to let them know that this file
is important and requires attention.
 There should be acknowledgement that the package is
complete and received.
 Documentation should be made each time a conversation is
held or activity takes place.
 This is not a happy decision for the lender. It will get shoved
to the bottom of the to‐do list over and over again.
 Lenders are infamous for “losing” short sale paperwork.
 The buyer and seller should be updated often. If there is a
drop‐dead time limit to the offer, remind the lender of it
often.
Important Note: Following Up

The Timeline
A Short Sale typically takes between 45 and 120 days.
1. Lender is Notified
2. Property is Listed
3. Offer Received
4. Hardship Package Submitted
5. Values are ordered
6. Negotiator Assigned
7. Decision
8. Closing

Timeline: Typically 120 days
Right of Redemption: Yes
Deficiency Judgments Allowed: Yes
In Nevada, lenders may foreclose on deeds of trusts or
mortgages in default using either a judicial or non-judicial
foreclosure process.
Nevada Foreclosure Timeline

Judicial Foreclosure
 The judicial process of foreclosure, which involves filing a lawsuit to
obtain a court order to foreclose, is used when no power of sale is
present in the mortgage or deed of trust. Generally, after the court
declares a foreclosure, the property will be auctioned off to the
highest bidder.
 The borrower has one year (12 months) after the foreclosure sale
to redeem the property if the judicial foreclosure process is used.

Non-Judicial Foreclosure
 The non-judicial process of foreclosure is used when a power of
sale clause exists in a mortgage or deed of trust.
 A "power of sale" clause is the clause in a deed of trust or mortgage,
in which the borrower pre-authorizes the sale of property to pay off
the balance on a loan in the event of the default.
 In deeds of trust or mortgages where a power of sale exists, the
power given to the lender to sell the property may be executed by
the lender or their representative, typically referred to as the trustee.
 Lenders have three (3) months after the sale to try and obtain a
deficiency judgment.
 Borrowers have no rights of redemption.

End-of-course Quiz
 You are now ready to take the end-of-course quiz.

C.E. Course
CE.5022001-RE
3 Hours General

Short Sales and the Listing Agent JF031215.pptx

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