FAAR Louder: Short Sales Essentials

Mackenzie Rathbun 0:01
Welcome to FAAR louder, your official Association podcast. Hey, FAAR listeners. Thanks for joining us. Today, we’re going to talk about short sales with Ali From century 21 Red Wood, and she’s gonna give us a little bit of the ins and the outs and why it matters today. So Allie, thank you so much for being here.

Ali Allen 0:20
Thank you, thank you for having me. I love short sales, I’ve been doing short sales for the last 13 years, I got into real estate in 2008. So all I know, was a depressed market. The last five years for me have been really interesting because suddenly everybody can afford their homes. So while she says I’ve definitely dwindled in the last five years, they are still out there. I recently just closed one that started out as short sale and because the market is so great actually wound up being a full payoff and the owners got money back. So even if you start with me as a short sale, if the money is there, we’ll put you into a regular sale, you don’t have to go through a short sale. So that’s been really fun for me to see the transition as the market comes up. And now that we’ve got the COVID and stuff possibly coming back down, but we’ll get into that here. But absolutely.

Mackenzie Rathbun 1:05
So to start us off, can you explain a little bit about what a short sale is?

Ali Allen 1:09
Sure. So if you’ve never heard of a short sale, you’ve been living under a rock or you haven’t done it forever. A short sale is basically when a homeowner owes more than the house is worth. So for example, if a homeowner owes us $150,000 in their mortgage, and we put the house up for sale for 200,000. After all the closing costs are reduced after the Commission’s are reduced title fees, etc. The payoff to the mortgage is now $100,000, or maybe 125. So versus 150, to the what they owe versus the 125, which is what they’re getting. We have a $25,000 shortfall. So we’re asking the bank the lender to wipe out and delete that $25,000 no longer collectible, no longer enforceable any of that. So a common misnomer is that the short in short sale or first time, but it’s actually the short payoff amount that we’re actually actually asking to reduce and wipe out.

Mackenzie Rathbun 2:04
So really, it’s just the bank saying we’ll forgive the debt for this amount, because we’re going to see our return now instead of a writer. So they’re going to

Ali Allen 2:12
basically they’re doing is they are getting rid of a non producing loan, again, at the height of short sales, everybody was in pain. So nobody was producing all these loans. They weren’t making the banks any money. So they get rid of those they bring in a buyer who is going to be called a producing loan, the person who’s going to continue making their payments was 30 some years. So that’s what you’re doing. You’re getting rid of a non producing loan for producing.

Mackenzie Rathbun 2:33
Absolutely. Okay, very cool. So we’ve actually heard kind of a buzz around short sales right now, you can’t really go anywhere without hearing people talking about seeing, thinking they’re going to see them come up. Yes, um, what, what are some of the factors that are leading into this buzz around short sales right now.

Ali Allen 2:52
So prior to COVID, so I’m going to take you back to 2019. Before all the world went crazy, um, the main top three reasons for being a short sale at the time were relocation, divorce and retirement. So it was no longer disguise falling my credits shot and losing my job. You have to remember back in the bubble, not only were the sellers losing their jobs, but the buyers that were buying the properties were also losing their jobs. So we were losing contracts right and left. Now overseeing like I said, is more divorce relocation. It’s the reduction in income, a lot of first name fall offs, but we’re still negotiating a short sale on maybe their HELOC. Right now with COVID. What I’m raising my alarm bells on the red flags that I’m seeing are these forbearance loans. The people who have not paid their mortgage, whether they started back in 2020, or 2020, all the way through now or sometime in between there, as you have one client who hasn’t paid since February of 2020. So she’s looking at possibly a one and a half year, non payment loss. And we don’t know what type of program the bank is going to offer her. This is completely uncharted territory, just like it was back in oh eight. So what we can do is prepare our clients with what’s called a business decision. If they are facing financial difficulty, it is a business decision to sell it now, while the property market is still so high, it’s so great, they might still have equity to offset the losses that they’re going to take in those forbearances. The other red flag that I see that I don’t know if anybody’s really asked I haven’t heard, please if you notice the answer, please call me Give me some some info. What I’m afraid of is that the people who took a forbearance and are not paying down their principal, the interest may still be collecting. So while you have the equity like my current seller just got an extra $50,000 equity. So you have this equity that’s building but if your principal is not being paid and that interest is coming up, eventually you’re going to miss that mark. That’s the red flag that I’ve seen. That’s what I’m worried about. I think that’s what everybody is kind of thinking the difference here between 2007 to two 2008 is that it is no long, it’s not that everybody is losing their job, everybody’s losing their savings, everybody, including buyers are going to be losing their jobs. No. Last year, there was so much free money in the market, between PvP loans, SBA loans, stimulus money, some people may have hand over fist and stocks. So for me, I think the craze of the buyer market may dwindle down a little bit now that all of that free money is kind of gone. And with the forbearance ending in June, we’ll see they extended again, along with the eviction and foreclosure. I can never say the word memorandum tutorial. Whenever that ends, that’s a big trifecta that is about to burst. And I think a lot of people are gonna fall through the cracks. They’re going to have programs just like they did in 2007 2008, they’re going to try to put money in here, we’ve got a landlord relief, we got renter relief, but you have to jump through those hoops to get it. And if you don’t know that you’re just going to sit in your house and kind of bury your head in the sand going, Oh, well, they can’t foreclose on me, they can’t evict me. That’s not true. They are evicted. They are foreclosing. If you have a property that’s been abandoned, and there’s nobody to effect, you’re at the front of the line. So please be careful on some of these things. When you’re talking to your clients, please make sure that they understand that it is a business decision, take the emotion out of it. I call it short term pain for long term gain. And I go over that here a little bit.

Mackenzie Rathbun 6:26
So I’m a little bit back on what you said, for these property owners who did own rental properties who maybe didn’t get a new tenant in there, they might be in a position where they need to sell the houses to come Yes.

Ali Allen 6:38
So that’s the other reason why we’re seeing our rental market explode right now. or similar to our buyer market. Why there’s no rentals is because all of the people who held on to their properties in 2008 2009, when the market dipped it became landlords are now suddenly seeing their gains that if they held on to the property, so now they’re selling them for top dollar. And now that rental property is now gone. And we have several of those, I do some work with some property managers here were probably a good handful of the owners have decided not to rent and decided to sell instead. So it’s all sort of, you know, symbiotic and all connected with short sales and people’s business decisions in the market and all of that. So if you have to remember back in, oh 708. When people lost their homes, it’s because the adjustable rate was so high up. Okay. So somebody who paid interest only on $17,000 a month, suddenly had their arm adjusted. And to add in the principal, their new payment was like, say 20 $200 a month. So they made the business decision to sell that as a short sale, and they went into a rental as 17 $100 a month. So rentals became super popular because all of those homeowners now suddenly became renters, those guys now are at a position where they should be able to buy again. So those guys are buying, they’re now in the pool. And those rental houses are now being sold. So it’s all intertwine from way back again, 10 years ago, and here we are again in the same position. So for me, I’m just preparing everybody, I don’t want this guy to fall, I don’t want you to have to sell your house because of COVID or because of financial difficulty. But we are here for this purpose so that they don’t fall into foreclosure. You don’t want that the short sale is always going to be better than foreclosure in the state of Virginia.

Mackenzie Rathbun 8:26
Absolutely. So definitely, knowing how to be an agent to service those needs would be very important. What are some things that I would need to know as an agent looking to maybe start working with short sale perfect. So

Ali Allen 8:39
as a listing agent for a short sale, you have to qualify the homeowner first before you even take the listing. So these are not going to be their typical listings where you’re negotiating your commissions your negotiating condition compared to other comparables with short sales, when you do your CMA, you can generally discount about 5% off of that, because you know that it’s going to take a long time for the buyer to sit there and wait, you have a lot of work to do as the agent. So again, before you take the listing, you’re gonna have a one on one, sit down with them. And you’re going to ask them what’s going on, the more truthful your owner is with you, the better you can help them on the back end, it’s all going to come out. Okay, there’s no hiding insurance sales, the bank’s gonna pull a credit report, the bank’s gonna pull a title report, we’re going to know if there’s extra liens or judgments on there, we’re going to know if they have extra debts that they’re not telling us about you cannot hide them short sale. So it is better for you as an agent and the customer to tell us up front what is going on. And we can put that information in our back pocket and use it to our advantage later down the road. So what I mean by that is if you’re going through a divorce, and somebody ran off with all the money, don’t be ashamed by it, just let me know where the money went and went went. I need to know that it was on this month and this much was taken and this is how much I lost. I don’t need to know that they ran off with so and so and you know, the whole emotional side of maybe the facts of the case, you just need the facts. Okay? So the reason being is that when you submit all these documents to the bank, all the banker sees his word on paper, right? They don’t have this emotional connection that we do over sitting across from them. I’ve had homeowners cry, I’ve had homeowners who have had death in the family, the borrower, it’s very difficult. You’re dealing with somebody who’s very angry that they have to sell. The banks don’t want to work with me, they just want to foreclose, no, they don’t, they don’t want to own your home. They’re not in the business of owning homes. They’re in the business of making money with mortgages, right? So you are doing a lot of psychological issues with the homeowner in this type of position. So go in and and just ask those questions. Why are you facing foreclosure? Questions a foreclosure? Why are you facing financial hardship? What drove you here was a divorce? Was it relocation? Was it COVID? Does it excessive credit? Do you just not have any more credits to be able to pay your debts? On top of that, then, once you get the financial statements, you want to make sure because the bank is going to ask for three months of back pay stubs. And they’re going to ask for three months of back bank statements. A good negotiator will then go through and say, okay, based on your income expenses that you’ve given me, for the previous month that I did, I will go through with a highlighter, and I will do my own budget. So I can see if you’re actually telling me the truth. Or if you’re not, because the bank will also go through your bank statements line by line, what they’re looking for are your other bank accounts that you haven’t given us. So they’ll go through and they’ll say, Oh, well, you transferred this bank of america account to bank account. 1234 $500, where’s bank account? 123. Again, you cannot hide. So being very, very upfront with that with the listing agent side. The other thing that you want to know is who is on title, who are you actually dealing with? Way back in the beginning, I had a husband who tried to sell a property without his wife’s knowledge. been super fun. So she called me all upset. I had no no no idea. But we did the title for and sure enough, she’s all title she’s allowed, she has to be able to contract. That is a big common misconception to that our question that I get, if husband is on title, but husband and wife are on the loan, okay, husband and wife’s that documentation needs to be submitted to the bank. But you only have to worry about getting everything signed, title wise with the husband, or vice versa. So husband and wife, we’re on title but only husbands all alone, you would only need the husband’s financial documents, but husband and wife have to be able to contract in the listing agreement. Wow, that’s a lot to juggle there it is. It’s a lot of information. So that’s why we talk about commissions. That’s usually why listing agents get a little bit more is because we do have to do so much on the back end of collecting documents and who we’re actually selling a property for. Another common thing to ask is if they are currently facing foreclosure. With a foreclosure stay right now, that’s not been a big question or common thing. But as we get into June and pass that when foreclosure start again, possibly. You want to ask if there’s a foreclosure sale date within the next 30 days, the reason being is nine times out of 10. Most short term lenders will not take a short sale file, if there is a sale date within 3030 to 31 days. The reason being is that there’s just not enough time to get documents together, get it listed, get an offer, get documents to them, get an appraisal done and get back to find out if that offer nets them more than the open market.

Mackenzie Rathbun 16:20
So obviously, there’s a different timeline for every closing when it comes to short sales. But is there a general overview of a timeline that you can give us that maybe we could know where we would be in the process? Yes.

Ali Allen 16:34
So generally speaking, short sales, the only thing that changes in short sales are the sellers financial situation, everything else generally is the same. So you’re going to have the same 30 day window for document collection 30 to 60 days is going to be your appraisal timeframe. So the phrase being ordered, returned, reviewed, and then the next 60 to 90 days is going to be the final investor review. So no matter if you’re on the listing side, or you’re on the buying side, your timeframe should be somewhere between 75 to 90 days, 30 days for docs, then 30 days for the appraisal another 30 days for the investor review.

Mackenzie Rathbun 17:08
Okay, so what are some of the steps that go on in each of those segments.

Ali Allen 17:13
So depending on the loan type, we talked about FHA being different than conventional VA. So I’m going to talk about FHA first, and then we’ll talk about conventional and VA. FHA, they have what’s called approval to participate. It’s called ATP for short. What that means is that the seller is pre approved to be determined to be eligible for short sale. So when you have the listing, and you’ve got the listing going, it’s active on the market, you’re going to submit the listing agreement, an authorization, and the initial financial documents to the bank. I’m just gonna use Bank of America as our example. So I’m going to submit everything to Bank of America, Bank of America is then going to issue me a phone number, the seller calls and does an interview. Once that’s complete, the seller to RCV Bank of America then determines are the sellers eligible for short sale and they issue what’s called the ATP, the ATP will have exactly what the value is that they’re looking for, it will have the exact net they’re looking for. So the payoff that they want, how many days that you have to get that and if there’s any money going back to the homeowner, again, back in the heyday of short sales, and we had the half of credits and all of that ATP is delegated the homeowner about $3,000. To move out on that it dropped down to 1500 by a certain date and then zero to another date, I think it is now completely zero. Once the ATP is issued, any buyer who meets and or exceeds that minimum that requirement, their offer should be approved, pending review. So an FHA short sale, they are guaranteed 1% in closing costs for FHA buyers, conventional and VA, you will have to ask for what’s called a variance request. If you’re asking for the full 3% on FHA buyer, you will have to ask for the variance request anyway. Then you have the final approval for the contract. So you have two part approval on FHA, you have the seller approval, seller side only approval with the ATP, and then you have the contract approval. And you start FHA when you list the property, conventional and VA short sales, you will start the short sale once you receive an offer. Once you receive the offer, the bank knows how much they’re going to get and their payoff the value they’ll do their bpos, all of that. So that’s the only difference between FHA and conventional. The same thing that happens so this one, FHA starts the 60 days prior when you start listening, these guys start when you ratify and then those 30 6090 days start, okay. So FHA starts just a little bit ahead of everybody else.

Mackenzie Rathbun 19:36
Okay, so you get you get approved, and then you have all of these. So what do you do when you start getting offers like, what do you do? Okay,

Ali Allen 19:46
so the same thing will happen okay, takeaway in this short film is the name short sale when you have multiple offers because it’s a crazy market, right guys? multiple offers. You want to do the best that’s the best for your client and what’s going to be best for the bank. Okay. Nine times out of 10, you don’t want to take a ridiculously low offer, okay? This is not the sky is falling, we’re going to take it off for like, say 50 $60,000 under list, okay, in this crazy market, I highly doubt that would still happen anyway. But being realistic, okay, this was not the crazy market that we’re going through this is a normal market. If you list a property at 200,000, do not accept offers lower than I would say 175. Because now you’re trying to cover a gap, right? The bigger the gap, the more disappointment that buyer is going to have, the more disappointment the seller is going to have, the more disappointment and frustration you’re gonna have, because you’ve done all this work, and it just fall out. Right. So if I have an offer for 200,000, and I see that the listing agent has ratified an offer for 150, that just hurts my heart, because we have a $50,000 gap between what you as the listing agent said the market value was worth and what you ratified, don’t do that to yourself, you have the opportunity to counter even before the bank sees it. So you get a ridiculous deal offer counter, if they can’t come up to that price, then don’t waste your time. Okay, a $25,000 gap is much easier to cover that $50,000 gap. So if I’m using that example, offer price at this price is 200,000. buyer maybe offer up 150. Say the bank counters at 180. Well, we’re only $20,000 off this price. But we’re $30,000 off this price. So the buyer has to come up so much more than what the bank wants, well, maybe the bank counters at 190. So you seem to think that you’ve got to cover all of this began. Don’t do that to your buyer. Don’t do that to yourself. Don’t do that to yourself. So be smart about your pricing. If you think even as a short seller, you’ve taken the condition and how long this process is going to take into consideration. And the property value is 200,000. Don’t deviate too too far from that. I would only say 25 to $30,000 off list. Because the bank is going to do their own appraisal, their BPO and all of that. So don’t set yourself up for failure. Don’t set your buyer up for failure. Okay, don’t don’t let them do that to you.

Mackenzie Rathbun 22:05
Be realistic. So there is a lot to know when you are being a buyer’s agent. Yes. Or when you’re being a seller’s agent, what do you need to know when you’re being the buyer’s agent? In those situations? What’s kind of different about

Ali Allen 22:17
it? Okay, so you have to take the knowledge that you have as a listing agent for short sales and put it to the task of buyer’s agents. So you have to know where you are in the process as a buyer’s agent. So as I said, All short sales have the same 3060 day 90 day window. As a buyer’s agent. The first question that you’re going to ask is if it’s an FHA short sale, as I said, FHA short sales can begin at the time of listing. So if you have an FHA listing, and they haven’t started, then you know, automatically that your buyer is going to have to wait an additional 30 to 90 days on top of the original 30 to 90 days, they’re short sale review. There’s not a whole lot they can do other than wait, the first 30 days is just Document Submission. So you’re just calling up every week. Hey, is there any change? No, Cool, thanks, keep rockin. Once you get to the 60 day mark the 45 days 60 day mark, that’s when you want to start asking about the value being ordered a negotiator being assigned. So I know in the earlier I use the equivalent of the roller coaster. So you have to think like here’s your listing. Here, now we’ve got a contract. So our first 30 days, we’re going up the roller coaster, the value is here we’re crushing the roller coaster, and then the investor with you to the final decision, we’re coming down the roller coaster. So basically, once your your value is in, now you’re just waiting for it to come in. And that final investor review. Okay, those investor reviews take anywhere from 10 to 30 days. So it’s all downhill once that value is in you should now 10 to 30 days, I should have a final decision. So as a buyer’s agent, and you cannot call the lender, you cannot call the foreclosure attorney, you really have no power, you don’t have the information that you need to get past the recordings. To get your authorization to do all of that, the best thing you can do is sit tight, and wait and reassure your buyer that the first 30 days of no updates is normal. And remember, 30 days is 30 business days, not 30 calendar days. So when I tell you 10 business days, that’s two weeks and calendar days. So remind your buyer that hey, today is only day three of 10. Today is day 25 of 35 more days. So the more that you’re open with your buyer that this is normal. Hold on, don’t panic, the more they’re more confident that things are progressing, even when they don’t seem like it on your end because the back end, they’re doing all kinds of stuff. As a buyer’s agent, just make sure that you haven’t missed any initials. Make sure you’ve got your ratification date, make sure you’ve got a closing date. Make sure your pre approval letter is dated within the last 30 days and just hold tight.

Mackenzie Rathbun 24:50
That’s really as a buyer’s agent. It really is important to know everything the sellers agent knows though but yes, it is that process and knowing and having the confidence To tell your buyers, hey, it’s been 30 days and we haven’t heard anything. It’s okay. He says, This is the process, yes. And to be able to come with that authority to it. So you don’t

Ali Allen 25:12
have to know all the ins and outs like a listing agent or like myself, you don’t have to know the lingo, certain lingo. But you do want to have a basic understanding of where you should be within your file review. I have had buyer’s agents come to me in my office and say, hey, I’ve got a short sale Is this normal? Where the listing agent has told us very whoever you’re talking to? Please stop? No, I’m going to ask these questions, because I’m going to ask very in depth questions to know where it’s at. That particular buyer’s agent got a printout of the timeline of everything that was happening, I reviewed it, I said, Yep, this is normal, it’s normal. These are your next steps. This is what you should expect. It went off without a hitch hereby or close within four weeks. So just be reassured if you need help, call me I will help you I will help you with the questions that you need to ask to actually get you understanding of where you are in that process for a buyer’s agent, because like I said, it can be very daunting to not know especially if you’ve never done them, you don’t know what questions you should be asking to get the information that you need to give yourself and the buyer the confidence to stay on the contract.

Mackenzie Rathbun 26:13
So in a market, where we are definitely seeing that short sales are going to be coming back where sellers agents are going to need to know and buyer’s agents are going to need to be aware, fully there was a place there where they could take a class about no Yeah, my gosh, like the fire academies class short sales 101, which will be July 16. And anybody interested can register at Bit.ly/shortsales101. The link will be in the description for the podcast today.

Unknown Speaker 26:42
But um,

Mackenzie Rathbun 26:44
what else can we expect to learn in this class that we maybe didn’t cover here today or couldn’t go in depth on so the

Ali Allen 26:49
people that have taken the class prior have told me that it’s like drinking water from a firehose, even talking with you and our little break here, you said that you learned just a little bit tidbits from the little drips that I’ve given you. We are going very, very in depth. So we’re going to talk about why people short sale, what to expect with COVID, what to expect the forbearance options, what questions you need to ask to pre qual during the financial interview, what documents you’re going to need to collect at the listing stage. There are case studies so that we really hone in on what the ATP is what that actually means that we go over what happens if a borrower is deceased, and they’re facing foreclosure in those 30 days, if there’s an active or close to bankruptcy, if they’re an active divorce. We’ve even done ones with active military overseas, how we do that over zoom, and DocuSign, all of that. And then the back end of that is how to buy a short sale, what to expect what questions to ask the listing agent terminology to know so that you know the lingo and what they’re actually asking for and what these abbreviations and all these acronyms actually mean. And then we do some case studies. So the very last case study, you will see why I’m so adamant about not seeing approval until you actually have it in hand. You will see how that played out and why that case probably would have lost to a lesser agent if they didn’t know what they were looking at.

Mackenzie Rathbun 28:13
Absolutely. Well I’m personally very excited about this class. I learned a lot today and I hope you guys have as well. Please check out the far website if you’re interested in taking profit again the link in the description. Thank you for joining us today and I catch you guys on the next episode.

Transcribed by https://otter.ai

To learn more about short sales, take our Short Sales 101 class at bit.ly/shortsales101