In previous blogs, we’ve discussed the meaning of short sale in real estate investing and the difference between short sales and foreclosures, in addition to the process of a successful short selling, all in regards to distressed real estate investors. We’ve also stressed the point that real estate investors must work with a real estate agent if they face a short sale. So, what do real estate agents need to know about short sales, and what is the process like for them? The following is a guide for real estate agents interested in representing real estate sellers who are (or who may be) in a short sale situation.
Educate and Prepare Yourself
The first thing real estate agents must do is ask their broker if their company has specific policies and procedures regarding short sales. Follow these guidelines to ensure you are not breaking any federal, state, and local laws, MLS rules, the Realtor Code of Ethics, and real estate regulations. Also, keep in mind that the real estate agent’s responsibility to real estate sellers applies in a short sale situation just as it applies to any other sale.
Related: What Is a Real Estate Agent and Is This the Right Job for Me?
Moreover, read up-to-date information on successful short sales from reliable sources like the National Association of Realtors and your state’s Realtors Associations. Research and read online articles on short sales to prepare yourself for the real estate sellers’ questions. Speak with local attorneys and CPAs who are experts in short sales. In addition, seek out other real estate agents and brokers in your area who are known for doing successful short sales. Ask them: What have they learned? What are their best practices? What are the pitfalls?
Gather Information from the Seller and Other Sources
A short sale occurs when real estate investors sell their real estate property for less than the total amount owed on the borrowed mortgage. For real estate agents, it’s important to know exactly how much is owed on the investment property. Ask real estate sellers for copies of the most recent mortgage statements including second mortgages and lines of credit, in addition to the most recent property tax statement and association dues bill. Moreover, it is important to check with the tax assessor, if necessary, to verify the total debt and any penalties and be as accurate as possible.
Another way of gathering information is through conducting a thorough Comparative Market Analysis (CMA) or Broker Price Opinion (BPO). Real estate agents have to be realistic about the value and include all costs of sale (commissions, closing costs, and any interest and penalties on loans or taxes in default). After collecting this information and calculating all the numbers, real estate agents must determine whether or not the real estate seller owes more than the investment property is currently worth.
Finally, a real estate agent has to find out whether the borrowed loan in a short sale is “Recourse” or “Non-recourse”. In recourse loans, the lender can go after the borrower’s other assets after the short sale. In non-recourse loans, on the other hand, if the asset does not sell for at least what the borrower owes, the lender must absorb the difference and can’t force the borrower to repay any deficiency.
Related: Can Anyone Get a Loan for Rental Property? What Does It Take?
Meet the Seller to Discuss and Evaluate Available Options
After concluding that the real estate investor owes more than the investment property is now worth, the next step for the real estate agent is to discuss the various options available to the real estate investor. A short sale shouldn’t be the first choice as it carries negative credit and, possibly, tax consequences. The real estate investor can alternatively:
1. Keep the investment property: If there no pressure for the real estate investor to sell, he/she can keep the investment property for the time being. Some financial distresses are short-term and don’t necessarily result in loss of the real estate property.
2. Sell the investment property and bring cash to close escrow: This is a good choice for real estate sellers who have to pay a deficiency from other liquid assets. This option allows real estate investors to avoid credit damage that even a successful short sale can cause.
3. Attempt a workout with the lender: In some cases, lenders are willing to reduce the interest rate or the allowable payment to help real estate investors avoid short sales and foreclosures.
4. Offer the lender a short sale: The process for this is provided below.
5. Allow the investment property to go to foreclosure: This is the worst option because it causes the most damage to a real estate investor’s credit.
The Short Sale Process
Assuming that the real estate investor decides that a short sale is the best option, here are the general factors and steps that real estate agents have to take for successful short sales:
The real estate property lost its value
The lender will want to see clearly that the real estate property is now worth less than the borrowed mortgage, and that there is no other chance that the property will sell for enough to cover the remaining mortgage.
The real estate investor has some hardship
Lenders consider the loss of job, unusual medical costs, natural disasters, and even divorce as hardships, as they lead to changes in financial circumstance and make it impossible to keep the real estate property.
The real estate investor is cooperative with the real estate agent and the lender
Sometimes, there is a formal short sales application which real estate sellers have to complete. As a real estate agent, you have to convince real estate investors that they should be willing to do what is required and that if they’re uncooperative, you will not be able to help them.
Contact the lender
First, the real estate agent will need an authorization letter from the real estate seller to speak with the lender on his/her behalf. The next step is to contact the lender’s Loss Mitigation Department, ask for the person who will process the short sale application, and request a short sale package which normally includes:
- Letter of authorization
- A copy of listing agreement
- Preliminary closing statement
- Completed financial statement
- Hardship letter detailing the negative financial circumstances surrounding real estate sellers
- 2 years of tax returns
- Last 2 months of bank statements
- Comparative market analysis or list of recent comparable sales
- Broker Price Opinion to verify the real estate agent’s evaluation
Be aware that if there is more than one loan on the investment property, real estate agents will need to contact multiple lenders and go through the same process.
List the real estate property
Here, it is important for the real estate agent to ensure that the investment property is properly priced and marketed. No successful short sale starts with a high price. Moreover, if you have no offers within a reasonable time, adjust the price. You need to prove to the lender that you’ve done everything possible to sell the investment property at the highest price.
Related: What Are the Best Ways to Market Your Rental Listings?
Present the lender with an offer and a completed short sale package
Remember, not all offers will be ideal, and real estate sellers are the ones who accept the offer. If you receive a very low offer, you may negotiate it between the seller and the buyer as in a traditional sale setting. When the seller and the buyer approve, the offer should be signed by them both and submitted to the lender for approval. Keep in mind that lenders want to see “as-is” offers.
Once the short sale package is submitted, the real estate agent has to stay in touch with the lender. Make sure the lender acknowledges that the package is complete, talk to the same person in the Loss Mitigation Department each time, keep the real estate seller and the buyer up to date, and if there’s a time limit for the offer, remind the lender of it.
Bear in mind that this is not a decision that the lender will be happy to make, and lenders are known to take a long time to respond to the offer.
The lender responds to the offer
The lender can do one of three things: ignore, refuse, or approve the offer. If the lender refuses the offer, the real estate agent can try to determine the net proceeds the lender would accept. Go back to the buyer and see if he/she is willing to increase the offer to provide those proceeds. In addition, the real estate agent could ask the lender for time to place the real estate property in the MLS as an “approved short sale” at the price and terms that the lender accepts. Then, if you find a buyer who agrees, you can proceed to close normally.
Typically, when the lender approves the offer, it will be in the form of a demand [the lender will accept no less than (X) dollars in proceeds no later than (Y) date]. Furthermore, the lender might attempt to reduce the commission. The real estate agent can argue with the lender about this, but in the end, the lender will decide.
This guide is designed to provide real estate agents who are interested in representing real estate investors in short selling their real estate property with an idea of what they need to know about successful short sales in order to guarantee a successful short sale process. For similar guides and more real estate investing tips to succeed as a real estate investor, visit Mashvisor.