Short Sales A Win Win Solution for Everyone Involved Prepared for: North American Title Company June 5, 2008 Prepared by: Ildiko Pali Real Estate Broker Short Sale Specialist 415 412 8721 (mobile) 415 923 9921 (office) 415 923 9921 (fax)
Outline 1. Rising number of Foreclosures in the Bay Area and California (Market Overview) 2. The 10 Alternatives to Foreclosure 3. Foreclosure Timeline: Stages of Foreclosure 4. Short Sales (One Alternative to Foreclosure) a. What is a short sale? b. Why would a lender accept a discounted payoff? c. Why is the Short Sale a win-win solution? 5. The Short Sale Process a. Find the seller (marketing) b. Consult the seller c. List the property d. Enter property into MLS e. Open escrow f. Prepare the short sale package (for lender) g. Market the listing h. Present offers to seller i. Submit offer to lender j. Negotiate with existing lenders k. Control & negotiate with other lien holders l. Continue to accept offers m. Close escrow 2
1. Rising Foreclosures in the Bay Area Statistics We cannot open a newspaper today without reading about the rising number of foreclosures in the Bay Area. While in San Francisco we have been very lucky, but we did have 420 Notices of Default (NOD) in the first quarter of 2008, a 94.4% increase over the first quarter of 2007, which had 216 NODs. Other Bay Area counties are experiencing much higher numbers of foreclosures. According to DataQuick, 16,398 NODs were filed in the first quarter of 2008, a 143.7% increase from the first quarter of 2007, which had 6,730 NODs. Between January and March of this year, 113,676 NODs were filed in California, up 39.4% from the previous quarter s number of 81,550 and up 143.1% from the first quarter of 2007, which was 46,760. According to DataQuick, 68% of the homeowners who entered default (47,171) this year lost their homes to foreclosure, and most of these went back to the lender as REO properties. A year ago this number was only 22,445. The increased number of houses lost in foreclosures reflects declining home values and a pool of at-risk mortgages that originated in 2005 and 2006 (100% financing, negative amortization loans). Foreclosure resales, REOs, became a significant market factor, 33% of all California s resale activity last quarter. A year ago it was only 3.2%. Foreclosure resales vary significantly by county: in San Francisco the number was 5.1%, but in other counties it was as high as 66.7%. I believe that as Realtors, it s our duty to educate and HELP our clients and the public by presenting alternatives and solutions that allow them to avoid foreclosure. Helping homeowners to get out of foreclosure or to prevent a foreclosure can be a highly rewarding and, above all, a profitable business for Realtors. 3
2. The 10 Alternatives to Foreclosure 1. Payoff/refinance (Equity required) 2. Reinstatement (Savings or equity required) 3. Loan modification (Need good paying job & cash) 4. Forbearance (Negotiate payment plan, payment reduction) 5. Partial Claim (Get a second loan from the same lender) 6. Deed in Lieu of foreclosure (Give home back to lender) 7. Sell their home (If there is equity, sell without lender approval time is of the essence) 8. Short sale (Money owed is higher than market value needs lender approval) 9. Bankruptcy (Only a band-aid to buy time timing is very important). Refer your client to a good bankruptcy attorney; they may need one. Chapter 7 liquidation, to completely wipe out personal debt (not mortgage loans, just deficiency judgments) Chapter 13, wage earned plan, payments are made toward a plan to pay off debts in 3-5 years (good for loan modification) Chapter 11, business reorganization) 10. Do nothing (Not a solution, but many homeowners choose this option because of fear, lack of information and lack of knowledge and guidance) 4
3. Foreclosure Timeline Stages of Foreclosure This is usually a 6-8 month process, although at times it could take as long as two years. 1. Collection Stage a. 2-3 months (varies) b. property owner stops making payments lender records succession of trustee 2. NOD Pre-foreclosure stage (90 days) a. NOD recorded b. Trustee notifies owner (serves) - certified mail c. Trustee notifies all secured parties certified mail 3. NOTS Notice of Trustee Sale (21 days) a. Posting period i. In public location (courthouse, newspaper) ii. On property 4. T.S. Trustee Sale on the 111 th day a. Bought by an investor b. Went back to beneficiary (lender) REO property 5. After Trustee Sale (Buyer/Beneficiary take possession period) a. Buyer/Beneficiary obtains trustee s deed from successor Trustee (15 days or more) b. Cash for keys or Eviction period 5
3. Foreclosure Timeline Stages of Foreclosure 6
4. Short Sales (One Alternative to Foreclosure) 1. What is a short sale? a. It means the property value is less than the loan on the property. The sale of the property is subject to the lender accepting a discounted payoff. (We need to write this in our listing agreement) 2. Why would the lender except a discounted payoff? a. Save their rating If their rating is below 4: Fed weekly overviews bank activities (banks don t want that) Above a 4: Fed very seldom checks bank s activities b. Save cost: after foreclosure, bank can lose up to 40% of their loan amount due to: Foreclosure costs Carrying costs (sometimes 6-12 months) Fixing up costs Insurance, eviction costs, legal fees REO marketing costs Loss of interest on the reserve amount. (when a loan goes to foreclosure, the fed requires the bank to put the same amount in their reserve, losing out on interest) 3. Why is a Short Sale a Win-Win solution? a. Lender wins: costs less only 20-30% loss vs. 40% b. Seller wins: saves their credit (can be repaired in 3, 6 12 months) c. Realtor wins: lender pays our hard-earned commission (amount varies by lender) d. Buyer wins: has the opportunity to purchase the property for slightly under market value 7
5. The Short Sale Process 1. Finding the Seller (Marketing) a. Directly to homeowners in foreclosure b. Build relationships w/mortgage brokers c. Buy list of homeowners in default d. Build relationship with lenders e. Client referral f. Build relationship w/lawyers (tax, bankruptcy, divorce, estate, criminal) g. Build relationships with estate planners/cpas, tax advisors 2. Consult With the Seller a. Qualify the seller (see Borrower Financial Statement Form attached) b. Qualify the property loan amount vs. market value g. Determine the listing price i. Do CMA (you have to explain this to lender) ii. Listing price depends on where the homeowner is in the foreclosure timeline iii. If you have time, list at market value (high end) iv. If you have less time at market value (low end) (make sure you have at least 30-45 days before TS date. Some lenders (like GMAC) will not process a short sale if they don t have at least 30 days before TS. A common mistake: agents list the property at all the liens + commission + selling expenses = NO offers (a sure way to drive the seller into foreclosure) 8
5. The Short Sale Process continued 3. List the Property a. CAR Listing Agreement i. Use 6% commission (lender will negotiate it down) ii. Terms: The sale of the above property is subject to lenders approval of a discounted payoff iii. Short Sale addendum: A very important document see Short Sale Addendum, attached. (I do not include this in my short sale package, it s only between seller and agent) iv. CAR disclosure regarding RE Agency Relationship v. Authorization to Proceed with Negotiations with Lending Institution vi. List of short sale package items you need from seller 4. Enter Property into MLS 5. Open Escrow get prelim (VERY important) a. Have to contact all lien holders b. Have to have authorization from all lien holders 6. Prepare Short Sale Package (for lender) a. Seller needs to provide their financial information ASAP b. Every lender has their own requirements what they want in their short sale package (call them to fax you their list) c. Lenders will not review or begin transaction until all necessary documentation is delivered d. My short sale package includes up to 21 documents and approx 60-180 pages (see Short Sale Checklist, attached) 9
5. The Short Sale Process continued e. All lenders want the following: i. Sellers 2-year tax returns ii. Sellers financial statement iii. Last 2 months pay stubs (for all parties on title) iv. Last 2 month bank statements v. Hardship letters vi. Listing agreement vii. Offer viii.hud ix. Etc 7. Marketing Property Time is of the Essence a. Possible buyers for these properties i. NOD period- owner occupier buyer (pays higher price) ii. NOTS period investor (wants min. 20% discount) More marketing time = higher price (pay attention! Lenders need 30-45 days to look at your proposal) 8. Present offers to seller a. Seller can accept offer ONLY subject to lender s approval (put it on a counter or addendum) 9. Submit Offer to Lender a. Pay Attention! Lenders need 30-45 days to look at your proposal! b. Short sale package with purchase offer 10
5. The Foreclosure Process continued 10. Negotiate with existing lenders a. Negotiate to accept a discounted payoff 2 weeks to 3 months and call all lenders before you start the process if you can and ask them if they would accept a discounted payoff and participate in a short sale. It could save you lots of time. 11. Control and Negotiate with Other Lien Holders a. IRS judgments, franchise tax liens b. HOA c. Child support 12. Continue to Accept Offers a. Continue submitting offers to seller until one is accepted by lender 13. Close Escrow a. Most lenders need 30-60 days to decide whether or not to accept a short sale b. When they do accept an offer, they want to close within 5-14 days. c. Make sure the buyer is prepared with their financing and can close quickly 11
6. What is the Closing Ratio on Short Sales? Due to the lenders inability to change with the market conditions, some of them believe that if they cannot get their price before foreclosure, they will get it after the sale as an REO property. I find that they are slowly waking up this year and are realizing that they can NET more through a short sale than after they take it back. Part of our job is to help them realize how beneficial a short sale can be for them in terms of reducing their losses. I hope that by the third quarter of this year, the short sale closing ratios will reach the 98% that we saw in the 90s. Our goal at Princeton Real Estate is to build strong relationships with other Realtors, mortgage brokers and direct lenders in order to work together to educate homeowners regarding their options and that we can dramatically decrease the number of foreclosure sales occurring in the Bay Area, thereby creating a win win solution for everyone involved. If you have any questions about short sales, need guidance in a short sale transaction, or would like to become part of my Mentoring Program, please feel free to call me, Ildiko Pali, at 415 412 8721. 12
7. About Princeton Real Estate Boutique Concept of Real Estate Industry Princeton Real Estate is the Boutique concept of the real state industry. Service above all with the client s best interest in mind Founded by Ildiko Pali, Broker and former owner of Century 21 Dynasty and a RE/MAX franchise. The Ildiko Pali Team has over 30 years of in-depth knowledge in marketing, selling, acquiring, renovating and managing real estate, and investment consulting in the Bay Area. Divisions Princeton Real Estate: Residential division, selling real estate in the Bay Area Princeton Premier Properties: Luxury Home Division, selling high-end properties in California. Princeton Investments, Inc.: Commercial Division, specializing in selling commercial real estate throughout the United States. Real Estate Asset Protection Group: Consulting Division, educating clients on real estate asset protection. 13
8. Mission Statement My mission, desire and goal is to assist all parties in a challenging real estate transaction, accomplishing their goals and allowing them to remain financially whole. I believe real estate decisions can only be made with the correct facts and realities as to the current marketplace. My goal is to make sure all parties the lender, the trustee and the Trustor have these facts to make the correct decisions. Once the decisions have been made, implementation is paramount because of time and value of money. Through counseling all the parties on the reality of the current real estate market and by producing a plan of action that will be quickly implemented, I believe my services can help reduce losses and create a situation where both the lender and the borrower can win. My philosophy is to get it done now! By working only with motivated buyers and sellers and by creating an environment in which we successfully sell the property and minimize the losses, we are able to create a win-win solution for all parties. \Äw ~É ctä Short Sale Specialist 14
9. Ildiko Pali, Owner/Broker Ildiko Pali has been working in real estate in the Bay Area for more than 33 years. Her objective is to provide real estate services that will assist others in gaining a benefit or avoiding a loss. This includes the purchase, sale, exchange and finance of residential, commercial, industrial, and income properties, as well as providing information about real estate specialties such as REO s (bank-owned) and short sales (discounted payoffs). Ildiko is an innovative marketer who has successfully marketed and sold residential properties ranging from 1-4 units to luxury homes, residential income properties, commercial and industrial properties, vacant land, new developments and probate properties. She specializes in complex short sale transactions requiring lengthy preparation, skilled negotiations, and creative problem solving. She has assisted hundreds of clients with pre-foreclosure and short sale transactions and has helped lenders in management and marketing of REO properties. She has over 30 years experience in selling, acquiring, renovating, and managing real estate and has supervised independent contractors and vendors for property rehabilitation projects. In addition, she has successfully completed numerous exchanges and has assisted many clients in probate transactions. As owner/broker of Princeton Real Estate and leader of the Ildiko Pali Team, she has created a company and a team that reflect her values and her commitment to serving her clients with the highest levels of integrity and professionalism. 15