Seller Contributions in a short sale

                                                        
LOTUS REALTY GROUP

  

We are seeing more and more lenders asking for either a cash contribution or a new promissory note if they feel that the homeowner does not have a strong enough hardship and see in the homeowner’s financials the ability to contribute.

  

Here is the issue we are repeatedly running into. The lender will ask for a cash contribution or new note. When the REALTOR presents the terms to the homeowner the homeowner is upset and the answer out of the gate is no or, if the homeowner will contribute to show good faith, it is usually a number that will offend the lender. Once the lender declines the offer the REALTORS scramble to come up with money from other sources which is usually out of their commission. OUCH! That doesn’t feel good.

  

It has been my experience that setting the proper expectations upfront at the listing appointment with a client will ensure that most problems are manageable. A thoroughly qualified client and your know how should allow you to rationally deal with the issues at hand. Whether it is good or bad news they will be prepared and you will know upfront whether the homeowner’s offer is realistically going to satisfy the lender.

How does the lender decide what the contribution will be?

  

Typically the lender will expect up to 30% of their loss. For example if the bank is writing off $50,000 then they will want a note for $15,000. We are seeing promissory notes between $10,000 -$20,000, 0% payable over a 5, 10 or 15 year period. Occasionally they will add an interest rate however I have only seen that once this year.

  

Can this be negotiated down?

  

It depends on the situation. If you take on a client where the hardship is not that strong, there is money in the bank and assets showing an ability to contribute then there is a high probability that the homeowner will have to contribute something to show good faith and close the deal.

If you have a client who is right on the edge then it may be negotiable. We have successfully reduced the amount requested by the bank in both of these cases however banks are getting tougher with their guidelines. To ensure fewer complications in the short sale process, again, set expectations up front with your client.

The times we do not see contributions countered by lenders is when we have a traditional short sale with a a true hardship a) insolvency b) change in income and c) financials are showing NO ability to contribute.

The other key is to have the right offer.

Rule of the thumb to decrease your chances of a contribution counter from the lender:

a) Qualify your client (ask the right questions) and make sure they qualify.

b) Set expectations. They may or may not have the ability to contribute however, make sure that your client understands that a contribution is a possibility and find out how much they can give to show good faith and if they would be willing to sign a new promissory note. Calculate the loss the lender will take and multiply this number by 30%. This will give you an idea of what the bank may request. Tell your client about this up front and start educating them so that when the time comes they are prepared to work with you. The closer their offer is to that number the more likely it is that your deal will close.

c) Whatever offer you bring to the table, if you can keep it between 90-95% of what’s owed on the property it may lessen the chance that the lender will ask for a contribution.

How does it help my client to contribute?

If a homeowner has the ability to show some good faith it gives them more of a chance to be released from the full liability of the note. In other words they will not be pursued for deficiency judgment. It will also give them a far higher chance for success.

How do I stop paying fees out of my commissions?

  

Simply take the deals that make sense. Structure these deals properly from the beginning and set the proper expectations with sellers AND buyers. Sellers should be paying seller contributions and BUYERS should be paying additional liens on the property. PERIOD. And this can be accomplished by?

  

- Setting expectations!

Tip of the week:

It is not our job to make our clients happy. I see REALTORS make the mistake due to wanting a listing so badly or wanting to impress the homeowner that they will only tell the homeowner what they feel the homeowner wants to hear. The homeowner doesn’t think it’s our job to make them happy. We are the only ones that feel it is our job to make everyone happy. They feel it is our job to tell them the truth and help them sell their house. Don’t tell them what they want to hear, tell them what they need to hear. Come from an authentic place. Make sure they know exactly what will happen next or what could happen next (play by play) and you will only gain their trust and confidence.

(Quote) The very essence of leadership is its purpose. And the purpose of leadership is to accomplish a task. That is what leadership does–and what it does is more important than what it is or how it works.

~Colonel Dandridge M. Malone

LOTUS REALTY GROUP

  

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