Short Sales are not for the faint hearted!

What is a “Short Sale”?

A “Short Sale” is a transaction in which the property is sold at a price that is insufficient to payoff the loans attached to it. We call these properties “underwater” or “upside down”. This type of a transaction has been in existence for a long time; I remember handling a few back in the ’80′s. In the distressing economic times after 2007, however, it seems like short sale transactions are the norm.

Although the basic concept of the purchase/sale transaction is the same as any regular sale, there are a few things to watch for.

What Is the Short Sale Process?

The Seller and the Listing Real Estate Broker (or Short Sale negotiator) have a great deal of preparatory work to do to convince the existing Lender(s) to agree:

• Seller to provide most recent copy of mortgage payment coupons.
• Seller to provide a financial package together with a letter of financial hardship.
• Seller to provide his real estate agent with an authorization letter to negotiate on Seller’s behalf.
• Seller to provide real estate agent with any other pertinent information, ie, homeowner association dues and delinquencies, property tax delinquencies, any other liens and judgments against Seller.
• Listing Agent to obtain comparables and a Broker’s Property Opinion letter (BPO) to show the value of the property.
• Listing Agent to market the property to sell at the best price with clear disclosures that the sale will be subject to short sale approvals
• Listing Agent to contact his Escrow Officer and get an estimated HUD-1 closing statement to show how much the Lenders will receive at a certain purchase price.

Once an acceptable offer has come in, and armed with all the items stated above, the Listing Agent will contact the Loss Mitigation Department of the short sale lender(s) and start the proceedings. The Agent should submit a complete package at one time. Do not submit information piecemeal.

For the potential Buyer’s agent (the Selling Agent) it will be a wait and see situation thereafter. The transaction will not actually enter into escrow until there is at least a tentative agreement that the lender(s) will accept the offer price submitted.

Tips, Tips and more Tips

Communication is essential! Keep everyone informed, and stay informed. Stay in touch with the short sale lender.
Deadlines are important! If a Notice of Default or Notice of Sale has been recorded, watch the deadline. You don’t want the foreclosure department to foreclose on the property when you have a valid short sale going on (and this has happened!).
Ask your Escrow Officer to update the preliminary report constantly for new liens and judgments.
There may be tax consequences to a short sale for which the Seller should consult with his independent legal and financial counsel. Forgiveness or cancellation of debt is considered by the IRS as income earned.
Seller can negotiate with the lender on how the short sale is reported. This will impact the Seller’s credit report:
“Paid as agreed”
“Charged off” or
“deed in lieu of foreclosure”
Recourse loan – refinance debt – loan made for any purpose other than to buy the property or to cash out to improve the property. On a recourse loan lender has the right to pursue the unpaid balance through court proceedings.
Nonrecourse loan – acquisition debt – loan made to buy the property or to take out funds to improve the property. On a nonrecourse loan the lender does not have the right to pursue the balance other than through the sale of the property itself.

Do’s and Don’ts

To the Seller -
Lenders will scrutinize your financial statements; they will even pull up the financials that you submitted when you made the loan to compare. They are on the look-out for fraudulent activity. Don’t withhold information.
Make sure your hardship letter is followed with documentation to substantiate.
Don’t declare bankruptcy halfway through your short sale! That may effectively stop the process.
Junior liens, IRS liens, State of California liens, child support liens, judgments recorded on the property, all have to be contacted and short sale approval letters or releases obtained from each.
The Escrow Holder will need to generate an estimated closing statement, so be as precise as possible about all the debt balances. All possible costs should appear on this important document. This includes HOA delinquencies and unpaid property taxes.
The lender may issue a short sale approval subject to the Seller coming up with a certain amount of out-of-pocket funds or even sign a Promissory Note for the future.
Patience! Especially if there is more than one lender. Remember, each lender (and especially the first lender), has to approve what the other lenders are demanding to be paid.

To the Buyer -
Be aware that the short sale lender may not agree to pay some of the normal costs to this transaction, for instance, termite repair work, home protection policy, or credits towards Buyer’s closing costs. They may also reduce the amount of title and escrow costs that they are willing to pay. The Buyer will be requested to absorb all the amounts not allowed by the lender.
Some lenders may want a higher payoff amount. If Seller does not have the funds to pay the difference, the Buyer may be requested to contribute towards the short sale.
If the Buyer is purchasing the property other than as a principal residence, certain disclosures and other specific documents apply.
Let your new lender know that you are purchasing property under a short sale so that they don’t lock your loan rate too early.
Patience! Some short sales have taken up to a year to complete due to lender, seller or negotiator issues.