Here is how the math works with a typical approved Short Sale.
Let’s say we have the following situation:
· The Seller owes $1,000,000 on his condo. He is broke and cannot pay his mortgage. And, he can prove this and he submits a hardship package that is approved.
· The condo is listed for sale as a short sale, with a listing price of $850,000 and a commission of 6% to the brokers.
· Say, the seller gets an offer for $600,000...
Here is how the math would work, assuming that the bank allows this short sale:
Buyer pays $600,000
Commission is 6%, or $36,000
Assume that taxes and other debts are due, for $25,000
Assume that closing costs for the seller are $5,000
The total of closing costs, commissions and debts are then $66,000
Since the buyer is paying $600,000, that is short of the amount owed to the bank by $400,000. So, the $400,000 has to come from somewhere. Also, there are $66,000 in closing costs. Where does that come from?
· The total amount needed to close the gap is $400,000 plus $66,000, or $466,000. So, the lender will have to issue a payoff letter, not showing that $1,000,000 loan has been satisfied, but rather, for a calculated amount of $1,000,000 minus $466,000, or $534,000. The lender says, then, that if it gets $534,000 at closing, they will close the loan, and move on.
So, look at it this way. If the seller says that it will accept $534,000 and close the loan, here is how the numbers add up. The buyer pays $600,000. From this amount, the lender pays the $66,000 in commissions and other closing costs. This leaves the lender with $534,000. Closing costs are paid. Loan is satisfied. Seller walks away. Seller has zero proceeds, of course, but the short sale is concluded. The lender takes a write off of $466,000 and calls it a day. By the way, a foreclosure may cost the lender more, so they are happy to settle this way.
On your initial offer to the lender be sure to include a negotiation (1% of sales price) & processing fee ($495.00) in the HUD. If you place them in section 1100 (Title Charges) they are more likely to get approved than if you put them in section 1300 (Additional Charges). My fees to the listing broker are typically 1% of the sales price. This fee is usually paid from the negotiation fee on the HUD or from the 6% commission allowed by the investor. Always "pork up" the HUD when you begin your negotiation. Sometimes these charges get paid and in some cases they are disallowed. Typically on an FHA, VA, FNME & FHLMC short sale they are disallowed because of federal guidelines. The negotiator will have you resubmit an updated HUD with their allowable charges. These files all pay the 6% commission so the costs of facilitation are covered. I have seen the processing fee get overlooked on some of these loans. It depends on what you call it and where on the HUD you put it. Again, section 1100 is best.
When working a file where the principal balance to the Jr. lender is more than $30,000.00 or there is a 3rd. lender or judgments which will have to be satisfied be prepared to find the funds or other work outs by the borrower to gain the release of the Deed of Trust or other judgment liens. The Sr. lender is very clear in regard to the limit they will allow from the proceeds of the sale for payments to Jr. lien holders. You must clearly show on the HUD who is getting what when the funds are disbursed at closing. Many 2nd. Mtgs are only issued with Mortgage Insurance. This means that you will be dealing with the MI Co. for approval through the servicing lender on the 2nd mtg. In many cases they will accept the allowable amount from the Sr. lender and accept a new promissory note for a greatly reduced settlement, 10-15% of the loan balance, from the borrower. These new notes are typically written for a term of 5 or 10 years at 0% interest. This offer can be very receptive to your borrower because it provides for a very low monthly payment which the borrower may be able to afford. The MI Co's like to show a more favorable recovery settlement on their books. They are also inclined to offer a greatly reduced settlement offer to the borrower after a year or two to have them removed from their books.