short sales presented by kim galvan keller williams realty, waco

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Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

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Page 1: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Short Sales

Presented by Kim Galvan

Keller Williams Realty, Waco

Page 2: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

What is a short sale?

• Homeowner owes more on their property than the property is actually worth

• Bank agrees to accept less than what is owed as payment in full

• Foreclosure process is far more expensive than the discount the bank takes on a Short Sale

Page 3: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Why do banks accept short sales?

• Win-win solution for all parties to the transaction1. Homeowner avoids devastation of foreclosure on

their record

2. Bank avoids time & expense of foreclosure process & holding property on books until it sells

3. Buyer buys property below market value & walks in with immediate equity

4. Realtor receives a commission for negotiating on behalf of client

Page 4: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

What is short sale process?

• Varies depending on loan typeLead

Qualification (via phone)

Listing Appointment

Short Sale Package to Bank

FHA VA/Conventional

Page 5: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

FHA Short Sale Process

Short Sale Package to Bank

Appraisal

Acceptance into program

MLS

Offer

Offer Approval

Closing

Page 6: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

VA/Conventional Short Sale Process

Short Sale Package to Bank

MLS

Offer

Appraisal

Offer Approval

Closing

Page 7: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

FHA vs. VA/Conventional

FHA

Short Sale Package to Bank

Appraisal

Acceptance into program

MLS

Offer

Offer Approval

Closing

VA/Conventional

Short Sale Package to Bank

MLS

Offer

Appraisal

Offer Approval

Closing

Page 8: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Who qualifies for a short sale?

The homeowner…

• is in default with their mortgage lender

AND

• has little to no equity in the property

AND

• has a legitimate hardship

Page 9: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

What is considered “in default”?

• Homeowner is at least 30 days past last day of lender’s grace period for making mortgage payment

Example: Payment due April 1st

Bank extends 15-day grace period

In default 30 days after April 15th

In default beginning May 15th

Page 10: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

What are legitimate hardships?

• Temporary or permanent loss of job

• Significant cut in pay

• Divorce

• Illness or death in family

• Increase in property taxes

• Increase in payment due to ARM resetting

Page 11: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

What documents are required in Short Sale Package?

• Authorization to Release Information Form

• Hardship Letter

• Financial Worksheet

• Copies of Tax Returns (last 2 years)

• Copies of All Bank Statements (last 2 months for all borrowers)

• Copies of Pay Stubs (last 2 pay periods for all borrowers)

• Application for Pre-Foreclosure Sale Program (if FHA)

• Homeownership Counseling Form (if FHA)

• Purchase Offer (if there is one yet)

• Estimated HUD-1 Settlement Statement (if submitting purchase offer)

• Comparable Market Analysis (CMA)

Page 12: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Authorization to Release Information Form

• Gives authorization by homeowner to bank for bank to discuss any details of loan with you, the Realtor

• Without this form, bank is legally prohibited from discussing any details related to mortgage with you or any other third party (i.e. title company)

Page 13: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Hardship Letter

• Sympathetically portrays homeowner’s situation

• Should contain trigger points to get bank’s attention

• Homeowner must be prepared to support whatever is portrayed in hardship letter (i.e.—divorce…divorce decree; loss of job…letter of dismissal; death in family…death certificate or obituary)

Page 14: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Financial Worksheet

• Lists borrowers’ name, date of birth, SS#, phone #s, and address

• Also includes all income (detailed), all expenses (detailed), account balances, and any additional assets

• Used to show that expenses exceed income and assets that could be liquidated to make up missing payments

Page 15: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Listing Agreement

• Must include two specific clauses in Special Provisions

• Must check box to indicate home will not be placed in MLS until after communication has been established with lender

Waiting to put listing in MLS until after short sale is approved will save you an enormous amount of time and frustration!

Page 16: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Copies of Tax Return

• Returns for last 2 years for all borrowers

• If unavailable, bank requires the homeowner to submit a sheet of paper stating that this particular document is unavailable

• If return has not been filed, bank may require copies of all W-2s and 1099s for year(s) return not filed

Page 17: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Copies of Bank Statements

• Statements for last 2 months for all borrowers on loan

• Statements for all bank accounts

• If unavailable, bank requires homeowner to submit a sheet of paper stating that this particular document is unavailable

Page 18: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Copies of Pay Stubs

• Copies of last 2 pay stubs for all jobs worked by all borrowers on the loan

• If homeowner(s) is/are not working and therefore do not have any pay stubs, bank requires that homeowner submit a sheet of paper stating that this particular document is unavailable

Page 19: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

For FHA only…

• Application for Pre-Foreclosure Sale Program (HUD form 90036)

• Homeownership counseling Form (HUD form 90038)

• Homeowner will be required to call a HUD-approved counselor to discuss all Pre-Foreclosure Assistance Programs available

• Phone numbers for HUD-approved counselors on website www.hud.gov

Page 20: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Purchase Offer

• If there is no Offer, go ahead and submit Short Sale Package without the Offer in effort to establish communication with bank

Page 21: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Estimated HUD-1 Statement

• Very important to work with closing officer who is experienced in closing short sales

• First American Title Company, Dora Betts

• Bottom line on Seller’s side of HUD-1 must ALWAYS net to ZERO

Page 22: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Submitting Short Sale Package

• Utilize Short Sale Fax Cover Letter each time

• Only info that will change is info specific to individual transaction (loan #, homeowner(s) name, lender, lender’s fax #)

• Fax it to right person in right department!

• Key to making sure you’re in “short stack” is to have all paperwork completed and completed correctly

Page 23: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

How much will bank take for payoff?

• Appraisal is most critical piece of information!– FHA loans insured at 82% of appraised value;

therefore, bank can discount pay-off amount down to 82% of appraised value

– VA loans guaranteed at 88-91% of appraised value; therefore, bank can discount pay-off amount down to 88-91% of appraised value

– Conventional loans tend to be discounted at anywhere from 85-92% of appraised value

Page 24: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Earnest Money and Option Period

• Recommend no less than $1000 earnest money

• Bank will typically reject offers with less earnest money because they consider them not serious enough to warrant an approval

• Option Period should not exceed 7 days

• The clock is ticking!

Page 25: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Special Provisions

“All parties understand that the subject property is being sold via a short sale with the seller’s lender and that all terms of the purchase offer must be approved by this lender. The contract will not be executed and therefore the Option Period will not begin until approval is received from the seller’s lender. If all terms are approved, the seller’s lender will pay certain closing costs on behalf of the seller, including broker commissions.”

Page 26: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Calculating the MLS list price

• Objective is to list the property at a price that will generate an offer quickly, achieve the bank’s required net for the transaction, and cover all commissions and seller closing costs

• If set too low, first thing to be cut is agent’s commission!

Page 27: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Calculating the MLS list price

Discount Thresholds

Conventional 85-92%

FHA Insured 82%

VA Guaranteed 88-91%

Example: Appraised value = $150,000

FHA loan $150,000 x 82%

Conventional loan $150,000 x 85%

VA loan $150,000 x 88%

Gross-up to include seller closing costs and commissions

Page 28: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Calculating the MLS list price

• Next, add real estate commissions and seller closing costs

Typically 6% for commissions

and 2% for seller closing costs

To gross-up by 8%, divide by the inverse,

which is 92%

Page 29: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Calculating the MLS list price

EXAMPLE

Type of Loan? FHA

Current market Value (appraisal) $150,000

Lender Threshold? 82%

Real Estate Commissions? 6%

Closing Costs? 2%

Calculation

$150,000 x .82 = $123,000 / .92 = $133,696This is lowest offer you would take for lender approval to cover costs

Page 30: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Judgments/Liens/Other Costs

• Add any additional amounts due by homeowner for judgments, liens, delinquent taxes, HOA dues

• If FHA, add an additional $1000 for Seller Incentive

• Add some “negotiation room” or a “buffer” (2-3%)

Page 31: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

EXAMPLE

Type of loan? FHA

Current Market Value? $150,000

Lender Threshold? 82%

Real Estate Commissions? 6%

Closing Costs? 2%

Judgments/Liens? (Mechanics, IRS, Ppty Tax) $4,200

Seller Incentive? $1,000

Buffer? 3%

Page 32: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Deficiency Judgment

• Difference between the mortgage balance and the discounted amount accepted by the bank as a result of the short sale

• Bank can pursue a deficiency judgment against homeowner

• FHA and VA are required to waive the deficiency• As part of negotiations, you should require that

bank waive their right to any future deficiency judgment against homeowner

Page 33: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Tax Ramifications

• IRS considers shortage on net amount received by bank versus principal amount due by homeowner to be “forgiveness of debt”

• IRS deems “forgiveness of debt” to be taxable income

• Banks required to issue Form 1099 for amount of debt forgiveness

• Bank CANNOT issue both Form 1099 and deficiency judgment

Page 34: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

Most Common Set-Backs

• Judgments that have attached to the property

• Clouds on title

• Inexperienced escrow agent

• Disconnected utilities

Page 35: Short Sales Presented by Kim Galvan Keller Williams Realty, Waco

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