Short Sales:Industry Expert Article
By: Michelle Rawn
Borders & Borders Attorneys
BackgroundIt is impossible to turn on the TV or look at a newspaper without running into an article about the mortgage crisis that the country is currently experiencing. Due to lax lending practices, consumer spending practices and fluctuations in the housing market, there are many homeowners who need to sell their home but can't sell it for enough to pay off their loans. In addition, there are some homeowners who have fallen behind on their payments for a variety of reasons and are in various stages of foreclosure. When they find a buyer, most of these homeowners must either bring funds to closing or negotiate with their lender to accept less than the full amount due on the loan. If their lender does agree to accept less than a total payoff, this is called a "short sale."
The process of obtaining lender approval for a short sale is a laborious one. The seller usually must provide financial documentation of his or her income and budget to show the lender that the seller cannot afford to pay the full amount due. It can take many phone calls and faxes over weeks (and months) to get the correct information to the correct person at the lender to consider the offer. Usually, lenders will not discuss a short sale unless the borrower/seller is behind on his or her payments. In addition, lenders will not discuss the borrowers' situation with anyone (such as attorneys and realtors) other than the borrower without express written permission signed by the borrowers and on record with the lender. One of the items that the Seller will need to provide, further along in the negotiation process, is an Estimated HUD. Oftentimes the first item on the HUD that the lender will cut is the commission.
Lenders say "If we are taking less, the agents will take less." This can be particularly frustrating for agents because they will usually spend far more time on a short sale than on a typical sale; if anything, they deserve a higher commission. It is critical to begin this process as soon as possible. When you are aware that a short sale may be required, you should obtain the seller's permission to indicate on the listing that the sale will be "subject to approval by the seller's lender(s)." In addition, the contract should contain a contingency for the approval by the seller's lender.
Also, keep in mind that if the seller is in foreclosure, you also must be aware of when the property is scheduled to be sold at the Commissioner's sale. If you have a client who is buying a property under a short sale, make sure they know to fasten their seat belts. The good news is that they are usually walking into some equity. The bad news is that it will be a bumpy road. It is not unusual for a short sale negotiation to take months, which almost always puts the parties outside their contract timeframe. If the buyer is in a position of needing possession soon, it can be a bad experience for all involved. Be sure to have these discussions with your buyer as early as possible.
What happens to the deficiency?
When a lender takes a loss on the payoff, it has two options. It can require the borrower/seller to pay back the remaining amount. This will come in the form of a note, or a promise to pay; however, it is not secured by the property since it has been sold. Believe it or not, lenders seldom choose this option. In the alternative, lenders can "forgive" the difference. In that case, the amount of debt that was forgiven may be considered as income for the borrower and may be taxable. Congress passed the Mortgage Forgiveness Debt Relief Act of 2007, allowing in certain circumstances, for forgiven debt not to be taxable to the borrower, thus giving the borrower some relief. Your client should check with his or her tax preparer to see if he or she may qualify under the Act.