With more than 36 million people currently receiving unemployment benefits due to COVID-19-related job loss, mortgage-delinquency rates have surged.
In March of 2020, the Federal Housing Finance Agency (FHFA) instituted a moratorium on foreclosures for anyone with a federally backed mortgage. They also offered various loan forbearance options to unemployed homeowners who experienced financial hardship due to the pandemic.
But on August 31, the foreclosure moratorium expires. Due to the time-sensitivity of this situation, real estate agents like you may be receiving a high volume of requests from homeowners who have fallen behind on their mortgage payments.
If you’re not sure of how to deal with the challenges involved with selling pre-foreclosure properties, let this article be your guide. In it, you’ll learn about how real estate agents can help clients avoid the foreclosure process, teach them the ins and outs of the short sale process, and more.
How to Avoid Foreclosure 101: Talk to the Lender
Depending on the state of your local real estate market, it may not be in your client’s best interest to sell their home right now. Before helping them put their home on the market, encourage them to talk to their mortgage lender. Because foreclosures can be quite expensive for lenders, they may be open to a loan modification or might refinance a mortgage loan, which would lower the amount of your client’s monthly mortgage payment and allow them to stay in place.
However, if your client’s income has drastically changed, due to job loss, a relationship split, or another reason, a renegotiated mortgage loan or loss mitigation agreement may not be sufficient to keep them in their home. In that case, talking to the lender is still advisable.
Because in order to avoid foreclosure costs, the lender may be willing to:
- Postpone the foreclosure process, giving your client the chance to sell their home and pay off their debts.
- Help the client set up a temporary monthly payment plan while they wait for their home to sell.
- Agree to a short sale in the event that the mortgage is “underwater,” i.e. if the homeowner owes more on their home than it’s currently worth. Because consenting to a short sale means accepting less money than they’re actually owed, the lender may ask the homeowner to pay off the balance of their debt after their property is sold. But in some situations, the lender may forgive amounts owed that exceed the home’s final sales price.
These are all various loss mitigation tactics intended to help both the loan servicer and the homeowner. The hope is to slow down or avoid foreclosure proceedings altogether.
Check Your State’s Laws
Foreclosure rules differ from state to state. Before advising your client on foreclosure prevention, make sure you understand how your state’s foreclosure laws work.
For instance, some states give homeowners more time to catch up on payments or sell their homes than others do.
The more time you can buy for your client, the more likely it is that you’ll receive an appealing offer for their home.
Options for Selling a Home in Pre-Foreclosure
Not all pre-foreclosure home sales are short sales (although all short sales are pre-foreclosure sales). If your client’s mortgage isn’t upside-down yet, a pre-foreclosure sale is similar to a regular home sale, with the difference that:
- Your timeline is shorter
- Much of the proceeds of the sale will go to cover the unpaid balance of the mortgage, as well as lender penalties and unpaid mortgage interest
The advantage for your client is that homeowners who sell their homes while they’re still in pre-foreclosure can evade the negative repercussions of having a foreclosure listed on their credit score.
Clients who sell their homes in short sales will also have more mortgage-friendly credit reports than homeowners who were foreclosed on. In fact, they’ll even qualify to apply for future mortgages, should their financial situation improve.
Short Sales: Special Challenges
While short sales are usually a better option for your clients than foreclosure, they present real estate professionals with several challenges, including:
- Understanding and complying with any lender-specific short sale terms
- Negotiating with multiple lenders (in situations where the client has several mortgages)
- The fact that the mortgage lender must approve of any offer the client had decided to accept, which can cause lengthy processing delays and turn off buyers
The best way to cope with these issues is to communicate them to your clients. That way, they won’t be caught by surprise.
Tips for Selling a Pre-Foreclosure Home
If you’re selling a home that’s in pre-foreclosure, it’s recommended that you take the following steps:
- Capitalize on buyer interest – Potential buyers are often drawn to pre-foreclosure homes because they see them as bargains. But that doesn’t mean you can’t get a good price for your client. Check Nextdoor’s real estate section to see for-sale, pending, or recently sold homes in your client’s neighborhood. Set your client’s home’s price at slightly under the market value of similar homes in the neighborhood. You’ll still attract a flurry of interest.
- Establish regular communication with lenders – Your client’s bank or lender may be willing to settle for less than they’re owed, in order to avoid the ordeal of selling the property themselves. Speak to them on your client’s behalf and emphasize the win-win aspects of everyone working together. You may be able to buy yourself and the client more time to sell the home.
- Encourage the client to be proactive – To sweeten the relationship between the lender and your client, advise your client to treat the lender as a business partner, rather than as their enemy. The lender’s worst nightmare would be for the homeowner to abandon their home to vandals, resulting in it losing further value. By collaborating with the lender, the buyer may be able to obtain better terms.
- Promote the home on Nextdoor – With an audience that’s comprised mainly of local homeowners, Nextdoor is one of the best real estate tools for professionals. To list pre-foreclosure homes on Nextdoor, create a free Business Page, then sign up as a Neighborhood Sponsor. You’ll be able to post home listings, advertise, and connect with local buyers.
Tips for Selling a Short Sale Home
If you’re acting as the listing agent for a short sale, it’s recommended that you take the following steps (you’ll notice some are very similar!):
- Use Nextdoor and other property sites to accurately gauge the value of the home – Again, a property needs to be valued appropriately. By using Nextdoor’s real estate section, you can gain accurate information on the going neighborhood rate. The main difference here is that the short sale property needs to be valued at an amount that’s lower than the mortgage balance. That way you’ll set the home’s selling price at an amount that’s likely to attract sellers and be approved by the bank.
- Create a short-sale package – One of the most important aspects of guiding your client through the short sale process involves helping them craft their short sale package. These packages, which all lenders require, generally include financial statements, a description of the situation that led to the short sale, and other lender-specific documentation.
- Promote the home on Nextdoor – Similar to pre-foreclosure homes, Nextdoor allows real estate professionals to maximize their advertising budgets by signing up as a Neighborhood Sponsor. You can spread the word about short sale properties by setting up a free Business Page and creating posts about them. Consider also hosting a virtual open house or private home showing to speed up the process.
The Pre-Foreclosure Sale Process
During the process of selling a pre-foreclosure home, owners are encouraged to stay on-site. On-site owners can actually make a property more attractive to buyers, since they guarantee that the property is being maintained. Lenders prefer on-site owners as well, because they eliminate the need for security on the property.
As mentioned above, the pre-foreclosure sales process doesn’t differ significantly from a typical home sale. However, in the best-case scenario, your buyer will obtain a loan through the same lender that your seller did, which simplifies the process of transferring ownership.
The Short Sale Process
As previously mentioned, short sale rules vary from state to state. However, in most cases, if your client accepts an offer, you’ll need to send the lender copies of:
- The listing agreement
- The buyer’s pre-approval letter
- A copy of the earnest money check
- The seller’s short sale package
- The executed purchase offer
Remember, the lender has the power to approve or deny the short sale. Unfortunately, while they may approve the buyer’s offer within a few weeks, some lenders may take several months to respond.
The Bottom Line: Help Clients Avoid Foreclosure By Acting Quickly
When showing your clients how to avoid foreclosure, take the following steps:
1. Recommend that your client talks to their lender. Lenders are incentivized to steer clear of foreclosures as much as clients are, due to their assorted expenses and lengthy timelines. Because of this, they may be willing to make a number of borrower accommodations.
2. Make sure you’re fully up-to-date on every foreclosure law in your state, so that you can give your client accurate advice.
3. If selling a pre-foreclosure home, use the real estate listings on Nextdoor and other metrics to accurately gauge the value of the property, then set an appropriate price. If guiding your client through a short sale, use the same tactics to set your price, but make sure you get approval for it from the bank or loan servicer.
4. For short sales, make sure you understand any lender-specific short sale terms, and abide by them. You’ll also need to create a short-sale package.
5. Use Nextdoor’s free Business Page and become a Neighborhood Sponsor to capture the attention of qualified local buyers.
6. Reassure the lender by bringing them along for every step of the process.
If you can hit all these marks, you’ll provide your clients the helping hand they need.
Auction.com. What is the Difference Between Short Sale, Pre-Foreclosure, and Foreclosure Properties? https://www.auction.com/blog/what-is-the-difference-between-short-sale-pre-foreclosure-and-foreclosure-properties/
Curbed.com. A Foreclosure Crisis Could Still Happen. https://www.curbed.com/2020/7/27/21335855/coronavirus-foreclosures-housing-crisis
Forbes. How Real Estate Professionals Can Help Clients Navigate Short Sales And Foreclosures. https://www.forbes.com/sites/investopedia/2013/07/15/how-real-estate-professionals-can-help-clients-navigate-short-sales-and-foreclosures/#63ee38886b96
National Association of Realtors. Short Sales & Foreclosures. https://www.nar.realtor/short-sales-foreclosures
National Association of Realtors. The Short Sale Workflow. https://www.nar.realtor/legal/risk-management/the-short-sale-workflow
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