Remember, when you submit your Short Sale package to the lender, you are presenting a hardship case on behalf of your client. As we discussed earlier, for a bank to consider a homeowner for a Short Sale, one of the things they will want to determine is if the homeowner has little or no equity . For the bank to do this, they will order a formal appraisal or BPO (Brokers Price Opinion) to determine the current market value. Then, they will compare these results to how much is owed on the mortgage to determine if what is owed is, in fact, more than or close to the actual market value of the home. Because in a Short Sale, the bank will discount the pay-off, most agents are left wondering at what price they should initially list the property.

When we originally list the price the lender will want to see that we listed the property at what the client owes plus commission, closing costs and taxes.  This number will be more than the seller owes on the property and that is what we are trying to prove-

Secret - formula

Hardship + No Equity =  Short Sale Candidate

Secret  The price we have on the listing agreement and the price we set in the MLS are not the same. We know that we must price the property to sell right out of the gate.

What should the initial price be for the MLS?

Remember from the previous section that the initial list price for the Listing Agreement is probably above market value. At this point, the objective is to list the property at a price that will generate an offer quickly, achieve the bank s required net for the transaction and cover all commissions and Seller closing costs. Calculating the initial list price for MLS is a critical part of setting up the Short Sale. We all know that when considering market comparables for a specific area, if the price per square foot of your client s property is equal to or higher than any other property in the neighborhood, your chances of getting an offer quickly are pretty slim and the whole goal in a Short Sale is generating an offer quickly so that the house doesn t go to foreclosure.  

Determine Current Market Value

The discount thresholds that banks use in determining their required net in a Short Sale is based on the current market value of the property and the type of loan that is being shorted. Even though the Short Sale lender will ultimately order their own appraisal, it is very important that you know how to properly evaluate area comparables and correctly assess the current market value of the property beforehand. If your client has a Conventional or VA loan, the bank will want you to submit a Purchase Offer before they will order an appraisal and entertain a Short Sale.  .

Secret The Brokers Price Opinion is the central point in the short sale. If it is possible you always want to meet the BPO agent at the property to discuss the comparable properties and market conditions. 

Determine the Lender s Discount Threshold

As discussed earlier, banks have a threshold at which they will accept or reject an offer in a Short Sale. And knowing these approximate discount thresholds is imperative in determining your list price for MLS, so that you are able to generate an offer that will meet the bank s requirements, as well as cover all the Seller closing costs and protect your commission. When we refer to the banks discount threshold , we are referring to the net amount that the bank requires in the transaction.

Type of Loan?              Offer required for lender                   Threshold?

                                          to order appraisal?                (% of market value)

Conventional                         Yes                                          85-92%

FHA Insured                             No                                              82%

VA Guaranteed                       Yes                                           88-91%

Secret - These thresholds represent a percentage of current market value, not the loan balance. Currently the Conventional threshold is 85-92% of current market value. This threshold fluctuates with the market and is lender-specific. VA and FHA thresholds have not changed during the past 5 years. Know that changes in market conditions, bank policy and/or the passing of legislation can effect these thresholds. If the market takes a turn for the worse and property inventory increases for lenders, you will most likely find that Conventional thresholds will decrease.

So, to say it another way, the discount thresholds above reflects the lowest amount that the lender will need to net on the final HUD Settlement Statement in order to approve the transaction. And again, this threshold is a percentage of the current market appraised value, not the loan balance.  Using the thresholds in the chart above, select what type of loan your client has and take note of the threshold associated with is. After you have correctly assessed the current market value, you will take this value and multiply it by the discount threshold. This will give you the amount that the lender will, more than likely, not go below in the Short Sale. For example, let s say the current market value is $150,000. If your client has an FHA loan, this means that the lender will need to net 82% of the current market value. So, take $150,000 and multiply by 82%. If you have done your math correctly, you calculated $123,000. This represents the amount that the bank has to net in the transaction. It also represents the starting point at which you will begin grossing-up to arrive at your initial list price for MLS. If we were shorting a VA loan, we would multiply $150,000 by 88%. If it were a Conventional loan, we would multiply by 85%. When there is a range in the discount threshold, we use the lower end of that threshold. Again, from this number we will need to gross-up to include Seller closing costs and commissions.

Secret - As in Conventional and VA Short Sales, if an offer is required for the bank to order an appraisal, it is all the more important for you to correctly determine where your initial list price should be in MLS. If you come in too high, there is a good chance you will not receive an offer in time to avoid foreclosure.

Add Real Estate Commissions and Seller Closing Costs.

Next, we need to gross-up the net amount required by the bank to include Seller closing costs and broker commissions. As a general rule, we gross-up by 8%, to include 6% (3% to the Listing Agent and 3% to Buyer s Agent) and 2 % for Seller closing costs (which includes title policy and miscellaneous fees normally associated with the title company closing the transaction). To gross-up by 8%, we have to divide by the inverse, which is 92% (100%-8% = 92%).

Secret - If you are working with a bank that is paying less than a full 6% in broker commissions, you will need to adjust your calculation accordingly. On FHA and VA Short Sales, the banks must pay the full 6% commissions as required by HUD/VA. Sometimes you may have a Conventional lender that will pay only 5% in commissions, but most banks are prepared to pay the full 6%. Always ask for the full 6%, even if the bank says they will only pay 5%. The bank is trying to mitigate their losses and negotiating the commissions down is one way that they may try to do this. There are some banks that my typically pay only a 5% commission, but we have them to be more lenient if you 1.)send a complete and flawless Short Sale package, and 2) you generate a Purchase Offer that is close to current market value.

Type of Loan?                                                                                     FHA

Current Market Value?                                                                      
$150,000

Lender Threshold?                                                                              82%

Real Estate Commissions?                                                                  6%

Closing Costs (including title policy)?                                                 2%

Calculation

$150,000  X  .82 = $123,000 / .92 = $133,696

The result represents the lowest offer you would have to generate for the lender to approve the transaction, cover 6% in broker commissions and 2% closing costs on behalf of the Seller. If you were working a Conventional Short Sale and the lender is only paying 5% in commissions, you would divide the bank s net amount by 93%, which grosses the net up by 5% commissions and 2% in closing costs. Know that, on FHA Short Sales, the banks cannot go even one dollar below their required net, so if you do not calculate your numbers correctly, any shortage will end up being taken out of your commission. To ensure that this does not happen, we also add what we call a buffer to the list price to give us a little negotiation room, protect our commission and cover any incidentals that might come up at closing. We will discuss this further in a later step. For now, let s move on to considering other costs used to arrive at your final list price when going active in MLS.

 Add other Miscellaneous Fees and Delinquent Dues

Now that you have determined what sales price you need to ensure that your commissions and closing costs are covered, you will now want to add any additional miscellaneous fees and/or delinquent dues. It is a good idea to have your Escrow Officer do a title search as early in the process as possible to check for nay clouds on title that your client may or may not be aware of. You do not want to find out a few days before closing that your client has liens or other clouds on title that need to be resolved before the Short Sale can close. If there are any additional liens or judgments, you will want to add these to the number we arrived at in Step C. We recommend that you and your Escrow Officer work closely with your client to negotiate and resolve any outstanding liens or judgments well in advance of closing. If you do not get these resolved prior to closing, the closing will be delayed until these are taken care of. Your negotiating power with any miscellaneous liens or judgments is that the lien holder get nothing if the bank forecloses. Most of the time, these liens can be negotiated and reduced to a lower price, if not, completely waived. Let s now take the previous example and add a lien/judgment.

Type of Loan?                                                                                     FHA

Current Market Value?                                                                       $150,000

Lender Threshold?                                                                              82%

Real Estate Commissions?                                                                  6%

Closing Costs (including title policy)?                                                 2%

Additional Liens/Judgments?                                                           $5,000

Calculation

$150,000 X .82 = $123,000 / .92 =$133,696

Then, add $5,000

$133,696 + $5,000 = $138,696

Add the Seller Incentive (FHA Only)

As discussed earlier, if you are shorting an FHA loan, HUD awards the Seller with a monetary incentive, if the property is sold within the bank s allotted period of time and they receive their required net in the transaction. Once approved into FHA s Pre-foreclosure Sale Program, FHA gives the homeowner 90 days to sell the property under the terms of the program. If the Listing Agent can procure a Buyer and close on the property within this 90-day period, the Seller will be eligible to receive a Seller Incentive of up to $1,000. The Seller Incentive is documented as POC (Paid Outside Closing) on the final HUD Settlement Statement under line 1300. If the property comes under contract, but closes after the 90-day period, the homeowner will be eligible to receive a reduced Seller Incentive of up to $750.

Now, it is very important that you know that in order for the bank to award the Seller Incentive, there must be sufficient proceeds from the sale to cover this cash incentive. In other words, in an FHA Short Sale, the bank cannot go below their 82% discount threshold to award this incentive. Therefore, it must be included in the MLS list price (and therefore, included in the Sale Price) to ensure that it will be available.

Let s discuss some of the benefits of the Seller Incentive and why you should always include it in your MLS list price when working an FHA Short Sale. We discussed earlier in this book that the Seller s lender will typically cover all closing costs on behalf of the Seller, including title policy. However, there are some closing costs and fees that the Seller s lender will not pay for, such as a home warranty, delinquent HOA dues, HOA transfer fees, and possibly a few other miscellaneous fees. It is important for you to know that while the Seller Incentive is a great way to get your clients a little cash at closing that they were not expecting, you should also know the Seller Incentive can be used to pay for those Seller closing costs that the bank will not cover. Another reason to pad the MLS list price with this Seller Incentive is to ensure that the closing costs that the lender will not cover do not get paid for out of your commission!

If the entire $1000 Seller Incentive is used to cover the Seller closing costs that are not covered by the lender, but there are still additional expenses, liens or judgments related to the Seller, HUD may approve an additional incentive, not to exceed $1000, to cover these cost. The Seller Incentive cannot be used to pay for any closing costs or repairs on behalf of the Buyer.

The Loss Mitigation Rep will require the final HUD Settlement Statement 3 days before closing, so that they can approve the final net, the closing costs to be paid on behalf of the Seller, and the allocation and distribution of the Seller Incentive. When the Escrow Officer submits the final HUD Settlement Statement, it is important that the incentive be documented under Line 1300 on the second page of the settlement statement. If specific items are being paid from this incentive, each item should be documented in the subsequent few lines available under Line 1300. Please take a look at the following example:

Line 1300       Seller Incentive- POC (Paid Outside Closing)                    $1,000

Line 1301       Residential Service Contract- Pd from Seller Incentive        $360

Line 1302       Delinquent HOA Dues- Pd from Seller Incentive                  $150

Type of Loan?                                                                                     FHA

Current Market Value?                                                                       $150,000

Lender Threshold?                                                                              82%

Real Estate Commissions?                                                                  6%

Closing Costs (including title policy)?                                                 2%

Seller Incentive (FHA Only)?                                                               $1,000

Calculation

$150,000 X .82 = $123,000

$123,000/.92 + $1,000  = $134,696

As shown in the calculation above, we see that the lender s threshold is 82% because it is an FHA loan. After taking the current market value and multiplying it by 82% , we then divide by 92% to gross up for real estate commissions and Seller closing costs, and then add the Seller Incentive of $1,000. Once again, it is very important that you include the Seller Incentive when calculating the MLS list price for FHA Short Sales.

Note: To date, we have only known of a Seller Incentive being paid on FHA Short Sales, but we encourage you to confirm with your Loss Mitigation Rep whether or not a Seller Incentive might be available for your Conventional and VA Short Sales as well.

Add any Delinquent Property Taxes

Some states do not have property taxes, while others do. If you have property taxes in your state and your client has not escrowed for these taxes, you will want to determine if there are any outstanding property taxes that will need to be paid upon the sale of the property. If so, you will need to add these delinquent property taxes to your MLS list price to ensure that there are adequate sale proceeds to cover these taxes. If the property taxes have been escrowed, you do not need to be concerned about factoring in these property taxes because the bank will simply absorb the taxes as part of the Short Sale. The following example reflects the delinquent taxes being added to determine the MLS list price:

Type of Loan?                                                                       Conventional

Current Market Value?                                                       $350,000

Lender Threshold? (We ll us 85% in this ex.)                      85%

Real Estate Commissions?                                                    6%

Closing Costs (Including title policy)?                                    2%

Delinquent Property Taxes                                                  $6,200

Calculation

$350,000 X .85 = $297,500

$297.500/.92 +$6,200 = $329,570

Short sales and foreclosures in Livingston County Michigan includung Brighton, Howell, Hamburg, Hartland, Pinckney, Whitmore Lake, Byron, Webberville, Williamston, and Fowlerville will account to near 40% of the sales in 2009 and 2010.