Stacey is executive editor of publications for the National Association of REALTORS® and editor-in-chief of REALTOR® Magazine.
Beating the Odds on Short Sales
Take a hardship sale, apply knowledge and chutzpah, and get ready for some of the most rewarding closings ever.
January 1, 2012
“There’s nothing better than being able to give a seller a new chapter in life,” says Chris Willette, a salesperson with Edina Realty in Edina, Minn., talking about the three years he has spent honing his short-sales expertise. “The recommendation letters I have from people . . . you can’t explain the gratitude people feel.”
Whether short sales are a small segment of your business or critical to your survival, you need to know how the process is evolving so that you can beat the high failure rate that continues to plague short-sale offers.
“Lenders have hired more staff, developed more structured escalation policies, and in a few notable cases adopted technology platforms, all intended to improve the quality of their work on short-sale files,” says default-industry consultant Scott Thompson of Sacramento, Calif. “Nevertheless, approval timelines are sometimes so long that it’s difficult to hold a transaction together.”
To the sellers and buyers you serve, being able to masterfully close short sales will make you a hero, a genius, and a saint all rolled into one—a hero for the fearless persistence you show when you hear no (or nothing) from the lender; a genius for being able to understand and explain the changing short-sale guidelines; and a saint for being willing to proceed against the odds, knowing that you won’t be paid unless the transaction closes.
San Francisco resident Michael Colo found himself on the brink of foreclosure a few years ago after the value of his luxury condo plummeted. He talked with four salespeople before finding Dennis Serrao, broker-owner of Serrao Realty in Livermore, Calif. “Dennis took the time to explain the whole process,” says Colo. “He was the only one who said the sale might not go through. He was very up-front about expectations.”
Three months later, Colo had sold his condo in a short sale. “I avoided foreclosure, and my credit looks great,” he says. He has since bought another home.
Thomas Lamosse of Edina, Minn., was on the other side of a short sale. Lamosse lives in the United States just six months of each year. For several years, he rented from a friend. “I wanted to get out of my friend’s basement,” he says. Another salesperson offered nothing but discouragement. “She kept saying, ‘Don’t buy a short sale. You have to negotiate with the bank, it’s a long wait, and you won’t get it because 30 percent of them don’t go through,’ ” recalls Lamosse. When he found a short sale listed by Willette, he discharged the other salesperson. The prospect of dual agency didn’t alarm him: “I’m a shrewd businessman, and it was a cash offer.”
Three times, Lamosse threatened to pull the plug rather than bring more money to the transaction. As a result, “I found out the bottom-of-the-barrel price the bank would take,” Lamosse says.
But that price was still higher than he was willing to pay, so Willette convinced the seller to put $3,000 into the deal. “It was an emotional roller coaster, but Chris was pretty amazing because he got the seller to kick money into the pot, he got the bank to drop its price, and he got me to raise my maximum amount,” he says. “The other salesperson couldn’t have come close to this.”
Lamosse moved into his condo in September.
One Destination, Many Roads
When you embark on a short sale, the biggest obstacle you’ll face is the lack of a clear, consistent, dependable path. “In Forrest Gump vernacular, short sales are like a box of chocolates,” says Thompson. Apart from the basics—submitting a hardship package and waiting for the bank’s answer—“you have to approach each sale individually and, at the same time, stay on top of a constantly changing landscape,” he says.
That starts with an understanding of the federal guidelines that have been created for loan servicers, the entities that collect mortgage payments from home owners and attempt to work out distressed loans through modifications, short sales, deeds-in-lieu of foreclosure, or, if all else fails, foreclosure.
Borrowers who fall within federal guidelines may be able to accomplish a short sale using the Home Affordable Foreclosure Alternatives program (see “How HAFA Has Helped”). But the HAFA guidelines vary depending on whether the loan is held by Fannie Mae, Freddie Mac, or a private entity, so it’s important to know who owns the loan. Even if they don’t qualify for HAFA, borrowers may still be able to do a short sale—but factors such as the documents required in the hardship package, qualifying criteria, and speed at which a negotiator is assigned will vary. Learning the variations takes time.
After a sale, “I always ask the processor or negotiator, ‘Is there anything I could have done differently?’ ” Willette says. In this way, he gets to know each bank’s particular hang-ups, such as wanting every page of the short-sale package numbered.
Willette brings empathy to his work. A 16-year veteran of the business, he got his start in short sales three years ago when he needed to sell his own home at a loss. The runaround and lost paperwork were considerable, he says, but he got the bank to accept a $200,000 loss. The process has gotten only slightly easier, he says.
“There are still too many lost faxes and inexplicable valuation problems,” Thompson agrees. “There’s also too much ad hoc policymaking by inexperienced lender representatives—and too much waiting on hold.”
Willette avoids faxing altogether. “I use certified mail,” he says. “If a document is lost, I can say, ‘You received it at 10:38 a.m.,’ and then it’s mysteriously found. Even if it costs me $20, my time is important.”
Who Are Component Servicers?
Traditionally, mortgage loans have been serviced by lending institutions. But more and more, servicing is splitting off as a distinct function that may or may not be administered by a lender—particularly for loans in distress.
Lenders both big and small are looking at the option of moving delinquent mortgage volume to component, or specialty, servicers. In nearly all cases, the component servicer takes on only the default servicing functions on the mortgages. These specialty servicers are paid for achieving pre-foreclosure resolution. Meaning: Your sellers’ interests and those of the component servicer are aligned. On short sales that have been assigned to a component servicer, you have the benefit of working with someone whose sole focus is on resolving the delinquent mortgage—as quickly as possible.
“Once we confirm the transaction is consistent with program guidelines and serves the interests of the mortgage investor, we want to get the transaction completed as quickly as possible,” says Leo Esposito, first vice president of Loss Mitigation & Asset Disposition at Pittsburgh-based ServiceLink, one of the largest component servicers in the market. “Transaction velocity is important.”
To curb problems, many servicers are turning to technology platforms that allow you and the servicer to collaborate throughout the short-sale process. The biggest, Equator, was first released as REOTrans in 2003 by the company’s Chairman Mark McKinley and CEO Chris Saitta; the platform was expanded about two years ago to handle short sales. It’s used by several major servicers, including Bank of America and Wells Fargo. In general, platforms such as Equator have been lauded for bringing more accountability to the process. But for some practitioners, particularly those with established systems, the change can be daunting. Picking up the phone to communicate an update and making a note in your file won’t suffice. All updates must be recorded in the system.
You’ll have problems if you don’t use the system properly, Serrao says. “If you’re going to use it, you should strive to be platinum certified,” he says, referring to training certifications Equator offers.
“Also, beware of a subtle shift some lenders are making from a document-driven to a data-driven process in which you’re expected to do data entry,” Thompson says. “It’s one thing to upload a financial statement form that has been completed by the seller and quite a different thing to enter the data on an online form. There’s a risk of introducing an error that could cause a problem in an otherwise approvable short sale.”
If technology is gaining importance, it still plays second fiddle to experience. “It’s a mistake to assume that the lender will place the short sale in the right program, properly apply program guidelines, or understand state-specific regulations,” says Thompson. If you want to achieve the best possible outcome for the owner—a sale with no deficiency judgment—“fair or unfair, you need to be the smartest one in the room,” he says.
Set clients’ expectations at the outset. “I tell the seller and the buyer’s agent up front that I’m going to come down hard on them because we need those documents signed and back the same day,” Willette says.
If you’re working with buyers, you need to assess their readiness. “Not all buyers have the temperament for a short sale,” Thompson says. “Those who require a dependable closing schedule or lack flexibility probably aren’t the best candidates.” You also need to learn as much as you can about the listing and listing agent. Ask: How many short sales have you done? Have you had any hardships? Has an appraisal been done yet? Which lenders are involved?
Serrao finds about 10 properties in his buyers’ range, then does a phone interview with each agent. But just asking the questions isn’t useful unless you know why you’re asking, he says. Experience with different lenders will tell you, for example, whether the process will extend beyond your buyers’ time frame or the holder of a second lien will stand in the way of the sale.
Banks Are People, Too
Knowledge gives you bargaining power. “Agents will come in with a $300,000 offer. They’ll be dealing with the lowest-level bank employee, and the BPO will come in at $320,000,” says Serrao. “They have worked on this for months, but they’ll walk away and say, ‘We tried our hardest.’ They don’t know there’s another way to go.”
That other way is to escalate. Willette has established relationships up the chain of command, enabling him to cut 30 days off the typical four to seven months it takes to close a short sale, he says.
“There’s an art and science to escalation—when to do it, how to do it,” says Serrao, who—with his wife, Stella—has closed more than 80 short sales since 2007. “We do it when the price is right. We have upper-level contacts with almost every bank.”
“Many practitioners don’t want to do short sales because they don’t think they can get it done,” Willette says. “Counter back to the banks! You can always provide comparables to support your value. If you’re weak, they’ll run right over you. And ask the seller to contribute. These second mortgages take huge hits; they can’t give you a dime. You have to have a backbone.”
It’s time-intensive work. “At any given time, I’m negotiating 20 short sales,” Willette says. “There are many nights I’m in the office until 4:30 a.m. going through every file, so I’m ready if there’s a request. You have to be organized and know where each file is in the process.”
Deals can turn suddenly. “In one case, we had a cash buyer and bank approval,” Willette says. “Two days before closing, the bank said it was countering the offer by $15,000.” Willette jumped in his car and captured photos of comparables to show why the lower offer should stand. “Finally we got it done,” he says. “The negotiators said, ‘You physically took the transaction in hand. Ninety percent of agents wouldn’t do that.’ ”
Serrao recently worked with a transferee whose house was $150,000 underwater. His parents had cosigned the loan, and he didn’t want to hurt their credit. “Because he was current, the bank denied him,” says Serrao, who reached out to a senior vice president and succeeded in changing the decision.
But while experience and perseverance can reduce the failure rate on short sales, you’ll still have disappointments. Serrao worked with one couple who had fallen behind on a property after both lost hours in their jobs. “Things just soured over eight months. We escalated, but we couldn’t get through [to the bank] that this was a true hardship. The home went into foreclosure.”
The point to remember in such a situation is that the bank is not the enemy, Serrao says. “[Bank employees] can be inept, but so can agents. They’re human and they’re overwhelmed. You’ll send them paper. They’ll lose it. You’ll send it again. That’s just the way it goes.”
How HAFA Has Helped
In 2009, the U.S. Treasury Department unleashed a torrent of new acronyms for servicers, all under the umbrella of Making Home Affordable. MHA provides guidelines and incentives to lenders to encourage mortgage modifications and to facilitate short sales or deeds-in-lieu of foreclosure in the event a modification isn’t possible or doesn’t work.
Lenders start by qualifying borrowers through the Home Affordable Mortgage Program. Those who are eligible for HAMP (based on the size of their mortgage and their financial situation) but don’t qualify for a modification may be considered for the government’s Home Affordable Foreclosure Alternatives program. HAFA offers:
- Guidelines for completing short sales and deeds-in-lieu of foreclosure.
- Incentives for servicers and investors.
- Moving expenses for sellers.
HAFA has been roundly criticized for falling short of its goals. But for all the talk of HAFA not delivering the results that were expected, it’s a government program that has made a difference, says default industry consultant Scott Thompson of Sacramento, Calif. “The discussions that led to the adoption of HAFA and extensive follow-up dialogue have brought focus to many of the critical issues that need to be resolved for the short-sale process to work better.”
Travis Hamel Olsen is COO of Loan Resolution Corp., in Scottsdale, Ariz., a component servicer that takes on short-sale files for many of the country’s largest lenders. His company handles thousands of HAFA short-sale files every month. “The rules and guidelines in the HAFA program are noticeably improving the overall short-sale process,” Olsen says. “It has urged servicers to move in a proactive direction and adopt a more standard set of short-sale guidelines.”
5 Ways to Gain Confidence in Short Sales
1. Take a course to help you understand the basics. NAR’s Short Sales & Foreclosures Resource certification (realtorsfr.org) is one option. To become certified, you listen to three recorded webinars (free), take a one-day course either live (the cost varies by provider) or online ($115), and pay a $175 application fee. Don’t expect the course to make you an expert, though; that comes from experience. “The short-sale landscape, with all the new and changing programs, guidelines, and regulations, requires a real effort from practitioners who are committed to staying current,” says default-industry consultant Scott Thompson.
2. Network with peers. Talk regularly with agents and brokers in your areas and from around the country to share issues and ideas and gain a well-rounded perspective on the broader short-sale market.
3. Review pertinent federal and state guidelines. It’s important to know not just the federal rules but what’s going on in your state, Thompson says, because a variety of state statutes have been enacted to address foreclosure processing improprieties, taxation of mortgage debt forgiveness, and liability for deficiency balances after a short sale or foreclosure. Just remember: Don’t give legal advice unless you’re also an attorney. Always recommend that short sellers retain an attorney—preferably one with knowledge of tax and bankruptcy law—to help them navigate the sale.
4. Identify a strategic partner. That could be another salesperson in your area with the expertise and willingness to work with you or a third-party company. One such company is Dallas-based Wingspan Portfolio Advisors, says Thompson, who is working with the company to refine its short-sale process. Wingspan was founded in 2008 to serve the interests of mortgage insurance companies and subordinate lien holders. Leveraging its servicer and mortgage insurance relationships, Wingspan will be rolling out a “Certified Short Sale” program in late January that will provide pre-negotiated MI and junior liens, along with lender-approved price targets, all designed to smooth short sales. “We’d already been working on the toughest parts of the short-sale process with MI and the seconds,” says Chris Plummer, managing director of Wingspan Real Estate Network. “We feel we can be that partner that could make a real difference for agents.”
5. Seek your broker’s guidance. As you work on short sales, meet regularly with your broker to discuss file documentation, disclosure, and office policy issues.
Updated: May 17, 2022