A short sale occurs when the seller’s net proceeds from a property sale are insufficient to cover the seller’s mortgage balance(s), and the lender agrees to release its mortgage lien in exchange for payment less than the full loan balance.
While it can never be assumed that any lender will agree to a “short sale” payoff, some lenders will, especially in a slow market, negotiate to accept a discounted payoff if the amount of the discount is less than the lender’s costs of foreclosing upon, taking title to, holding, maintaining and re-selling the property themselves. A lender will generally, moreover, only contemplate a “short sale” payoff if the seller is in default on the mortgage, can document financial difficulty in making continued payments, has a firm sales contract in hand which generates insufficient proceeds for full payoff and provides no net to the seller, and can show that the current market comparables support the contract’s purchase price. In addition, a lender may insist that the buyer pay seller closing costs and that the real estate brokerage commissions also be discounted. Negotiating a “short sale” becomes even more complicated when there are multiple lenders or subordinate lien holders, each of whom must agree to an acceptable payment.
For these reasons, real estate licensees must tread very carefully when working with any financially-distressed seller with little equity in a property and insufficient other assets available to pay current mortgage or lien balances. Such a seller may be a candidate for a “short sale”, but only with proper professional guidance from a real estate consultant/advisor that is knowledgeable to negotiate with a lender(s).
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- Successfully completing a “short sale” has less of a negative effect on the owner’s credit.
- In some cases the lender(s) will agree to stop reporting missed payments during the “short sale” process.
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Why would a lender take less than the loan amount?
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- Lenders are not in the real estate business.
- The cost of foreclosing is expensive and time consuming.
- Lenders typically try to sell the homes they repossess, often at fire-sale prices.
- Repossessing and selling a home costs a bank $50,000 on average, according to the Federal Reserve.
- The amount of property lenders would have to assume could force them to close their doors.
- Lenders do not want to be the “Bad Guy”.
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Role of Crowne Consulting, Inc.
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- Prepare and list the subject property
- Update and communicate activity with the home owner
- Manage all purchase offers
- Answer prospective buyer and agent inquires as it relates to the subject property and/or the short sale process
- Work as a liasion with LMA to provide a fluid transaction
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Role of Loss Mitigation Advisors
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Determine what the payoff balances are on all mortgages, liens, and assessments.
Determine what the arrearages are on all mortgages, liens, and assessments.
Document, if any, all correspondence the seller has received from the lender(s) or their attorneys.
Determine if the seller has been cooperative in any and all ongoing contact with the lender(s).
Determine who the contact person/negotiator is with the lender(s).
Determine if the seller has discussed a ‘short sale” with the lender’s “loss mitigation” department.
Determine if the seller has explored other alternatives with the lender(s), such as mortgage modification or extended payment terms, assumption, deed-in-lieu of foreclosure, bankruptcy options, reinstatement, forbearance, repayment plan, partial claim, or FHA Secure.
Determine what the nature and cause of the seller’s financial hardship is.
Help the seller to show an unanticipated, significant hardship occurring after the seller originally qualified for the loan-and be able to prove it to the lender(s).
Consult with a title agent to check the seller’s title online at the clerk of court’s public records, to independently confirm the mortgages and liens shown on the property and whether the lender(s) has yet filed a foreclosure suit.
Advise the seller to hire a real estate professional to market the property and assist that real estate professional in establishing market value for any “short sale” contract.
Advise the seller to seek legal and accounting advice if so needed.
If the seller decides to proceed with the “short sale”, advise the seller that since the seller will not net a dime from the sale of their property, the asking price must be “reverse engineered”, i.e. start with totaling loan and lien balances, add any and all repairs, and then initially determine if the market will sustain pricing in a range as high as the total loan balances plus all necessary repairs.
Since a quick sale is necessary, the asking price should be set at the very bottom of the current market and further discounted to attract buyers and create a competitive advantage over other comparable properties on the market.
Collect, assemble, and package, for lender(s) review, the seller’s employment and income records, bank statements, last two year’s tax returns, property tax bill, and appraisal(s) reports, if any. This documentation will be sent to the lender(s) to prove the seller’s lack of income to make loan payments and lack of assets to cover shorted loan balance(s) upon the sale of the property.
Contact the seller’s lender(s), obtain further information from the lender(s), and act for the seller in all negotiations with the lender(s) concerning the sale of their property.Assist the listing agent in drafting the listing agreement to ensure that the language in the listing agreement gives the listing agent permission to disclose the seller’s mortgage predicament, advertise a “pre-foreclosure opportunity”, or seek a “short sale” contract. Other language in the listing agreement should/might include: (1) It is understood by the parties that any purchase contract for the Property will be contingent upon Seller’s lender(s) approving of a “short sale”, entailing discounted loan payoff(s); (2) Seller authorizes Broker to market the Property as pre-foreclosure, with sale subject to lender(s) approval as a “short sale”, and to disclose the foregoing provisions as well as Seller’s approximate loan and lien balances to cooperating brokers; and (3) Seller shall cooperate as required by Seller’s lender(s) and promptly furnish all requested personal and financial documentation to facilitate lender(s) approval of any purchase contract and “short sale” loan payoff(s).
Assist the listing agent in drafting language to be included in the MLS Confidential Information/Remarks/Comments when inputting the listing in the MLS. Language should/might include: (1) It is understood by the parties that any purchase contract for the Property will be contingent upon Seller’s lender(s) approving of a “short sale”, entailing discounted loan payoff(s); (2) If the purchase contract requires a “short sale”, the gross commission set forth herein is subject to approval of Seller’s lender(s) and reasonable reduction if such lender(s) so requires; (3) In the event said lender(s) require reduction of the gross commission, compensation offered to cooperating brokers is to be fifty percent (50%) of the gross commission approved by lender(s); (4) Cash buyers or pre-qualified mortgage loan commitment only; (5) If financing is used, buyer must submit a copy of a pre-qualified loan commitment letter from a lender along with the purchase contract; (6) All offers must be submitted on an “AS-IS” sales contract accompanied with the Addendum To Sales Contract Short Sale, all offers not following this format will not be tendered to the lender(s) and will be rejected and returned to the buyer’s agent as an incomplete offer.
Protect the seller when an offer is made through the addition of certain clauses in the sales contract. Language should/might include: (1) This Contract is contingent upon the approval of the purchase price and terms by Seller’s mortgage lender(s) and/or lien holders, their acceptance of possibly discounted loan payoff(s) and agreement to release all liens up the Property; (2) If such approval(s) is not obtained in writing within forty-five (45) days of the Effective Date, either party may terminate this Contract; (3) Upon request, Seller and Buyer shall each promptly provide to said lender(s) documentation relating to their financial capacities; (4) Closing date should be no more than thirty (30) to forty-five (45) days from Effective Date; and (5) If Seller’s lender(s) request an additional period of time not to exceed thirty (30) days to review the terms of this Contract, the contract review contingency and the Closing Date shall both be extended for such an additional period of time not to exceed thirty (30) days.
Present all offers to the seller’s lender(s) and provide the documentation needed to convince the lender(s) to accept the Contract as the basis for a “short sale”.
Focus on the lender(s) or lien holder(s) with the lowest priority liens on the property.
Negotiate with the second mortgagee or other subordinate lien holder for they have the most to lose in a “short sale” and will need to agree to the biggest reduction in the payoff.
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