How to Give a Short Sale Your Best Shot

Are you one of the millions of underwater homeowners hoping to get your mortgage lender to let you sell your home for less than you owe so you can move on? Real estate attorney Jo Ann Koontz, CPA is helping clients do just that in Florida, one of the states hit hard by the real estate downturn. In this edited excerpt from a recent interview on Talk Credit Radio she offered her best tips for giving a short sale your best shot.

Gerri: What is a short sale?

Jo Ann: A short sale is simply a sale of a property where you know going into it that the sale proceeds will not be sufficient to satisfy all of the outstanding liens against the property, meaning all of the mortgages aren’t going to be paid in full.

Make a Good First Impression

We’ve heard of people who get these amazing deals where the lender pays them to walk away from their home and then other people say they can’t get anywhere when they talk to their lender. Can you give us an idea of some of the ways the lenders are working with consumers in these situations?

What we see most commonly is that the lender is going to want to receive a complete and accurate package, all in one piece. So for example, most lenders will not accept a short sale request or application until the seller has a buyer under contract, fully executed.

They’re going to want 2 years of tax returns, 3 months of bank statements from a primary checking account, 30 days of pay stubs or proof of income. If the person has Social Security, they’re going to want the award letter. All of these documents must be in place all at once and submitted to the lender. It doesn’t guarantee you’re going to get (approved). It just gives them the basic information that they need to start their analysis.

The lender will then go to its own independent resource to research the value of the property. They’re going to order what’s called a “BPO” or a “broker price opinion.” It’s essentially an appraisal performed by a Realtor that the lender hires. It’s not performed by an appraiser but they get the value of the property from that report. It could be right, it could be wrong.

If that report comes back and the value of the property is said to be much higher than it really is, then we need to engage in a value dispute and say “No, lender, here’s why you think this property is worth more than it really is. You have failed to take something into consideration — location, view, something.”

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Live with Uncertainty

It’s confusing. You’re going to put your house on the market for less than what you owe and you don’t know what the lender will go for?

You have no idea. The best way to combat that is (sellers should) contact a real estate professional knowledgeable in short sales who can provide them with an analysis of their property and make a suggestion. For example: “Mr. Seller, I think your house is worth somewhere between $180,000 and $220,000 and maybe we list just right in the center.”

The bank is going to expect that the buyer of the property receive a discount off of the fair market value but they’re not going to give the property away. They’ve got a lien that they could enforce through a foreclosure. They’re going to want to recover more than those proceeds in a short sale.

There’s got to be something in it for the bank. They don’t have emotion, they’re just in it for business. So if the numbers make sense, they’re very likely to approve the short sale.

[Related Article: Underwater On Your Home Option 4: Short Sale]

It’s All Relative

What kind of hardship do you have to demonstrate to a lender to convince them they should let you do a short sale?

Well hardship absolutely runs the full gamut. Sometimes folks come in and they say, “I’m not certain I can get approved for a short sale. A hardship could be the obvious ones — death, disability, divorce. The lender is looking for an involuntary change in your circumstances, and those are homeruns.

But certainly there’s (other types of) hardship. One would be maybe reduced income. Maybe you didn’t get a raise you thought you were going to get. Or “Hey, I thought I’d get this bonus, (or) I thought I’d get this raise or promotion and it didn’t materialize.” It doesn’t just have to be “I’m making less than I used to.” That sometimes takes people by surprise.

Other things can simply just be increased expenses. Maybe your income hasn’t gone down but trying to purchase health insurance, homeowner’s insurance, real estate taxes, even just the cost of gas, everything has gone up over several years. You’re comparing your financial circumstances now to the time that you took the loan.

So it doesn’t necessarily mean you are poor or you can’t afford your school expenses or other required household expenses. All it has to be is a demonstration that this mortgage payment is causing a burden on your overall household income.

You’re Just One of Many

And I think some people expect they will have to provide a detailed budget with every line item scrutinized by the lender. Do they go into that much detail?

Here’s the thing, we’re dealing with such a volume that there’s essentially a “McDonald’s theory” going on where most of the lenders are just cranking them in and cranking them out. It’s very uncommon that they dive too far down in terms of detail. They’re not forensic accountants that work for the bank. The banks had to ramp up these lost mitigations departments and get these folks trained very quickly.

What Works Today Can Change Tomorrow

It’s been a lot of trial by fire, which is part of the reason that you see so much misconception out there when people talk about how a friend or neighbor did a short sale and people will say, “Oh, Bank of America was awful and Wells Fargo was fantastic.” These things are very fluid and very dynamic and they change all the time. What happened a month ago, or 3 months ago, or a year ago is not necessarily what’s going on now.

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How to Give A Short Sale Your Best Shot (cont.) »

Image: Kevin Shorter, via Flickr

It Takes Time

So when a client comes to you, what do you prepare them for in terms of time frame?

I would say somewhere between 3 and 6 months is normal. I’ve seen longer, I’ve seen much shorter. When you see substantially shorter time frames, a couple of things tend to be involved. Normally there’s what is called a “fast track” program, a seller incentive program, a relocation program, or something like that. So those are the loans that we see where folks are getting a check at closing, and a “thank you for doing a short sale, here’s your $5,000, $10,000, $20,000,” whatever it is.

Those are typically loans they want to get rid of. For example, we’ve seen a big push on that with Wells Fargo and Chase and Bank of America. They’ve all three acquired other (lenders), and those (loans are) harming their balance sheets, it’s impacting their stock prices which is why they want to get rid of them. In those cases, they do move a little bit more quickly. I’ve seen some fast track programs will guarantee approval within 7 days, some say thirty.

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Practice Patience

So you’re counseling patience right?

I always tell people, it’s a lot of work, we’ll be happy to pull the wagon for you but you’ve got to be patient, you’ve got to understand it’s a little bit like standing in a line in Disneyworld. It’s hot, you’re tired and you’re thirsty, and nobody wants more on the ride than you do but that doesn’t mean that the line goes faster.

And that’s really the most difficult thing for folks to keep in mind is this is going to be slow. Everybody says in the beginning that they understand that, that they’re going to be patient and everybody has a tendency to get antsy throughout the process. But, no one is being singled out, the bank is not working on your file on purpose. You just have to keep in mind the human factor that the person you’re working with literally has hundreds of files on their desk.

I’ve heard you mention that the thousands of applications for short sales and modifications that banks are getting, literally tens of thousands a month.

Yes, absolutely, and some tens of thousands a week. So they’re doing the best they can. They don’t have any disincentive to not help you. Many of the negotiators are being paid on a per file basis so they do have motivation to get this file out of their office. But you have to keep in mind how many things they’re trying to do, which is why I really encourage a nicely organized package. There’s nothing different than the good old third grade example; if your handwriting’s good on your paper, you might get a better grade.

[Related Article: Credit Score Recovery Time from Foreclosures and Short Sales]

Get Help Before You Need It

As a real estate attorney, you help clients with short sales. What point do you come into this process?

Certainly I always think it’s always a good idea to get me involved sooner or later. There’s so much planning we can do ahead of time that can maybe reduce tax implications of a short sale, maybe reduce a potential for a deficiency judgment, or for a seller contribution fund that the seller might have to provide at closing. There’s a number of things that we can do if we simply have adequate time.

I’ve been called in to help on a short sale after the person has already listed the property and has an offer from the buyer but there’s just less planning that we can do. We could be of more value by the time the person has the contract. We could negotiate with the bank and make sure that all of the most valuable information is presented in the most beneficial way.

Learn More (Podcast): Listen to a 30-minute interview with attorney Jo Ann Koontz, CPA on Talk Credit Radio where she explains in more depth how short sales work, including what to do if you have a second mortgage and how to avoid a big tax bill. Download the interview here (right click and choose “save as”); listen online; or listen on iTunes.

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