Provided by Craig Curreri
A short sale occurs when the outstanding loans and/or obligations of the homeowner are greater than the current value of the property and the lender(s) accept(s) a discounted payoff.
Why would a lender be willing to do that? A little history will help your understanding. In the 1990s, there was a decline in property values and many homeowners who had bought with little or no down or refinanced pulling all their equity out, found themselves facing possible foreclosure. Some lenders discovered it was better to accept a short payoff as opposed to foreclosure. Foreclosures are notorious for running up expenses for repairs, sales commissions and taking plenty of time. Today, the average savings to a lender with a short sales is $14,000 per property when compared to a foreclosure.
The benefits of the short sale for the lender are the cost savings, as mentioned above, and the fact that lenders aren’t property managers, especially for vacant, non-income producing ones. Short sales are desired by homeowners to avoid the stigma and damages of a foreclosure. The benefit to the buyer would be the potential to purchase a property at a very competitive price. Indeed, short sales can be a win-win-win for lender, buyer and seller.
The real crux of these transactions is negotiation with the lender. And interestingly enough, it’s not always the listing agent doing the negotiations; very often it is the buying or selling agent. These transactions can take three to six months to close. Here is an idea of some of the steps and documentation that may be required by the lender.
First, because of the privacy laws, the lender will require an authorization to release information form signed by the homeowner, giving the party that will be doing the negotiation authorization to discuss the loan with the lender.
Second, and possibly the most challenging, is locating the correct lender representative who has authority to accept a discount. This is usually someone in the loss mitigation department.
Once you have the correct contact, you’ll need to find out what documentation the lender would like to support the offer. This may vary with different lenders but expect them to request the following:
A firm market-value offer and/or contract Local comps appraisal (be sure to ask the lender if they prefer to arrange it themselves). Estimated closing statement (your title company should be able to assist you).
In many short sales, the buyer pays the closing costs and the agent may be asked to cut their commission to help. If applicable, there is a need for an estimate of cost of repairs or a contractor’s bid for items that would normally be part of a seller’s costs. Most importantly, a hardship letter from the homeowner, including as much support documentation as possible that details the seller’s lack of resources to repay the loan.
Be prepared for the lender to ask for more documentation. We have been told that under the Real Estate Settlement and Procedures Act (RESPA) a lender may not file a deficiency judgment for the unpaid portion of the loan and that if they have agreed to and accepted a lesser amount as payment in full, a deficiency judgment would, in effect, negate the short sale agreement.
It may be prudent to inquire what the intent and/or practice of your lender is in case further negotiation is needed on this matter. The lender may also be able to take other legal action to collect, such as garnishing wages. Be sure it’s very clear what, if any, other action the lender may take, so that this, too, can be negotiated.
Some lenders may write off the unpaid portion of the loan. If the lender forgives a portion of the debt, the homeowner may be subject to a 1099 and hence taxed under ordinary income rules.
The lender will provide a demand to the title company for no less than the negotiated amount and will require it approve and estimated closing statements.
Short sales are no picnics, but knowing more about them, especially in today’s market, is crucial.
Provided by Craig Curreri of Coldwell Banker 707.477.5120
Source: Broker/Agent Magazine, July 2007
Have you reviewed the rule adjustments impinged upon the U.S. Treasury by the Obama Admin? The deals will still remain at auction trustee sales.
Hello – just a quick note to say thanks for this article. Very great.