How To Do A Shortsale

If you’re staring foreclosure in the face or looking to buy one of the “distressed” homes glutting the market since the 2008 recession, you might be considering a short sale. Don’t be scared off by tales of frustration and failure: Experts say deals are out there, waiting to be done. Aaron Eyerman, Broker with Blue Water Realty in the Cape Coral, Florida, estimates that 70 percent of his business is in short sales. He also teaches classes on the subject for office associates  and public events. eHow spoke with Eyerman about the ins and outs of a short sale.

 eHow: What is a short sale?

Aaron Eyerman: A short sale is the process of selling a home for less than the bank is owed.

The national statistic for short-sale success ranges from 30 to 50 percent. That’s because most people don’t know what they’re doing. A good agent who knows what she’s doing can close 90 percent of short sales.

eHow: Why would a bank accept less than the amount of the loan?

Eyerman: In most cases, their only other alternative is a foreclosure, which is an extremely costly event. The average short sale nets a bank 24 percent more than they would have gotten in a foreclosure.

eHow: How much of a discount does the buyer usually get?

Eyerman: I’d say that you should be able to get a short sale between 10 and 20 percent off of market value.

But the buyer needs to know what the actual market value of that house is and be prepared to pay close to that amount. All of our listings end up selling for more than we have them listed for.

eHow: How should the seller start the process?

Eyerman: The seller needs to be working with an agent who sends them to also speak with a bankruptcy attorney and a CPA and sometimes a real estate attorney. If the real estate agent does not have those resources, they are not an agent you should be working with.

You have to get the right team in place when you’re doing a short sale. You really need that team.

eHow: What else is required of the seller early on?

Eyerman: You need to find out whether your state is a deficiency state. In a deficiency state, the bank has a right to pursue the seller for the difference between what the seller owed and what the bank recouped from either the short sale or the foreclosure. Florida [where Eyerman works] is a deficiency state.

If you’re in a deficiency state, the main focus of the agency you’re working with needs to be negotiating a waiver of that deficiency.

eHow: What should the buyer do at the start of the process?

Eyerman: The buyer needs to understand the short sale process and the foreclosure process. This is a transaction that is counter intuitive from beginning to end, and they need an agent to explain why things don’t make sense.

A good example is a house listed at 60 percent of fair market value. That buyer does the “woo-hoo” dance and puts in an offer at full list price. Two months later the bank counters those terms to full market value and the buyer is asked to bring more money to the transaction. That isn’t good news.

A skilled agent would have counseled [the buyer] to base their expectations on the market value rather than the list price, knowing that sometimes the listing agent is deliberately pricing below market value for a fast offer in order to get an extension of a public sale date, the date at which the seller will lose his house to foreclosure.

eHow: Isn’t the purpose of a short sale to avoid foreclosure?

Eyerman: Just because you’re engaging in a short sale doesn’t mean the bank will stop the foreclosure process. Often the two are happening hand in hand; if one fails, they’ve got the other option. In most cases, you can get the bank to extend that public sale date to extend the foreclosure.

It’s in the bank’s interest — they’re going to make more money that way [with a short sale] — but they want the backup plan.

eHow: Do the seller and the buyer have different goals?

Eyerman: A buyer needs to understand that the seller’s motivation often is preventing a foreclosure, while the buyer’s motivation is getting a good deal. So the two often don’t behave the same way; they aren’t coming from the same place. The art of negotiating is understanding the other side’s point of view.

All paths can still lead to foreclosure, and both sides need to be prepared for that.

eHow: How does the seller convince the bank to approve a short sale?

Eyerman: A short sale is always predicated on a hardship, so the seller and the agent will have to put together a package of documents to make that argument. It will include all the documents the seller would provide if they were applying for a loan: tax returns, bank statements, pay stubs, etc.

That package will also include a hardship letter and the contract with the buyer. The seller and agent will send the whole thing off to the bank for their review.

The seller wants the negotiator at the loan servicer (the company you write your check to every month), the investor who owns the note, which probably is different from the loan servicer, and the mortgage insurance company (if he has mortgage insurance) to look at the package and say, “Yes, I agree, this person can no longer pay this mortgage.”

Before the underwriter signs off on it, the bank will order either an appraisal or a broker price opinion on the house. The broker price opinion is the linchpin of this transaction, because it is that broker price opinion on which the bank will determine the final price they will agree to.

eHow: How do the seller and the buyer get together?

Eyerman: The seller lists the house, usually in the bottom third of the market value, and secures an offer from a buyer.

Once the seller is chugging away on the short sale process, there’s the inspection. That’s also counterintuitive to the buyer.

eHow: There’s an inspection even when short sales usually are sold “as is”?

Eyerman: It’s in the buyer’s best interest to do an inspection very early in the process, even before the short sale has been approved. A buyer is buying the property in “as is” condition; they’re not going to get the seller to perform any repairs and they’re not going to get the bank to perform any repairs.

[But with the inspection] we can show them bids for legitimate habitability issues, like the house needs a new roof or sewer line. Doing an inspection early is the buyer’s only opportunity for influencing that price downward from the point of view of the bank. If you wait to the end of the transaction to do the inspection, the bank is not going to go back and adjust that value.

If the bank is going to counter the terms or the price, they will do so at this point. This is where the high-level negotiating comes in.

eHow: What happens when you get a decision?

Eyerman: A formal letter of approval gives the terms of the decision. Reviewing that final approval is important for both the buyer and the seller.

It’s a more important document for the seller. That document is going to tell them in most cases what could happen after the closing. Not every bank is going to agree to waive their deficiency, no matter how well you negotiate this thing.

The most significant preparation for the buyer is to manage their expectations [and know] that the process will take longer than they expected. The buyer needs to be prepared for how stressful this is and that the closing date is going to move around. They need to be aware this process could draw out and it’s going to be unpredictable.

[But] if they hunker down and do their homework, get an early inspection and ask a lot of questions, at the end of the day, they’re likely to get a great deal.

Short Sale Expert Broker Aaron Eyerman of Blue Water Realty Inc of SW FL 

www.OnlyFloridaHomes.com

aaron@bluewaterrealtyofswfl.com