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What is a Short Sale? 

Many people hear the term ‘short sale’ and think it means that the escrow period will be shortened, and just the opposite is true. Get ready for a long and bumpy ride! Currently, short sales are taking approximately 6-7 months to close. The actual term is used to describe a property sale where the total sale proceeds are less than the balance due against the property. This includes the cost of the sale – such things as customary seller closing costs, realtor commissions, and repairs, to name a few. If you have ever heard someone say they are ‘upside down on their mortgage’ this is exactly what they mean. Not all lenders will accept the request for a Short Sale if it would make more sense for them to foreclose, and not all sellers or properties qualify for short sales.

Many transactions today in Southern California are Short Sale transactions. Below is a list of some of the requirements that are necessary for us to close and insure a Short Sale transaction. These are necessary to be able to guarantee the insured buyer and insured buyer’s lender that the lien will be extinguished subsequent to the close of Escrow. Unfortunately, every Short Sale transaction is different and unique. This is because all Short Sale lenders have their own unique requirements. Below is a list of the typical required items in a Short Sale transaction.

• Current Short Sale Letter from Lender.

• Separate written extension is acceptable

• Must contain commitment language to issue reconveyance upon payment.

• All affidavits must be signed by all parties required.

• Payoffs to junior liens must be approved by the senior lender.

• If required 90 day no transfer, buyer and seller must agree to not transfer in an Affidavit.

• Estimated HUD must be approved by lender prior to close of escrow.

• Buyer on the Grant Deed must match the buyer on Short Sale Letter.

• Sales price on transaction must match the Short Sale Letter.

Top 9 Short Sale Hurdles   (RETURN TO TOP)

1. Last minute submission of Seller’s State of Information”.

2. Demands (1st & 2nd) not matching. Not approved or different amounts.

3. Payment outside of escrow not approved by short sale lender. (1st lien holder must ok 3rd party paying the difference to the 2nd.)

4. Conditional demands from short-sale lender. (ie: Lender can rescind demand and require full payment, even after transaction has closed if certain conditions are not met.)

5. Waiting until the last day of the short sale lender’s approval period to close.

6. Fallouts (new liens filed after transaction opens.)

7. Communication failure between the bank and the foreclosing Trustee.

8. Seller generated changes to title.

   • Place title into a trust, corporation or LLC

   • File Bankruptcy

   • Contacts a foreclosure rescue company, who creates conditions on title that may prevent the sale. (Typically, conveying a fractional interest to a person or entity who is in bankruptcy.)

9. Seller not performing based on advice of their attorney.

Why are Short Sales Common?   (RETURN TO TOP)

The foreclosure rate is soaring in many areas and Southern California is not exempt.
The chain reaction below will give you a better understanding of why short sales are common in today's market.

 In the past several years during the real estate ‘boom’ lenders generously offered the following:

1.    Large volume of risky ARM's

2.    0% down payment

3.    Stated Income Loans

The net result of the above has produced the following:

1.    Brought a stream of buyers into the market inflating home prices

2.    Initial low-interest ARM's ‘adjusted up’ and payments increased

3.    Buyers can't afford the new adjusted payment

4.    High inventory of active properties contribute to declining home prices

5.    No ability to refinance

 As a result, homeowners are facing serious financial problems and are considering other real estate options such as foreclosures or short sales.

 

Who are the multiple parties involved in a Short Sale?   (RETURN TO TOP)

1.    The Seller – keep in mind that this is a devastating time for most sellers, and they are in a position they would much rather avoid.

2.    The Lender - Mortgage lenders of all types will be faced with a high volume of non-performing loans on equity deficient properties over the next several years. There can also be more than one loan against the property, and this is where things get especially complex. ALL lenders must agree to the terms of the sale. A lender will not agree to a short sale unless the seller has no equity and no money to bridge the gap between current market value and what will be owed after the sale. Sellers may also owe taxes on the amount of debt that is forgiven.

3.    The Realtor – An experienced Short Sales Specialist is one of the most critical players of a Short Sale transaction. A Realtor®, after identifying and qualifying the homeowner as a candidate for a Short Sale, is responsible for navigating through the process with commitment, patience and follow-through. You don’t want any aspect of the transaction to fall through the cracks and cause any delays to an already-lengthy process.

4.    Loss Mitigator – This is a person who facilitates a process to avoid foreclosure; the lender tries to help a borrower who has been unable to make loan payments and is in danger of defaulting on a loan. Loss Mitigation is a concept made up of two components:

    *      Limiting actual costs and expenses incurred by the lender on "at risk loans."
    *      Reducing the lenders exposure to risks tied to real estate ownership.

Each lender approaches Loss Mitigation with their own set of goals and priorities.  Some will move aggressively to cut losses and limit risk by pushing Short Sale files to conclusion quickly.  Others will proceed with caution on Short Sale files, placing a high priority on approving only those files with horrendous hardships and desperate financial circumstances.  It all comes down to how a particular lender views the idea of mitigating loss. The Loss Mitigation Department is the place where your file ends up when you ask a lender to agree to a Short Sale.

Each Loss Mitigation Department will operate with slightly different policies and protocols.  Sometimes you'll be assigned just one case manager that you'll speak with all the time, other departments have a pool of case managers that work on all files in that department.  Each style of operation has advantages and disadvantages, but always remember that the Loss Mitigator has a position of authority and you will be most successful if you can accept that Loss Mitigators’ style and approach. Your listing agent will most often deal with this department when your short sale has been approved.

5.    The Title Company – and Escrow Officer - Escrow officers can identify and solve a wide range of issues that may come up during a Short Sale transaction and will work closely with a Title Company to identify all parties legally involved in a transaction and any parties who have placed liens on the property needing to be satisfied through the sale proceeds.

6.    The Buyer - Every real estate transaction needs a Buyer to seal the deal. In the case of a Short Sale, you need the right Buyer - one who has the patience to stick through the obstacles that most Short Sales face.

7.    The Bank – Why do banks participate in Short Sales?

a.    To help homeowners and themselves prevent foreclosures.

b.    To avoid the costs associated with foreclosing, and thus the managing and reselling of an REO (Real Estate Owned) asset.

c.    Compared to foreclosures, Short Sales are less costly, less time-consuming and more likely to see completion.

d.    The over-supply of foreclosure properties is a financial burden against the banks. Banks cannot afford to take back all of the foreclosed homes.

What are some of the benefits to participants in a Short Sale?   (RETURN TO TOP)

1.    The Seller/Homeowner: The seller avoids the credit disaster of losing a home to foreclosure. It's viewed as the "responsible choice."

2.    The Lender: By completing the Short Sale, the lender reduces the actual loss and eliminates the exposure to risk that goes with acquiring a property through foreclosure.

3.    The Buyer: The buyer that hangs in through the Short Sale process can get a property at a below market price.

Understanding Your Options   (RETURN TO TOP)

Depending on the sellers situation, there are many options to consider before attempting a short sale.

1.    Contact the Lender – ask to speak to the supervisor, NOT the ‘short sale’ or ‘work out’ department. The seller should contact their lender as soon as trouble arises.  A lender may be willing to make accommodations if a borrower finds himself or herself in a difficult financial situation, particularly if it is temporary. The key is to let the lender know up front, before the problem becomes too serious to work out with the lender.  Lenders may allow borrowers to refinance, reduce the payment, defer a payment, modify the loan, and waive late payment charges. If payments cannot be made in a timely fashion, lenders may extend the "grace period" and work with the borrower.  Lenders may even agree to delay filing a Notice of Default if, among other things, they feel they are informed about the borrower's intentions. This may make it easier to sell the property, and may preserve the borrower's credit.  

2.    Turn the home into a rental - Is there the possibility of renting the property and paying the difference between rent and the mortgage payment and looking for other living options for the borrower?

 

3.    Deed in Lieu of Foreclosure - The borrower voluntarily delivers title to the lender and the lender accepts it in full satisfaction of the debt.  The lender then owns the property and can dispose of it as the lender sees fit. This effectively avoids the whole foreclosure process and if the lender agrees to this, the homeowner would have to vacate the property. Again, there could be significant tax implications to the homeowner as well as their credit being compromised.  

 

4.    File Bankruptcy - If the borrower declares bankruptcy, the foreclosure process is temporarily put on hold.  However, the lender may request the bankruptcy court to lift the automatic stay with respect to the lender's loan and resort to its’ remedies under state law, including foreclosure, if the lender can show justification to proceed.  Some borrowers think bankruptcy offers the best way out, but the borrower's credit may be seriously impacted for many years.

5.    Stop making payments - Stop making payments altogether and stay in the property until the property goes through the foreclosure process.  The timeline can vary, but generally, the timeline does not begin until the lender feels they have exhausted all avenues for ‘curing’ the payment delinquency.  Normally, this happens after the borrower has missed three monthly mortgage payments and the Notice of Intent to Foreclose has expired. The borrower has probably been contacted by the lender several times prior to beginning the foreclosure process.  The official foreclosure process then begins by the lender contacting a Trustee and instructing them to file a Notice of Default. (Once the NOD has been recorded it takes 120 days to complete the foreclosure process.)  This could take anywhere from 6-9 months, possibly longer.  The homeowner's credit will be severely affected; however, they may have been saving their money by not making their mortgage payments to prepare for relocation once evicted.

6.    List the property and negotiate the Short Sale - Get an offer and negotiate the short sale with the lender(s).  There is no guarantee that this will be successful and no guarantee how much time and energy will be put into the process. If this is the choice that is determined to be the least disruptive and the lesser of all other choices, then contact a Realtor who is a Short Sale Specialist to move forward.

 

Credit Implications   (RETURN TO TOP)

A Short Sale may have the least adverse effect on the borrower's credit status. A borrower's credit may be adversely affected in any of the following:

    *      Short Sale
    *      Notice of Default being recorded
    *      Deed in Lieu of Foreclosure
    *      Foreclosure
    *      Bankruptcy


Short Sale Start-Up Checklist   (RETURN TO TOP)

Below is a list of what lenders are requesting:

1.    Seller application and Letter of Authorization – lenders typically do not want to disclose any of your personal information without prior written authorization from you. If you are working with a Realtor, Title Company or Attorney you should write a letter to the lender giving them permission to talk with any specific interested parties about your loan. Information they typically want from you will include the following:

a.    Full Name

b.    Address

c.    Social Security Number

d.    Loan Reference Number

e.    The date

f.     Your realtor’s contact information

2.    Proof of Income and Assets

a.    Employment Information

b.    Salary and 401 K

c.    Years of Employment

d.    Bank Accounts Including Other Investments (i.e. stocks, mutual funds, other real estate, etc.)

e.    Copies of your most recent paycheck stubs

f.     Copies of Bank Statements

g.    Copies of your last tax return

3.    Hardship Letter – the sadder, the better!

a.    Hardship letter is a statement of fact explaining why the borrower is no longer able to make the payments and any documentation to support their claim. Lenders are not particularly sympathetic to situations involving dishonesty or criminal behavior

4.    Comparative Market Analysis – (CMA) – When markets decline and property values fall, your realtor can substantiate this by submitting a CMA to the lender which will show prices of similar homes on the market that are active sales, pending sales, and closed sales from the last 90 days.

5.    Preliminary Net Sheet – this is an estimated closing statement that will detail your ‘shortfall’. It can be prepared by your Realtor, Escrow Company, Title Company or Attorney.

6.    Purchase Agreement and Listing Agreement – be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as home protection plans and termite work.

If everything goes well, the lender(s) will approve your short sale. As part of the negotiation, you might ask that the lender not report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request. If they agree to your request remember to get it in writing!

As a real estate agent I am not licensed as a lawyer or a CPA and cannot advise on those consequences. Except for certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, be aware that the IRS could consider debt forgiveness as income, and there is no guarantee that a lender who accepts a short sale will not legally pursue a borrower for the difference between the amount owed and the amount paid. In some states, this amount is known as a deficiency. A lawyer can determine whether your loan qualifies for a deficiency judgment or claim.

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Some information provided by: Philip Waterman www.caltitle.com/waterman

Tia Rowland — Prudential Realty 626.685.1114
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