In the first quarter of 2013 Nationstar acquired Mortgage Service Release Agreements valued at 200 billion dollars. Bank of America formerly serviced these assets. For this reason short sale transactions will, in many cases, involve Nationstar as the Servicer.
In order to facilitate short sales effectively and efficiently, it is important that real estate practitioners gain a thorough understanding of the processes that will be implemented. If we are to serve the needs of distressed homeowners, information and knowledge are prerequisites.
Let’s get to it! For the record this post is not intended to offer personal opinions as to the processes that will be discussed, rather it is an effort to provide information to the real estate industry. You have most likely heard about Nationstar’s Market Validation Program (MVP). This online auction platform is currently being utilized as a “offer validation” tool.
Without a doubt, short sale transactions have been the subject of fraud and abuse as it relates to undervaluing short sale properties. This sad fact has lead to the implementation of a variety of “offer validation” processes. Servicers and Investors have adopted tools and systems to mitigate loss and ensure they fully maximize the sales price. As an example you may recall that the US Department of Housing and Urban Development (HUD) was recently considering a ban on brokerage dual agency on FHA short sales. That decision is on hold for now. In an attempt to be abundantly clear that fraud and abuse will not be tolerated, the auction platform for market validation is being implemented by some Servicers to insure open market and competitive bidding.
In those circumstances where the servicer is not contacted until after a purchase contract is formed and the offer on the table meets the Fair Market Value (FMV) threshold; it is unlikely to be overbid during the online auction. Remember, the successful bidder at auction will pay a five (5) percent buyer premium unless the successful bidder was the original buyer currently under contract.
Note: Clearly it can be very frustrating when agents, after working diligently have an offer only to learn that the property must go to auction to validate the offer. The question often asked is: “Why?”
Servicers and Investors contend:
- The validation program has been instituted as a result of the abundance of dual representation in those transactions where negotiated sales price was less than the FMV
- The use of the MVP program has shown a 13% -15% increase from the original offer
- When using the on-line auction concerns regarding dual representation are mitigated
Here are a number of tips every real estate practitioner should consider:
1) The duty to ensure that the seller receives highest price / best terms is of paramount importance in short sales as in any other transaction. All too often I’ve heard statements like this: “What difference does it make to the seller they aren’t making any money on the sale, so what’s the big deal?” The big deal is our duty to ensure highest price / best terms which does not carry a stipulation that says: “Unless it is a short sale!”
2) FMV is what Servicers and the underlying investor expect to receive. FMV is based on the property location, amenities and benefits. Keep in mind that in a short sale the value may be slightly skewed because many buyers anticipate some sort of price concession due to the uncertainty and time constraints these challenging transactions entail.
3) Once a homeowner, after exploring all other options, determines that a short sale is best for him/her it is prudent to contact the servicer prior to or at the time of the listing. That initial you, the agent, to assess procedural requirements, qualification for consideration, reserve pricing, list price guidance policy, relocation incentives and special programs, including the utilization of the auction platform. If the Servicer is contacted at the time the listing is taken the property may be entered into the auction platform upfront.
4) Often the short sale can be initiated at the time of listing under the “marketing status” category.
5) Delaying initiation with the Servicer until a purchase contract is executed is often problematic, in particular when the auction “bomb” is dropped on unsuspecting parties, including the real estate practitioner. When this happens buyers feel disenfranchised and sellers are frustrated and confused. Some servicers have teams set-up to begin discussions as soon as the property is listed. In fact, most Servicers would prefer to know about the Short Sale request at the time the listing is taken. They may be able to provide you with pertinent information as to their specific processes so that when you do obtain an offer, the buyer and their agent can be informed as the sale is negotiated.
6) Always check the foreclosure sale status at the onset. Securing a postponement is not always a simple matter. Additionally, it is important to note that the only way to document the postponement is through the trustee.
7) Document marketing efforts by using a Market Activity report. Include MLS data sheets including broker and public remarks as well as accurate relevant comparable sales. Do your homework – make no assumptions when it comes to establishing value!
8) If repairs are needed to enhance the value of the property or seller disclosures indicate serious material defects, provide the servicer with estimates from reputable licensed contractors along with the disclosure documents. Photographs speak a thousand words – use them as needed to document property condition or neighborhood deficiencies.
9) When an offer is received review the terms with the seller and issue counter offers as needed in order to negotiate a sales price that reflects FMV.
Note: Sellers should be made aware that a short sale involves additional steps and processes to be taken with the servicer. While there is an executed purchase contract the agreed upon sales price does not fulfill the full amount of the borrower’s debt. The responsibility to ensure that the loss is minimized falls upon the servicer.
10) As mentioned above Servicer concerns regarding dual brokerage/agent representation may be eliminated in the auction process. The auction platform requires open marketing for a set number of days and affords all interested buyers the opportunity to compete regardless of representation.
11) The Equator system tasks and deadlines must be adhered to. Failure to do so may result in the file being terminated causing unnecessary delays.
Whether or not the auction platform is successful in securing higher net proceeds for investors remains to be seen. However, because a short sale is a debt settlement the Investor has the right and the Servicer acting on behalf of the Investor has the duty to act in a manner that ensures losses are mitigated.
Short sales are complicated. Preparation and knowledge are the keys to success. Always request that sellers aggregate financial documentation early on. Setting the expectations of both buyers and sellers will ensure that short sale navigation is as smooth as possible.
This brief post in no way addresses each and every challenge faced in short sale transactions; but is an overview of one of the recent developments – the auction platform.