Short Sales
“The Long and Short of It”
Kathy Mehringer CRB, SFR
Broker Associate
Director of Risk Management
Acquisitions / Short Sale Advisor
Coldwell Banker Residential Brokerage
Short Sales
The Big Picture
or
“the little shop of horrors”
But first
………….. a word on the Home Affordable
Foreclosure Alternatives Program
Key Acronyms
•
•
•
•
•
•
•
•
•
Making Home Affordable Program (“MHA”)
Home Affordable Modification Program (“HAMP”)
Home Affordable Refinance Program (“HARP”)
Home Affordable Foreclosure Alternatives (“HAFA”)
Government Sponsored Enterprises (“GSE”)
i.e., Fannie Mae & Freddie Mac
Short Sale Agreement (“SSA”)
Request for Approval of Short Sale (“RASS”)
Minimum Acceptable Net Proceeds (“MANP”)
Deed in Lieu of Foreclosure (“DIL”)
MHA, HAMP & HAFA
•
MHA is a government backed plan designed to help stabilize the housing
market and assist homeowners who are struggling to keep their homes.
•
HAMP is part of MHA and is designed to help homeowners who meet
specific criteria modify their mortgage loans to avoid foreclosure.
•
HAFA, also part of MHA, is a new Short Sales program established by the
U.S. Treasury Department to streamline and simplify the Short Sale process
and provide financial incentives to mortgage servicers, lenders/investors
and eligible borrowers who were unable to qualify or keep their homes
through HAMP.
HAFA also includes a Deed in Lieu (DIL) program whereby the borrow may
be able to convey the property (i.e., the deed) back to the Servicer “in lieu
of” foreclosure.
HAFA Program Variations
Currently there are 3 variations of HAFA
Treasury (Non-GSE) www.makinghomeaffordable.gov
Eligibility/Servicing requirements in the Treasury Department’s Supplemental Directive
09-09 (Revised).
Fannie Mae (GSE)
www.eFannieMae.com
Eligibility/Servicing requirements in Fannie Mae Servicing Guide Announcement SVC2010-07. Mandatory as of August 1, 2010.
Freddie Mac (GSE)
www.FreddieMac.com/singlefamily/service/hafa.html
Eligibility/Servicing requirements in Freddie Mac Single-Family Seller / Servicer (Guide)
Bulletin 2010-12 & Guide Chapter D65. Mandatory as of August 1, 2010.
Fannie and Freddie requirements are consistent with Non-GSE requirements with a few
important differences (noted where applicable). While you are welcome to review any of
the above for informational purposes, this training will cover what you need to know.
Note: HAFA does not apply to FHA and VA loans.
Overview of HAFA Eligibility
Requirements
The requirements listed below are Non-GSE (Fannie and Freddie differences
noted where applicable):
•
•
•
Property must be borrower’s primary residence (limited exceptions).
Loan must have been originated before January 1, 2009.
The mortgage must be delinquent or default must be reasonably
foreseeable.
Fannie: default or imminent risk of default (must be non-strategic default).
Freddie: must be more than 60 days delinquent and must have cash
reserves less than the greater of $5,000 or 3 x the monthly mortgage
payment).
• The current unpaid principal balance may not exceed $729,750 (higher
limits for 2-to 4 unit dwellings).
• Borrower’s total monthly payment (inc. PITI) must exceed 31% of
Borrower’s gross income.
Note: Servicers may have additional requirements that are consistent with
investor guidelines.
Important Timeframes
•
•
•
Servicers must consider eligible borrowers for HAFA within 30 days of the
borrower doing at least one of the following:
– Does not qualify for HAMP (loan modification)
– Qualifies for HAMP but does not complete the HAMP Trial Period Plan
– Misses two consecutive payments during the HAMP Trial Period Plan
– Requests a short sale
If Servicer has not yet discussed a short sale or DIL with Borrower:
– Servicer must provide borrower with written notice of these options
– Borrower has 14 calendar days to contact the Servicer (orally or in writing)
to request HAFA consideration
– Borrower’s failure to timely respond ends Servicer’s duty to consider
Borrower for HAFA
If Borrower appears to be HAFA eligible:
– Servicer sends SSA which must be signed by Borrower and Listing Broker
and returned to Servicer within 14 calendar days
Note: The Non-GSE and Fannie Mae SSA’s are very similar but there are
minor differences and they are organized differently. Fannie Mae’s SSA is
identified in the footer as Form 184.
HAFA
Improving the Short Sale Process
•
•
•
•
Standardized process, documents and timeframes/deadlines
Uses financial and hardship information already collected by Servicer during HAMP
review
Allows for pre-approved short sale terms prior to listing (including minimum net and
costs):
– Fannie Mae: the MANP cannot be disclosed to the listing broker, Seller, or Buyer
– Non-GSE: the MANP may be disclosed at servicer’s discretion
Seller must receive full release from liability for first lien:
– Cannot require cash contribution or Note and must waive deficiency
– Junior liens must agree to accept short payoff and fully release seller from liability
•
•
Senior does not negotiate on behalf of borrower
– May not require contributions from brokers or seller as a condition
Provides financial incentives:
– $3,000 for borrower relocation assistance
– $1,500 for Servicers to cover administrative costs ($2,200 for Fannie and Freddie)
– $Up to a $2,000 match for 1st Mortgage holders if they allow for a total of up to $6,000
to be distributed to subordinate lien holders. 6% cap per lien, in order of priority.
HAFA Homeowner Guidelines
The homeowner:
• Cannot list the property with, or sell to, anyone to whom they are
related or with whom they have a close personal or business
relationship.
• Cannot receive any funds or commissions (even if a real estate
licensee).
• Cannot have an agreement with the buyer to repurchase or rent the
property.
• Must waive any reimbursement of:
– Remaining escrow pad
– Buy down funds, if any
– Prepaid items
• If applicable, is required to assign any insurance proceeds and/or
refunds to the lender/servicer.
• May be required to make partial mortgage payments until closing to
remain HAFA eligible.
HAFA Timelines for Offers
• Within 3 business days of receipt of an executed offer Seller
must:
 Completed RASS (signed by Seller) Seller must fill in all blanks on
Terms of Sale page
 RASS must include (i) copy of sales contract and all addenda; and
(ii) Buyer documentation of funds and/or pre-approval/commitment
letter
• Within 10 business days after Servicer receives RASS and
required attachments Servicer must send:
 Written Approval of Short Sale; OR
 Written Disapproval of Short Sale and provide reasons for
disapproval
• Servicer may require reasonable closing date following
approval of RASS:
• Not sooner than 45 days from the date of the sales contract
unless borrower agrees
HAFA Required Provisions
All HAFA property listings must include:
HAFA Addendum to Short Sale Listing Agreement:
o Seller may cancel listing without notice and without paying
commission if property conveyed to mortgage insurer or mortgage
holder.
o Sale of Property is contingent on written agreement to all sale terms
by the mortgage holder(s) and the mortgage insurer (if applicable).
All offers on HAFA properties must include:
HAFA Addendum to Sales Contract:
o Seller and Buyer represent that the transaction is “arm’s length” and
that they are not related by marriage, family, or business
relationship.
o Buyer agrees not to sell Property within 90 days of closing.
Servicer Termination
Lender/Servicer reserves the right to terminate the SSA prior to expiration for
any of the following reasons:
•
Homeowners:
– Financial situation improves
– Modification qualification
– Becomes current on mortgage
– Mortgage paid in full
– SSA monthly payments not made
•
•
•
•
•
Significant change in property condition or value
Evidence of fraud or misrepresentation
Bankruptcy is filed or bankruptcy court declines SSA approval
Litigation that could affect or interfere with the title or valid conveyance
Listing agent or homeowner fails to abide by the terms of the SSA including:
– Listing
– Marketing
– Closing the sale
Subordinate Liens
•
On any short sale, subordinate (i.e., junior) lien holders are not obligated to
accept a short payoff and they therefore generally have the ability to prevent
a short sale from being approved by the 1st mortgage holder.
– Because they refuse to accept minimal contributions from senior lien holder
•
•
Really? As a practical matter, junior lien holders will negotiate because the
likely alternative is that the 1st mortgage holder will foreclose and the junior
liens will get nothing. (recourse vs. non-recourse varies by state)
In a typical (non-HAFA) short sale, lenders will allow nominal payments to
junior lien holders in full satisfaction of their lien. This does not mean the
debt is forgiven. The subordinate lien holder does not have to agree
– Reservation of rights is common in non-HAFA short sales
•
HAFA provides financial incentives to Servicers (up to $2,000) to allow
greater payoffs to junior lien holders (i.e., maximum payoff of 6% of the
unpaid principal balance of each lien, up to a total of $6,000 combined for
all junior liens).
– Full forgiveness of debt is a requirement in order to receive the incentive
– How is that working for you?
Key HAFA Prohibitions
• Rebates from Realtors®
o HAFA prohibits rebates to buyer or seller (Seller certifies under
penalty of perjury in RASS that neither Buyer or Seller are
receiving any funds/commissions from sale of property).
• Arm’s-length Transaction
o Seller can not list or sell to any relative or to any person with
whom the Seller has a close personal or business relationship .
• Anti-fraud provision
• Avoids risk of seller profiting
• Payments to Subordinate Lien holders
o Up to 6% of the unpaid principal balance of each subordinate lien
(not to exceed $6,000 in total for all subordinate liens)
o It is a “hard cap” regardless of who pays the money
A Short Sale Refresher!
What Is A Short Sale?
“A TRANSACTION WHERE NOTHING
IS CERTAIN BUT FOR THE
UNCERTAINTY”
Realtor® Rewards
• Assist homeowners in need
• Bring the benefit of homeownership to
qualified buyers
• Participate in the economic recovery
• Build a specialized book of business
• Develop and/or enhance your unique set of
skills
– The ability to “Negotiate” is the key
16
If you only remember 3 things
Negotiation 101
“Don’t Give Up”
The Trust Factor
“Who’s Your Daddy?”
Lose the Low Level Clerk
Mentality “Honey and Vinegar”
“The Short Payoff”
Lien holder(s) agrees to accept a payoff that is less
than borrower’s debt:
 With an agreement to absorb other costs of sale
Seller expectations and considerations:
 Release of lien OR a full discharge/forgiveness of debt
 Possible State and Federal tax liability
 Negative credit consequences
 Potential financial contribution in the form of a note OR
cash at close
Lender may elect to cooperate:
 To save expense and time of foreclosure
 Hedge against declining value
 Purely a business decision / algorithm
18
“The Short Payoff”
•
Protocol may vary:
– Treatment of subsequent offers by lien holder or servicer
– Are they to be submitted
• Who decides – the Seller or the lien holder
• Equator system can (or will soon) support upload of more than one
offer
• Bank of America / GMAC / Wells Fargo
– The process, procedures and requirements
• Breaking news on trustee sale postponements
• Some lenders and investors now only allow one time postponement if:
– Short sale in process, all approvals in, borrower proof of funds
– Extension for close of escrow dates
•
Documentation required from borrower:
– Request lien holder specific Short Sale package
– Provide lien all lien holders and Mortgage Insurer with all required
information when the offer is submitted
– Complete and professional “packaging” circumvents delays
Short Sale Myth and Reality
The Myth: Release of lien and forgiveness of debt are the same thing.
The Reality: This is not the case. Merely releasing the lien does not
mean the debt is forgiven or discharged. This is a point of negotiation.
A lien holder’s term sheet/notice agreement must specifically state the
debt is forgiven or discharged.
The Myth: Our state is an anti-deficiency state so: “No worries for
Homeowners with purchase money loans.”
The Reality: A real estate agent cannot opine on this subject. A short
sale is not a the same as a foreclosure. All guidance on this point must
come from the homeowner’s legal advisor.
The Myth: A lien holder “reservation of rights” is illegal.
The Reality: This is not an assurance a Realtor® can or
should give. Litigation or legislation will decide the issue.
Short Sale Myth and Reality
The Myth: Repayment plans, such as promissory notes, are
unenforceable.
The Reality: Often the lien holder requires a promissory or
personal note for the deficiency. Prior to signing the note the
homeowner should seek the advice of legal counsel.
The Myth: Taxpayers no longer need be concerned with tax
consequences after a forgiveness or discharge of debt.
The Reality: There are certain exemptions under the
Mortgage Debt Relief and Economic Stabilization Act it, with
conditions, and only certain taxpayers qualify.
• Only Federal taxes (“IRS”) are considered in the bill
• State tax is another matter
• Capital gains tax is not considered in the bill
Short Sale Myth and Reality
The Myth: Homeowners can be forced to liquidate assets such 401k,
IRA or CD.
The Reality: This is not the case lien holder can ask/require assets to
be liquidated as a condition of approval however, homeowner can
decline. Refer to financial, tax and legal advisors, in writing.
The Myth: The lender term sheet and the HUD-1 do not have to
match and can include different terms and payment assignments.
The Reality: The lien holder term sheet/agreement notice and the
HUD-1 should be identical. If the HUD-1 is modified to include
additional payouts (i.e. contributions to junior lien holder) that are not
included in the term sheet/agreement notice, written consent
of the senior lien holder is required.
Short Sale Myth and Reality
The Myth: As long as the lien holder verbally allows outside of escrow
payments its okay to do it.
The Reality: No it’s not. Even if “everybody else is doing it.”
Myth: Short Sale Fraud is currently “far under the Radar” of local, state,
and federal authorities.
The Reality: Many law enforcement agencies, including the FBI,
have ranked short sale fraud as a high priority.
Myth: Short Sale Fraud is not a concern of lien holders and servicers.
The Reality: Major lenders along with Fannie Mae and Freddie Mac
are actively reviewing open and closed files suspected of “fraudulent
activity.”
Cast of Characters
• Borrower / Seller
– Title holder(s) OR parties on the note(s)
• Evaluates options
• Elects a short sale
• Retains full authority to accept, counter or reject offers
• Seeks tax, financial and legal counsel sooner vs. later
– Reduces fall out ratio
– Addresses concerns early on
• Role of real estate licensee (listing side)
– Qualify listing; evaluate lien(s) vs. value
– Qualify seller objective and motivation
– Assess cooperation
24
Cast of Characters
– Preliminary title report at time of listing as warranted
– Ask questions regarding other liens such as mechanics liens, judgment
liens, prepayment penalties, delinquent property taxes, Homeowner’s
Association delinquency or liens and federal or state tax liens
• Use Intake Sheet
– Seller objectives:
• Retain interest in the property or liquidate
• Forgiveness of debt or lien release
• Funds to move
– Packaging
• Coldwell Banker Residential Brokerage proprietary package
– Includes Short Sale Addendum to Listing Agreement
– Refers to legal and tax advisors (confirming letters)
– Does not offer legal financial or tax advice
Cast of Characters
– Disclose short sale status in MLS subject to local or regional MLS
rules
– Incorporate Short Sale Addendum to contract to achieve
understanding of the process and establish condition(s) of approval /
terms of contingency
– Provide homeowner with and retain signed copies of informational
materials at the onset
• Buyer
– With full knowledge of property status
– Opts to purchase a property that is over encumbered
– Made to understand the process, is prepared for
delays and difficulties
• Fall out ratio due to Buyer losing interest
Cast of Characters
• Role of real estate licensee (Buyer side)
– Due diligence
• Evaluate liens vs. value
– Contacts listing agent to acquire additional information:
• Other offers pending
• Back up contracts
• Prior experience with lien holder(s)
• Plan
• Package
• Offers assistance www.realestateriskmgt.blogspot.com
– Counsels Buyer on process
• Fall out ratio due to Seller remorse
• Provides information on “proper practices”
– Includes Short Sale Addendum with Offer
“The Short Sale”
Why does it take so long?
Lien holder has inadequate staff to handle and
review requests
• Expanded research required to insure arm’s
length status of Buyer
• Fraud Prevention
– Lien holder expects a complete package at the
onset
– Incomplete packages result in delays at best and
may lead to termination of negotiations
• Estimated HUD 1
• Borrower Hardship Explanation
28
Keeping the Buyer in the
Game
“Reality isn’t the way you wish things to be,
nor the way they appear to be, but the they
way they actually are.”
Robert J. Ringer
Manage Expectations
Nobody likes surprises!
Many Short Sales break down because…………
Buyer Risk / Reward Analysis
• Buyer Reward
– Benefit of homeownership at a fair price
– One less foreclosure preserves value in community
• Buyer Risks
– Transaction may not be approved / costs may be incurred
• Based on terms of Purchase Contract and/or Short Sale
Addendum
• Buyer may not have the right to cancel until deadline for
lender approval
• Specific date for lien holder /servicer written approval
• When do time periods for Buyer due diligence and
contractual actions commence?
Buyer Risk / Reward Analysis
– Value may decline
– Missed opportunities
– Treatment of other offers by Seller
• May be negotiated by creating contractual agreement
• Seller may accept other offers / back up position
– Good faith deposit
• Limit amount if possible / small claims jurisdiction
– Buyer may be asked (but cannot be required) to absorb
some costs of sale
• Junior lien holder OR Mortgage Insurance OR HOA
delinquencies / liens
• Title and escrow OR repairs
– Best practice is to prepare Buyer for process
Working with the Seller
“Knowing how to make stepping stones
out of stumbling blocks is the secret of
success.”
Orison Swett Marden
“Know Your Client”
Manage Expectations
Remember, nobody likes surprises!
“Seller remorse is most likely when………”
Borrower Options Other than Short Sale
• Loan Work Out or Modification
– Modify terms (i) forgive debt (ii) lower interest rate (iii) reamortize (iv) refinance www.fha.com
– HAMP or GSE version
• www.makinghomeaffordable.com
• Deed in Lieu of foreclosure and Lease in Lieu of foreclosure
– After default borrower voluntarily delivers and lien holder
agrees to accept deed
– Borrower can deliver deed and remain as a tenant (Fannie
Mae)
• Short Sale
– Sale proceeds, subject to lien holder consent, are less than
borrowers debt typically with some level of hardship
Borrower Options
• Bankruptcy
• The court cannot compel lender to take
less than amount owed
• Foreclosure delayed due to “automatic stay
in bankruptcy”. Lender can seek to have
the stay lifted by the court.
• Foreclosure
• Trustee Sale
• Judicial
Seller Risk / Reward Analysis
Seller Reward
– A more dignified alternative
– Avoid stigma of foreclosure and/or bankruptcy
– Preserve community values
– Fannie Mae guidelines recently altered
• As little as 3 year limit for re-establishing credit
– 20% down
– Non-strategic default (i.e., stopping payments due
to inability to make them)
– FHA may loan immediately if borrower current last 12
months and if short sale is non-strategic
Seller Risk / Reward Analysis
Seller Risks: Tax – Credit – Deficiency Consequences
– Forgiveness / cancellation of debt typically taxed as ordinary
income (see exemptions to follow)
– Ongoing liability for note / deficiency
– Credit reporting affects:
– FICO score and length of time on record
– Foreclosure process continues
– Tax, financial and legal advice are essential
www.hud.gov www.fha.gov www.hopenow.com
Tax and Other Consequences
Generally, any forgiveness of indebtedness is treated as gross
income, and pursuant to Tax Code reported to the IRS on a
1099C
Federal Tax Debt Relief Bill signed on December 20, 2007


Funds used to purchase or construct or rehabilitate a
primary residence (refinance only up to the amount of the
old mortgage principal, just before the refinancing if used
to improve primary residence). ww.irs.gov (form 982)
Debts discharged after January 1, 2007 and prior to
January 1, 2013
One million (single) 2 million (married)

State law varies

Working with Sellers
Price the property fairly and fully negotiate terms
• Exhaust the counter offer process
• Presenting multiple and subsequent offers
• Demonstrate fair market property value
• To lender and seller/ borrower
Licensee may not rebate any funds to Seller, junior
lien holder or mortgage insurer without written
consent of senior lien holder
• Buyer may not pay any seller indebtedness OR pass funds to
seller w/o senior lien holder written approval
• All funds are to be reflected on HUD-1
• Term sheet ought to match HUD-1
Working with Sellers
Start the process early do not wait for default, perform your
due diligence research property status at onset
 Portfolio loan or serviced loan (investor)
 Know the difference
 Why does it matter
 Timing and guidelines vary
 Assess lien holder willingness to participate in or cooperate with a short
sale
 Thorough and honest evaluation of comparables & market trends
Refer to tax, legal & financial advisors EARLY, OFTEN & IN WRITING
At time of listing
 Before accepting Purchase Agreement
 Prior to Seller acceptance of approval notice / term sheet
 Learn to love “confirming letters”
 Because you care about your client
 Because it matters!
Credit Effects on Borrower Vary
Foreclosure / short sale are said to remain on credit report
seven years
While the credit impact of a short sale may vary slightly from
foreclosure:
REFER CLIENT TO PROFESSIONALS FOR ADVICE
DO NOT make promises or assurances to borrower
DO NOT advise borrower to stop making payments
The Real Estate Licensee
“We must realize that the rewards of
true success are well worth the effort.
The highway to success is a toll road.”
Realtor® Risk / Reward Analysis
Reward
– Opportunity to assist homeowners in need
– Afford Buyers the advantage of homeownership
– Business specialty development
– Participate in the economic recovery
Licensee Risk
– Failure to secure Seller’s written consent to lien holder(s) terms
prior to delivering approval to Buyer and/or Buyer’s agent
– Failure to recognize short sale prior to contract
• Public records including: deed, liens & encumbrances,
notice of default and sale notice plus judgments
• Preliminary title report under special circumstances
Realtor® Risk / Reward Analysis
– Failure to refer to tax and legal advisors, disclose options &
document file
– Advising seller to cease making payments
– Don’t negotiate $ at time of listing / FannieMae, FreddieMac
and HAMP policy precludes servicer from requiring reductions
below 6% in broker compensation as a condition of approval
– Loss of other business
• Work in tandem / refer in house / designated team
– Pricing below market value
• Failure to exhaust negotiations
– Impact of property values / lien holder “trust factor”
– Not recognizing schemes and scams
Tips for Agents in Short Payoff Transactions
When preparing contracts (listing and sale) be certain time
periods such as expiration dates, dates for contingency
removal and close of escrow, do not extend beyond any
trustee or foreclosure sale date
•Notice of Default may not be filed at first delinquency
•Monitor property status throughout the process
•Any foreclosure sale postponement must be in writing
•Foreclosure process continues even thought short sale is
being negotiated
Hot Topics / Red Flags
Factor in all costs necessary to meet seller obligations:
Brokerage fee & other costs of sale
Junior liens; equity lines (HELOC), home improvement loans
Property taxes, Judgments, Homeowner Association and other
additional liens
Chasing the market down
Price reductions OR contract negotiations
Red Flags
Negotiating with a seller not on title / Option Agreements / Flippers /
Double Escrows and Straw Buyers
Any money or commitment for payment outside of escrow that is not
included on HUD-1 OR is inconsistent with lien holder term sheet
Buyer additional fee agreements with kick backs to Seller or others
Seller related to Buyer
Pre-arranged agreement
Seller lease back from Buyer
Listing Broker Duty to Seller
•
•
•
•
•
•
Obtain highest and best price possible
Listing agent ought not attempt to negotiate a
future listing with the foreclosing lender
Utmost loyalty is owed to the seller/borrower
Avoid even the perception of a conflict of
interest
Confidential and insightful managing of this
delicate matter is a must
Confidentiality survives the close of escrow
What Buyers Need to Know
Buyer(s) writing offers on more than one property:
– Executing multiple offers intending to purchase only one
– Fraught with risk
• Disclosure is required (Use appropriate forms if
available)
• Contingency language is recommended
• Seek management and/or legal advice
Sellers may:
• Depending on purchase contract, addenda and local
MLS rules:
– Continue to market and offer the property for sale
– Receive and forward additional offers to lien holder
» Back up position
» Consider notifcation to Buyer #1
What Licensees Need to Know
• What lies ahead
– Plan
– Prepare
– Persevere
• Negotiation is key
– Do not be attached to the outcome
– Operate from strength not fear
– Techniques vary
• Courtesy
• Consideration
• Respect
What Licensees Need to Know
There are NO exemptions from
state and federal statutes regarding
disclosures including Lead-Based
Paint, Property Defects/Condition,
etc.
But I heard “NO”
• Be prepared for “NO”
• The rule:
– “It takes 7 NOs to get 1 “YES”
• As with any sale:
– “Without follow up there is no sale”
• Push back – don’t take “NO” for an answer
– It is an opportunity
• Escalation strategy
– Judicious implementation
– www.jigsaw.com
• Always be ready to resuscitate!
Short Sales
The Big Picture
or
“the little shop of horrors”
Scams and Schemes
• Stop it before it starts
• We are all part of the solution!
– Honest Realtors®
– Broker defense lawyers
– Risk management advisors
– Brokers and managers
– Real estate trade organizations
– Law enforcement agencies
– Buyers and sellers
– Lien holders and servicers
Tricks of the Trade
Keep Your Eye on the Snake in the grass
Everybody wants to make a buck
If it seems too good to be true, it is!
Short Sale Negotiators
Be careful
Payments not fully disclosed
Paid “outside of escrow” – “outside of escrow is usually outside the law”
Advance fees are not permitted
Power of Attorney OR Trust OR Option
Often recorded against the property
Tricks of the Trade
•
•
•
•
Property in default
– Investors buying property in default ought
not take advantage of distressed homeowner
Real estate licensees as Negotiators
• Using an LLC
• Wears two hats / enjoys two pay days
• Accounts for fee with manipulated HUD-1
• May use multiple HUD1 Statements
Flipper (investor) buys property from Seller
– Negotiates the Short Sale as Buyer
– Promises Seller EZ Out
– No tax, credit or deficiency consequences
– Flips for profit w/o disclosure to lien holder
Sale subject to large personal property sales
– “Outside of escrow”
Beware Third Party Negotiators
Loss of company & agent revenue
Negligent referral
License status
Seller informed and written consent
Agency Relationships
Reputable and knowledgeable
Professional liability insurance
Correct forms
Power of Attorney
Options OR Trusts
Title transfers
Advance Fees
“What agents are asked to do..”
• Price the property low
– Reduce comparables to show a lower value
– Because it’s better for everyone to sell quickly
• Modify offers to include “phony buyer credits”
– Often used to pay short sale negotiator
– Secret addenda
• Payouts to third parties or seller
• Withheld from lien holder /servicer
• Prepare bill of sale for personal property
– Sale is conditioned on agreement
“What agents are asked to do..”
• Alter HUD1 with artificial costs
– Pad costs and fees
– Manipulate line items
• Introduce distressed homeowners to SSN
– We can save them from foreclosure
– No credit consequences
• And we fix credit too!
• Arrange for “silent” payouts to subordinate liens
– Everyone is doing it!
• Transfer escrow to “my team”
– We know how to get business done
Buyer Additional Fee Agreements
• Buyer is required to engage the services of third party negotiator for
a fee
– Demand for payment as a condition of offer
– Specified in Multiple Listing Service
– Separate secret addendum
– Buyer’s lender may not approve payment w/o lien holder written
consent
• If a “negotiator” is working for both Seller and Buyer are they a dual
agent?
• Agency Disclosure
• Confirmation of Agency Relationships
• Is the fee a commission?
– Required language regarding negotiability
Buyer Additional Fee Agreements
•
Buyers may be asked to re-write their offer
– At a price lower than fair market
– Lower than Buyer was originally willing to pay
– New offer includes a 3-6% credit to Buyer from the lien holder
– Buyer signs addendum agreeing that all or most of the money will be paid to
SSN or other parties
– Credit may be included on the HUD1 but WILL NOT appear on lien holder term
sheet
• Multiple or manipulated HUD1 Settlement Statements
• Lien holder / servicer receives final HUD1 after the close - OOPS
• Fees may be logged under an alternate category (i.e. documents prep fee or
attorney fees)
• Buyer may expect lower property tax base
• But, assessor can recalculate based on market value
– Money paid out without consent of senior lien holder is F*#@*
• Short sale may be rescinded and loan reinstated
• Placing Buyer’s new loan in subordinate position
The Double Dipper
• Real estate licensee sets up LLC
•
– Operates an LLC as a third party negotiator / loss mitigation
consultant
– Demands payment from Buyer or Buyer’s agent (condition of sale)
• Often specified in the MLS OR
• Separate written agreement
– Does not disclose ownership interest in LLC
– Does not provide a separate service
• Secret profit
• RESPA
• Compensation does not flow through the real estate brokerage
– Violation of Article 7 of the Realtor® Code of Ethics
Earns commission and a hefty fee for negotiating
– 1 to 3 % of sales price OVER and ABOVE commission
The Inside Man
• Solicitation by Short Sale Negotiator (“SSN”)
– Homeowner (most likely in default)
– Listing Agent (most likely with listing in default)
• The Promise
– To Homeowner – “ I will stop the foreclosure”
– To Listing Agent – “Your short sale made EZ I have a
inside contact”
• The Plan
– Procure ready, willing and able buyer
– Negotiate settlement with all lien holders
– SSN and Buyer
• Fee based service contract
The Inside Man
• What happens next
– Buyer’s purchase offer is sent to senior lien holder
– After some period of time SSN approaches parties with
“good news / bad news”
– Offer of $______ will not be accepted
– Lien holder insists, based on their appraisal that the
offer be REDUCED by $_______
– Buyer, Seller and agents are persuaded this is
necessary to facilitate the transaction
The Inside Man
• And then
–
–
–
–
–
SSN privately approaches Buyer
You just saved $__________
Now we have to “take care of” my guy inside
Subordinate lien holder
Outside of escrow / under the table / in a dark alley
• By the way
– SSN insists Escrow be transferred
– Only seller HUD1 can be forwarded to lien holder or
no deal
– “My team knows how to get things done”
• Is there anything wrong with this picture?
Red Flags
• Negotiating with a Seller not on title
– Option agreements or memorandum
– Undisclosed double escrows
• Check public records for chain of title
• Transaction related payments
– Junior lien holder, Seller or other third party
– Any payment outside of escrow is usually
“outside the law”
– Any and all disbursements must appear on HUD1
• Proper category
– Lien holder / servicer term sheet must mirror HUD1
or issue a written approval of any exception
Red Flags
• Reputable / established title and escrow company
– Ensure HUD1 and term sheet match
– Should demand written approval for any variation
– Current claims against escrow/title who have deviated
already in queue
• The “settlement sale”
– Distressed seller
– Power of Attorney
– Title transfer
– Settles loan
– Sells for profit
Red Flags
•
Personal property
– Sale is conditioned upon the sale of Seller’s personal property
• Artwork - indoor/outdoor furniture - accessories OR appliances
– Paid outside of escrow (often post close)
• Pre-arranged Bill of Sale
– Once you know
• You can’t un-ring the bell
•
Arm’s length transaction
– Buyer may not be related to Seller
• Business or personal
– Listing agent may not be related to Seller
• Business or personal
– Disclose any relationship in writing
• Buyer Eligibility Certification or Statement
– Required in most short sale transactions
Red Flags
•
•
•
Mortgage fraud investigations underway
– Mortgage Guaranty Insurance Corporation (“MGIC”)
• Hires Investigation Service
• For the purpose of “examining the facts and circumstances” surrounding
the borrowers original mortgage loan application
• As part of an internal control process
• Requires immediate interview with borrower
Selling Office Commission issues
– Using the MLS to compel participation in negotiator fees
– Or by addendum pre or post contract
Real estate licensee’s duty to
– Mention or point out risk of and options to a short sale
– Refer to tax, financial and legal counsel
• Confirm in writing 3x (listing, final offer/counter, prior to
accepting terms from lien holder)
– Article 13 of the National Association or Realtors®
Code of Ethics
FannieMae and FreddieMac
•
FreddieMac
– Aggressive field investigators
– Filing a complaint or reporting fraud:
• Fraud Hotline: (800) 4FRAUD8 OR (800) 437-2838
• Martin Abad, Associate Director (213) 337-4268
• Home Value Suite: Home Value Explorer® and Home Value Calibrator®
• Quality Control Resources and Fraud Prevention Web site
• Fraud-related articles available on FreddieMac.com
•
FannieMae
– Desk top investigations
• Works in conjunction with FreddieMac
• Filing a complaint or reporting fraud
– (800) 7FANNIE OR (800) 732-6643
•
Federal Bureau of Investigation
– “In for a dime in for a dollar”
– “Follow the money”
– www.fbi.gov
Additional Licensee Challenges
• Listing agent is instructed by Seller NOT to present a subsequent
higher offer to lien holder / servicer
– Licensee duty to Seller
– Obtain written confirmation from Seller
• Protect yourself when advising on risks/benefits of a short sale
– Provide substantive information
– Confirm delivery to Seller by retaining signed copies
– Use confirming letters
• Risk of mortgage fraud investigation
– Advise Seller of likelihood of lien holder / servicer
comparing original loan application to hardship
• Licensees lacking experience / expertise
– Work with a brokerage team member
• Article 11 of the National Association of Realtors®
Code of Ethics
Solutions
• Lien holders and Servicers
– More controls in RMV units
• Only a property sold below market can flip within 30
days at a 20-30% profit
• Title / Escrow vetting and selection
• Reputable and knowledgeable
• More effective settlement checks and balances
– Detailed review of HUD1 Statements prior to closing
• Estimated HUD and;
• Final HUD
– Addendum or enhanced language in term sheet
• Specific prohibitions
• Everyone signs off
Solutions
– Buyer Certification or Affirmation
• Arm’s length
• No other money paid
• Seller not to remain as occupant
• No other terms or agreements
– Expressed or implied
• Train negotiators
– Recognize fraud
– Review recently recorded documents
• Look for Trusts
• Options
• Sale memorandum
– Request all referenced addenda and agreements
• Review all offers and counter offers carefully
Short Sales & the Code of Ethics
The Code of Ethics applies to all transactions
Including Short Sales!
• Article 1: REALTORS® shall treat all parties honestly.
1.3 Shall not mislead Seller as to market value
1.6 Shall submit offers objectively and quickly
1.7 Shall continue to present all offers unless waived in writing by
owner
1.9 Confidentiality survives the relationship
1.12 Shall advise Seller of Broker policy on Co-op compensation
1.15 Shall, in response to inquiries from Buyer or Co-op, with Seller
approval, disclose (i) the existence of other offers, and (ii) if
asked, whether those offers were obtained by the listing
associate, listing broker, or a cooperating broker
Short Sales & the Code of Ethics
• Article 2: Realtors shall avoid exaggeration,
misrepresentation or concealment of pertinent facts
relating to property or transaction.
• Article 3: Realtors shall cooperate with other brokers.
3.6 Realtors shall disclose the existence of accepted
offers, including offers with unresolved contingencies,
to any broker seeking cooperation.
Short Sales & the Code of Ethics
• Article 7:
Realtors shall not accept compensation from
more than one party, even if permitted by law,
without disclosure and informed consent of the
parties.
• Article 11:
Realtors shall not undertake to provide
specialized professional service concerning a
type of property or service outside the scope of
competence unless they engage assistance from
one who is competent.
Short Sales & the Code of Ethics
• Article 12: Realtors shall be honest and truthful in
their real estate communication and shall present a true
picture in advertising (inclusive of internet)
X - “Short Sale Expert” or “Results Guaranteed”
X - “I can stop your foreclosure” or “I can save your
home”
• Article 13: Realtors shall not engage in activities that
constitute the unauthorized practice of law and SHALL
recommend that legal counsel be obtained when the
interest of the parties require it. Do NOT give legal, tax
or financial advice.
That’s it for now! Be Careful Out There
[email protected]
http://www.youtube.com/watch?v=u8b9mCAIwcU
www.realestateriskmgt.blogspot.com
[email protected]