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As any agent who has dealt with short sales will tell you, it takes excellent negotiation skills for the short sale to be approved.Listed below are some of the more common negotiating challenges faced by agents in their dealings with lenders and the top reasons lenders reject short sale offer.
Negotiating Challenges
Banks do not return phone calls.Banks only call when it’s convenient for the bank to call.
If a foreclosure is imminent, the listing agent can request that the file be escalated and sent to a negotiator immediately, however, the bank does not have to comply with this request.
Incomplete short sale packages will end up at the bottom of the lenders short sale request pile.
The bank will often assign a new negotiator mid stream through the short sale approval process. Get the name, phone number and email address of each negotiator assigned to the case.
Finding out who actually owns the homeowner’s mortgage loan.
The loss mitigator that is assigned to the case should know.This is important because whether you’re dealing with Fannie Mae, Freddie Mac, FHA, or VA loans, they all have a predetermined percentage of the property value that they will accept in a short sale. Knowing this ahead of time will make negotiations much easier.
Some banks will not let you know what the BPO is
The listing agent can ask but the lender is not obligated to provide that information.If you do find out, count on paying approximately 85 - 90% of that number for the purchase price. Fannie Mae and Freddie Mac came out with their own versions of the HAFA program and implemented them on June 23, 2010. One problem with their version is the loan servicer is prohibited from telling the seller, buyer and Realtor what the Minimum Acceptable Net Proceeds amount is.As a result, it’s a guessing game so when submitting a contract, all a buyer can do is hope the offer meets the Minimum Acceptable Net Proceeds (MANP). In general, short sales have a better offer of being accepted if the offer is for at least 85% of the BPO value.
Conflicting views on Broker Price Opinion (BPO)
If the lender thinks they can get more money for the home by reselling it after a foreclosure than by approving a short sale, the agent should send in recent comparable sales to illustrate to the bank that the short sale offer price is fair based on current market value.If you think the BPO is too high, insist on getting an interior BPO. Do your homework and gather all factual evidence that supports a low BPO. Meet and accompany the BPO agent to the property and provide him or her your evidence.
Issues with or on the HUD-1
The HUD-1 is the main negotiation document as far as the numbers are concerned. If the lender finds something odd on it, they will not process the file. Make sure the listing agent has ALL fees and charges that are paid by the seller included on the HUD-1, and entered in the correct spaces. The amount due seller has to be $0.00. If the buyer is an investor or cash buyer, don’t expect to get any buyer’s closing costs approved. (Note: On a cash transaction the seller and seller’s lender have no right to see the buyer’s side of the transaction.) Double check the HUD-1 when you get it from your escrow or title company and before you submit it to the lender!!!
Back Property Taxes
Property taxes will stay with the property even in a foreclosure. That’s why paying past due and prorated property taxes from the proceeds of the sale is never a disputed issue. However, it’s very important that you let your title company determine any taxes beforehand, and enter them on the HUD-1 that you submit with the short sale package. Once a payoff amount has been approved it can be difficult to take anything away from that.
Sellers Contribution.
Recently some lenders have been demanding that the seller put actual cash into the transaction to close the deal.This issue may be triggered by lack of evidence that there is an actual hardship. If the credit report shows that the seller is current on everything but this loan, this could be an indicator.Under the new HAFA guidelines, sellers can not be required to make a contribution.
Trying to Control Resale.
Lenders have recently tried to enter clauses into the short sale approvals that essentially control the title of the property beyond the closing of the short sale transaction. These clauses are attempting to prohibit the buyer from reselling (ie ‘flipping’) the property within a certain time frame. Under the new HAFA guidelines, those who purchase a short sale can not resell it within 90 days of the purchase.
Earnest money deposit is too low.If the earnest money is too low, the lender may ask the buyer to submit more as a low earnest money deposit usually means the buyer is not as committed to seeing the transaction through as they are normally ok with losing this small amount of money if they walk away from the deal.
Wanting to Do the Home Inspection After the Lenders Approval
Lenders do not want to accept offers with contingencies that allow the home inspection to occur after the short sale is approved because these contingencies often include maximum dollar amounts allowed for repairs as the result of the inspection.If the contingency states that if the max dollar amount for estimated repairs is reached, then the potential buyer can get out of the contract and get their earnest money back, then a lender may want to negotiate this point before approving the sale.Why?Because it often takes a lender months to approve the short sale and a seller doesn’t want the buyer backing out after all these months waiting because if he does, the seller might be forced into foreclosure.
Low Interest Rate
Most short sale transactions do not close in the typical time span of 30-60 days.The buyers interest rate lock-in may expire during that time.If there is a low interest rate in the contract and the interest rate goes up and never comes back down to what the contract stipulates, the buyer may be able to walk away from the offer with no recourse by the seller.
Why Banks Reject Short Sales
Banks demand a plethora of documentation before approving a short sale. Contrary to popular belief, sellers do not need to be behind on making mortgage payments for a short sale to occur. Here are reasons that banks turn down short sale requests:
Short Sale Offer Price is Too Low
Banks will request an appraisal, sometimes several appraisals, and may also order a BPO. When the listing agent submits the short sale offer, the agent should also include a comparative market analysis that justifies the price in the short sale offer. If the bank believes it can make more money by taking the property through foreclosure proceedings, the bank will reject the offer.
The Short Sale Package is Missing or Incomplete
After the listing agent submit a complete short sale package to the lender, confirm that it was received and assigned to one of the loss mitigators and find out who that is.In some cases, it doesn't matter how many times the package is expressed overnight or faxed, the bank might misplace it.They are overwhelmed with foreclosure paperwork, so a call or two may help your package avoid getting lost in the shuffle.Worse, an important document might not be in the file, and without every single required document, the sale will not be granted.
Remember:a buyer’s agent can NOT call the lender to find out if the package has been received – only the listing agent can do this.
The Seller Does Not Qualify
The bank may not believe that the home owner has a justifiable hardship and deny the short sale.Listing agents need to supply as much documentation as they possibly can to prove the hardship.
If the current homeowner is asking for debt forgiveness so the lender doesn’t impose a deficiency judgment later, the bank will want to see a hardship letter from the seller that explains why the seller cannot afford to pay back the shortfall difference. Sellers who have taxable assets are at a disadvantage if the sellers are unwilling to work out a repayment plan with the bank.Prepare a hardship letter, profit and loss statement and monthly budget that show the seller has little or no assets and no disposable income.
Note:Under the new HAFA guidelines, lenders that participate in HAFA waive their right to a deficiency judgment.
The Buyer Does Not Qualify
A desire to buy a home and the financial means to afford a mortgage payment does not mean a buyer qualifies to buy a home. A buyer's lender will examine credit history, length of time on the job, debt ratios, and a host of other criteria to determine a borrower's qualifications. To gain credibility with the seller's bank, buyers need to submit a loan prequalification letter along with the offer, but a loan preapproval letter carries more weight.
The Bank Sold the Loan
Sometimes, the bank won't realize it no longer holds the mortgage on the property until many months have passed by during short sale negotiations. If the bank has sold the mortgage to another lender, the bank has no authority to approve a short sale because it has released the asset. Although the seller may continue to receive statements from the bank, the bank might be servicing the loan but not own it.
The Seller Has More than One Lien Holder and the Junior Lien Holders will Not Approve the Sale
If the seller has more than one lien holder (ie their primary mortgage lender and a different lender who holds either a second mortgage, home equity loan/HELOC,it is a lot more difficult to get the short sale approved as the short sale package must be submitted to ALL lien holders and ALL lien holders must approve the short sale in order for the property to be sold.
The primary mortgage lender will always be in ‘first position’ meaning first in the right to collect from short sale proceedings.The second lender will always be in second position, unless the first is willing to subordinate their position which is unlikely to happen.
In most instances, the first negotiation by the listing agent is to offer the second lender a small amount, say $1,000. This is a very small amount compared to what is usually owed, however, if the second lender refuses and does not approve the short sale, it may ultimately get nothing as if the home goes to foreclosure, only the primary mortgage lender gets anything as all junior liens are wiped out.
At times like these, it seems the junior lender is simply cutting off their nose to spite their face and it makes no sense at all, however, many of them do it. But this is where the first lender can give up a little more to make the deal work.As most lenders in first position are happy to receive at least 90%, see if the agent representing you can negotiate to make sure a reasonable sum is offered to the second lien holder.
Note: Under the new HAFA guidelines, secondary lien holders are being given financial incentives to approve the short sale, therefore, we may see a new wave of approvals in the near future.
What is an SFR?
The complex details involved with short sales and foreclosures are unique calls for specialized expertise.Contact an agent such as myself that has earned the Short Sale and Foreclosure Resource (SFR) Certification through the National Association of Realtors and who is committed to guiding you through the process, setting realistic expectations, and streamlining your path to homeownership. Call me anytime at (910) 787-2160 to set up a free, personal consultation.
If you are considering buying a short sale or foreclosure, there could be drawbacks that I, as a real estate agent, cannot advise you on.For your protection, I suggest that all borrowers:
Obtain legal advice from a competent real estate lawyer to discuss title issues, changes to land use, sellers right to redemption and a host of other issues.
Call an accountant or CPA to discuss short sale and foreclosure tax ramifications
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