As a new real estate broker, you may want to spend time researching the benefits of marketing to short sale clients. Successful short sale brokers can generate significant amounts of commissions in much shorter amounts of closing time. They often have very happy, relieved, and loyal long-time clients who are more than willing to send new referrals their way. Plus, if banks become impressed with a broker’s high-quality work, they may send along more potential short sale deals as well.
Keep reading to learn about the opportunity for short sales and how to succeed when working with short sale clients.
What is a short sale?
To put it simply, a short sale is the sale of a property that has existing mortgage debt and other fees in amounts higher than the net sales price. These net gains or losses are calculated after deducting closing costs such as broker commissions, escrow, title, transfer fees, property taxes, and other costs. In short sale situations, the seller may not be financially able to come up with the net losses in order to bring the lender’s payoff to an even zero amount.
Between 2008 and early 2016, there were literally millions of distressed “upside-down” properties that went all the way through the entire foreclosure process. There were many other homeowners who were able to successfully complete loan modifications program requests for much lower mortgage payment options, such as HAMP (Home Affordable Modification Program) and HARP (Home Affordable Refinance Program), which both began in March 2009. Other homeowners listed their homes later sold through short sale programs instead of refinancing or letting the lender foreclose—while also walking away with some net cash.
Since 2008, a high percentage of homebuyers across the U.S. have purchased their owner-occupied homes using some type of a government-backed or insured mortgage loan such as FHA or VA. With many of these purchase loans, the buyer might have invested anywhere between 0% and 3% towards their down payment (97% to 100% LTV). This high loan-to-value (LTV) mortgage loans have a much greater chance of becoming future distressed properties with negative equity, making them exceptional short sale listing opportunities for brokers.
Getting short sales approved by lenders
For any potential short sale homeowner who is weighing the pros and cons of “walking away” from their home, attempting to complete a loan modification request, or working with a real estate broker to assist them with a short sale listing, one of the very first steps should be the completion of an updated comparative market analysis (CMA) report. A CMA report is the equivalent of a detailed updated sales comp study of similar-sized properties in the most immediate neighborhood region.
Once you and your client have a general idea of the most probable current value range, then you can add up all of the debt on the subject property. This includes the loan payoff amounts for any first or second mortgage, credit line or HELOC (Home Equity Line of Credit), unpaid property taxes, and any delinquent mortgage interest, late fees, or foreclosure trustee fees. You can then create estimated settlement or closing statements for the lender. You will need to send copies of the estimated closing statements and value estimates, along with the borrower’s income, expenses, and asset information—including their most recent pay stubs, previous tax returns, and copies of their latest bank statements—to the lender’s short sale department.
You and your client should also create a solid and definitive “Hardship Letter” for the lender. This will ensure that the lender is more aware and understanding of the borrower’s dire financial position. Since borrowers are more likely to walk away from an upside-down home with no equity, lenders are much more willing to work with a financially challenged homeowner in order to minimize both the lender’s and the borrower’s potential losses. If your clients can show true financial hardship with a well-organized short sale package, they will likely get approved much faster.
Cash for keys: Relocation fees
For properties currently in foreclosure, the pre-approval from the same lender’s bank to allow a short sale listing may also put a freeze or temporary stop to the ongoing foreclosure process. Many lenders will even offer their approved short sale borrowers a “Relocation Fee” (thousands to tens of thousands of dollars). Other homeowners can be paid by way of government-sponsored relocation fee programs, such as the Home Affordable Foreclosure Alternatives (HAFA) program, in amounts of $3,000 or more.
The stated purpose of these relocation fees or “cash for keys” programs is to help provide financial assistance to struggling property owners so that they will have funds to move elsewhere. These fees are also offered to homeowners so that they will cooperate with their lenders during the short sale process and don’t steal appliances or other household fixtures on the way out of the property, for example.
The vast majority of agents and homeowners will list their short sale property as close to fair market value as possible. Some banks may consider offers 5%, 10%, 15%, or 20%+ below their estimates of fair market value, depending on the current market conditions. The relocation fee, and the overall short sale strategy, can be “win/win/win” for brokers, homeowners, and lenders willing to work together toward finding the most profitable solutions.