How Does A Short Sale With A Second Loan Affect A Buyer?

Elk Grove, CA Real Estate - Short Sales
Elk Grove, CA Real Estate – Short Sales
A great question. This question was recently asked of me and I thought I would share the information with you all.

The Jr Lienholder in the past has been very difficult to deal with. However, recently, most Jr Lienholders are very cooperative in the short sale approval process. This is due to new laws (state and federal) and incentives being offered to the Jr Lienholder for their cooperation.

For example, the jr lienholder currently can be offered up to $8500 through the HAFA short sale program (if the seller qualfies for the program). In addition, there is typically an unspoken threshhold which the Sr Lienholder is already willing to go to offer a payoff to the Jr Lienholder. So, it is safe to say that there is already some money there for the Jr Lienholder, most of the time, not always.

Then you have the Jr Lienhodler from hell, like Franklin Credit. I must say, it took over one year (and I’m assuming some personnel turnover) to get them to approve as Jr Lienholder on a file we closed several years ago. Needless to say, things with them have not changed. I was contacted by an agent from So Cal who was going through a very similar and painful experience with Frankline Credit – their tactics have not changed. They are a mostly non-negotiable, non-cooperative, non-customer friendly credit collector. I don’t mean to sound so negative about them, but these are the facts. If things have changed with them and I am wrong, please, please, please correct me.

So, how do you prepare a buyer going into a short sale situation with a jr lienholder? In our Short Sale Offer Submisison Addendum, we let the buyer know that there may be a possibility that they may be asked to pay any additional fees which the Sr Lienholder does not approve, as long as the Sr Lienholder approves of the buyer paying those fees. That normally works out fine. When we are negotiating a short sale, we always begin negotiations with a small amount to the Jr Lienholder ($3000). That is traditionally the standard amount most Sr lienholders will approve to the Jr Lienholder. From there, if the Jr requires more, we submit that to the Sr lienholder first, then if more cash is required, we go to the buyer. Buyer is lready prepared, so no surprises there.

However, most Jr Lienholders that I am dealing with will now accept the standard $3000 payoff. Not always the case, but we can usually work something out if they require more.

Note also that SB 458 prohibits the seller from being required to make a contribution to the sale in order to attain an approval. It is the seller’s discretion as to whether they are able and willing to contribute In most cases the seller is not in a finanical position to make a contribution.

So the above are a few ways in which you can prepare yourself as a buyer, or buyer’s agent when representing a buyer in a short sale, and contending with the Jr Lienholder. If my colleagues out there have any additional advice to offer, I’d be happy to hear about it!

Bank of America Electronic Signatures Requiremen​ts

Memo from Bank of America:

Bank of America accepts electronic signatures on most documents collected throughout the processing of short sales; however there are specific requirements that must be met in order for the documents to be accepted.  If these requirements are not met the short sale process may experience significant delays and may result in the decline of the file.

Agents choosing to use e-signatures will need to check with their electronic service provider to ensure the below requirements can be met prior to initiating a short sale. Currently, DocuSign is one provider that has shown they have the capability to meet our security requirements. However, this should not be construed as an endorsement, or recommendation of their work, and agents and sellers should use their own best judgment in choosing a provider.

Requirement

Details

Certificate of Completion Serves as a receipt showing exactly who signed, how they signed and where the signing took place.

The Certificate of Completion must incorporate:

  1. IP Address of each signer
  • Disclosed Authentication/Security levels of e-signature user
    1. Knowledge Based Authentication (KBA) allows signers to validate their identity – ID check must have a passed result showing
    2. Email address exclusive to each user/signer on the signing platform
    3. Account Authentication (password, passcode, or access code)
  • Global Unique Identifier or ID number or Transaction number

To meet authentication requirements for e-signed transactions, all three items must be included on the Certificate of Completion on each e-signature transaction for any customer or authorized third party (user/signer).

Bank of America E-Transaction Consent Disclosure Form
  • The required E-Transaction Consent Disclosure Form can be found on the Agent Resource Center under the “Short Sale forms” section.
  • Each electronic signer must consent and agree. The Consent must be signed electronically for those that have signed the documents electronically.
  • All four pages are required and must be fully executed.

Any e-signature platform selected by an agent must comply with the above requirements in order for the documents to be accepted by Bank of America.  There are no exceptions to these requirements.  If the requirements are not met when documents are submitted at the time of initiation the documents will be rejected.

The truth about Short Sale Leasebacks

Elk Grove Short Sale Agent - Lease Back image
Elk Grove Short Sale Agent – Lease Back image
The current industry trend of short sales has caused a large amount of hopeful home owners to place a hold on their dream of homeownership. So it’s no surprise that this new trend of short sale leaseback programs, popping up all over the country, seems like an answer to prayer. The exposure is overwhelming. What could be better than a distressed homeowner being able to get out of a financial hardship and keep their home?

Short sale leasebacks became a hot topic when the HAFA Supplemental Directive 12-03, was released on April 17, 2012 allowing for leasebacks. It states:

“A servicer may in its discretion approve a transaction under HAFA that provides an opportunity for the property to be sold to a non-profit organization with the stated purpose that the property will be rented or resold to the borrower so long as all other HAFA program requirements are met.”

So let’s take a look at how this new short sale leaseback program is supposed to work. The short sale is purchased by an investor (a non-profit organization). Instead of the owner moving out, the property is leased back to the homeowner so that the homeowner can stay for a period of time. At the end of the lease agreement, the homeowner buys the property back from the investor.

The challenge is, prior to the supplemental directive, leasebacks were considered a violation of the Arms Length Affidavit provision of most short sales due to:

  • Fraud committed by sellers who are not supposed to benefit from the forgiveness of their debts
  • Investors taking advantage of sellers who had hopes of purchasing their homes back

The chief issues with the short sale leaseback program are increased potential for fraud to the homeowner and other parties to the transaction which in turn causes the program to garner almost no support from the major servicers, U.S. Treasury, and GSE’s.

So what are the major lenders saying about short sale lease backs? Only one major lender has agreed to allow them, and to date (as of the date of this article), “They have only closed one” states Certified Distressed Property Expert CEO Alex Charfin. He said the major banks do not see leasebacks as viable option because they attempted pilot programs and the pilot programs were not successful.

Bank of America, one of the nation’s top mortgage holders of distressed properties, won’t allow short sale lease backs. Per a recently released memo, B of A now requires all short sale listings must be marketed in the local MLS and remain there throughout the short sale listing process until closing. Short sale lease back are not marketed in the MLS because they are sold directly to the investor.

If only a few have closed, then why does this sound like the next big answer for distressed property owners? Unfortunately, the marketing of the program, by certain companies, is very good. But their closing ratio is not. Short Sale leasebacks do not protect the homeowner or the real estate agent.

That brings us to the risk of fraud to the homeowner. The increased risk for fraud occurs when the investor purchases from homeowner, and when it’s time to buy back, the investor does not sell back to homeowner. HUD approved charities (non-profit organizations), have only closed a few, nationwide.

However, as with any big opportunity, we will see a surge of companies professing to be able to train you how to successfully close a short sale leaseback. They have done some good marketing and PR as are touting it as if it is a great and highly successful program. But the reality is they’ve literally only done a few and the flood gates of fraud will open wide.

If you are a homeowner or an agent interested in doing short sale leasebacks:

  • Make sure that the company you use is a non-profit organization (http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Select-Check)
  • Review all leaseback information
  • Have all documents reviewed by an attorney
  • Never allow a third party to have any negotiation control over the transaction – you and your broker (or your agent if you are a homeowner) are ultimately responsible for the results
  • Exercise extreme caution

Know that there are many short sale leaseback training programs. The good programs will require agents to take training and to give up 1% of their commission so that they can negotiate the sale and the leaseback. But agents, before signing up for training be cautious and consider the challenge you may present to a homeowner. This is a new strategy that is completely unproven and most servicers do not have an appetite for. The property is never really in the MLS, so it’s not properly marketed and you are relying on this non-profit to negotiate the deal and provide an approval (which most lenders have already said they won’t do it), all of which may take more than the average six months because of the involvement of additional parties. Then, if there is no approval, you will have to go back to the homeowner and explain that you were unable to make that happen for them and you lose 1% of your commission in the process because you signed an agreement.

On a final note, before you sign up for any training or place any homeowner into this type of pipeline, qualify the organization. Can they show you evidence of completing transactions, can they show you the paperwork, can they show you the properties which were successfully leased back, and can they let you talk to a homeowner who is actually living in a property today and has successfully completed a short sale and has now leased their property back? Verify that before you put yourself and your client into a challenging situation. And remember; don’t get tangled up in fraud.