You searched and searched for a home. You may have participated in a bidding war and probably negotiated on a home price. You have had the home inspection and now there is one thing standing between you and your new home, closing. Closing is more than just picking up the keys to your new home; it can be a mysterious and confusing time for even experienced home buyers. Closing, or “settlement,” will require a lot of your patience and a fair amount of time so being prepared and armed with as much knowledge as possible beforehand will help reduce stress and make closing easier and more efficient. When closing on a home, set aside as much time as possible so that you do not feel rushed. There are a lot of documents to read and sign, they are very important but sometimes confusing so you will want to ensure you have plenty of time to read carefully, ask any and all questions and have a thorough understanding of your commitment. You will also want to be prepared financially for closing. There are certain fees associated with closing and they vary widely by the area in which you are purchasing. Closing costs are typically anywhere from 2% to 6% ($4,000 to $12,000 on a $200,000 mortgage) which means you will need to set aside additional funds from your down payment. Closing costs are essentially, fees, taxes and other charges from your lender. Some lenders do offer loans that have no closing fees associated with them. While these loans are a valid option for some, buyers should be aware that there are often higher interest rates associate with these types of loans. Buyers should also be aware that costs and fees associated with closing can and should be negotiated prior to closing which is another reason to thoroughly read all the documents at closing and pay attention to your GFE (good faith estimate) from your lender. There may be many people involved in closing such as the home seller, buyers and sellers real estate agents, title company representatives, buyers and sellers attorneys (if they have one), closing agents and lenders representatives. When you prepare financially and inform yourself in advance of closing it will make the process much easier. After signing papers the keys will be turned over to you and you will take ownership of your new home!
On many short sales, there’s a point at which the bank will tell us that the seller is required to come to the table with cash or a promise to sign a note for a certain amount of money.
In a specific example, a home owner has been told that they are on the verge of an approval, but until they either pay $3,500.00 cash or promise to repay $7,000 in cash over 120 months (that’s 10 years,) the approval will not be issued.
The bank will typically represent that the mortgage insurance company who holds a policy on the note is asking Wells Fargo to ensure they get a cash contribution before they’ll pay the claim on the loss from the short sale. They’ll say that it’s their request.
What’s Really Happening
Sometimes the MI company does request cash, but remember, the bank is in the business of getting your money in their pocket, and they’re not beyond using the ruse of a mortgage insurance company request to ensure you pay them so they recover more of their losses. So more than likely, the MI company has has NOTHING to do with the request.
The bank is telling the seller that the mortgage company needs a cash contribution, but the mortgage insurance company never told the bank that they needed it. This is a tactic that negotiators use which I contest is converted to incentives paid to negotiators for bringing in more money for the bank. The bank is still going to file their claim with the mortgage insurer to recover a vast majority of the losses, but the insurer will be none the wiser that they’ve just squeezed the seller for even more.
How I Handle This
I call their bluff.
As a “private investigator” for short sale approvals (that’s basically what we are,) I hunt down the truth. A simple friendly phone call to the mortgage insurance company will easily reveal whether or not the bank or servicer is telling the truth. When we learn that there was never a request, it means we have more information than they’d like, and that’s how one wins negotiations. The person with the most information wins, every time. (It’s also assumed that that person has walk-away power.)
What if they actually did make the request? That’s okay too, because that can also be negotiated away directly with the mortgage insurance company provided the details can be “worked out” as they call it. If the seller has no money, and no room in their budget for a promissory note payment (in our example $7,000 ÷ 120 months = $58.33 per month) then there can be no contribution.
Now, in light of the situation, $58.33 per month is a small price to pay for the mess that we’re cleaning up, but it’s absolutely unnecessary, and likely to be defaulted on. The notes are usually proposed at 0% interest, and $58.33 per month to a behemoth of a bank is less than peanuts. It’s not even peanut dust.
So, if it comes down to blows, and the MI company absolutely won’t budge, then a payment might be wise just to make the problem go away. You can see that we do everything we can to make sure that this is never the case.
(This is the final article of a 5 part series entitled Short Sale Basics)
If the net payoff on a given HUD-1 for the sale of a home does not meet the standards set by the investor as a percentage of the BPO (Broker Price Opinion) then there will be a gap. For example, if the $100,000 offer yields a payment to the lender of $90,000 after all costs are calculated -AND- the lender is willing to accept no less than 88% of the BPO -AND- the BPO is reported to the lender at a value of $110,000 then $90K suddenly becomes 81.8% of the BPO (90 divided by 110.) The bank will not approve the deal unless it’s 88%. This is a general estimate and close to what many banks accept. If 88% is the magic number, then it means we need to bring the bank $96,800. We’re $6,800 short.
Closing the Gap
(Often confused with the concept of counter offers in a short sale, and not always a step in every short sale process.)
There are many ways to close this gap. One way is to continue to negotiate with the bank to prove the buyer’s offer is more realistic than the BPO report claims to be. This is done through a BPO dispute. It doesn’t work every time, and sometimes there’s not enough time before the house goes to auction to achieve this goal. In some cases the market has changed enough from the time the offer was submitted to the time the bank evaluated the BPO that the buyer’s offer no longer stands up.
Another way to close this gap is to have the buyer raise their price. This is a sensitive direction to go considering the buyer may simply walk away if they hear any talk of raising the price.
Yet another way to do this is to adjust the HUD-1, legally, to be as accurate as possible. You see, it’s common to submit a HUD-1 with padded costs to the seller in order to have wiggle room to negotiate once you reach the stage of closing the gap.
Commission reduction is an option, but it’s the last option because we work very hard to obtain approvals for our clients and since the seller is typically not coming out of pocket at all because they’re in the middle of a financial hardship, we aim for a full commission as allowed by the bank once they approve a lower net payoff.
One last option is to have the seller come to the table to close the gap. This is tough to do, but often can save a house from foreclosure. This is more common when we see people strategically defaulting on their homes as they intentionally quit paying their mortgage and begin stockpiling the payments. If this is you, my advice would be to set that money aside and consider it not available to you and to be used solely in aiding the process of short selling. After all, the two major concerns for a seller are whether or not the lender will be able to pursue them for the difference between what the sale pays the bank and what they owe, and whether or not their tax situation will yield a tax liability for the deficiency. The two simple questions are, 1) will I have to pay taxes, and can they sue me? These can only be answered by the corresponding experts in those two fields…a real estate C.P.A. and a real estate attorney.
In Closing, the bank’s perceived market value of your property compared to the net payoff as a result of the sale will determine whether or not money needs to come to the table to get the deal done, and often times the bank is wrong, which is still mind-boggling, as the process of foreclosure will cost them far more than closing the gap.
On the first page of the purchase contract there is a section that defines your purchase price, your “down payment” and your earnest deposit, and/or anything else you wish to stipulate.
Section 1c to be exact, provides for all of these. You first define your purchase price, or the full amount you’re willing to pay for the property. Below that, you include how much money you’re willing to put up as a deposit on the transaction to show the seller that you’re serious about purchasing the property. This amount is released to you at close of escrow for the purpose of fulfilling a portion of the purchase price, plus closing costs.
The third line is often used to define the down-payment. On a contract, I typically don’t write “down-payment.” Instead, something on the lines of, “Additional funds due at close of escrow.”
When you open escrow after the contract is ratified by the seller (assuming all parties agree to all terms of the purchase contract and all parties have signed,) your earnest deposit goes to the escrow company, which you’ve chosen prior to writing the contract. They issue you a receipt, and they hold this money through the escrow period. You receive a receipt, and begin your 10-day inspection period (in most cases.) Short sales are a bit different, depending on how the seller has instructed you.
When it comes time to close, you bring the difference, or the “Additional funds due at close of escrow” to fulfill your promise on the down-payment. Below is an example of Section 1c for a house with a purchase price of $100,000.00, a 3.5% down-payment, and an earnest deposit of 1.5% of the purchase price. Lines 9, 10, and 11 should add up to the purchase price in line 8.
Handling a Short Sale for a client is a very complicated and detailed process, but at its core, there are only a few basic steps involved. The real success of the Short Sale is attributed to the experience level of the agent representing the seller. If they don’t know what they’re doing, it’s likely you won’t have a very smooth transaction. In fact, if they are attempting to short sale your home without experience, then they are doing you a disservice, as its our fiduciary as Realtors to represent your best interests, which cannot happen without proper experience.
Short Sales Process at its Basics
Listing: The first step is to list the property for sale. Traditional marketing does not typically apply to short sale properties because we’re pricing it to sell as quickly as possible. The seller doesn’t make any money, and they don’t approve the sale, so essentially, the seller really isn’t the seller. The bank is ultimately in charge.
Offer: A qualified buyer presents an offer. Just like any other sale of any other property, ensuring the buyer is adequately qualified to actually purchase the home is just as important on a short sale as a normal sale.
Execution: The seller signs the contract. Provided the offer is within reasonable fair market value of the comparable sales in the neighborhood, when the offer is presented, the seller will sign it and it will be considered executed or “accepted,” but not “approved.”
Submit to Lender(s): Along with all of the required documentation, the offer and all associated listing paperwork, addenda, financial statement, etc., is submitted by your Realtor to the lender(s) on the property and the approval process begins.
Receive Letter of Agreement: When the lender approves of the sale, meaning they’re taking what they can get from the deal, they provide a letter of agreement which the seller reviews and approves or disapproves of. If the seller agrees to their terms, the normal closing time line begins.
Due Diligence: It’s now time for the buyer to conduct their inspections and obtain their funding. If everything checks out okay, and the property appraises for at least the contract purchase price, then the buyer moves on to the next step.
Signing: Woo hoo! This is where the buyer signs their final paperwork. Title will then record the property transfer with the county recorder and the new buyer will take ownership of the property.
That’s it. Those are the basic steps of a short sale. From start to finish, this entire process is completely dependent upon how cooperative each party to the transaction is, and no two short sales are the same. This entire process can take a few weeks, to more than 8 months. So, as a buyer or a seller, be prepared to wait.
Who’s next? That’s about all we have on our minds lately. Christmas is only a few weeks away and shopping during the holiday season traditionally makes up 50% of the annual revenue of companies like Best Buy. So what businesses are we losing next? Here’s a list I recently received that was quite shocking. I’d love to know what you have to say about it.
Circuit City is closing who knows how many stores.
Ann Taylor – 177 Stores Nationwide are being closed.
Lane Bryant, Fashion Bug, and Catherine’s to close 150 stores nationwide.
Eddie Bauer is closing 27 stores, and even more after January.
Cache will close all stores
Talbots closing all stores
J.Jill, closing all stores
The Gap – 85 Closing
Footlocker will close 140 stores and more after January
Wickes Furniture, closing.
Levitz is closing remaining stores.
Piercing Pagoda, out of business.
DISNEY!!!! Closing 98 stores.
Home Depot, 15 Closings
Macy’s to shut down 9 stores after January
Linens and Things, out of business.
Movie Galley, closed.
Pacific Sunware, closed.
Pep Boys, 33 stores closing.
Sprint / Nextel, 133 Stores closing.
JC Penney, closing a number of stores.
Ethan Allen, 12 stores closing.
Wilson Leather, all stores closed.
Sharper Image, closing all stores.
K B Toys, closing 356 stores.
Lowe’s and Dillard’s, closing down some locations.
I was shocked to read some of these, and although I haven’t personally verified each one, my source is reputable. What’s amazing to me is the number of chains that are closing that have been around long enough to be considered “just part of the landscape.” These economic times are completely re-shaping the face of our retail environment, opening up opportunities for more prosperous companies to take the place of some of these. It will be interesting to see what happens over the next few years.