Once you've gotten rights to talk to the lender about the mortgager's home loan the fun begins. From here on out you will have minimal dialogue with the homeowner again. The deal is for the most part between you and the financial institution. The items of the "short sale package" and awareness of its function is vital to your success in working out shorts sales. As I spoke about earlier, a short sale offer is a collection of paperwork which is usually made up of up to nineteen (19) pieces including:
1. A Short Sale Proposal Letter (also called an Offer Page)
2. Purchase Sales Agreement
3. Settlement Statement
4. Authorization to Release Information
5. Borrowers Signed Short Sale Payoff
6. Hardship Letter
7. Financial Statement
8. Owner Financial History
9. Payroll Stubs
10. 2 Years' Tax Returns
11. 6 Months' Bank Statements
12. Credit Report
13. Unemployment Benefits
14. Medical Bills
15. Divorce Paperwork
16. Short Sale Purchase Contract
17. Comparables
18. Repair Cost Estimates
19. As-is photos
Let's explore each of these individually.
1. Your short sale proposal letter (also referred to as an "offer page")
The start of your short sale package should have the offer page. The top of the offer page should have your logo/name, address, phone number, and fax number. You may also want to put in your email. Then you put the name of the seller with the property and the property address and phone number.
You should note note any deficiencies in the property in the offer letter. You should paint a grim picture for the lender and summarily list all that will need repairing or replacing. You should also note that most mortgagers will not discount based on cosmetic repairs.
On first mortgages we offer 60 to 65% of the loan balance. Sometimes, we may get more aggressive and offer only 40%, but most of the time we offer 60 to 65%. On second mortgages, we offer them 10 to 15% of the loan balance and do the same for any other junior liens.
2. Purchase and Sales Agreement
On your purchase and sales agreement you must to set your closing date for 60 days away from the date that you are submitting your short sale package. Your numbers should also reflect 60 to 65% of the loan balance. In the agreements or special conditions section of your sales contract, it should state that this is dependent upon the lender accepting less than full payoff.
It is very critical to make sure that any and all homeowners sign your purchase and sales agreement. Now with this being part of the short sales process, this tells the lender that the homeowner is in agreement with selling the property at a discount. Remember, your Purchase and Sales Agreement should not be any different than any other agreement.
Note: Some lenders will not allow a company or entity to purchase the property through a short sale. If that is the case, you may be required to use an individual as the purchaser of the property.
3. Settlement Statement
A HUD-1 is a necessity of the short sale package because the lender wants to know what they are going to net in the end if they go along with your proposal. All you have to do is fill in a few numbers and you're done with it. The final HUD-1 will be done by your title company, not you. The HUD-1 that you complete will always be a preliminary HUD-1.
4. Signed authorization to release information
I mentioned this a while back and just include it here for emphasis. A lender cannot legally talk to you without this permission.
5. Borrowers-signed short sale payoff form
This document is supplied to you by the lender. You must have your client sign this and submit it with the short sale package. On infrequent occasions a bank will only supply this to the borrower after receiving the submission package. If this is the case, help your client fill it out, make sure they sign it, then fax or mail a copy to the lender.
6. Hardship letter
The hardship letter will be created by the homeowner. I suggest that the homeowner handwrite it and it should be one page. Since this is a very emotional time for them, it may be lengthier and that is fine. In this letter, the homeowner needs to tell what has happened. Here are some of the usual reasons that people may be going into foreclosure:
Loss of job
Medical
Divorce
Relocation
Bankruptcy
Death
Arrest, incarceration
Drugs Abuse
Gambling
Overextended themselves
Predatory Lending
Then we want to make sure they include these next items: they attempted to sell their house with no success, and you or your company were the only serious buyer willing to buy the property. Plead with the bank to work with you or your company in this undertaking because the seller is doing everything he or she can to avoid bankruptcy.
7. Owner financial statement
For a short sale package, an owner financial statement can be made very quickly. This statement lists all the owners assets, such as real estate, stocks, bonds, mutual funds, collectibles and bank accounts on one side of the piece of paper. On the other side, liabilities are listed. These liabilities can include such things as the current real estate loan that is in arrears, personal loans, credit card debts, lawsuits, judgments, alimony and IRS liens.
In most pre-foreclosure situations, the owner's liabilities usually exceed their assets. Sometimes the difference can be great. When your liabilities exceed your assets, you have what is known as a negative net worth. In some cases the lender may want all monthly payments included in addition to assets and liabilities. This would consist of car payments, utility bills, credit card payments, medical bills, insurance, child support, food, clothing or anything that the borrower pays monthly.
8. Owner Financial History
Mr. Doe's financial history has been poor. He has been in the financial funks for several years. He had lost his job and his unemployment benefits had run out. He was paying one credit card with another. He was of course behind in his mortgage and contemplating bankruptcy. If you encounter an owner who is in bankruptcy, the short sale plan needs to change; ultimately the bankruptcy court judge is the person who has final say on your short sale.
9. Owner payroll stubs
Include the pay stubs in your short sale package. In a common situation you include your client's pay stubs to verify his monthly income. If your client has not been working, a brief note to this effect should suffice to explain the missing pay stubs.
10. Two years' tax returns
Lenders will almost always require two years' tax returns of the borrower supplementing your short sale package. The rationalization is that the mortgager is attempting to get a full picture of the borrower's financial situation. Is their income going up or going down? Will the homeowner be able to make payments if they reconfigured the loan? Does the homeowner even want to make the loan right?
11. Six months' bank statements
For the same reason the lender wants tax returns, they also want six months of bank statements within the short sale package. Again this is for the purposes of verifying income.
12. The credit report
Your client's credit report will be pulled by the bank and included in the offer. Sometimes homeowners will have a copy of their credit report. A lender will almost always want a current report, and will order one themselves.
13. Unemployment benefits
As a general rule unemployment is a strong motivator for the banks to do short sales. Banks are under political pressure to help the unemployed. But when it can be demonstrated within the short sale package that your client is both broke and is going to be broke for a long time, a short sale becomes a great option for the bank.
14. Medical bills
It's a sad truth of medical problems can be a major cause of people getting behind on their mortgage payments. Medical hardships, particularly unexpected medical hardships, are easy for banks to understand. Banks are typically inclined to help out the medically unfortunate by approving short sales and relieving them of a mortgage burden.
15. Divorce paperwork
As I mentioned earlier, divorce is one of the leading causes for people bailing out of home loans. The expense of maintaining two homes becomes backbreaking, and something has to give. Though both partners in the divorce would certainly love to keep the home, it becomes a financial nightmare to manage all the additional costs. If your client is divorcing or recently divorced, include the divorce decree.
16. A short sale purchase contract, signed by the borrower
This is obvious, but I'll make the point anyway. It's a unique agreement that says the owner of the home is agreeing to sell you the house at a short sale price, and gives you the permission to negotiate with the bank. Just for clarity, remember that since the bank doesn't own the home the bank cannot sell you the home. The homeowner must sell you the home. That requires an agreement.
17. Comparables
After the bank receives the short sale package it will order two Brokers Price Opinions (BPO). The purpose of this is so that the bank can get a realistic and unbiased opinion on the real value of the home today. In today's world it seems as though most of the homes in foreclosure situations are newer. This makes assessing the value of the home much easier, and creates a situation where your estimates will likely lineup with the broker's estimates. Where you get into trouble is on older homes where there may be a wide variance between what you think the value is at the brokers opinion. You can and should offer your own market comparables to make your case of a lower price if you think a broker is going to come in with an unrealistically high number.
18. Repair cost estimates
Any repairs that need to be done on the home should be listed as a separate item encouraging the bank to quickly conclude the short sale. These are good faith estimates of what the bank will need to spend to make the house sellable. If you like, you can include these costs as an expense to the lender on the HUD statement. They may just pick up the cost of these repairs.
19. As-is Photographs
For inclusion with your short sale package, take pictures of the home and the neighborhood, and try to make them as unflattering as possible. You are not trying to downgrade the value of the home or the neighborhood, but you are trying to get the lender aware of the true value of the property. Any money that you will have to spend to get the property into sellable or rentable condition should be factored into the short sale offer.
