Back to Basics - a Review of Short Sales

Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

Short Sale Primer - Back Room Lender Decisions

A Primer -

Short sales are nothing new.  When I represented a national lender for all of their foreclosures in the State of Florida several years ago, we negotiated "loan workouts" which are now called "short sales".  Since they have been around so long, I did some digging with my old pals that were the executives I worked with in the loan workout and REO department of this national lender (the lender has since been merged into Bank of America).

I found one in Atlanta, and another in Washington.  Our discussion about short sales showed that nothing was new under the sun - the formulations and decision making processes were unchanged from 15 years ago - and only some of the terminology had changed.  Another executive of that lender was found in Florida and she now works with me in the client management and lender negotiation of our client's loan workout situations.

Short sales are a process of "shorting" the debt (the mortgages) encumbering a parcel of real estate (the house or investment property).  Shorting the debt means that the person holding the debt (the lender) agrees to release its lien on the real estate for less than the amount the lender is due according to the promissory note.

The explanation is simple.  The execution and the details of a short sale are highly complicated.  The chemistry of each short sale situation is not identical and quite often the goal you want to achieve is a moving target seemingly and frustratingly impossible to reach.  More detail in some of the methodology to a short sale is in a previous article (see link - What do I do? - I can't pay my mortgage).

Who Qualifies - And Why A Lender Would Want The Loan Paid Off -

You can read discussions on who qualifies for a short sale in a previous article (see this link  Some Sellers Think They are Entitled to a Short Sale and Economics 101).  Technically, everyone can qualify for a short sale.  To understand this we need to become more, well, "technical".

Logically, a lender is not going to want to keep a secured loan on its books where it has evidence that the security has decreased in value dramatically and the loan to value ratio under which the loan was originally made is now "upside down", meaning the value is less than the amount of the loan.  The portion of the loan that is not in compliance with the original loan to value ratio is, for bank auditing purposes (or investment valuation purposes if the loan is not a portion of a mortgage backed collateralized security) and therefore is not considered secured.  That is bad since it makes the lender set aside reserves of cash for the lack of value in the loan.  The lender needs to do something to change that situation.

Depending on the language in your mortgage or your promissory note, the valuations being upside down could be reason to put your loan into breach and call the promissory note.  I have not seen this done as of yet by any residential lender.  But technically, if a property is in this upside down situation, the loan could already be technically in default.

Often, the desire to unload the upside down property is made based on economic calculations made by the owner of the property.  Those calculations usually show that it is better to take a loss now of a known amount of money rather than continue to pay interest, insurance and taxes in excess of the income from the property for an unknown period of time until rental or property values increase so the economic cash drain is reversed.

In any event, the lender would prefer to have the loan right side up or off its books.  In some cases the property owner has excess cash laying around and can just sell the property (if that is their plan) and pay the amount to the bank that they are "short" at the closing so the loan is paid off in full.

In other cases, usually where the borrower has become financially distressed but also where the borrower is asset rich but presently is lacking liquidity (I call it financial indigestion), other arrangements satisfactory to the lender can be accomplished.

These other arrangements usually come in two flavors: (1) providing alternative secured collateral to the lender, such as a first or second mortgage on another borrower owned property that has equity value, or (2) having the borrower sign a new or modified promissory note that is unsecured and payable over a fixed period of time, usually 3 to 10 years from the date of the short sale.

Where the borrower is experiencing extreme financial hardship, a third alternative can occur, which is actual forgiveness of the unpaid amount to the lender.

This leads us to the issue of the unpaid portion of the short sale.  Many lenders will not provide a release of the balance due.  This causes some good and some bad issues for the borrower.  The good part is that without a final disposition of the unpaid portion, the borrower has not received any phantom income (i.e.: that 1099 stuff).  This good news does not last forever.  Once the statute of limitations on enforcement of the promissory note expires, then the borrower has that income to report to the IRS.  The bad news is that the lender very well may sell the unpaid promissory note to some investor for 5 or 10 cents on the dollar and then that investor will definitely come after the borrower for as much as they can get above that 5 or 10 cents on the dollar.  The small element of good news here is that as long as they are trying to collect on the unpaid portion, that unpaid portion is not income that the borrower has to report to the IRS.

Short But Important Reminder On The 1099 -

As a short reminder, the big deal about 1099's is really an illusion.  1099 or no 1099, if the debt is forgiven, the borrower has income to report to the IRS.  No exceptions!  Too many people come to me and say they want me to negotiate with the lender so that they don't get a 1099.  I ask them why?  They tell me that if they don't get a 1099, they don't have to report the income they would get on the debt they did not pay.  The next question is why does the bank get to decide what the IRS usually has jurisdiction to decide?  The answer is of course that the lender giving a 1099 means squat - unless the borrower is intent on committing tax fraud by not reporting income.  What relief that is available to the borrower are two opportunities to not recognize up to all of the income.  These are discussed in detail in my article on the Sellers Always Have Income.

Short Sale "Bookends" -

Note that these are the general parameters that we have seen over several years of dealing with loan workouts.  There are always exceptions where the decision of the lender is simply without logic.

Illogical example #1 - The borrower is without a job, has moved out of the house and is living with one of the spouses' parents out of state.  The house is now valued at $190,000 to $210,000 and the loan is at $350,000 and has been on MLS at $200,000 for 3 months.  One quarter of the homes in the neighborhood are in some kind of pre-foreclosure or distress.  The lender refuses to accept a contract at $178,000.

Illogical example #2 - The borrower owns two businesses and shows annual gross income of $500,000.  Borrower has 4 homes all investment and lives in another (5 altogether).  Lender accepts a short sale on one investment home at 10% under value, leaving $70,000 short on the mortgage payoff.  Borrower asks for a letter of release from the lender that it will not pursue the shortage on the promissory note and the bank gladly provides that letter, letting the borrower off from every having to worry about the shorted promissory note.

I call these the "bookends" to the short sale definition of what fits the parameters of the banks.  As you can see, even the bookends can be moving targets, since neither makes any sense.  Fitting everything else in the middle leaves a really big gray area on the fringes of the middle!

No Science To The Short Sale -

There is no set course to the successful short sale presentations to the lender.  We have seen 5 page packages and 50 page packages get approved.  It depends on the lender.  It depends on the borrower's situation.  It depends on the property.  Notwithstanding, we find that the best opportunity for a short sale to be successful is to provide a simple yet complete package to the lender - keep it simple - but back up the assertions made in the presentation.

You have probably heard about the one, two or even three months to get the bank to even start to move on a short sale application.  Again, this is hit and miss.  This winter we made two presentations to the same lender, one in early March and one in mid April.  Same neighborhood.  The April package got a BPO call from the lender in only 2 weeks.  We are still waiting on the March package! (Yes, we confirmed that the lender has it and they confirm that they are working on it).

Lender Overload -

It appears that since most lender loss mitigation department personnel are carrying 500 to 600 files per person, the best opportunities for success should be on the packages that are clear cut, summarized, and organized.  But each package must be accompanied by someone that will call the lender to get status reports on the package at least weekly. I was amazed with one lender when we called them to ask why the lender had not even acknowledged that they received the package.  Incredibly, the answer was that they take no action on any package received until someone calls to find out the status on the file!

Short sales have a long history of being in the arsenal of lenders for loss mitigation and loan workout issues.  Used properly, the short sale can be a benefit to the lender and the borrower and an opportunity for a buyer with patience to obtain a relative bargain in the marketplace.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660  RPZ99@FLORIDA-COUNSEL.COM - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Consult with Brokers and Sellers Nationwide! For a complete listing of articles by Mr. Zaretsky see: SHORT SALES AND MORTGAGE MODIFICATIONS TABLE OF CONTENTS


Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Speed Equity® Mortgage Acceleration System 08/08/2010 10:09 AM
  2. Shannon Coe 01/22/2011 06:08 PM
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Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

As usual, an excellent post. There are plenty of blogs on short sale. I think with 99% od those the difference is expertise vs what we feel it is.

WHether you warn us or not, your expertise is and will be used by us. It is still the best to go to your attorney and ask the right questions, rather then go and say "Tell me all you know about the subject". It is not going to work.

When someone comes in my office and asks me to tell them what I know about the property (my office is in the condo-hotel), I usually ask them if they have two weeks, so I can start.

Congrats on the feature.

Jun 10, 2008 02:29 AM #48
Cristal Drake
Prudential California Realty - Fullerton, CA
Realtor - Fullerton Real Estate

Wow, this is such great info.  I am so glad I stumbled accross your blog.  I love to read the law instead of everyone's guessing!  Thank you!  I am now a subscriber!

Jun 10, 2008 04:21 PM #49
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices


I carefully reread all the questions and your answers and it donned upon me that this is the only known source to me, where you can ask the attorney question after question and 3 things happen:

1. He knows his stuff, real expert;

2. He answers all questions, and makes them easy to understand;

3 It costs us nothing to tap into that resource.

I nearly started feeling bad about it, but then remembered that I am sending you another deal tomorrow, so that helped.

Thank you for terrific help.


Jun 10, 2008 06:23 PM #50
Pedro Gonzalez
ADT-Millennium Alarms Systems - Pico Rivera, CA
Home Security Systems- ADT authorized dealer.

Great information, It is definately going to come in handy. I appreciate all of this

Jun 11, 2008 03:57 PM #51
Gary McAdams
GMAC Schwartz Property Sales - Key West, FL

I have done two short sales and am negotiating another now.  After this one I am done.  I refuse to show or list another.  It isn't worth the trouble and aggravation.  I will refer them to another agent.

Jun 11, 2008 11:15 PM #52
Renee Johnson

I just received my first request from a client to put their house on the market as a short sale.  So, I immediately came to Active Rain for help.  Thanks!

Jun 12, 2008 04:15 AM #53
Lisa Lambert
The Law Offices of Elisabeth A. Lambert - Fresno, CA
Esq. 1031 Exchange Expert

Excellent summary of the process Richard. Many realtors and borrowers don't really understand the mechanics of a "short sale" because the term has been bandied about without any real understanding of what it means.

Jun 12, 2008 05:28 AM #54
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

This is an excellent explanation.  I'd like to add that the short sale is simply one of a handful of loss mitigation programs/strategies available to homeowners.  In my humble opinion the short sale should be implemented only after all other options are exhausted.  Unfortunately, the short sale is the most public of these options so it gets the most press.   As you mention, it all starts with putting together a good clean package for the banks to review.  Having someone on the team that knows how to package and present the options to the bank should be an important team member for every realtor.



Jun 12, 2008 06:14 AM #55
Alex Charfen
Charfen Institute - Austin, TX

Richard - this is an exceptional entry - thank you for sharing it with everyone.  In our area (similar to yours) about 70 to 85% of closings invovle a lender (short sale, REO or auction).  Agents need information exactly like this.  We would love to have you in a CDPE Course.

Jun 18, 2008 11:27 AM #56

Was wondering where a seasoned real estate agent that lacks experience in short sales can get A-Z information. I see alot of people offering training and i dont mind paying for GOOD training.



Jul 24, 2008 09:09 AM #57
Randy Sanger

Good Blog-I enjoyed the reading.

Short sales are nothing new, there is just more of them.  Seasoned Real Esate Agents are best qualified to do these type of transactions but need a program just like they use for any other disipline of real estate.  The Certified Distressed Property Expert program offers a package that is complete from A-Z for doing short sales and comes with a certification.  Frankly, I would not do a short sale without the going through program.  It has save me time, it has save me repeat visits with my client, it has saved me from looking for more leads.  It is a two day seminar and has a foundation to start and then covers the back with tools and aids and how to deal with the Banks and Mortgage Companies.  I have yet to run out of work or leads and commissions are always paid by the bank at full rates.  And until the market stabilizes in my area this seems to be a great service to my clients and my market.  And the fact that I am helping people with foreclosure avoidance really makes me pleased with this program.  I took this seminar about 3 months ago and me and several other agents have grown the program locally into a larger machine to accept leads from all types of sources to help with foreclsoure avoidance.  And now we are building an infrastructure to handle all the lead generators in sofar as providing feed back of our services to their leads. 

So for the experience agent, I would check out the Distressed Property Institute at and even if you are new to the real estate business, you could see if you want specialize in short sales.  At least it is further education and an investment into yourself and your future and helpful to your own community.

Jul 24, 2008 10:48 AM #58
Dan & Michael Nathanson
RE/MAX Services - Boca Raton, FL
Nathanson Brothers

Richard - Thanks for the terrific entry!  You have a lot of great information to share.

Rosie - I agree with Randy.  The best source we have found for short sale education is the Distressed Property Institute, and the Certified Distressed Property Expert (CDPE) designation.

We had taken several of the free 1 or 2 hour classes that some title companies are promoting, and a few of the classes that so-called and self-professed "experts"are offering.  After having attended the CDPE course, we realized that not only were we "taught" much mis-information, also several of the things being taught are actually illegal!  The Distressed Property Institute has been endorsed by such reputable organizations as Keller Williams Realty and Star Power.  They are an honorable company with an extraordinary amount of integrity.

When you leave the CDPE course, you actually are an expert.  It's 2 full days jam-packed with valuable information.  You also walk away with the systems, flow charts, forms, insider tips, even a complete sample short sale package.  You also learn how to generate short sale business.  It really is the "complete package."  It is worth the price at 10 times the amount they charge...easily.

What we really like is that, as Randy said, it allows us to help people avoid a credit-destroying and emotionally-damaging foreclosure.  The relief that sellers feel, even just after signing the listing agreement, let alone after their closing is visible.  There has been no better feeling in our business, than helping people avoid a foreclosure.

Definitely go to and sign up for the next course.  It has changed our business, and can do the same for yours!  If you have any questions, don't hesitate to contact us.

The Nathanson Brothers - and

Jul 24, 2008 02:49 PM #59
Donald Apelian "Short Sale Specialist"
Meridian Financial / First American Financial - Saint Petersburg, FL

Excellent information - Thank you so much!

Aug 18, 2008 07:42 AM #60
Steve Richman
Genworth Financial - Raleigh, NC

Just so you know, at Genworth Mortgage Insurance, we have a loss mitigation department and we are very involved in executing all types of workout soultions for borrowers in trouble - including short sales.  We have a policy that if we agree to the short sale and it is successfully completed, we will not pursue any deficiency from the seller.  If you need more information, please do not hesitate to ask.

Nov 07, 2008 05:29 AM #61
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Thanks Steve!

Nov 07, 2008 08:15 AM #62
Virginia Loewe

I helped my niece get a mortgage on a house so that her three children (one of whom is disabled) would have a place to live.  I put in about $35,000 so that she, alone, could qualify for the mortgage and the house could be fixed up.  The "value" of the house at the time (2007)of sale was $200,000.  She gave me a quit claim deed as "security" against her failure to pay the monthly mortgage.  Not only did she ruin the house, but she doesn't take care of the children and numerous reports have been filed against her on the child neglect hotline. Now she's stopped paying the mortgage because she quit her job.  The house is hardly worth $200,000 at the present time, and she owes $148,000 on the mortgage (I guess that's with interest and penalties).  I'd like to save the house for the children, whose grandmother is devoted to them and has agreed to move in to take care of them, but I can't afford the mortgage either.  I'm torn up about all of this for the sake of these beautiful children.  I'm not inclined to want to file my quit claim deed, especially since it appears that my niece is willing to move out of the house peaceably so that she can live with one of her many boyfriends.  Can the children (and their grandmother) remain in the house "for free" until the end of foreclosure (the grandmother has a small condo she purchased, so she can't afford the house mortgage either, until her own property sells), and, if so, what amount of time are we looking at until she and they will have to move out of the house.  Can I at some point offer the lender, say, $95,000 for the house (they could go after my niece for the deficiency- good luck!), turn around and sell the house maybe for a little profit that could be used to provide the children and the grandmother with an apartment bigger than the one the grandmother lives in now? Thank you for your kind counsel if you can give it to me.  I enjoyed reading your article.  Signed: Great Aunt G.  P.S. May I ask you please not to publish my last name or my e-mail address?  I wouldn't want others to be aware of the conditions under which the children are being forced to live.  Thank you again.

Jul 22, 2010 12:14 AM #63
Speed Equity® Mortgage Acceleration System
Speed Equity® - Olympia, WA
We help your clients Own Their Homes Years Sooner

Richard, I'm going to be reading all of your articles this week.

Aug 08, 2010 10:09 AM #64
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Virginia -

Your heart rending story is unfortunately not atypical in this climate.  Unfortunately there is not much in the way of good news for you regarding this house. Lenders will not allow you to acquire the house and you cannot negotiate your neice's mortgage under lender rules.

Since I don't know where the house and therefore the foreclosure procedures for that jurisdiction, i cannot tell you the timing or methods of foreclosure.

Consult with local counsel on those questions and good luck to you.


Sep 19, 2010 03:35 PM #65
Dave Halpern
Keller Williams Realty Louisville East (502) 664-7827 - Louisville, KY
Louisville Short Sale Expert


You wrote this almost 3 years ago and it still relevant today.

Jan 24, 2011 07:31 PM #66
Randy Sanger
Thanks Richard. Florida is still in the RE value decline along with other states so your comments are as timely as ever. In months to come we are going to find out more information about lenders SOP and their effect on the RE market. CDPE for Realtors has been our best source of updates thus far and I the history you added is still true today, as you said.
Jan 24, 2011 11:49 PM #67
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