What is a Short Sale?
- Short sales have no legal existence, not created or regulated by statute
- Product of negotiation between buyer and seller, subject to lender approval
- Lenders will want approximately 80% of outstanding debt
- Commercial lenders are typically easier to work with than government lenders
- Driven by market conditions – short sales are more likely in a declining or depressed market
- Emphasize that this is a win-win-win situation – buyer gets a bargain, seller unloads a debt, lender turns a non-performing loan into a marketable property
Issues for Sellers:
- Process will take longer than a standard sale
- Sellers may need to make minor but essential repairs, or may have to bring cash to closing
- The worse a seller’s overall financial picture, the more likely the bank will approve the sale
- A short sale may be consummated during a bankruptcy, but will be subject to Court approval
- Mortgage debt relief act has been extended through the end of 2017
Issues for Buyers:
- Be prepared to wait – the interplay of the approval process, plus TRID requirements, make this a long haul. The situation is ideal if you have somewhere to live during the process.
- Strictly “as is”! Consider an FHA 203K loan or a Fannie Mae Homestyle that includes repairs.
- Lender will require its own appraisal.
- Lender will be calling all the shots with regard to the Closing Disclosures
- Now more than ever, no side or under the table deals!
Tax Sale Foreclosures:
- Check for an outstanding tax sale certificate.
- Verify if a foreclosure action is pending.
- If a foreclosure action is pending, you will need Court approval for a short sale, a complication that may make your buyer look elsewhere
- Most lenders have a package of forms for short sale, usually available on their websites.
- Sellers will be expected to submit hardship letters (handwritten is still best!), hardship affidavits, IRS 4506T forms and financial worksheets.
- Some lenders use online portals like Equator and do not accept paper documents.
- Real estate agents may be asked to cut their commissions.
- Bear in mind that this is a long, arduous process – if you are a seller’s attorney, price your services accordingly!