A Harris Real Estate University student sent me this article from BiggerPockets.com. (Great site to learn about real estate investing)
Its crucial that your HUD-1 is prepared correctly when you submit your short sale package.
The lenders will accept the short sale offer based on the numbers in that original HUD-1. Unlike a traditional transaction where its normal for the numbers in the HUD-1 to change..on a short sale transaction your initial HUD-1 better be accurate. If its not, and the final settlement requires the lenders to take more of a loss than they originally agreed to based on your HUD-1 don’t be surprised if the difference comes out of your commission.
Agents, this is an easy mistake to make.
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In the past, the average real estate agent didn’t spend too much time scrutinizing the estimated closing statements. Usually, that task would be left to escrow officers, title officers or lawyers. With short sales being the new normal, scrutiny of these statements in the early stages of a short sale transaction is vital.
Why? Well . . . the banks request the settlement statement as part of the short sale package. The short sale lien holders want to see their bottom line. How much money are they going to net? How many cents on the dollar will they be forgiving?
Preparing the HUD-1 for the seller’s first and second lien holders is truly an art form. This is primarily because mathematical calculations need to be done in order to assure that there is no shortage of funds on the close date. And . . . since it is difficult to determine how long the bank is going to take to approve the short sale, under-calculating the fees or forgetting to put all of the fees on the HUD-1 could potentially blow the deal or, at the very minimum, cut into the agent’s commission or the buyer’s bottom line.
Since short sale deals are tricky and time consuming, nobody wants the deal to go south and nobody wants to give away any of their commission or pay more for the property than anticipated. Because of this, it is absolutely necessary to prepare the HUD-1 with a closing date that is realistic. This way taxes and any penalties will be calculated to a realistic date, and not a date only a few weeks out. An extremely careful review of the purchase contract is vital to generating a high-quality settlement statement. Was money allocated for pest control, HOA fees, and potential liens, etc.?
While it was probably nobody’s intention to get involved in this aspect of the real estate transaction, imagine how much more knowledgeable we will all be . . . and imagine how much more appreciative we will be of our fellow escrow officers, title officers, and lawyers once this current wave of short sales is over!
The preparation and “end-game” forethought invested in the Prelim HUD-1 can absolutely illustrate to multiple lien holders what it’s going to take to get a short sale closed.
Example: Had a recent transaction with two institutional 1st and 2nd liens attached and a private third lien which completely owned any final resolution.
Recognizing this on day one and with most RE professionals walking away from it altogether I had the Prelim HUD prepared in a way that completely focused on the power over the settlement that that the 3rd lien private investor held.
In the normal payout waterfall this 3rd lien holder would have recieved ZILCH on his $400,000 balance. Additionally “it was reasoanable to assert” that the 2nd lien holder would be completed vaporized of their entire $250,000 balance if we did not secure release from the third lien holder.
In advance I mentally prepared the private 3rd lien holder that the best I would be able to to is get him around $10,000. Lowered his expectations.
This Prelim HUD-1 went through 18 revisions during the process.
I lobbied for both the 1st and 2nd lien holders to pay the third lien holder 30% or $120,000 of their balance and through multiple negotiations and revisions of the Prelim HUD-1 this transaction closed with the 3rd lien recieving $67,500 (16.8%) and the 2nd lien holder receiving $182,500(73%)with the 1st lien holder told us to go fly a kite.
This transaction closed with “smiles all across the table” and I’ve recieved 5 referrals from the private investor post closing and attorneys all across the Metro area have been calling me for closing technique advice producing even more referrals.
It only takes one brilliantly negotiated transaction to elevate yourself to being the GO-TO-EXPERT in your community.
Excellent job Scott!
Tim
Scott
So the junior liens split the $250,000 second lien balance which begs the question, did the first lien get paid in full?
It is very important to work with an experience escrow officer as part of your team, they have a better understanding of the little details which can be daunting at closing. It is very important to have a good estimate on how long will it take to close the transaction, so you can add any fees, missed payments, taxes, HOA etc. If for example you order the HOA demand, and after 6 months of transaction, the HOA dues have increased. A good escrow coordinator, will anticipate this and add this estimate to your HUD1, This is known as PADDING.