Short Sales

A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold.

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the mortgagor (borrower). This negotiation is all done through communication with a bank’s loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.

A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from a Broker Price Opinion BPO or through a full residential appraisal.

For the home owner, advantages of a short sale include avoidance of a foreclosure on their credit history and a homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed home mortgage after 2 years. A homeowner who loses a home to foreclosure will be ineligible for a Fannie Mae backed mortgage for a period of five years.

In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the short sale acceptance letter.

Negotiations

Lenders have the “loss mitigation” departments that processes potential short sale transactions. Today, lenders may accept short sale offers or requests for short sales even if a Notice of Default has not been issued or recorded. Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Multiple levels of approvals and conditions are very common with short sales. Junior liens – such as second mortgages, HELOC lenders, and HOA (special assessment liens) – may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax – as opposed to real property taxes, which have priority even when unrecorded) and mechanic’s lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender’s loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction which is why unfortunately short sale deals have a high failure rate and often do not close on time to save homeowners from foreclosure when they are not handled by a knowledgeable and experienced professional.

Bottom Line

Banks and Servicers do not make it easy for Short Sales to be approved.  Banks aren’t in the business of discounting notes and losing money. From their perspective, you the borrower, have signed a contract and should live up to it! But these same Banks and Correspondent Lenders aggressively marketed risky loan products with payment adjustments that the borrowers actual income could never afford. The smoke and mirror underwriting guidelines that facilitated the housing bubble has now come home to roost. The mortgage payments that the Banks pushed as easily affordable are now impossible.

This housing crisis has pushed millions towards foreclosure. Those borrowers who cannot refinance or qualify for loan modification can look to selling their home through a Short Sale. This alternative to foreclosure known as a Short Sale would appear to be the best financial solution for the bank and borrower. But in reality Realtor’s only close 12-15% of the short sales they market.

As a real estate broker I have closed 89.9% of the short sales I’ve listed in the past 18 months.

So if you find yourself considering a Short Sale, first seek the advice of an Attorney and or Tax Advisor: The following has worked best for me in closing my Short Sales.

1. Call your bank and inform them you want to short sale your home. If you have a 2^nd Trust Deed or Heloc you must call that lender also. Ask for a short sale package with a list of all that is needed for your Bank’s approval to be sent to your home. Banks can postpone a foreclosure if they believe you have a valid hardship and a properly packaged short sale application. Packaging is the KEY to SUCCESS! Incomplete Short Sale packages are never processed.
2. DO NOT ANSWER FINANCIAL QUESTIONS ABOUT YOUR INCOME OR EXPENSES ON THE PHONE! The seemingly friendly “trained associates” on the phone are there expressly to gather information. These first line “trained associates” of Your Bank’s Loss Mitigation Department are NOT there to approve your short sale. That will be handled later with a higher level Negotiator. Tell them politely you would like to carefully fill out your financial information yourself and to please send you a Short Sale Package to your home. If you make mistakes declaring your income or expenses on the phone you may jeopardize your chances for a Short Sale Approval! Don’t Panic. Take a depth, breath, and be sure to package your application properly at home and NOT ON THE PHONE!

Remember the first words spoken to you each time you call your Lender, by their “trained associates” by Law is…..

“We are a Debt Collector and ANYTHING YOU SAY will be used for that PURPOSE!”

1. Send a completed package by fax or Certified Mail. I have found Banks prefer a fax. Call within 48 hours to confirm receipt of Short Sale Package.
2. Find a Professional Realtor who has the financial expertise to understand how Bank’s financially evaluate a Foreclosure vs. Short Sale Approval Calculation. Remember it’s ALL about the Bank’s bottom line. If they can recover more money in a Foreclosure vs. Short Sale then they will Foreclose! If the Realtor doesn’t understand the underlying financial numbers then your chances of success are lessened. Hire a Realtor who understands the numbers!
3. Hire only a Realtor that has successfully closed (5) or more Short Sales in the past year. If they have closed five or more in the past year they are doing something right. Time is of the essence in a short sale and having your short sale negotiation with someone with limited or no success in closing short sales in not in your best interest!
4. Find a Realtor that has successfully negotiated releases from the 2nd Trust Deed and Junior Lien Holders. It’s important that they have experience in Bank negotiations because failure to get these secondary lien releases will kill the Short Sale.
5. Lastly, Ask Questions and Work with Professionals! It can be done successfully but you must keep a clear head and have LOTS of patience.
6. If you have any questions you can send them to me below.

Disclosure: I am NOT a Lawyer or Tax Advisor. I am not giving any legal or tax advice on this Blog. I urge everyone to seek Legal and Tax Advice before they proceed with a Loan Modification or Short Sale.

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