Short Sales - Advice from an attorney to realtors

PART 1 Getting Familiar With Short Sales:

This first section of the series describes the basic definition of a short sale, the motivations of the Seller and Lender in negotiating a short sale and the basic steps that need to be taken when a realtor works with a Seller who needs to accept offers that are lower than the amount necessary to transfer the Seller’s property free and clear of all liens and costs ----

SHORT SALES DEFINED

Short sales are sales in which the total amount owed by a Seller (including adjustments and costs of transfer) total an amount that is greater than the price for which a property may be sold. Typically a Seller who finds herself in the position of selling for less than what is owed will attempt to negotiate with the creditor who is owed the most upon sale  - this is usually the Seller’s lender (i.e., the mortgage).  Seller will attempt to lessen the obligation necessary to pay the lender in full in order to allow the sale to go through. Although it is the cumulative effect of all of the liens, costs and transfer fees that make a sale “short”, we are usually talking about larger numbers when referring to a particular transaction as a “short sale” and therefore it is the negotiations between Seller and Seller’s Lender that are at the crux of short sales.

It is the negotiation between the Seller and the Seller’s Lender that this series will focus on with particular attention paid to the interaction between the Seller, Realtor and the Real Estate Attorney.  Although Short Sale Transactions have become easier in some respects, short sales are still time consuming, resource hogging, stressful transactions that can be a real gamble for the real estate professional who dares to accept the challenge of listing a short sale property.  It is only through preparation and good communication that these transactions can reach happy results for all parties involved.

WHY IS THE SELLER LISTING THEIR PROPERTY WHEN THEY WILL BE SHORT?

First off, many times the Seller is unsure of whether or not their sale will be a “short sale”.  There are entire categories of Sellers who need to sell quickly for a variety of reasons e.g. to relocate for a job, marriage, school, death of a spouse, or other family obligations, requiring them to sell quickly regardless of the consequences.  Therefore, it is critical that the realtor takes the time to review all of the Seller’s obligations and costs that will effect the sale of the Seller’s real estate when listing the property. In the next section of this series I will go into great detail concerning gathering the information , but for now suffice to say, it is important to take great care when the numbers are “close” to properly determine whether or not the sale will be short.

In the majority of cases, however,  it is the Seller’s inability to pay their current mortgage obligations and  Seller’s lender’s foreclosure efforts that bring the Seller’s “short sale” listing to the realtor.  Sellers may have already run through some of the  alternatives discussed below before seeking your assistance as a Realtor to list the short sale property. Time may be a critical factor in listing the property, selling the property and negotiating with the Seller’s Lender before an auction date.  This is why a quick and thorough evaluation of the Seller’s debts and costs of closing is necessary and why preparation for and knowledge of the negotiation process with Seller’s Lender are important.

OPTIONS OF SELLER WHO HAS FALLEN BEHIND IN MORTGAGE PAYMENTS

1.    Do nothing:  

        Bank forecloses, new owner or bank evicts borrowers.  Bank files suit to collect deficiency    (amount between what is owed and what the property sells for at auction.)

2.    Deed in lieu of foreclosure:  

        Deed property to bank and Seller is forgiven  any amount owed that is over the value of the property.  Seller must immediately vacate the property. This option has a negative  effect on credit, but not as negative as the bankruptcy option below.

3.    Refinance:    

        This is sometimes impossible due to the fact that all of the equity has already been taken out of the property in previous refinance or home equity transactions and / or the value of the Seller’s home has fallen.

4.    Bankruptcy:    

        This option may be useful if there is equity in the home to slow down the foreclosure action.  If there is really no equity then the a subsequent sale will still be a short sale and bankruptcy may not be a viable way to stop the foreclosure.  Bankruptcy also can have a devastating effect on a borrower’s credit.

5.    Short Sale:  

        Short sale allows property to be sold, all taxes and and all utilities and other debts associated with the property to be paid.  The effect of a short sale on Seller’s credit is not as negative on Seller’s credit as deed in lieu of foreclosure or the bankruptcy options above.  The short sale may have a tax consequence. 

SHORT SALES NOW AND THEN

Historically short sales have been difficult propositions for the real estate professional and generally have been viewed as transactions to be avoided. Beyond the  unpleasantness of being involved with a sale that will produce no proceeds for your client, there is also no money to help the transaction move forward, i.e., any repair credits or other Seller concessions cannot be offered in order to keep a transaction together.  These transactions are generally difficult and a gamble as far as getting approval from the lender.  In the past, lenders often looked to the other real estate professionals to take a cut in their fees and commissions in order to make the short sale transaction happen.

Recently the market has shifted and many lenders have restructured their loss- mitigation departments to handle larger volume of requests for “short sales”.  This has increased the flexibility that lenders have in settling the short sale negotiations, has made them faster in many cases and less demanding of the processionals involved.

One of the lessons that lenders have learned in this market over the past two years is that they can sell the property for what the market will bare before the foreclosure through a short sale  or they can go through the expense of the foreclosure, legal fees, auctioneer fees,  the expense of maintaining the property if the lender buys at its own auction, and the expense of listing the property with a realtor, only to find months later that the market has further declined and that the short sale opportunity prior to the foreclosure would have netted far more than the final sale.

THE BASIC STEPS OF A SHORT SALE

1.    Setting sale price at market rate - You must determine the fair price to sell the home and be prepared to defend this price.  It is helpful if you have the listing for a few weeks and can show similar properties selling for listed price.

1.    Gather information for Lender’s “Short Sale Package”. Use  a checklist.

2.    Get offer to purchase signed by all parties (use an addendum for offer and contract) have any short sale contract reviewed by an attorney or title company assisting you with the short sale.

3.    Provide attorney with all gathered information from checklist so that attorney can apply for the short sale package.

4.    Attorney prepares short sale package for Lender with assistance of Realtor.  It is extremely important that the realtor is available to show the property to Lender’s agent who is producing the Broker’s Price Opinion.

5.    Lender sends agent to produce a “Broker’s Price Opinion” .

6.    Negotiations between the Attorney / Realtor and Lender begin, possible 2nd Broker's Price Opinion or appraisal may be necessary. 

6.    Short sale is approved  by Lender through a certain date.

7.    Negotiations can continue as situation changes through sale date (examples to follow).

Stay Tuned for Part 2 which will cover the Realtor's Intake, How to deal with debtors, helpful checklists for the Realtor and good Realtor - Attorney Communications. . .