Part 3 of 5
By Darryl Davis
RISMEDIA, September 1, 2008-Now that you are familiar with short sales and why they are beneficial to all parties involved, you may begin to realize that you need to get involved. But, where exactly do you begin? One of the key factors in the outcome of a short sale is the Short Sale Package. This package is so important; acceptance from the lender depends on it.
Listed below is the paperwork required to successfully negotiate a short sale and will be followed by a brief explanation of all the items:
Authorization to Negotiate
Signed Sales Contract
Broker Price Opinions
2 months of bank statements (W2, 1099, tax return, etc.)
Photographs of the home (interior and exterior)
Other documents related to current market value (lis pendens listings, sale listings, etc.)
The very first step in creating a short sale package takes place when you meet with the homeowner(s). Since you, as an agent, will be speaking to the lending institution on their behalf, you’ll need authorization. An “Authorization to Negotiate” form is a very simple document that states you, as the agent, will be negotiating on behalf of the homeowners. This form should contain the borrower’s name, their Social Security number, date of birth and other relevant information including the address of the home facing foreclosure. Once complete, this document should be faxed to the bank so that you may now negotiate in lieu of the homeowner.
With written permission to speak with the bank, you can now start to collect pertinent documentation from the homeowner. The banks have a standard set of requirements for paperwork they need in order to complete a short sale. This includes a sales contract; this means that by the time you send in this offer package to the bank, you have a buyer in place for the property facing foreclosure. It is this situation that confuses some agents and homeowners.
Simply stated, in order to complete a short sale, we must show the bank that the amount of money we want to give them (which is obviously less than the amount owed) for this short sale is the true market value for the home. The best way to accomplish this is to have a buyer who is willing to pay a certain price and sign a contract with a deposit. You’ll want to be sure the contract clearly states “subject to third party approval,” which is the lender’s approval of the sale.
A creative way to show the bank that this is fair market value is to first list the house at what is owed to the bank. As an agent, you want to show the lender that you tried to sell the house and give them all the money owed to them, but the listing price doesn’t represent market value anymore. Document the number of people who were showed the home and the marketing you’ve done on the property. Once this is tried and failed, reduce the price of the home to a more realistic number that will attract buyers. Additionally, always have a broker’s open house. Be sure to obtain BPO’s (broker opinion sheets) from as many brokers as possible. This will help in showing the bank what true market value is in the homeowner’s neighborhood. The opinion sheets will state the home is overpriced and “x” should be the price to list the home in order to sell it.
Once you find a buyer for the home, the price is on the contract (this number should be similar to the broker opinion sheets), and you are now ready for the next part of your short sale package. The bank will require a HUD-1, or in this case, a preliminary HUD-1 since we do not know all the final numbers that will appear on the HUD-1. Keep in mind the seller must net zero once this transaction is complete. The preliminary HUD-1 should state the sales price minus all the buyer’s expenses which includes commission (yes, your commission), closing costs, points, attorney fees, etc. The number left after all the fees are subtracted is essentially the amount of money that is being given back to the bank at the time of the closing.
The next step is to acquire a hardship letter from the homeowner. After all, there was a reason they fell into financial troubles. This letter should be very explanative, honest and detailed. However, the reasoning must be an occurrence that was involuntary; such situations include a loss of a job or family member, illness or other unforeseen circumstances. Laziness or irresponsibility is not an excuse for defaulting on a loan.
The lender will also require two months of bank statements to go along with your shorts ale package. This includes W2s, 1099s and tax returns. As the representative agent, you have to show the lender that the homeowner is unable to pay the mortgage. There should be no savings accounts, and if there is money in a savings account, we have to supply a budget sheet. This is the personal budget of the homeowner. The Budget sheet lists all the personal finances including what it costs for gas, car insurance, dry cleaning, food, and any other expenses that they incur throughout the month.
Be aware that one of the first things the bank will do once you submit your short sale package is to order their own drive-by BPO (broker price opinion). To justify your sales price, you must prove that the home is worth what it is being sold for and not a penny more. Take photos of all the rooms, any damage the house has, repairs that need to be done, anything that would validate your sales price. Include photos of the outside of the property and different views from its exterior. Each photo should be labeled with simple statements like, “crack in wall” or “broken window.” Another great item to include is a list of repair estimates. If you can get several estimates, that would be ideal.
The next item to include that will challenge the results of the lender’s BPO are recent comps. Be sure to use current values; any homes that closed that day or that week. Include only the most recent comps in neighborhoods in very close proximity. Nothing will prove to the lender what the true market value is better than the most recent available comps. To add to the value of your short sale package even more, begin to collect local headlines. Since the bank may be in another state or region of the country, this will help show them what is taking place in your local market, today. If you’re currently subscribed to a lis pendens service, you can show the bank the number of defaulted properties in your neighborhood. Should you want to enhance your package even further, you can consider including some competing properties that are listed for sale in your neighborhood. There are so many ways to prove to the lending institution that the sales price is in fact what the true market value is at that current time and place, and that their BPO could be incorrect if it returns a higher value.
All though it may seem like a lot of paperwork goes into the short sale package, what you must understand is that the more documentation you send the bank, the more they’re going to realize that you’ve put together a full and complete package. This package is so important; the outcome of your short sale rides on it. Your short sale package should be submitted to the bank by overnight envelope, fax and email.
Once you’ve collected all of these items, and have submitted them to the bank by the three methods mentioned above, it’s a waiting game. And, it cannot be stressed enough, that the more complete your package is, the better the outcome will be. While waiting for the bank’s approval, there are many ways to keep the process moving along. It is important to closely watch the deal, as many buyers get anxious and try to break the contract and find a home they can purchase right away with assurance. Another situation to monitor is if the home is vacant, as it is subject to graffiti and loitering. In Darryl Davis’ complete Certified Short Sale Professional home-study designation course, (www.ShortSaleDesignation.com), agents learn how to keep the buyer motivated so the sale doesn’t fall through, and how to keep on top of the bank without overstepping boundaries. It’s imperative to portray urgency in the approval of the sale to avoid losing the deal altogether.
Now that you’re ready to start working with short sales, do you know how and where to find leads? Keep an eye out for our fourth articled in this five-part series, Series 4: Creative Ways to Find Leads.
About the program: Darryl Davis’ “CSSPTM: Certified Short Sale Professional” Home study designation course teaches agents and brokers how to fully understand and capitalize on the profitable and overlooked Short Sale market. Through this effective and informative learning program, you agents develop the tools and techniques to increase their sales, always receive a full commission and generate higher profits in any type of marketing condition. After completion of the program, each agent receives their designation as Certified Short Sale Professional.
To learn more and order the program, visit www.ShortSaleDesignation.com
About the author: One of the most sough-after speakers in real estate, Darryl Davis has been a Master Trainer and Advisor for the past 15 years. He has been named one of the Highest Rated Speakers at the National Association Of Realtors® Convention for the past 9 years. Darryl has directly impacted hundreds of thousands of real estate professionals with his live events, best-selling books, learning systems and coaching program.