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THE SHORT SALE STORY

Let me give you an explanation of “The Short Sale Story”.

Unlike a short story, the Short Sale Story is normally NOT a short story.

For the entire following story, we will assume we are using the “Multiboard Residential Real Estate Contract 5.0” typical, standard DuPage County real estate contract.

Background

In a normal real estate transaction (which apparently, rarely exists in today’s market), Buyer and Seller sign a contract, their respective attorneys review it and propose changes as they see fit, and most of the time the attorney changes get resolved to a point that both Buyer and Seller are satisfied enough to move forward and not terminate the Agreement.

During the same time as the “attorney review” issues are being raised and resolved, the Buyer gets a Professional Inspection, and tells their attorney what, if any, deficiencies to ask Sellers to remedy either by repair, replacement, repair credit (money) or some combination of repair, replacement and/or money.  Sellers review the deficiencies, and the Sellers and Buyers, through their attorneys and sometimes their real estate agents, get these deficiency issues resolved enough to move forward and not terminate the Agreement.

The attorney review and professional inspection resolution process should take not more than two weeks from the day Buyer and Seller both signed the Agreement, sometimes more depending on the nature and extent of issues.  Typically, after those issues are resolved, two contingencies remain: a homeowner insurance contingency and a financing contingency. 

The homeowner insurance contingency is just a paragraph in the Agreement that states the Agreement is contingent on the Buyer obtaining hazard insurance (also known as Homeowner’s Insurance) at “standard premium rates”.  This means Buyers should go to their insurance agent and get a quote for the homeowner insurance coverage to make sure the premium is not going to be unreasonably high, i.e. like $3,200.00 on an old Lisle farmhouse that was never updated.  Buyer has 10 business days to get the quote, and, if the quote reveals a non-standard premium rate, then Buyer can kill the deal.  Typically, this contingency does not come into play; I used it once in 20 years on an old, extremely outdated, Lisle farmhouse.

The financing contingency, on the other hand, comes constantly into play in most every deal, except for the cash Buyer.  The deadline here is handwritten into the Agreement usually by the Buyer’s real estate agent.  This contingency comes into play so often less because of the Buyer’s efforts and diligence and more as a result of (i) the appraisal, (ii) the lack of diligence by Buyer’s loan officer or loan processor or underwriter, (iii) changing underwriting regulations, and (iv) inability of loan processor (a) to obtain verifications of employment from Buyer’s employer, (b) inability to obtain Buyer’s tax returns from the U.S. Treasury/IRS, (c) to obtain verification of Buyer’s cash account deposits from Buyer’s banks, credit unions or other asset account holders.  A good loan officer or mortgage broker will ameliorate the issues cause by the mortgage contingency, but it is a very tough lending market out there today, so even the most efficient mortgage brokers and loan officers may find approvals a little more difficult to obtain.

Assume the mortgage contingency date is June 1, 2010.  Buyer’s loan officer says Buyer is good to go, but the attorneys cannot schedule closing because that loan officer does not have the loan officer’s underwriter’s written approval or “Clear to Close”.  The Buyer does not want to kill the deal based on not having timely fulfilled the contingency.  So the Buyer’s attorney sends a letter out that states Buyer did not obtain financing approval timely and asks for additional time to get the financing.  Generally, the Seller would prefer to wait for the Buyer to get approved rather than start over with some new buyer.  So the financing contingency date gets extended, sometimes repeatedly, until Buyer gets Buyer’s Clear to Close.  Once Seller receives the extension request, Seller has the option to terminate or grant the extension and typically in this market grants it.

Assuming attorney review, professional inspection, insurance and financing contingencies all get met, then eventually the Buyer and Seller close and everyone moves on with their lives, all of this having take place generally in 5 to 6 weeks, or so.

Keep in mind; there are multiple variations of the above scenario and various offshoots I have left out for the sake of simplicity.  Many in the residential real estate industry could write a book with all the variations.

The Short Sale Story has multiple impacts on all of the above, except the insurance premium contingency.  This is because finding out the amount of the premium is a simple matter of asking and obtaining a quote at no cost to either party.  The inspection and financing contingencies involve the Buyer expending money to determine whether the house is in decent enough shape for the price and Buyer’s expectations and Buyer’s mechanical ability and to determine whether the house has market value that supports the amount of loan the Buyer needs to buy the house.

On the Professional Inspection, the cost is about $400 and more.  If Buyer wants radon, mold, pest and/or lead inspections, the cost increases.  A Buyer may not want to spend the money in a short sale until the Buyer knows the Seller has the Seller’s bank’s approval and can actually close.  As a result, Buyer generally may want to wait to do the Professional Inspection until after the “Short Sale Approval” or “Short Sale Pay Off” letter is provided by the Seller’s bank.

Buyers should consider two lines of thinking in regard to the Professional Inspection in a short sale purchase.  I will assume for purposes of this explanation that Buyer understands the short sale Seller has no ability to make repairs or replacements and accepts the property in “as is” condition.  If Buyer does the inspection and spends the money during the first week after signing the Agreement and then the Seller’s bank refuses to provide a Short Sale Pay Off letter, Buyer might feel like Buyer wasted the money. This is one line of thinking, and it is not wrong, but there is another line of thinking.

If Buyer does not do the inspection in that first week and then Seller’s bank does provide the Short Sale Pay Off letter 60, 90 or 120 days later, and the Buyer has the inspection done within the one week after the Seller’s bank provided that letter, and the inspection reveals deficiencies that the Buyer cannot accept, then the Buyer wasted a lot of time only to find out the Buyer does not want the property anyway.  And thank you all for playing.  Had the Buyer done the inspection in the first week, the Buyer would have killed the deal and moved to another deal on another home.  For some Buyers the potential waste of money is more important than the potential waste of time.  For others the time is more important than the money.  The Attorney Review provision raises some different issues.

There are many changes that should be made under an Attorney Review provision for both Seller and Buyer in a short sale transaction.  For example, every Seller’s attorney should make the Agreement contingent not only on the Seller obtaining the Short Sale Pay Off letter(s) from Seller’s mortgage company(ies) but also on the Seller’s acceptance of the terms of that Short Sale Pay Off Letter.

Almost every Short Sale Pay Off letter contains terms of contract that obligate the Seller to some covenants, i.e. that Seller sign a promissory note for the difference between the amount actually owed to the mortgage company and the amount the mortgage company is actually getting from the sale of the property.  This difference is termed the “Deficiency”.  Some Short Sale Pay Off letters state that the deficiency is waived but that the mortgage company will 1099 the Seller for the amount of debt forgiven, being the Deficiency.  There are income tax ramifications for the short sale Seller in that scenario with possible exceptions for short sale sellers who are selling their primary residence prior to 2015.  Seller should check in with Seller’s tax preparer to determine the affect of the 1099.  This is just one issue on the Seller’s side.

For the Buyer in the short sale purchase setting, there are multiple changes that Buyer’s attorney should propose.

1.              Try to extend both the attorney review and professional inspection contingency date deadlines in order to give the Buyer the option to do the Professional Inspection now or later;

2.              Change the closing date and financing contingency date in the Agreement to time both to properly coordinate with each other and the Seller’s bank’s issuance of the Short Sale Approval letter.  Typically, 30 days for financing approval from date of being provided the Short Sale Approval letter and 45 days from being provided the Short Sale Approval letter to do closing; Buyers can live with different timing; it just requires more extension letter requests to be sent later on by Buyer’s attorney to Seller’s attorney; we try to avoid those subsequent letters for two reasons: one, every time an extension is requested, it gives the Seller the opportunity to say “no”, terminate the Agreement and sell to someone else (which actually almost never happens because the Seller would have to go back to Seller’s bank to get the ok to sell to that next buyer); and two, it’s slightly less work for us;

3.              Add a term requiring Seller to give Buyer (a) the estimated HUD-1, being the estimated costs of closing and net money to the Seller’s bank from the sale, and the Short Sale Approval letter, if Seller ever gets it;  we need these in order to determine whether the estimated numbers accurately reflect amounts Buyer should get on price, earnest money, tax credits and possibly other amounts that might affect Buyer, and we need them to make sure the Seller is actually meeting some of the critical points of the Short Sale Pay Off letter.

4.              Find out how many liens are held against the property; the more liens, the less likely the Seller can get an approval from all the lien holders;

5.              Add a right of first refusal if the property is to remain actively marketed in the MLS;

6.              Get Buyer an option to terminate; the short sale negotiation between Seller and Sellers’ mortgage company(ies) is time-consuming.  First, you have a bank that lent money to millions of people on the assumption all it would ever have to do is collect money and foreclose occasionally; instead, they are not collecting as much money and foreclosing on so many properties as they should has been found to be counterproductive to their pocketbook because their sales at foreclosure auction are worse net to the bank than the short sale is (though not always which is why not all short sales get approved); Second, the new world the bank finds itself in is not what they are used to; they are not designed to accept less than what is owed, and they are still working on the systems they need to install procedurally, technically and in terms of necessary personnel, and they are a very giant, slow-moving bureaucracy where no one has the stones and/or the authority to be the decision-maker until higher up on the corporate management scale; for example, Bank of America as almost 300,000 full time employees. (Source: http://finance.yahoo.com/q/pr?s=BAC)  If you can imagine that one particular employee that the Seller’s attorney eventually deals with at the Seller’s bank being someone the bank had to employ so it could lose money, and add to that the fact that that one person wades in a multitude of employees that number the population of about one quart to one third of the entire population of DuPage County, and you can imagine it takes a while for that person’s paperwork to get up to a review committee’s decision makers and then back down to that employee to express that decision in writing.

Because it takes so long to get a decision, the Buyer should have the option to walk out of the deal at some point.  Depending on the nature of the Buyer and the Buyer’s personal situation, that walking point could be from day one, starting on day 31, 61 or 91, etc.

Buyers have to understand that the Seller has to do all the following just to get one person at their mortgage company to pay attention to the Seller’s request for short sale approval: provide last two years tax returns, provide last two months bank statements for all bank accounts, investment accounts, IRAs, CDs, 401Ks; provide last two payroll check stubs; prepare and provide a Personal Financial Statement identifying all assets and their values, all debts and their principal balances and amounts of installment payments, and all monthly income and monthly expenses; a copy of the Seller’s listing agreement with their real estate agent so the bank can see how long the property has been marketed; a copy of the contract, so the bank can review the terms and make their own estimates; a copy of the Seller’s attorney’s estimate of the closing figures or closing statement, known as the HUD-1, so the bank can see what the Seller’s attorney is thinking in terms of financials for the transaction; written authorization from the Seller for the Seller’s attorney to be able to communicate with the Seller’s bank; hardship letter so the bank has an idea whether the Seller “deserves” help; possibly other documents required by various lenders, i.e. Wells Fargo addendum for Buyer and Seller to agree they are not related by blood, business or friendship.

And all this stuff gets faxed to a number at a bank with over a 100,000 employees.  We have had it take 6 tries before a 98-page fax was found by one Seller’s mortgage company after 5 weeks of trying.  The larger the Seller’s mortgage company, the less efficient it tends to be at the simple things like getting a fax, but at least they have personnel appointed to process the request . . . eventually; the smaller the company, the less efficient it might be anyway because it cannot devote the personnel; like in any large system, the better the person processing the request, the more efficient the process will run; but, again, it is a process the mortgage company was not really designed to process at the scale it is currently needed.  So we wait.

How long should we be required by contract with Seller to wait?

Personally, I would, as a Seller’s attorney, allow the Buyer to walk any time until I have the approval letter, then the Buyer must stay through closing, unless Buyer gets denied financing or the property is damaged beyond repair;

As a Buyer’s attorney, who understands not all Seller’s attorneys will agree with this, I think a Buyer should be able to walk after 45-60 days.

The first 30 days feel like a “normal” transaction to the Buyer.  The second 30 feel uncomfortable to the Buyer due to the continuing uncertainty, and the next 30 drive Buyer’s nuts as does any time thereafter.  Sometime after that first 60 days, the whole process just begins to reveal itself to the Buyer as a really inefficient, stupid process, at best.  And rightly so;

7.              A Buyer right of termination should also be required after Buyer gets the Short Sale Approval letter from Seller; some letters require closing to occur within unreasonable time frames, so they are essentially worthless and extensions on them from Seller’s bank will be needed to close; Buyer should have the option not to stay in the deal because sometimes getting the extension takes too long too;

8.              Some of the above changes are not needed depending on the particular circumstances, and based upon those circumstances additional changes may be needed just like a normal real estate transaction.

From the Sellers’ side of the transaction, the only changes needed besides making the deal contingent on acceptable Short Sale Pay Off letter terms are eliminating the obligation to provide a plat of survey and then other typical changes that depend on the Seller’s circumstances.  For example, if the Seller is still living in the property, can the Seller vacate on what might end up being a very short time frame between getting an approval letter and the time allotted in that letter for closing.

Reality Check

So now you have a decent background for the Short Sale Story.  This section of the story deals with what is actually happening on the Seller’s side of the transaction, assuming an attorney represents Seller in the “negotiation” with the Seller’s lender(s).

A Contract has Come in!

Awesome!.  I sold my home, and I am finally going to eliminate the one, biggest financial problem in my life.  What do I do now?

1.  Listing Agent to provide Attorney with fully signed and dated Sale Contract;

2.  If not already done in a Pre-Short Sale Procedure, Seller has to get the following done:

            A.  Have Seller’s Listing Agent provide Attorney the LISTING AGREEMENT

B.  Seller has to provide Attorney the following information:

-       Social Security Number for each Seller

-       Name, Loan Number & Telephone Number for each of Seller’s lender(s)

-       Hardship Letter directed to Seller’s lender(s) (One for Each Lender)

C.    Attorney will then send Sellers an Authorization that Seller must sign and   return to Attorney; this authorizes Attorney to speak with Sellers’ lenders;

D.  At the same time as 3, Attorney should send Sellers a blank “Borrower’s Personal Financial Statement” that Seller must fill out completely, sign and return to Attorney; this might have to get updated later;

E.  Seller MUST provide Attorney all of the following completed AND signed

documents: (i) complete 2008 and 2009 Federal Income Tax Returns; (ii) Signed Hardship Letter; (iii) Signed Authorizations;  (iv) Borrower’s Financial Statement.

3.  Hopefully, within 3 business days of receiving the Sale Contract, Attorney should prepare and Send Estimated Closing Statement to title company.  Should have HUD-1 within first week of Contract delivery to Attorney.

4.  Attorney should send Contract, Authorization and Estimated HUD to Seller’s Lender(s) within 3 business days of Seller tendering signed and dated Authorizations to Attorney.

5.  Attorney should confirm with Seller’s Lender(s) that they received items in 4.  Should have this done within 7 days of delivery to Lender.

6.  Attorney should obtain from Seller’s Lenders the Lender’s “Supplemental Needs List”      (Documents that are additional to our standard short sale documents list).

7.  Attorney should obtain from Seller the documents listed on that Needs List and provide to Lender

8.  Attorney should get “negotiator” to order BPO.  This should be done within to weeks at most of Contract signing, unless (i) Seller is not providing required information or documents or (ii) Seller’s lender is not confirming receipt of emails/faxes.  (Most we ever sent was 6 faxes and it took 5 weeks +/- to get lender’s confirmation of receipt of documents).

9.  Attorney should follow-up on BPO.  Lender’s “processor” will order BPO and the BPO broker should be contacting Listing Agent with 10 days of Lender’s confirmation that Lender received Estimated HUD-1, Authorizations, Contract and Listing Agreement.  Listing Agent should advise attorney (i) when the BPO is scheduled and (ii) on the day the BPO actually gets done.

10.  After BPO comes in to lender, Attorney should follow-up for “negotiation” with “Negotiator” weekly to every other week, depending on lender.

11.  Attorney should obtain Short Sale Pay Off Letter some day that is anybody’s guess, once BPO is completed.

12.  Attorney MUST follow Instructions on Short Sale Pay Off Letter

13.  On Closing Date attorney should double-Check Short Sale Pay Off Letter Instructions to ensure they were and are followed

ASSUMING, the Sellers, their listing agent, their attorney, and the “Negotiator” and the Decision Maker for the mortgage company are ALL diligent this process should take 50-60 days.  When 5 different people are involved in a process, we guarantee you that 3 or 4 of the 5 will not be perfect on any particular transaction, and it is likely 2 of the 5 will NOT be diligent.

And I can feel the frustration build as the lack of diligence grips the pavement in its effort to prevent the deal from moving forward to closing.

A Tale of Two Hopes

Now you have a really good grasp of the background and the frustrating reality of The Short Sale Story.  Let’s apply it to various Buyers and Sellers...

MORE TO COME

 

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