Hands On The Heartland
The Pulse Of The Kansas City Real Estate Market

This is Part 2 in our 3 part series Kansas City Short Sales. Part 2 is “The Selling Side Of The Short Sale Process” and we provide insight into what home sellers and their listing agent may encounter during the Short Sale process.  As you read in Part 1 of the series, Short Sales have become more commonplace in today’s evolving real estate market. So once a borrower has decided to move forward with attempting a Short Sale, there are a lot of steps to the process that need taken into consideration.

(Part 1 of 3) The Kansas City Short Sale Process: An Introduction To The Short Sale Process
(Part 2 or 3) The Kansas City Short Sale Process: The Selling Side Of The Short Sale Process
(Part 3 of 3) The Kansas City Short Sale Process: The Buying Side Of The Short Sale Process

A Short Sale can have long reaching benefits not only to a Seller and the lender but to rest of the public as well. Every Short Sale that’s completed is one less foreclosure in our neighborhoods. It needs to be emphasized that a seller is not likely to walk away from a Short Sale unscathed. They’ll almost certainly not walk away with any cash from the Short Sale. By it’s definition, a Short Sale means the seller is upside down in their home, so walking away without any cash is probably understood.

While a Short Sale is not an ideal outcome for a borrower, it can be more like a bruise than the black eye and knot on the head that a foreclosure often leaves. Once a borrower has decided that a Short Sale is their best avenue, from there it generally becomes a process of (1) convincing the seller’s lender that a Short Sale is in everyone’s best interest and (2) in locating a homebuyer who is looking for a good deal. As more lender’s seek to mitigate their losses in our current real estate market, Short Sales are very likely to become even more commonplace. With more and more Short Sales hitting the market, a significant proportion of the available homes on the market are going to be Short Sale properties.

Simply put, a Short Sale has the best chance of success when all parties involved in the process view their involvement as a lesser evil than having to deal with the property as a Foreclosure or a Deed in Liu of Foreclosure.

Time is limited when working to achieve a successful Short Sale and there’s no such thing as the rumored “foreclosure delay specialists”. Once the foreclosure process has begun the clock is ticking for a borrower to get their payments current or to achieve a successful alternative, such as a Short Sale.  Anyone touting that they can delay a foreclosure process should be analyzed cautiously. There are laws in place that dictate the speed at which a lender can move forward with the foreclosure process and only they or their attorneys (or a judge intervening or an act of God) could stop or “delay” the foreclosure process for a borrower. Any “delays” someone may claim they are able to cause are probably just the normal delays seen during the foreclosure process. So borrowers should be on the look out for scam artists who are promising the moon and borrowers should take the time to read up on some of the Foreclosure Scams that are out there.

It’s possible for a Short Sale to be completed up to the time of the lender’s foreclosure auction date. Keep in mind the lender is in the business of loaning money and does NOT want to own any real estate. So it’s possible that a satisfactory settlement could be achieved at the last minute, if all parties were still willing.

A lender is unlikely – or at least less likely – to consider a Short Sale if the borrower has assets (like cash in a savings account or a boat at the lake) that could otherwise be used to continue making their mortgage payments. Also viewed unfavorably by many lenders are homeowners that recently did a cash-out refinance on their home – a borrower putting money in their pocket and then telling their mortgage lender they are unable to afford their payments can create an obvious objection when trying to negotiate a Short Sale with the lender.

During a Short Sale there could be varying degrees of negotiations going on. Negotiations on the sales price a lender would be willing to accept from a buyer will obviously be a factor. But the lender will also be negotiating with the seller on what, if anything, will be done about the loss amount that will be incurred.  The lender (or the PMI company discussed later) may ask/require the borrower to sign a promissory note to pay back some or all of the loss amount on the loan. There is no way to predict how negotiations between a seller and their lender will turn out – a theoretical example could have a seller agreeing to pay back 20% of the loss on reasonably favorable terms such as over 20 years at zero percent interest.

Since a year ago, the success rate of Short Sale listings successfully making it from the listing table to the closing table in some of our areas has tripled.  The more knowledgeable the listing agent is about the process, the better the success rate will be. As the process becomes more familiar to those frequently involved with Short Sales, the success rate should continue to rise.

Not long ago most lenders wouldn’t consider a Short Sale if the borrower wasn’t already behind on their payments. So many requests for help from a borrower who was ABOUT to get behind on their payments were ignored. The rising number of defaulting loans due to the Subprime Mortgage Crisis and resetting Adjustable Rate Mortgages (ARMs) (with higher monthly payments that borrowers can’t sustain) has led many lenders to start considering a Short Sale even before a borrower has missed a mortgage payment – this change in philosophy increases the chances of completing a Short Sale and keeping the home out of foreclosure.

Although most lenders are listening when a borrower brings up a potential Short Sale, it’s important to understand that the bank doesn’t have to accept a Short Sale. The borrower took out the loan and the debt is solely the borrower’s responsibility. So a borrower needs to either (1) continue making their mortgage payments, (2) be able to negotiate a Short Sale (or alternative plan) with their lender, or (3) be faced with the likelihood of foreclosure. Borrowers should always seek legal advice from an attorney regarding their options.

When considering a Short Sale, the borrower’s lender will want to see a Hardship Letter that indicates the borrower’s inability to continue making their mortgage payments. Borrowers should be prepared to share any supporting documents that help their cause including: bank statements showing little to no cash, tax returns that verify little to no other assets, pay stubs, credit card statements showing high balances, financial judgments against the borrower, work termination papers, unfavorable profit loss statements if self-employed, W-2’s, death certificate of a spouse, doctor bills if health has been an issue, divorce decree (some lender’s don’t consider divorce a hardship), and just about anything that supports a claim that the borrower’s financial situation has taken a turn for the worse since the loan was made. Don’t include any fluff in the Hardship Letter and use common sense too. ATM withdrawals to show losses at the casino would do more damage than good.

When a lender is faced with the decision of accepting a Short Sale or moving forward with foreclosing on a borrower, it should be expected that the lender will choose the option that nets the lender the least amount of loss (not the option that is the most favorable to the borrower).

Lenders often lose around 10 to 20% (off a borrower’s outstanding loan balance) on a Short Sale but closer to 30% to 40% on a Foreclosure. Fannie Mae estimates a lender’s financial loss on a Foreclosure to be in the $20,000 to $60,000 range. Of course every deal is different and a lender’s loss could certainly be much more or less depending on the circumstances. If a lender believes a Short Sale will reduce their loss they’ll likely jump on a Short Sale opportunity.

Be wary if anyone tries to convince you that a Short Sale is a simple process. There are variables in every Short Sale situation for which no seller, buyer, Realtor or anyone else can be fully prepared. Have a plan in place and act accordingly, but understand that even with the best laid plans there are going to be times where you have react quickly to events that occur during the Short Sale process.

A Short Sale listing agent will need the seller’s permission to negotiate with the lender on the seller’s behalf. This is done with an Authorization To Release Information that will be signed by the seller. Unless specifically written otherwise, this authorization will only permit the listing agent to contact the seller’s lender and neither a buyer’s agent nor anyone else involved in the transaction would be allowed to do so.

If Private Mortgage Insurance (PMI) is included on a borrower’s loan, the lender could posssibly determine that letting the home go through the foreclosure process and collecting the PMI settlement from the insurance company after the foreclosure process is completed is the best option. PMI would be applicable if the borrower had less than 20% down payment when the loan was originated and PMI insurance is paid by the borrower in their monthly mortgage payments and insures the lender against the possibility that the borrower may default on the loan. PMI claims could also be made in a Short Sale situation, so it’s possible that the presence could help a Short Situation. Again, every deal is different and it’s impossible to know what the lender will determine to be their best option going forward.

On the subject of PMI companies, you could have a buyer, seller, mortgage lender and maybe a Junior Lien Holder (described later) who are all agreeable to a contract price and settlement but a PMI company could ruin the deal if they aren’t satisfied with the degree of “hurt” that each party is sharing in the Short Sale. Some PMI companies may also ask or demand that the borrower sign a Promissory Note to repay some or all of the loss the PMI will incur. It’s all negotiable and every deal is different.

If there’s a Second or Third Mortgage (a.k.a. a Junior Lien) on the property, a Junior Lien holder can be a blessing or a curse during a Short Sale. A Junior Lien holder must also be agreeable to the Short Sale, so if the Junior Lien holder is offered nothing, they’ll probably be happy to send the property into foreclosure. But a Junior Lien holder is not as powerful as it may seem. A simplified explanation starts with the understanding that if a property goes into foreclosure, a Junior Lien often receives nothing out of the foreclosure proceedings. Foreclosure laws allow a Primary Lien holder to only be concerned with netting enough to satisfy themselves on the amount owed on the First Mortgage. So a Junior Lien holder is… well… you know.  For this reason, a Junior Lien holder will often agree to accept 10% to 20% on the amount owed to them because getting something in a Short Sale makes more sense than getting nothing later in a foreclosure. Furthermore, having a Junior Lien holder who is willing to accept pennies on the dollar works in a sellers favor because that’s less of a total loan amount that will need to be covered by the home’s sale price. Of course some Junior Lien holders will hold out in hopes of forcing a better offer (even though an end result of a foreclosure would likely net them nothing).

In addition to everything else they are handling, the listing agent will often play intermediary to the buyer’s agent (and buyer), the main lender, a PMI company, a Junior Lien holder, etc. There will be drawn out, back-and-forth, negotiations as each entity works to find a Short Sale resolution that each party believes minimizes the loss they’re about to incur.

Borrowers should be aware that some lenders won’t consider a Short Sale if the property has not been listed on MLS with a Realtor for a significant amount of time. Some lenders want to see the history of the MLS listing to verify a legitimate effort has been made to sell the home at a higher price – they’ll be looking at the amount of time the home has been on the market, price reductions that have been made, etc.

It’s possible that a seller could face a Taxation of The Forgiven Debt on the Short Sale. This taxation to the seller would apply on the amount of the loss the lender took as a result of the Short Sale. The IRS may view this benefit as a “gain”, and thus as income. If so, the borrower may receive an IRS 1099C report of income from the lender. It’s also possible that a lender may not report this at all or may delay reporting it for some time.  The Mortgage Forgiveness Debt Relief Act of 2007 makes this a mute point for many Short Sale sellers since the Act may provide relief from the Taxation of Forgiveness Debt. Borrowers should check with a Certified Public Accountant and an attorney to determine whether the Act makes them exempt.  Here’s an out-of-state attorney’s views on Cancellation Of Debt Income.

As part of agreeing to a Short Sale with a borrower, some potential recourse by a lender may include (1) requiring the borrower to sign a promissory note to make payments on the Short Sale loss amount, (2) Filing A Deficiency Judgment against the borrower for payments to be made on the loss amount, (3) placing a lien on other assets owned by the borrower, (4) turning the loss amount over to a Collection Agency, (5) selling the “rights” to any Promissory Note between the lender and borrower on to a third part later on, (6) attempting to slide in a new agreement at the closing table for payments to be made, etc. Every deal is different and it’s also possible a lender will require none of the above to get a Short Sale completed.

To get an idea of just how “upside down” a seller is on a Short Sale property, add up the expected costs to sell the home (loan balances, real estate commission, property taxes, etc.) and subtract that total from the anticipated sales price of the home. If there is a Second Mortgage present, hopefully there is enough proceeds to be able to offer the Junior Lien holder roughly 10 to 20 percent on that Junior loan balance.

If a Short Sale property involves an FHA loan then the HUD Pre-Foreclosure (Short Sale) Sales Program requires that the Short Sale NET (after real estate commission, property taxes, etc.) at least 82% of the “as is” Broker Price Opinion (discussed in part 3 of our series) and the BPO value must be at least 63% of the borrower’s loan amount. Conventional loans don’t have similar guidelines to provide guidance.

A seller should be aware that a Short Sale could be stamped to their financial record (similar to a bankruptcy or a deed in lieu of foreclosure). There are varying opinions on how much affect a Short Sale may have on a borrower’s credit report and thus a borrower’s ability to get a loan down the road. Since the answers are all over the board, borrowers are advised to contact a lender (not their current lender) to obtain the most current information and a better idea of how much a Short Sale may affect their future ability to get a loan. Here’s a great Explanation of FICO Scoring and some additional information can be found at MyFico.com.

Credit rules are changing by the day and as mentioned previously, borrowers are advised to consult with a lender they trust on the potential future credit report ramifications of a Short Sale. Depending on who you ask, you’ll get answers such as: (1) How the final Short Sale Acceptance Letter (between the seller and lender) is written will have an affect on whether the Short Sale is reported and, if it is reported, what degree of credit report damage it may do, (2) any late payments leading up to the Short Sale can have a separate negative credit report affect (outside of the Short Sale itself, if reported), (3) three or fewer late payments leading up to a short Sale may affect a borrower’s credit report for about a year (four or more late payments an even more drastic affect), (4) a Short Sale may affect a borrower’s credit report for two to six years, (5) a foreclosure may destroy a borrower’s credit for seven to ten years, (6)  some borrowers have reported their credit scores dropping 50 to 250 points after a Short Sale (200 to 300 point drop after a foreclosure), (7) a borrower may be able to get an FHA or Fannie Mae underwritten loan less than two years after a Short Sale.

Short Sale sellers should read the 2007 Fannie Mae Loan Underwriting Guidelines for borrowers who have a Short Sale (or foreclosure) on their credit record. This is important because Fannie Mae guidelines come into play on a majority of the mortgage loans made by lenders today. Most Lenders Sell Their Mortgage Loans Off to another lender or investor and part of obtaining that lender’s acceptance to purchase the loan is predicated upon the loan getting through Fannie Mae underwriting approval. Even if a lender has no intention of selling a given loan off, they’ll often run the loan through Fannie Mae underwriting anyhow for peace of mind – and to know there’s a good chance they could sell the loan off later if they chose to do so. If Fannie Mae underwriting rejects a borrower, the borrower still has the option of searching for a lender who will hold (keep and maintain) the loan and not sell it loan off. Although many lenders sell off 100% of their loans, there are still some around (such as Wells Fargo and Pulaski Bank) who have the ability to hold loans and thus not follow Fannie Mae guidelines. Here’s an Explanation On Different Types of Lenders.

It’s critical that a seller select a listing agent who is very knowledgeable about Short Sales. The importance of having a great listing agent becomes magnified when a buyer (or a buyer’s agent) doesn’t understand the Short Sale process and what goes into turning a Short Sale listing into a successful Short Sale closing.

A Short Sale listing agent should have a title company run a Preliminary Title Report to determine who claims an interest in the property. A title company is the entity that will be providing a Title Commitment at closing that guarantees the buyer (unless otherwise stipulated) is purchasing a property that includes a clear and equitable title. Usually the title company that will be providing a Title Commitment later is happy to run the Preliminary Title Report at no cost to a seller or listing agent. The report will show the title company’s requirements on conditions that must be met before a Title Commitment will be issued at closing. Items often seen on a Preliminary Title Report include the seller’s loan(s), ownership interests, property taxes due, judgments, liens, etc. Some items that show up on a Preliminary Title Report can be easily cleared up while others may take the seller and title company some time to get cleared up.

When determining an appropriate list price on a Short Sale home, it’s recommended the home be priced very close to other comparable homes in the area. This is important should the home goes under contract quickly after it is listed. If that happens the lender may argue that the home was under-priced. If possible, it’s also recommended that the minimum initial list price of the home be more than the amount owed on the home. This would show the lender that you have tried to net the lender as much as possible on what the borrower owes the lender. If the initial list price doesn’t bring in a buyer then price reductions should be made at regular intervals until the home goes under contract.

After listing the property, it’s not a bad idea for the listing agent to try and locate a buyer (an investor maybe) who would make an offer on the Short Sale property – a test run if you will. Even if the offer were unlikely to be accepted by the lender, seeing how the lender responds should help guide the process later once a better offer comes in on the property.

Short Sale listing agents should spell out on the Multiple Listing Service (MLS) that the home is subject to the seller obtaining Short Sale approval from their lender. The best listing agents will include verbiage such as “subject to bank approval”, “subject to short sale” or “subject to third party approval” on the MLS listing. This is important because there’s no point in going under contract with a buyer who isn’t prepared for the Short Sale process. The best Short Sale buyer will be one who is prepared for delays during the process and who has the patience to navigate through the process.

The listing agent will need to prepare a Short Sale Package that will be given to the lender at the time a buyer’s offer is presented. The Short Sale Package is the key component in achieving a successful Short Sale. Items that are typically include the Short Sale Package include the seller’s Hardship Letter, items supporting the seller’s hardship (financial statements, bank statements, pay stubs, tax returns, W-2’s, etc.), a current assessment of marketing conditions in the given area, the buyer’s purchase contract, the buyer’s lender pre-approval letter, a Broker Price Opinion (discussed in Part 3 of our series), repair estimates on the home, a preliminary HUD Settlement Statement from the title company, a copy of the listing agreement between the seller and listing agent, etc. Because of the importance of the Short Sale Package, it’s important that the listing agent contact the lender when the home is listed to find out what the particular lender will require to be included in the package. The listing agent and seller should try to have everything ready to go prior to a buyer making an offer on the property.

It’s important that a Short Sale listing agent be educated when speaking to (and negotiating with) the lender’s Loss Mitigation Department (discussed in Part 1 of our series). There’s a very real risk that a listing agent who doesn’t know what they’re doing will be told bluntly by the the lender that “we don’t have time to train agents on how to complete a Short Sale”. Many of the staff in a lender’s Loan Mitigation Department may be new to the process or they don’t deal specifically with Short Sales. So a listing agent needs to be adamant when requesting to speak with a supervisor (who can provide answers) in the Loss Mitigation Department.

The listing agent must be tenacious in chasing after responses from all parties involved in the transaction – seller, buyer, lender, buyer’s agent, PMI company, Junior lien holder, title company, etc. In addition to sometimes working for less commission on a Short Sale, a listing agent will work many MORE hours on a Short Sale. Because of the lower success rate with Short Sales – especially for Realtors who don’t fully understand the process – many Realtors are not willing to deal with Short Sales.

Despite all of the hard work a listing agent will do when working with a Short Sale, it’s possible the lender will request that the real estate commission be reduced (from the commission stated in the listing agreement between the seller and listing agent). If the lender has a concern about the real estate commission, they may bring this up in the initial conversation with the listing agent. It’s also possible they’ll bring it up later in the process. If at any point the lender asks the listing agent (and buyer’s agent if applicable) to reduce the real estate commission, it shouldn’t be difficult for a listing agent to explain to the lender why the agents involved should be paid more – not less – for working the Short Sale transaction.

After a seller and lender arrive at a Short Sale agreement, the lender will produce an Acceptance Letter for the seller’s signatures.  In this letter a seller may find: (1) The amount the bank is willing to accept as a pay-off on borrower’s loan, (2) a statement that the agreement is a final settlement of the loan, and/or (3) the words “paid in full” or at least the words “satisfied in full”, etc. How the Acceptance Letter is written could have an affect on whether the lender comes back later for a deficiency judgment against the borrower and may also have an effect the seller’s future credit report.  Each Acceptance Letter will vary and it’s important a seller has a clear understanding and commitment from the lender. A seller should review the Acceptance Letter closely and seek legal advice on any questions they may have.

The unexpected can happen at any point during a Short Sale transaction and a seller should not assume a looming foreclosure is no longer a concern until a closing on the property has occurred. When considering a Short Sale, sellers should contact a real estate attorney (such as Norton, Hubbard, Ruzicka Kreamer & Kincaid) to seek legal advice, a Certified Public Accountant (such as Weber, Dorton, Beckstrom & Company) to seek professional tax advice, and contact a Realtor who can provide them expert guidance throughout the process.

When a seller and a listing agent work closely together during the Short Sale Process, a successful Short Sale becomes a realistic option. Other Realtors, sellers, buyers and lenders may report varying results from the Short Sales with which they’ve been involved. That would not be surprising with the unpredictable nature of Short Sales. If anyone has additional, supporting or contradictory information they’d like to share, please don’t hesitate to do so! The buying side is less complicated and we’ll discuss the role of a buyer and the buyer’s agent in Part 3 of 3 in our series Kansas City Short Sales.

Visit our Kansas City Short Sale Realtor page to learn more about Kansas City Short Sales.

Disclaimer: Jason Brown is a licensed Kansas real estate agent and a licensed Missouri real estate agent. Neither Jason Brown, Jason Brown Premier Realty Group or Keller Williams Realty Partners, Inc. are attorneys or Certified Public Accountants. The information found on this blog and on our web site is strictly informational and should NOT be considered legal advice or tax advice. Laws, regulations and tendencies are changing daily so be sure you contact an attorney and a CPA for advice and current information on real estate laws and tax implications of any real estate decision you may make.  Buyers and sellers should seek representation from a qualified real estate agent. Without a signed listing agreement, a home seller is a customer and not a client. Without a signed buyer’s agency agreement, a home buyer is a customer and not a client.

Posted by Jason A. Brown

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