Thursday, September 11, 2008

Ask Erin: Who pays for what in a short sale scenario? ...AND... What does the seller in a short sale pay for?

Get ready for another long-winded blog...I am often asked these question by sellers facing the possibility of attempting a short sale of their property. Having successfully closed several of these, I will tell ya'll what I know to be true based on my experiences.

-Who pays agent commissions? In a short sale scenario, the lender(s) who agree to forgive debt and allow a short payoff of the loan(s) pay the agent commissions. Sometimes these are re-negotiated by the lender(s) during the process. For example, if the seller and listing agent agree to a 6% total commission (3% to the listing agent, 3% to the selling agent) initially when the property is listed, the lender may re-negotiate that fee later to perhaps 5% total (2.5% / 2.5%) or less.

-Who pays title, escrow, and transfer tax fees? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). For example, perhaps the buyer and seller agree initially that the seller will pay for 100% of title and escrow fees, 100% of county transfer tax, 50% the city transfer tax. The lender(s) may negotiate that the buyer pay a different split of these fees...however the portion that is paid by "the seller" is absorbed in to the overall debt forgiveness and short payoff. So basically, again, the lender(s) pay these fees in some.

-Who pays for inspections or certifications? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). I have seen this vary widely from the short sale lender(s) agreeing to pay for pest inspections, pest clearances, roof certifications, etc., to lender(s) that do not agree to pay for any inspections or clearances. A lot will depend on the circumstances with the condition of the property, how many loans are involved, the buyers loan program, if the property is in default, the length of time of negotiation, etc. As a safety net - buyers, do not expect that lenders will grant these requests. Generally short sale properties are sold "as-is."

-Will the lender(s) give the buyer credits for closing costs? These are negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). I have seen this vary widely from the short sale lender(s) agreeing to pay up to 6% closing costs for the buyer (including an instance of seller-funded downpayment assistance...which is now a long shot thanks to HR 3221), to the lender(s) rejecting those requests. Again, much will depend on the circumstances surrounding the sale of the property.

-Who pays delinquent property taxes or liens? Sellers - if you have not been paying your property taxes or county utilities, you really need to let your agent know this ASAP! I work closely with the title company on this to make sure that we know of any lien issues in advance, but because it can take several weeks or months to get approval, new liens may pop up during the lender negotiation process. When I negotiate short sales, one of my worst fears is that after the short sale is approved an unexpected lien will pop up. This has happened to me before, and for lack of a better way of describing it - this sucks! If you can let your agent know in advance that these items are unpaid, it will save lots of headaches all the way around. IF WE KNOW in advance that these liens exist, there is a great chance that the short sale lender will absorb these costs into their overall debt forgiveness and short payoff. IF WE DO NOT KNOW in advance that liens exist, once the short sale is approved - this will halt the transaction until we can find a way to pay these liens. The seller is often financially unable to pay them, the buyer does not want to pay, the agents commission has already been reduced, and the lender has already taken a loss on the loan. Sellers - communicate with your agents.

Unless asked to carry an unsecured promissary note (which has not happened in any of my short sales), the seller usually pays nothing out of pocket to close the transaction. The seller can not make any money from a short sale either. Hope that answers some frequently asked short sale questions...cheers!

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