BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
SHORT SALES – ONE MORE TIME
(INCLUDING A SUMMARY OF PAST SHORT SALE WEEKLY TIPS)
A “Short Sale” is a sale where a lender agrees to take less than the full amount due on the loan on the property. If there is more than one lender, it is the junior lender (as measured by time of filing of the deed of trust) who is in the greatest danger and should be willing to take less than the full amount due. The reason for this is that, if there were a foreclosure by the holder of the most junior lien, they would not get the full payment. If there were a foreclosure by a senior lender, such as the holder of the first, the junior lienholder(s) could get foreclosed out, potentially getting nothing.
Institutional lenders understand this, and usually do not want to take a property back as a foreclosure into their Real Estate Owned(“REO”) department, since this is an expensive process, and looks bad on their record with the regulators. They will usually work with you, but you have to find the right person to talk to, usually a vice president or department head.
If the junior lienholder is a hard money lender, friend or family member, you may find it difficult or impossible to negotiate with them. You may not have a saleable listing. One phone call may make that clear.
PRACTICE TIPS:
LISTING AGENTS:
1. To avoid the problem of a short sale, or at least anticipate it, at the time of taking a listing go over the existing financing with every seller. Ask about any liens, judgments or attachments. Get the Preliminary Title Report (“PTR”), or a Property Profile, from escrow early and review it to see if there will be enough proceeds from the sale to pay off all recorded liens, judgments and attachments – as well as your commission. If not, discuss with the seller before you proceed. Start early to resolve the problem.
2. Be sure to calculate any pre-payment penalties into your calculation, since this can take a significant amount out of seller’s proceeds.
3. If you choose to help your seller negotiate a short sale with a lender (you have no obligation to do so but most sellers don’t know what to do), some lenders will not talk to you without written authorization. You can get that authorization using CAR form “Authorization to Receive and Convey Information” (WinForms ARC).
4. Advise your sellers that the lender will want documentation, which may include: a “hardship” letter, tax returns, W-2’s, a list of other assets, etc. Remind your seller that this information must match the information on the loan application, or the lender might charge that there was lender fraud when the loan was taken out.
5. If the seller/borrower has other assets or an income stream (i.e., a steady job), the lender might not do a short sale but instead do a “compromise” sale. This is where the lender will place a short demand into this escrow to allow the sale to close, but will require a note from the seller for the balance. This note may be secured by other real property, if the seller has any; or it may be a personal note.
6. If the lender is doing a short or compromise sale, ask them if they will show the file as “paid in full.” A file marked as “settled” or “satisfied” can reflect negatively on the seller/borrower’s credit report. Discuss this with your seller before proceeding.
7. You may be able to negotiate even with senior lenders for removal of penalties and other added fees to help get the total of the demands into escrow down. It’s worth a try.
8. If sellers have any questions about the above, they should be sent to their tax advisor or attorney. Be careful not to refer your seller clients to mortgage foreclosure consultants; many of these are less than honest and you could incur liability if these consultants damage your clients.
9. The purchase contract should state that this will be a short sale, and that close of escrow by seller is conditioned on the successful negotiation with the lender(s) to demand not more collectively than the sale proceeds. It is also good practice to advise a buyer’s agent up front that this is, or may be, a short sale, so as to set the proper expectation.
10. Sellers should be advised that there can be adverse tax consequences to seller as a result of a short sale to the extent that seller receives relief from mortgage debt by the lender in a short sale.
FORM: CAR's Purchase Agreement Addendum (WINForms Form PAA), paragraph 5, covers short sales and should be incorporated into the purchase agreement.
11. COMMISSIONS: If you anticipate that the sale will or might be a short sale, place a conditional offer of compensation in the MLS broker comments, such as:
“Short sale — subject to lender approval. Any reduction in total commission received will be split evenly between Listing and Selling Brokers.”
Or, alternatively, you can propose some other arrangement as to who absorbs any shortfall in total commission received. It would appear, however, that an even split would be most equitable.
BUYERS AGENTS:
1. Immediately upon getting the PTR, review the liens on the property. If the total liens and encumbrances start to approach the purchase price, discuss the situation with the listing agent.
2. Next, discuss the situation with your buyer. Buyer is taking a bit of a risk since your buyer could spend hundreds or thousands on inspections and loan applications, only to have the deal cancel because the seller could not negotiate a short sale with their lender.
3. If you are a buyer’s agent concerned about getting paid on a short sale, you can enter into a Buyer-Broker Agreement with your Buyer. (CAR form BBE or BBNE).
FOR FURTHER INFORMATION: CAR has good information on-line about short sales:
“Short Sale Programs: Update” at: http://www.car.org/index.php?id=MTc5Mg
This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2006