What are short sales?

Short Sale Definition

Process

In a short sale, the secured mortgage lender agrees to discount the loan balance because of a financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan and turns over the proceeds of the sale to the lender.  The lenders incur a smaller financial loss than foreclosure or continued non-payment would entail. Borrowers are able to mitigate damage to their credit and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.

Lenders often have loss mitigation departments that evaluate potential short sale transactions. Some lenders have pre-determined criteria for such transactions and some may be open to offers. Currently, there are no industry wide standards for short sales and willingness varies. The lender will typically determine the amount of equity (or lack thereof), by determining the probable selling price from an appraisal or Broker Price Opinion (BPO).

Lenders may accept short sale offers or requests for short sales even if a notice of default has been issued or recorded with the locality where the property is located. Given the unprecedented and overwhelming number of losses that mortgage lenders have experienced, they are now more willing to accept short sales than ever before. This presents an opportunity for "under-water" borrowers who owe more on their mortgage than their property is worth and are having trouble selling to avoid foreclosure as a result.

Listing agents need to remember that the home seller is their client, not the lender. The lender is not the seller. The home owners should approve any offer before the contract is submitted to the lender for third party approval. Multiple contracts should not be sent to the lenders.

In Maryland, foreclosures are called trustee sales. These are the auctions that take place at the county court house entrance. Experience has shown that it is very difficult to obtain lender approval for a short sale if a trustee sale has been scheduled.

Additional parties

Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders such as second mortgages, HELOC lenders, and HOA (special assessment liens)  may need to approve the short sale. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Unsurprisingly, short sale transactions have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. ^] The best sources of knowledge and expertise in short sales are experienced real estate professionals, short sale negotiators, loss mitigation specialists, and real estate lawyers who specialize in short sales.

Consent

Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale is on the market. The borrower may decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. Any short sale contract includes a contingency requiring lender approval of the sale.

Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Typically, deposits will be refunded but money for paid inspections or other services cannot be repaid.

There are several defenses against this. If the seller has moved out of a property, that is a clue that they have no intention of staying or negotiating further with the lender. "Bank Approved Short Sales" are advertised and indicate that that listing agent has verified the lender position. This still does not guarantee acceptance, and it often does not take junior lien-holders into account.

Credit implications

Short sales adversely affect the credit of the home seller though the negative impact is typically less than a foreclosure. Like all entries except for bankruptcy, short sales remain on a credit report for seven years. Depending upon other credit information, a short sale may limit the ability to purchase another home in the near future. While lenders sometimes forgive the remaining loan balance, other lien holders likely will not.  Every home seller should seek legal advice on obligations that may continue past the date of settlement.

Short sale buyers should be selective

A high percentage of short sale listings never reach settlement. Many sellers fail to provide the needed documentation and many of the offered properties have unrealistically low prices. Every buyer should use an exclusive buyer agent that will provide the advice that is needed to protect the purchaser. Some title companies are offering assistance with short sale negotiations and provide a higher level of quality control to make sure that the required documentation is in place.

At the time of this posting, there are about 500 active short sale listings in Montgomery County Maryland. This compares with a little over 200 active listings of lender owned foreclosures. Currently, short sale listings are having a more negative impact on many areas than the lender owned foreclosures. Home buyers and sellers are compelled to understand the impact of short sale offerings.