Sunday, September 30, 2007

Ask Erin: Short Sales...

For some reason I have been asked by a zillion people over the last week regarding how short sales work. The 5-cent answer is short sales are hell for everyone involved. Sorry to be so blunt.

For those of you who are not familiar with this terminology, a short sale is the sale of a house for less than the amount that is owed to the bank/mortgage company. Occasionally, homeowners find themselves in positions in which they must to sell their home, but the reality is that their property is worth less than what they owe the bank...perhaps they went re-fi crazy?...perhaps they bought at the peak of the market with 100% Financing? Some banks will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the lender can avoid a costly foreclosure, and the owner is able to pay off the loan for less than what he owes.

What can the seller of a short sale property expect? Be prepared to give the lender lots of financial documentation. Banks do not just forgive mortgage debt for no good reason. Also - make certain to speak with a qualified legal and/or tax professional about the implications of possible forgiven debt.

What can the buyer of a short sale property expect? Waiting and uncertainty...lots of it. Once you make an offer, it can sometimes take 60-90 days to hear a response from the bank. Expect to take the property as-is, expect to pay ALL your own closing costs, and expect to pay for all inspection costs. Make sure your financing is rock solid! Whatever loan program you have qualified for now may not be available in 4-6 months or interest rates may jump if and when you are able to close escrow...

It is not uncommon that the bank will reject a short sale for whatever reason. You do not have a binding contract until the bank consents in writing to the short payoff specifically with regard to your purchase agreement...they have the right to entertain other offers during this "response period."

In your purchase agreement (offer), your agent will use the Purchase Agreement Addendum. Paragraph 5 specifically addresses short sales. It reads "This Agreement is contingent upon Seller's receipt of written consent from all existing secured lenders and lienholders (Short-Pay Lenders), no later than 5:00PM on _____(Short Pay Contingency Date), to reduce their respective loan balances by an amount sufficient to permit the proceeds from the sale of the property, without additional funds from the seller, to pay the existing balances on loan, real property taxes, brokerage commissions, closing costs, and other monetary oblications the Agreement requires Seller to pay at Close of Escrow (including but not limited to escrow charges, title charges, documentary transfer taxes, prorations, retrofit costs and repairs). If Seller fails to give Buyer written notice of all existing Short Pay Lenders consent by the Short Pay Contingency date, either Seller of Buyer may cancel the agreement in writing. Seller shall reasonable cooperate with existing Short Pay Lenders in the short -payoff process. Buyer and Seller understand that Lenders are not obligated to accept a short-payoff and may accept other offers, and that Seller, Buyer, and Brokers do not have control over whether Short-Pay Lenders will consent to a short-payoff, or any act, ommission, or decision by any Short-Pay Lender in the short-payoff process Seller is informed that a short pay may create credit or legal problems or may result in taxable income to Seller. Seller may present to Short-Pay lender any additional offers that are received on the Property. Seller is advised to seek advice from an attorney, certified public accountant or other expert regarding such potential consequences of a short-payoff." As a buyer, you could end up waiting 60-90 days for a response, just for the bank to reject the request...sounds like fun??

Why would a bank reject a short sale offer? Banks generally want proof that the seller of the subject property is completely financially insolvent. They ask for A LOT of documentation from the seller. They want to know that the sellers have drained all financial resources available to them. If the sellers have a 401k with $100k, guess what - the bank will want the sellers to contribute that to the sale. Or perhaps the bank is betting on the fact that they will be able to sell the property after foreclosure and come out ahead financially...

I could go on and on about short sales...pros and cons...there are lots of each. They can be a big win-win or a complete waste of time. Please call or email me with any specific questions.

1 comment:

Brandon said...

Hi Erin,

I couldnt agree more with your comment that "short sales are hell for everyone involved"

I negotiate short sales on a daily basis, and I know that the ups and downs of these transactions can be pretty annoying.

If you are ever in need of a negotiator let me know. I would be glad to smooth out the process for you! My company has over 100 approval letters from banks, as well as a 70% approval rate.

take care,