Frequent questions about Short Sales
What is a short sale?
A “Short Sale” was an unfamiliar term until the recent real estate and mortgage crisis created the situation where the value of millions of properties in the United States were worth significantly less in value than the mortgages that secured them. During the late 1990s until early 2007, properties appreciated unrealistically and lenders offered loan products such as negative amortization loans, 100% financing, adjustable rate mortgages, stated income loans, No Income Verification loans and other products that created an atmosphere where the following occurred:
- people with little or no credit could acquire multiple properties with no documentation;
- people were using the equity in their appreciating properties to acquire more properties;
- as properties were appreciating, interest rates were historically low and people were refinancing their properties multiple times in a short period of time to pull out cash to use for capital expenses, paying down credit cards, and buying more properties. Essentially, a person’s home became a personal “ATM” machine.
In 2007, the excesses of the prior year’s began to take their toll as the adjustable rate mortgages and negative amortizing loans became delinquent. People could not make their mortgage payments and lenders began the foreclosure process. The current economic downturn has made it impossible for many individuals to sell their properties as they owe more to their lender than the property is worth.
A short sale or short payoff occurs when a lender agrees to accept less than the outstanding loan amount to satisfy the seller’s loan. A short sale allows both the lender and the distressed property owner to avoid foreclosure by selling the property at a loss. Since the Seller is requesting that the lender accept a short payoff, Sellers can not receive any proceeds at the time of closing. Short Sales are warranted in the following situations:
- Seller owes the lender more than the value of the property and cannot sell otherwise.
- A mortgage modification is not a possibility.
- Financial Hardship creating an inability to keep property (i.e. loss of job, medical hardship, divorce, military duty, etc).
- Over-extended borrower with multiple mortgages
- Job transfer resulting in the forced sale of your home in a depressed real estate market.
- Without a short sale, foreclosure is imminent.
Why would a lender agree to a Short Sale?
Short sales are more advantageous to a lender than a foreclosure. Lenders are not in the business of managing and owning real estate, and a short sale offers the lender the ability to remove a bad debt from its books, and lend the money again. Short sales are less expensive than completing the foreclosure process and by accepting a short sale, a lender is immediately capping its losses. Rather than the continued expense or uncertainty of foreclosing on a property and taking possession. Foreclosure can be very expensive to a lender because it could take up to a year or more to take back a property. In a declining market the property may be worth substantially less when the bank finally obtains title than when the homeowner went delinquent. The bank may pay thousands of dollars to the foreclosure attorneys, sit on the property for another year and then pay up to 8% of the value to a Realtor.
What does the Seller need to know about the Short Sale process?
A seller initiates the short sale by contacting a real estate attorney to draft a real estate contract with addenda and contingencies specific to short sale transactions. If the seller has already selected a listing realtor, our firm trains the realtor on how to list and price the property so as to attract the most offers, while at the same time making sure that things are properly organized for the lender to give an approval on the Short Sale. We can also recommend a Realtor who is experienced in the intricacies of the short sale transaction and who have worked closely with our law firm to successfully bring dozens of short sale transactions to lender approval and ultimately to the closing table.
How does a Short Sale benefit the Seller?
- The mortgage is marked “satisfied” at the credit bureau and not foreclosed;
- The seller is not faced with a deficiency judgment as in many foreclosures;
- The seller’s credit does not suffer nearly the extent that it does if the property is foreclosed and in many cases our firm is able to restore the sellers’ credit shortly after the short sale is completed. Our firm also represents investors and equity funds and may be able to facilitate a transaction for our clients.
What does the Buyer need to know about the Short Sale process?
Education of the buyer is crucial to the short sale process and our firm works closely with the buyer throughout the transaction keeping them regularly informed of the status. Buyers must understand the following about a short sale:
- Short Sale transactions take considerably longer than traditional purchase transactions
- Do not expect a Short Sale to “close” in 30 days or less
- It could take several weeks to get a response from the Seller’s lender on an acceptance of the offer or even a “counter offer”
- The property may be sold at foreclosure auction before the closing can take place
- The sellers may accept “back up” offers while the lender is approving the buyer’s offer
- The buyer may be forced to use the seller’s “closing agent”
- Short sales are always “As Is” and it is strongly recommended that a Buyer complete a thorough inspection of the property by a licensed Home Inspector well advance of the closing.
What does it mean that a “Short Sale is conditioned upon lender approval”?
A short sale is a contract that needs acceptance from three parties; the buyer, the seller, and the seller’s lender(s). Without approval of the contract by the Seller’s lender (who holds the mortgage) on the seller’s property, there is no fully executed contract. When the Burgess Law Firm represents a buyer, we make certain that the seller or its agents have submitted all necessary documentation to its lender and will manage the transaction from contract to closing.
Why would the MLS listing price be lower than the price the seller’s lender is willing to accept?
Unless indicated in the listing that the lender has agreed to accept a set price, the price in the MLS listing may be unrealistic and ultimately rejected by seller’s lender. When a buyer makes an offer on a short sale, the lender will not approve the contract until they have sent an “independent agent” to the property to give a broker price opinion, also known as a BPO. This BPO gives the lender an opinion of the fair market value of the property at current market conditions. The lender will usually use the BPO as guidance when determining whether to accept a particular offer.
Why does a seller having 2 mortgages make it more difficult to get Short Sale approval than if a seller only has 1 mortgage?
A common scenario involves a seller who has a first and second mortgage and the offer will require that the first mortgage accept a short payoff, and the second mortgage to accept nominal sum (i.e. $1,000 to $3,000) to satisfy the second mortgage. In most cases, the first mortgage holder who agrees to a short payoff will not permit the second mortgage holder to receive any more than a nominal sum because they know that if the property goes to foreclosure then the second mortgage holder will probably be wiped out and receive nothing. Frequently, the second mortgage holder will insist on more money than the amount allowed by the first mortgage holder. Resulting in an impasse and the possibility that either the Seller or even the Buyer bring additional money to the closing table to satisfy this 2nd lien holder. Our firm has been extremely successful in creating solutions to close such transactions and gain approval by both lenders. However it is critical that both Buyer and Seller be educated about such risks.