(This is Part 2 of a two-part series. Read Part 1.)
Many areas are experiencing a serious real estate market slowdown. If prices are decreasing in your area, you may soon face the prospect of representing home sellers who need a “short sale.”
The term “short sale” refers to a situation in which the seller lacks sufficient equity to close a transaction unless the lender takes a reduction in the homeowner’s loan payoff. Negotiating this is difficult. The tips below are useful in any market where sellers may owe more than their property is worth.
1. Before taking any listing, check the existing loan balances.
When you take a listing, failure to check for all liens on a property is one of the most dangerous mistakes you can make. Never rely on what the sellers say they owe. They may show you the balance on their first mortgage and forget to mention that they have delinquent property taxes as well as a home equity line of credit. Depending upon the laws in your area, you may be able to obtain information on liens from the title company. If not, there are alternatives. If you suspect that the seller may be in trouble, you can use a Web site called www.zabasearch.com to pull the seller’s complete credit history. The cost is $29.95. (If you haven’t been to zabasearch.com, you may be shocked to learn how much of your personal information is available for free.) This may also be a good approach if you represent a buyer and suspect that the seller may be having serious financial problems. If the seller can’t come up with sufficient funds to close the transaction, the transaction may fall apart or the lender may reduce the loan payoff amount just enough to close the transaction without paying the brokers a commission.
2. Check the seller’s loan documents for prepayment penalties.
One of the most difficult situations in closing any sale occurs when the sellers have a pre-payment penalty in their loan documents. Most borrowers are unaware of these. The typical prepayment penalty is six months of interest and sometimes even more. Lenders are more likely to enforce these when interest rates are going down. Nevertheless, the lender may demand that the prepayment amount be included as part of its payoff. This is another way in which a short sale could result. This is particularly troublesome when no one is aware of the prepayment penalty until the transaction is ready to close. The usual outcome is that the agent attempts to piece together additional funds from the sellers and buyers. Since the lender has the brokers in an awkward position, the lender may demand that the brokers take a cut in their commission. The best way to overcome this situation is to show the lender the cost of completing the foreclosure, fixing the property up, as well as their holding costs. If prices in your area are declining, be sure to include the cost of the decline in your holding costs calculation. For example, on a $300,000 property where the market is declining at 4 percent per year, the additional loss would be $12,000 on an annualized basis. Thus, if it takes the lender five months to foreclose, a month to get the property ready for sale, and another four months to sell and close, the lender will make the equivalent of 10 months of payments plus lose $10,000 in depreciation. Using these numbers to make this argument is the best strategy for getting the lender to be flexible.
3. Tax liens are the kiss of death.
Another potential problem is that the seller may have delinquent property taxes or IRS tax liens that may not show up on the title company report. I have worked through numerous short-sale situations, including handling property tax issues. The one area where there is simply no flexibility is the IRS. Even if you persuade a lender to take a reduction in its loan, the IRS literally takes months to release a tax lien. If the seller has an IRS tax lien, the probability is high that transaction will not close. Consequently, it’s extremely important that you check for tax liens prior to listing a property and spending your hard-earned money on marketing it.
4. Numbers are your friend.
When the lender comes back at you with its appraiser’s list of comparable sales, the burden is on you to show whether those sales are accurate. It’s also important to show the lender whether the market is increasing or decreasing. An excellent way to do this is with a square-footage CMA (comparable market analysis). Based upon the current prices for the last six months, show the lender the average price per square foot for the specific subdivision in which the subject property is located. Next, go back to the preceding six months and find the average price per square foot. Calculate the difference to show the lender whether the prices are going up, staying flat, or declining. In the case where there is a decline, the lender will probably get even less for the property by waiting, as opposed to doing a short sale with your buyer.
Short sales are only for those agents who have excellent negotiation skills and who can skillfully illustrate to the lender the costs of waiting to sell. Mastering these few simple steps can help to avoid a great deal of grief. Furthermore, it will prevent you from wasting your hard-earned marketing dollars on a listing that cannot close.
Bernice Ross, national speaker and CEO of Realestatecoach.com, is the author of “Waging War on Real Estate’s Discounters” and “Who’s the Best Person to Sell My House?” Both are available online. She can be reached at firstname.lastname@example.org or visit her blog at www.LuxuryClues.com.