Because of the complexity of the short sale process, differences among each lender, and the lack of uniform standards or procedures, it’s important for sellers, buyers, and real estate agents to have accurate information and obtain current knowledge at every opportunity.
Part 1: Short Sales – the listing agent’s perspective prior to listing
- What is a short sale? Real property that’s encumbered for more than its value. The seller doesn’t have the assets to pay the difference between the value and the debt. A short sale is not the best option for all sellers who are upside down or in default. Note, the seller may take nothing from the transaction.
- What are the risks of a short sale? Personal liability for the deficiency, tax consequences, and credit rating damage.
- Fair or not, the first position lender calls all the shots. Fair or not, junior lien holders can defeat a short sale.
- What does deficiency mean? The deficiency is the difference between the debt recorded against the property and the proceeds generated from the sale of the property.
- There are many issues to discuss during a listing presentation, make sure you discuss the issues with the seller.
- A short sale may not the best option for a seller if the lender won’t agree to discharge the deficiency, if the seller’s debt is the result of a large equity refinance where the equity wasn’t used to improve the home, where more than one lien holder encumbers the property, if there isn’t sufficient time prior to foreclosure, if seller indicates an unrelenting requirement to exit the transaction with cash, or if seller’s debt unrelated to the house exceeds seller’s ability to repay.
- Alternatives to short sales are refinance, loan modification or a lender workout, deed in lieu of foreclosure, judicial foreclosure, non-judicial foreclosure, and bankruptcy. (cautionary reminders: Real estate agents are not licensed to assist debtors with refinances or loan modifications. If a seller wants to consider a deed in lieu, foreclosure, or bankruptcy advise them to seek legal counsel).
Part 2: Short Sales – the listing agent’s perspective once the seller chooses to list the property
- Help the seller understand the limitations of a real estate agent’s license and advise the seller to seek legal, tax, and credit advice. Warn the seller about foreclosure scams. Talk to sellers about short sale negotiators and the limited role that some short sale negotiators are licensed to play. There is no regulated licensing for short sale negotiators.
- Make sure the seller you’re working with is the seller who is on title. Beware of potential fraud of a buyer positioning himself/herself as the seller.
- What is required in the average short sale package? Short sale proposal letter, seller’s signed short sale application and other requested documentation, seller’s hardship letter and supporting documentation, seller’s financial information and supporting documentation, CMA and supporting documentation, marketing history, signed around purchase and sale agreement, proof of buyer’s ability to complete the purchase, preliminary title report, estimate of closing costs from escrow, and anticipated repair estimates.
- If the seller receives lender approval refer the seller to legal counsel. Real estate agents don’t exceed your limitations of license, get written statement from the seller acknowledging no advice from real estate agent and referral to seek legal counsel.
- If there are junior lien holders confirm their willingness to accept payoff including discharge of deficiency and refer seller to seek legal counsel if necessary. Confirm sufficient funds to pay all seller’s closing costs including commissions.
- Be prepared for the lender to require the seller to sign documentation warranting information such as: that all offers were presented, that seller received no proceeds from the transaction, that all transaction proceeds were accounted for on the HUD-1, that you believe the represents fair market value. Remember, each lender has different requirements.
Part 3: Short Sales – the buyer’s agent’s perspective
- Buyer’s agent should have a candid discussion with their client to determine if they’re a good candidate to purchase a short sale property.
- Buyer’s agent should talk with their clients to make sure they have reasonable expectations about the process. Make sure buyers know that short sale transactions take longer than direct sales, that they won’t receive immediate answers, that they’re likely to compete with other buyers who submit purchase and sale agreement after them, that at some point they may be challenged to increase their offer. Remind buyers that the seller’s lender will make the final decision terms.
- Let buyers know they may be required to act quickly once their offer is approved. Does the buyer need to sell another property before purchasing? Do they have financing in place? Are they flexible on rates and terms? Should the buyer consider having their inspections before receiving lender approval?
- When making an offer on a short sale always use the most current forms.
- Beware of requests for the buyer to compensate junior lien holders, the seller, or short sale negotiators outside of escrow – everything needs to be accounted for on the HUD-1. Beware of requests for the buyer to take assignment from the “seller” who is actually a buyer.
- If buyer is asked to sign any documentation from the seller’s lender, advise the buyer to seek legal counsel. If buyer’s agent is required to sign any documentation from the seller’s lender the buyer’s agent should consult their broker.