subject: How To Overcome Two Major Obstacles In Real Estate Short Sales [print this page] There is potentially a lot of money to be made in Real Estate short sales. This is because a short sale is where the bank agrees to sell its mortgaged property for a price lower than what is owed to them. Thus when you secure a short sale from the bank, you are potentially buying the property at less than the price it is actually worth.
But to arrange for a successful short sale with the bank, you have to address the bank's two primary concerns. These are the obstacles you have to overcome. They are basically the ability of the borrower to repay and the value of the property. For the bank to agree to a short sale, it must be convinced that the borrower has no means to repay and that the property is worth less than it anticipated.
The credit worthiness of the borrower can be substantiated by showing relevant proofs such as pay stubs, unpaid bills, bank statements etc. By including these types of evidence you can show why the borrower has not been able to keep up with payments and as such will not be able to make the loan current. This is the first factor for the bank to consider a short sale.
The other factor the bank has to take into consideration is the current value of the property. To ascertain the value, the bank will arrange for a professional valuation done by a real estate broker. This is called a Broker's Price Opinion (BPO) or Broker Opinion of Value (BOV).
Normally, the broker will do a drive-by analysis without actually going into the premises. You can reduce the perceived value by meeting the broker personally and pointing out all the defects of the premises. Plead your case by showing the broker your complete short sale proposal to the bank. You can run comparisons for him or her, show pictures, show the broker around the property, present a list of repairs that need to be carried out etc. You can also help the broker get to know the owner of the property (the borrower) by showing pictures of the family and explain how a low BPO can ensure a successful short sale and allow them to start anew. Needless to say, the more you can reduce the perceived value of the property, the higher a discount you can obtain from the bank in the short sale.
As for the amount of discount you can expect, there is normally a general rule of thumb to follow.
82% is what a first lien holder typically accepts. Junior lien holders would accept a lower percentage. However, if the loan has been guaranteed by the government as in the cases of VA or FHA loans, you can expect a lower discount (or higher percentage of the value of the property). Generally short sales on VA loans (called thus because they are guaranteed by the US Department of Veterans Affairs) would be at 91% of the "as is" value of the property whereas for FHA loans (guaranteed by the Federal Housing Administration), the percentage would be within the range of 82 to 87% of the "as is" value.
Your proposal to the bank for a short sale must comprise of certain indispensable items. First off is the Hardship Letter. The Hardship letter must come from the borrower himself or herself. It should specify in detail why he or she cannot continue the repayments on the loan and make it current. Banks and other lenders are not inhumane and can understand if the borrower has lost his job, was hospitalized or suffered a severe loss in finances. But they are not sympathetic in cases of dishonesty or fraud. So it pays for the borrower to be open and honest. Needless to say, the more detailed an explanation given in the hardship letter, the better the chances of a short sale.
Secondly, you need to provide Proof of Income and Expenditure in the form of W2's, Bank Statements and Pay Stubs etc. These documents are to support the contents of the hardship letter to give weight of evidence of the inability of the borrower to service the loan or make it current. If the borrower is unemployed, put it in writing to state that no pay stubs are included because he or she is not working. Once again, honesty is the best policy. Help the borrower disclose details in bank statements, bank accounts, stocks and shares, bonds, money market accounts, other forms of real estate etc.
If the bank statements or other records indicate unusual deposits or withdrawals, it is necessary to explain each item to the bank. The more extensive these documents are, the better your chances of securing a short sale.
Thirdly, supply the bank with a Listing Agreement. Banks want to be sure that the borrower has done all he can to sell the property before approving a short sale. Thus a listing agreement that shows the buyer has an agreement to list his property in the list of a listing broker gives evidence that efforts have been made to sell.
The next thing the bank would like to see is a Purchase Agreement. This is an agreement to purchase in writing between the borrower and you. This way, the bank will know there is a ready buyer for the property. In addition, the bank may want to see that you have your own loan pre-approved to buy the property at the short sale price. Send the bank a copy of your pre-approval letter to show that your financing is in order.
Fifthly, you should present a Comparable Market Analysis to the bank. This is a list of comparable sales that support the price you are willing to pay for the property. Show lower priced comps sold in the same area within the last six months or so. This will help lower the perceived value of the property when compared with the bank's BPO.
Details such as how long the property has been on sale may greatly help your proposal. If the properties in the same area have been on the market for a long time (a year or more) without a buyer, it will cause the bank to consider selling it off.
Next, whatever repairs needed by the property should be listed down on paper with their estimated costs. These details will convince the bank that it would not be worth keeping the property in the bank's inventory because it would cost too much to bring it back to its full value. This helps to reduce the perceived value of the property, thus enhancing the chances of obtaining the short sale and getting a higher discount.
Another important document for the bank is the HUD 1 or Real Estate Settlement Statement. Part and parcel of closing a loan come many types of settlement charges such as prepaid interests, late fees, outstanding payments, escrow reserves for taxes and insurance and the down payment. The HUD 1 stipulates all these charges. The bank needs to know the bottom line i.e. how much it will receive after all these charges have been settled. It is important that the borrower does not receive anything as he is not entitled. If the bank sees the borrower receiving any money, it will never approve the short sale.
Finally, you should submit an Authorization to Release Information Form to the bank. This is a form signed by the borrower to give permission to the bank to talk to you about the loan and short sale. You must show this form to the bank's Loss Mitigation Officer before he will entertain your request for information on the loan.
These items make up the complete short sale proposal or package. It is extremely important to submit these documents to the correct Loss Mitigation Department officer who has the authority to make the decision about your short sale application.
Taking these steps and submitting these documents will effectively help you overcome the two main obstacles to securing a short sale with the bank.
