Monday, December 27, 2010

Short Sales: Who pays for what...

I receive several calls per week from homeowners that are looking for information regarding Sacramento short sales, and aside from wanting to know about the process itself, one most common questions I get from them pertain to if the sale will cost them anything out of pocket, if so, then how much, and generally, who pays for what fees. Having successfully closed several short sales, I will tell ya'll what I know to be true based on my experiences.

-Who pays the real estate 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 for the real estate agent (or Realtor) commissions - generally by absorbing the costs of the commissions out of the proceeds of the sale. As a side note, often times these commissions are re-negotiated by the lender(s) during the process. For example, if the seller and listing agent agree to a 6% total commission initially when the property is listed (usually then split in half to 3% to the listing agent, 3% to the selling agent), the lender may re-negotiate that fee later to perhaps 5% total (2.5% / 2.5%) or less. Note: Real estate commissions are always negotiable and NOT set by law or local custom.

-Who pays title insurance, escrow fees, 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 insurance 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. Occasionally you will see a lender agree to pay one of these fees, up to and not to exceed a certain amount (for example, they may agree to cover up to $750 of the escrow fee that costs $1200). Generally then, the buyer would cover the unpaid portion of that fee. So basically, again, the lender(s) will absorb many of those types of fees.

-Who pays for a home warranty? This is negotiable between buyer and seller when the offer is initially negotiated (before it is submitted to the lenders for approval). Generally though, I would prepare any buyer of a Sacramento short sale property to expect to pay for this cost, even if you ask the seller or short sale lender to cover it. In my experience, this is paid by the short sale lender in less than 20% of my approved short sales.

-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). Again, most short sale lenders will not agree to cover things like pest or termite inspections, roof inspections, sewer line inspections, or any corresponding certifications. 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" and sellers can not afford to make repairs anyway.

-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 no longer possible thanks to past legislation), to the short sale 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 short sale lender has already taken a loss on the loan. Sellers - please save everyone a headache and communicate with your agent.

To make a bit of a sweeping generalization, the seller usually pays nothing out of pocket to close the transaction unless specifically asked to by the lender(s).

In perhaps one instance out of every six short sale transactions I close, the lender will request that the seller make a cash contribution to close the short sale. In these instances that I have negotiated, the sellers have had cash in the bank and were financially able to make that contribution...in those instances, the lowest cash contribution one of my short sale sellers has contributed was $1,000, and the highest was $5,000.

Also, you should note that in some short sale scenarios, the short sale lender will actually pay the seller "relocation assistance" to close the short sale. I have seen this in the range of $1,000 - $5,000. Not every Sacramento short sale transaction will qualify though.

Hope that answers some frequently asked short sale questions...cheers!

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