By: Furhad Waquad, ABR, CIPS, CRS, GRI, SFR, Real Estate One (Bloomfield, MI)
Today, the V-shaped recovery continues for the housing market. Home sales jumped a record 21% throughout the country in June. The median price rose 3.5% from a year earlier to $295,300 with gains in every region of the country. Mortgage rates have broken the 3% barrier for the first time in the last 50 years. The housing market across the United States surged forward despite the economic headwinds resulting from the Coronavirus pandemic. This, in a nutshell, is where we are today.
The worst pandemic in a century is upon us and it may well determine if this recovery will last or otherwise have a negative impact on the housing industry in the long run. It is therefore prudent to understand the world of distressed properties and short sales. We will explore the crucial role of the buyer’s representative and how they can aid the client through a smooth buying and selling process.
LISTING AGENT’S ROLE
The listing agent will usually be the first point of contact with the distressed seller and will assist them in navigating the short sale. The listing agent must be able to analyze the options available to distressed sellers, including refinancing, lender workout, selling and bringing cash to closing, short sale, deed-in-lieu of foreclosure and foreclosure.
To fulfil their advisory obligation to the seller, a listing agent must not only fully comprehend the various options listed above, but also understand the implications a short sale may have on the seller’s credit and their ability to purchase another home. For example, is a deed-in-lieu which stays on the seller’s credit report for four years a better option than a short sale, or foreclosure which stays on the credit report for seven years? Numerically, one may seem better than the other, but a detailed analysis of the variables will determine the appropriate course to take by the seller.
To be the trusted advisor to the seller, a listing agent must give the best advice as warranted by the situation.
To highlight this, let us look at a scenario: Jim and Nancy own a home that you sold them a few years ago. Jim loses his job and they are able to barely survive on Nancy’s income. They call you in a panic to list the house and negotiate with the investor/servicer on their behalf, as their listing agent. As a trusted real estate professional, should you:
[a] Rush to list the property?
[b] Advise them to stop making their mortgage payments?
[c] Try to broker a deal with their lender to reduce their monthly mortgage payment so that Jim and Nancy can keep the house.
The answer is none of the above.
As a real estate professional and REALTOR®, your role is to serve as a resource for your clients, whether they are selling or buying and to recommend tax, legal and other professionals as needed.
BUYER’S AGENT’S ROLE WITH THE SHORT-SALE AND REO TRANSACTIONS
The buyer’s agent will need to analyze the fundamentals of the REO business, including REO Lifecycle and the existing opportunities for real estate professionals.
Let’s say a buyer you are representing has decided on a short-sale property and is ready to make an offer. Before writing an offer, you should pre-qualify the listing agent, the seller and the short-sale property by asking a few pertinent questions.
- Has the seller’s hardship been verified?
- If yes, by whom?
- Has the seller submitted the necessary short-sale documentation to the servicer/investor? For example, if this is a Fannie Mae short-sale, has the seller submitted the Borrower Response Package?
- Continuing with our Fannie Mae example, has the servicer/investor established the price?
- Has a foreclosure date been scheduled, usually triggered by Notice of Default?
Ensure that the buyer’s lender understands the buyer is intending to purchase a short-sale property. The lender’s familiarity with that process is especially important. Counsel the lender to order an appraisal after the property inspection has proved satisfactory. Lenders who are not familiar with the short-sale process tend to wait until the servicer/investor approval to order an appraisal, which might be too late.
The buyer’s agents also need to educate their clients on the elements of a good offer. Writing an offer on a short sale is unlike writing on a property that is not distressed. The buyer’s representative needs to be aware of what makes a good short-sale offer that has a reasonable chance of being accepted by the seller and approved by the investor. To communicate what constitutes a well-written short sale offer to your buyer client, it must address the following in your buyer counseling:
Price. Your offer must reflect fair market value of similar properties. However, note that the listing price of a short sale may or may not reflect market value. Some are priced extremely aggressively, with the goal of creating a bidding war, which may backfire if the offer accepted by the seller is not accepted by the servicer/investor.
Length of Time for Approval. Each lender has its own protocol for approving short sales. The buyer’s agent will need to allow enough time in the contract to assure both the seller and the seller’s lender that they are not wasting their time with the buyer’s offer.
Earnest Money. This deposit at time of contract indicates to the seller that you are acting in good faith and will attempt to satisfy contingencies within the time frames agreed to in the contract. It also shows the lender that your contract has a reasonable chance of closing.
Home Inspection. Most short sales are sold “as is”. All buyers should complete a home inspection. The purpose of the home inspection is to determine, based upon condition, if the property is acceptable on the terms offered to the seller. Home inspection must be completed as soon as possible. If the inspection report alerts you to defects prior to the seller’s lender receiving the contract, you may be able to renegotiate the terms with the seller based upon the defects.
Mortgage Application. Frequently, seller’s lenders give limited time to close after approval, and if you have not started your mortgage process, you will not be able to meet the required date for closing.
Attorney Modification. If there is an attorney modification clause in the contract, you will want your attorney to look over the contract and make modification within the time frame allotted.
SOME COMMON SHORT SALE OBSTACLES
- Does Not Meet Servicer or Investor Criteria. Many of the loans we are attempting to do a short sale on have been securitized and sold to investors. The securitization agreement the servicer has with the investor often gives specific parameters of how much the investor can discount the loan in a short sale.
- Short-Sale Package Not Submitted Properly: This is one of the most common reasons why short sales fail. If the package is not complete, servicers typically will not call immediately and share with you what is missing. They will simply set aside the package and call later, while others may terminate the file without informing you.
- Junior Lien Holder Says “No”: The listing agent needs to assess the plan for repayment of debt to junior lien holders prior to acceptance of an offer.
This is just the start of everything you need to know about short sales & foreclosures — get certified & become the expert your clients need!
Short Sales & Foreclosure Resource Certification (SFR)
You play an invaluable role in helping homeowners and homebuyers navigate these transactions — and your expertise can help contribute to real
estate recovery.
The SFR certification will give you a framework for understanding how to:
- Direct distressed sellers to finance, tax, and
legal professionals - Qualify sellers for short sales
- Develop a short-sale package
- Negotiate with lenders
- Tap into buyer demand
- Safeguard your commission
- Limit risk
- Protect buyers