Short Sale Considerations
An article in Sunday’s New York Times brings up some common issues with short sales from the Realtor’s perspective. The article cited some responses from a survey of real estate agents sponsored by Inside Mortgage Finance Publications. Among the problems agents identified in their experience with short sales were the following:
- Loan servicers were unresponsive to offers presented by agents
- Slow responses from the bank to offers presented - sometimes months
- Tangled web of communications with the bank before being referred to speak with someone at the loss mitigation department.
- The lender is frequently unresponsive to phone calls
Most of us with any involvement in the short sale process can readily agree to the complaints above. A short sale requires much more patience from buyer and seller (and agents) if it is to be successfully completed.
The blog Calculated Risk provided a response to the Times article, citing some considerations that agents and parties involved with distressed sales should keep in mind to avoid a fraudulent transaction.
- Anyone at any time can sell short - that is to agree to a purchase price less than the amount of the full payoff owed to the lender, while asking that lender to release the lien on the property so that the buyer can have clear title. The idea is that the lender’s loss will be mitigated if they agree to the short sale instead of having to go through the foreclosure process - that is they will lose less than if they foreclose and allow the property to be sold at auction. Whether the lender should or will agree is another matter.
- Traditionally, a short sale comes up as an alternative after the borrowers are already delinquent. In these cases they have already been referred to the lender’s loss mitigation department.
- The confusion arises when the sellers put their property on the market and only receive an offer for less than the loan payoff. When the realtor or borrower then tries to inquire about a short sale, the stonewall begins - the lender has at that point no evidence that any loss will occur. They do not have a delinquent mortgage or notice of the buyer’s inability to make payments. The lender will expect payment in full unless they receive proper documentation of a problem.
- The seller must already have notified the lender of inability to make payments and that default is impending. Sellers must expect that the lender will request all financial information from the seller to back up their claim, and that the lender will order the property to be inspected. Failure of the seller to cooperate will almost certainly result in foreclosure instead of the short sale.
- The seller will probably have to pay something for the sale to be approved. The lender will also want to ensure that the transaction is arms length - buyer and seller are unrelated and unaffiliated - or if related or affiliated, that proof is given that the transaction is being conducted as if they were not. They will want to ensure that the property has been exposed to the market for sufficient time or otherwise be assured that they are getting a reasonable value for the property.
- The lender will want to verify the validity of the buyer’s financing and identity to assure themselves of the buyer’s legitimacy. Lenders must guard against the fraudulent transaction. Needless to say, sellers or agents who try to pressure the bank to move more quickly are not providing the reassurance that the lender needs.
Ultimately the question is whether an arms length short sale really will mitigate the lender’s loss more than a foreclosure sale at auction. For any foreclosure or short sale we represent, we will look carefully not only at these questions, but at the conditions under which title is conveyed. While foreclosure and short sales are becoming a more common occurence in our market, they also bring with them new risks and responsibilities for real estate agents.
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