If you are working on a short sale close to the end of the year, you will find that they are approving the short sales quicker versus throughout the year. The Banks work on numbers every quarter giving us 4 quarters per year to get a short sale approved. The closer to the end of the quarter, the more likely they will approve the short sale and when it comes to year end, the Banks are known to take deeper discounts, just so they can get the property off their books. Did you know that the Banks are required to hold in escrow three times the amount of their bad debt? Liquidating debt, aka short sales, allows the Banks to open up more money to the market that they can send out into their banking industry and loan out. When they loan the money out to customers, they receive interest, origination fees and points on the money.
When you submit a short sale to the Bank/Lender, the HUD Settlement Statement shows the negotiator what the NET is going to be in order to satisfy the debt. The NET figure is different than the Purchase Price. In fact, when you are negotiating with the Bank, you need to clarify that the “magic number” you are discussing is the Purchase Price and not the NET figure to them.
The Purchase Price includes all of the fees associated with selling the property such as title work, Realtor commission, settlement fees, tax prorations, outstanding liens, second or third mortgages, homeowner association dues and any other closing costs. When the short sale is submitted, the negotiator will usually run an REO Net sheet based on the loan balance, status of where it is in the foreclosure action, and how long it would take to get the property to foreclose and become an REO (Real Estate Owned) by the Lender. This helps the investor who owns the loan to determine whether or not a short sale discount would allow them to profit more than an REO property, and which way is most profitable to liquidate the property from their inventory.
So what does the Lender include on an REO Net Sheet (which is an internal document that is not provided to Seller or Buyer)? Below are the items that the Lender calculates to determine if the house would become an REO, what the Lender would have to spend and what their profit would be when the house was sold as an REO.
First, there are Foreclosure Costs that the Lender would have to pay which vary based on the loan type and the county in which the property resides. There are filing fees, title search costs, service fees, attorney fees, publishing costs, eviction costs, and miscellaneous costs that can range from approximately $3,300 to as much as $7,500.
Second, there are REO Carrying and Liquidation Costs that the Lender would have to pay such as Forced Insurance, Property Taxes, Transfer Taxes, Homeowner Association Dues, Maintenance, Utilities, Realtor Commissions, Clean out Fees, Delinquent Taxes, REO closing costs of 1.5% of the sales price and Miscellaneous Expenses. This figure can range from $10,000 up to $30,000.
Third, there is the Cost of Loss of Money based on the months that they were expecting their monthly payments, which include interest, principal, taxes and insurance. For example, if they were to receive $900.00 a month on a loan at 8% which was PITI, and the Seller hasn’t paid in 6 months and it will take another 6 months before the property can become an REO, the Bank has now lost an additional $10,800.
Example on an REO Net Sheet for a Purchase Price of $120,000
Purchase Price $120,000.00
Les Total REO Carrying and Liquidation Costs $ 22,250.00
Less Total Foreclosure Costs $ 3,300.00
Total Bank Net at Liquidation $ 84,450.00
Example of a Short Sale for a Purchase Price of $120,000
Purchase Price $120,000.00
Sellers Closing Costs estimated at 10% $ 12,000.00
Total Bank Net from Short Sale $108,000.00
Based on the above scenario, selling the property as a Short Sale would allow the Bank to profit more money versus letting the property go to foreclosure and reselling it in the future as an REO property.
There are additional things that are considered also on the loan itself, such as private mortgage insurance. Private Mortgage Insurance has guaranteed the Bank that should the Sellers default, they will receive between 20% to 30% of the loan amount paid back to them. That is why it is always important to see if there is PMI on the property that you are negotiating.
Therefore, at the end of the year, should you be working on a short sale and the Bank advises you of their counteroffer, what I normally do is have the Buyer make a lower offer than the counter just to see how bad they want it off of their books. Also remember that here in Florida, taxes are paid in November. Therefore, the Bank has normally paid those taxes allowing you to submit an offer lower, as the Bank does not have to pay for the taxes on the Final HUD Settlement Statement. This increases their net which works in your favor.
Please keep sending me your questions and topics that you would like to hear about, so I can be sure to keep feeding you with the information that you need in order to move confidently into 2016 and bring your real estate dreams to life!