About Short Sales

Understanding the Short Sale Process and Deficiency Judgments – A General Overview

 By Real Estate Attorney Steve Vondran.  Our firm currently handles Real Estate, Foreclosure, and Chapter 7 Bankruptcy cases in California and Greater Phoenix Arizona.  We can be reached at (877) 276-5084 or steve@vondranlaw.com

1. Sign a listing agreement between the real estate agent and the homeowner.  Typically the listing agreement will be for 6 months, and will list the commission as 6%.  A 60 day “broker protection period” is also a good idea to protect the short-sales agent.
2. The Property then needs to be listed in the local MLS. Once the listing agreement is signed, the property pictures get taken and the listing goes in the local MLS.  It should be clearly disclosed that the sale is a short sale is subject to lender / lien-holder approval.  The 6% commission might be stated to be split 50/50 – between buyers agent and seller’s agent – if the short sale deal is approved. In some circumstances, it may be possible to act as a “dual agent” in which case it might be wise to execute a dual agency amendment to escrow.

SHORT SALE LISTING TIP: It is probably a good idea to list the property 5-10% below current “comps” (comparative sales within last 6 months) in order to try to generate as many qualified offers as possible.  Because there is usually a “sale date” (foreclosure sale date) pending when a short sale is being pursued, it is wise to have as many offers as possible that the lender/lien holders can consider if the first deal falls through.  The lenders will often set a foreclosure sale date just a few days past the scheduled date for close of escrow after an offer is accepted, and if the accepted deal falls through, your Client will be staring a foreclosure sale date right in the face, and in that event you will want to be able to submit other qualified offers immediately, in the hopes of further extending the sale date.

1.  Client needs to start thinking about getting financials together, preparing a hardship letter /affidavit and seeing if there are any legal financial maneuvers that may make the loss mitigation package look more attractive to the lender and/or may help facilitate the short sale.  For example, this may be a good time to convert Trust Fund money or other cash assets into an IRA account, 401K, etc., (as these would not normally have to be disclosed on a lenders short sale or loss mitigation package).  Most lenders will make you disclose all of our bank account, savings, money market, CD’s, stocks and bonds, etc., under penalty of perjury.  Some items such as alimony, child support, separation maintenance, value of life insurance, retirement plans, etc., DO NOT NEED TO BE DISCLOSED.  If you disclose 100,000k in assets, the lender may not be so willing to do a short sale (especially a second mortgage holder who may be facing the prospects of getting very little money for their lien), and instead, they may want you to sign a deficiency agreement as a condition to permitting a short sale.  At this stage (before an offer comes in) it is a good time to examine the lenders loss mitigation application and see exactly what type of financial information they will be requiring you to disclose as part of the short sales process. Obtain all of the requested financial documentation, prepare the hardship letter/affidavit, and be ready to submit these materials when you receive an offer. 
2. Once your short sales agent obtains a short-sale offer, you will need to prepare your short sale / loss mitigation package to the bank. Basically, you will want to include, at a minimum, the following items:
3. Copy of the Listing Agreement between homeowner and short sale agent disclosing the commission agreement;
4. Homeowner financials, hardship letter, and loss mitigation package required by the lender/lien holder;
5. Copy of the offer (purchase and sale agreement), typical is to put that the escrow should close 45 days after acceptance by the bank.  Also include the short sale addendum;
6. Copy of Estimated HUD;
7. Broker Cover letter / Opinion of Value / Comps etc.
8. If Client has a refinance transaction within three years, you may also want to include a Truth in Lending (TILA) audit summary if a “material” truth in lending violation was found.  This especially if the borrower has some ability to “tender” (see a foreclosure lawyer to discuss this point).  If your Client has an ability to rescind their mortgage under TILA, this may provide additional motivation for the lender to accept the loan modification over pursuing a foreclosure sale.
9. There may be other documents to submit depending on the borrowers situation

SHORT SALE TIP: Make this submission as neat, complete, and comprehensive as possible.  Time is of the essence and you do not want to have to spend all your time re-submitting missing or incomplete documents.

1. Once the lender receives your short sale submission package, usually a processor and/or negotiator will be assigned to the file.  Your short sales agent will work with the representatives of the lender to get them what they need, and generally to try to get the deal accepted.
2. If the lender is inclined to accept the deal, the lender must accept in WRITING and the escrow period is then opened (as we mentioned, usually a 45 day escrow will allow time for inspections, appraisal, title search, seller disclosures, etc.).
3. At this point, it is a typical real estate transaction for the most part in that the financing must be arranged, inspections, appraisal, etc. and DONT FORGET a check with the Homeowner’s Association (“HOA”) should be made to ascertain whether the HOA is solvent or in litigation (if they are not solvent due to homeowners not paying their dues, or facing litigation over some other legal issue, then it may be impossible for the proposed short sale purchaser to obtain financing – mandating that only a full cash buyer will be able to close a short sale on the property).  This is an important factor to look into at the early stages of a short sale.  If you need an all cash buyer you might as well figure this out as soon as possible.
   
4. If the offer is accepted in writing, escrow opened, no HOA issues, and all other parts of the sales process are performed, and all lien holders agree to the short sale then the deal will close and commissions will be paid per the listing agreement and any dual agency addendums. 

NOTE: Where agreeing to a short sale will result in a lender or lien holder in receiving less than they are owed (for example you owe $500,000 to Bank of America and the short sale offer is only for $250,000) Bank of America may try to get you to sign a deficiency agreement whereby you agree to pay them the $250,000 deficiency amount that you owed them under the terms of your note.  This is where most people will want to consult with both a real estate lawyer to consult on the law of deficiency judgments, and a tax advisor or CPA to address issues of loan debt forgiveness being treated as income (thus creating a taxable event).  These are very serious and important issues that should be reviewed in every short sale setting.

NOTE: What some short sales agents might do is to agree to contribute a portion of their commission for the short sale to pay a portion of a borrowers agreed deficiency if such is required and the homeowner agrees to sign such.  This should be clearly disclosed in writing on the HUD closing statement. 

As an example, in Arizona, if you have a “purchase money mortgage,” (topic of another blog posting) it is quite possible that you are NOT LIABLE FOR ANY DEFICIENCY LOAN BALANCE AND THE LENDER COULD NEVER COLLECT SUCH EVEN IF IT WANTED TO.  In these circumstances, the homeowner should think carefully before signing any agreement to pay any portion of an alleged deficiency balance.  Again, you should consider contacting a real estate or foreclosure lawyer to discuss this issue, and a separate advisor to discuss any tax ramifications of a short sale.  PROTECT YOURSELVES – THE LENDERS ARE USING LAWYERS YOU MIGHT BE WELL ADVISED TO GET ONE FOR YOURSELF.

Another question we get quite frequently is what If I have two mortgages?  Both a first mortgage and a second mortgage. For example, two loans with EMC / Chase Mortgage?  In these cases the second lien holder normally wants to get cashed-out of its lien, and in many short sales the first mortgage will see if they can pay the holder of the second mortgage a certain amount of money (ex. $5,000) to release their lien and allow the short sale to proceed.  Again, the second lien holder is concerned with getting something from the borrower for the second mortgage note that was signed.  In these cases, depending on the assets and future income potential of the applicant, the second mortgage holder may want a deficiency agreement signed in order to proceed with the short sale and release its lien.  This is again a good time to see a foreclosure or short sale lawyer. 

Finally, it may be good to know whether your loan has any potential grounds for filing a lawsuit.  This is where the forensic loan audit by a qualified real estate lawyer may help you in your short sale negotiation. If a lender was the original lender of your loan, and held the loan in its portfolio, there is a possible chance that explaining the lenders potential liability to them following an audit may compel them to accept a short sale they may not otherwise be interested in accepting.  The situation becomes a bit more difficult where you are dealing with securitized loans and lenders claiming to be holders in due course.  But again, these issues may be worth looking at to try to ensure your short sale is accepted.   As a short sale will normally look better on your credit report than a foreclosure, there is incentive to look into these issues.

NOTE REGARDING: Home Affordable Foreclosure Alternatives Program (HAFA): make sure to check out our Blog on HAFA to see some of the recently enacted rules designed to make short sales more attractive to lenders and loan servicers.  The process is different than that explained above.  You can see the HAFA process, timelines, and forms at this blog post:

http://activerain.com/blogsview/1546141/foreclosure-defense-basics-understanding-the-home-affordable-foreclosure-alternatives-program-hafa-short-sales-deed-in-lieu-of-foreclosure-and-deficiency-judgments