Don't List That Short Sale by Bill Roberts

A lot of real estate agents believe that because their clients are upside down in their homes they have a RIGHT to do a short sale and the bank will approve taking a loss.

It just ain't so. Nobody has a right to do a short sale. It may be a solution, but maybe not.

What are the steps to a successful short sale

            •           Borrower can't make payments

            •           Borrower is in default

            •           Borrower has no assets which could be applied to loan balance

            •           Borrower has tried to sell house for enough to satisfy lender

            •           Only offer would result in short sale

            •           Borrower completes lender "package" of documentation

            •           Offer submitted to lender

            •           Eventually lender responds with a form of counter-offer (maybe we'll take this much)

            •           Buyer accepts counter-offer

            •           Lender counters again (more than once)

            •           Eventually, an agreement is reached

            •           Lender informs broker they will only pay a small commission

             •           Broker has three choices: Cave, Compromise, or Fight

             •           After the commission is resolved, lender will give buyer approximately 15 days to  complete the  transaction

That's what it takes to successfully complete a short sale, but even then it is far from automatic. The lender might not respond to the short sale offer at all, or they might "drag their feet" so long that the house "goes to sale" before the short sale is approved.

Why are they so difficult?

So why are the lenders so hard to deal with? Well, First and Foremost they don't like to lose money. Secondly, they believe that most defaults will be cured prior to sale, some even at the last moment. They have historical data to back up this position. Over the years over 80% of all defaults have resulted in the default being cured and the loan being reinstated.

The third factor, which won't be readily apparent to the borrower, is that the mortgage servicer probably doesn't own the loan any longer. It might be part of a "bundle" of mortgage backed securities (fund) and may not even be owned by any one bank. Since a large percentage of sub-prime home mortgages are in this category, These loans probably can't be approved for a short sale. The "manager" of the fund may not be able to do anything because changing the terms on one single house loan in the package changes the yield on the package and it is the yield that they sold to their investors. They are between a rock and a hard place.

And then there is the fourth main reason the lender might appear to be recalcitrant: PMI.

PMI (private mortgage insurance) is an insurance policy that the lender has to pay them for their loss in the event that they foreclose and get less for the house than they are owed. They (the lender) can buy coverage for any amount of loss, but the normal range of coverage is generally 20% to 40%, with 30% being "normal,"  This means that if the house is foreclosed, the Private Mortgage Insurer will cover the loss on the loan up to the limit of the policy. If this limit is 30%, then the lender is probably better off going to foreclosure than accepting a short sale. The borrower generally pays the premium on the PMI, but not always. The bank is free to buy this insurance themselves. If they have this insurance and for what amount, you won't know because it is none of your business. But it will affect the outcome of the short sale application.

90% of Short Sales Don't Close

With all that there is going on to make a short sale impossible, it's a wonder that any get approved, funded, and closed. So why are you wasting your time on an activity that has such a low probability of resulting in a successful event?

And, as if that wasn't reason enough to avoid short sales, there is the matter of legal liability. The documentation required by the bank to approve a short sale is more complete than the normal documentation to get a loan. The question the bank is going to have is "why could you afford the house when we made the loan, but you can't now?" If the borrower bought the house with a "stated" loan, they may be put in the position of providing written evidence that the lender could use to prosecute them for loan fraud.

And if the real estate agent "advised" them to seek a short sale and as a consequence they are charged with loan fraud, the agent will have liability for their advice.

The Hidden Liability for Agents

Since the house was listed for sale and put on the MLS, there is the question of "disclosures:" who will make them, and who will "assume" liability for them? The home seller is walking away with nothing, they can't assume any liability. The bank isn't actually selling the house because they are merely accepting a payoff of less than they are owed. As far as the bank is concerned it is "as is" because they've never seen the house, much less know anything about its condition and they aren't the owner. Well, if anything goes wrong, it only leaves the agent to take care of the problem. It will probably result in a lawsuit against the broker. Let his E&O insurance pay one of these claims and see what happens: cancellation or massive rate increase plus a change in terms of the policy to exclude short sales. You better check to see if that hasn't already occurred.

If you are an owner of a house that you need to sell and you think it might result in a short sale call me. We can discuss your options for getting out from under your burden with the least negative impact on your life. Bill Roberts (619) 244-4610.

Who Has a Right to a Short Sale?