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Short Sale Transactions

What is a short sale?

The current housing market has resulted in a seemingly ever-increasing number of homeowners in default on their home loans. These homeowners often seek guidance from their Realtor. One of the many possible options to a homeowner in default on their loan is to attempt a short sale.

A short sale is a real estate transaction in which the sales price is insufficient to pay the liens ecumbering the property and sale costs, but the seller in unable or unwilling to pay the difference. Managing a short sale transaction takes experience and involves inherent legal and financial risks. Therefore, Realtors must become educated about the short sale process and always advise their clients in writing to obtain legal and tax advice before proceeding with a short sale. Unless you are confident in your ability to handle such a trasaction alone, consult with a broker or cpa for advice.

Seller Considerations

When considering a short sale, the seller must first determine how much is owed on the deliquent loan, there may be a home equity loan, past due homeowners assocation fees or unpaid property taxes. Then, the seller must add the costs of a sale, such as closing costs, escrow fees and brokerage commissions. All of the seller's debt and costs must be factored in before determing whether a short sale is feasible.

The seller should also be aware of the downsides to a short sale. A short sale could appear on the seller's credit report as "pre-foreclosure redemption," "paid in full or less than full balance" or other similar terms. Further, even if a lender agrees to a short sale, the lender , the VA, or the FHA may not agree to forgive the debt entirely, and may require the seller to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action. For example, a lender may accept the short sale purchase price to "release the lien" on the property as oppposed to agreeing to accept the purchase price as " full and final settlement of the debt" on the property. Therefore, the seller should be certain of the terms of any short sale before making a decision and obtin any debt foriveness agreements with the lender in writing.

Also, a short sale in which the debt is forgiven is a relief of debt and may be treated as income for tax purposes. The mortgage forgiveness debt relief act of 2007 created a three year window for homeowners to pay no taxes on any debt forgiveness they receive; however, only cancelled debt used to buy build or improve a principal residence or refinance debt incurred for those purposes qualifies for this tax exemption under the act. A short sale may involve more documentation than the original loan application since the seller must "reverse qualify" and prove that the seller is financially incapable of paying the loan. The seller must convince the lender that it will be far better by agreeing to a sale for less than the outstanding loan amount.

The AAR short sale addendum to the listing contract will assist brokers in educating their sellers about these issues and help prepare them for this process. This addendum addresses the major issues of concern to a seller and advises the seller to obtain professional tax advice and independent legal counsel regarding the short sale.

Purchase Contract Considerations

The purchase contract in a short sale should be contingent upon a short sale agreement acceptable to both the lender and the seller. The AAR Short Sale Addendum provides that the contract will be contingent on a acceptable short sale agreement. This contingent on an acceptable short sale agreement. This contingency is similar to the buyer's financing contigency. However, both parties acknowledge that it may take weeks or months to fullfill the contigency by obtaining the lender's approval of a short sale.

The addendum also obligates the seller immediately deliver notice to the buyer that the seller and the lender have entered into a short sale agreement. This notice is defined in the addendum form as the Short Sale "agreement notice". The date of seller's delivery of the short sale agreement notice to the buyer is deemed the date of contract acceptance for purposes of all applicable contract time periods. In other words, although the parties have entered into an enforceable contract, the time periods do not begin to run until the seller has delivered the Agreement Notice. In the event that the seller and lender are unable to reach an acceptable short sale agreement, the seller must notify the buyer and the cotnract is cancelled due to the unfullfilled short sale contingency.

Steps to a successful Short Sale Transaction

1..(Obtain all pertinent information from the seller (pay off statements, liabilities, liens, trustee's sale date, etc.)

2. Perform a broker price opinion (BPO) or comparative market analysis (CMA) to determine the property's fair market value (Freddie Mac also requires that the BPO contain a 90 day "as is" marketing timeframe )

3. Calculate all costs of sale

4. Advise the seller to explore other workout options other than a short sale (retain the property, loan modification, deeed in lieu of foreclosure, foreclosure, bankruptcy)

5. Advise the seller in writing to obtain legal and tax advice.Incorporate the AAR Short Sale Addendum to the listing is not deemed sufficient and immediately contact the lender for short sale package instructions.

6. Communicate with junior lienholders and determine their payoff requirements.

7. Check the MLS rules regarding short sale disclosure requirements.

8. Ensure that the AAR Short Sale Addendum to the residential resale purchase contract is incorporated into the contract when an offer is received.

9. Gather the documents neccessary for a short sale for delivery to the lender such as:

  • Seller hardship letter
  • Seller financial statement
  • Recent pay stubs
  • Executed purchase contract
  • Estimated seller's closing costs or estimated HUD-1
  • Buyer pre-approval letter
  • Bank statements
  • Credit Report
  • Ensure that the escrow agent is aware that the transaction is a short sale
  • Communicate and follow up on details frequently.

By AAR General Counsel Michelle Lind

 

 

 

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