Short Sales: A Seller's Overview

Short Sales: An Overview For Sellers

This article is one in a series on Short Sales and Foreclosures. Eighteen articles are currently planned, but more will be added as needed. A complete list of articles appears at the bottom of this page.

What is a Short Sale?

A “Short Sale” occurs when a property, usually a home, townhome or condominium, is sold for a price that is less than the amount that is owed on the property AND the Owner cannot afford to pay off the balance of the mortgage(s). The “Short” in Short Sale means the Homeowner is “short” on the mortgage payoff.

Sometimes it is easier to explain using an example.

Mortgage(s) on the Home: $200,000 The total of all loans on the home.

Market Value of the Home: (150,000) The likely Sales Price.

Loan Balance after Sale: $ 50,000 The “Short” Amount.

That isn’t the entire story, however. There are Closing Costs associated with selling a home, such as Title Fees, Escrow Fees and Sales Commissions. Who pays those fees, which, in the above example, likely total around $11,000?

In an approved Short Sale, the Homeowner usually pays nothing! The Lender typically pays the Closing Costs, which, in addition to the $50,000 short amount, increases the loss by $11,000 or a total of $61,000!

Why would the Lender approve a $61,000 Loss?

The alternative to a Short Sale is Foreclosure. Foreclosure is a process where the Lender “takes” the home from the Owner. Foreclosure takes time, at least 90 days, and there are additional costs involved including legal fees.

If a Lender is given the choice between a Short Sale or Foreclosing on a home, presumably they will accept the Short Sale providing the sales price is at or near “Market Value”. If the sales price is too low, the Lender may decide against approving the Short Sale and either wait for another offer or Foreclosure on the property. “Presumably” is my way of saying we think the Lender will act rationally, but that is not always the case.

Am I responsible for paying back the Loss?

In Arizona, the answer is usually “No”. Arizona Law prevents Lenders from collecting on the unpaid balance of Home Loans once a home has been Foreclosed (taken back) by the Lender. The following requirements must also be met:

The Home must reside on 2 ½ acres or less.
The Home must be a Single Family or Two Family (Duplex) dwelling.
The Home must be fully built and have a Certificate of Occupancy.
The Owner must have lived in the home for at least six consecutive months.
The Decrease in Home Value must NOT be due to the Homeowner’s neglect.

The law is called the “Anti-Deficiency Statute” and only “Money Purchase” Loans, not Home Equity Loans, are covered under the Act. A Money Purchase Loan is one that is made to purchase or, in some cases, improve the property.

When a home is first purchased, the Buyer will usually sign one or more agreements with a Lender to obtain the funds to buy the home. These are called First and Second Mortgages, which are covered under the Arizona Anti-Deficiency Statute.

Are Refinances covered? Usually, so long as the Homeowner does not “take back” any funds in the transaction. Your new loan balance must be either equal to or less than the balance on the loan(s) you refinanced.

June, 2004: Home is purchased for $200,000 using a $190,000 Loan (Mortgage).

May, 2005: The home value has increased to $240,000. The Homeowner refinances the home and obtains a $220,000 Loan and uses the additional $30,000 to build a pool.

There is nothing wrong with this and it was a very common practice in 2005 & 2006; however, only a portion of the new loan balance is considered a “Money Purchase” Loan.

In a Short Sale, the entire loan may not be protected under the Anti-Deficiency Statute and the Lender may require the Homeowner to sign a Promissory Note on the additional $30,000.

I have also heard of Lenders taking the position that none of the loan in a refinance is covered under the Anti-Deficiency Statute.

Important:To the best of my knowledge, the information above is accurate; however, laws and rulings do change and I am not qualified to give legal or tax advice. You should always consult with a Legal or Financial professional regarding questions on the Anti-Deficiency Statute and how it applies to you.

Hardship Requirement

Owners must have a legitimate reason for not being able to continue to make payments on their home loan(s). Lenders require certain financial information and a letter from the owner that explains their situation.

Most lenders have a list of the items they require and some send out a Short Sale “Package”. Preparing the Short Sale Package and writing the letter, called a “Hardship Letter”, will be covered in a future article.

Lenders approve Short Sales when they believe it is their best alternative. The Lender must be convinced that the current owner cannot afford to make payments on the property and are financially unable to pay off the Loan Balance when it sells.

How Do I “Short Sell” My Home?

First, have a discussion with your Lender regarding the availability of any loan modification or other programs that would allow you to keep your home. You should also obtain professional legal or financial advice to ensure a Short Sale is your best course action. Then Contact an experienced, understanding Realtor who is qualified in Short Sales.

Short Sales are complex, time consuming transactions that are not for the part time agent or even a full time agent that is not experienced in them. Many Homeowners are experiencing financial difficulties for the first time in their lives, and this should not be a first time for your Realtor as well. You need the steady, patient, guiding hand of an expert to help you weather these times. It is also a very emotional, stressful period, and you should work with a Realtor that understands what you are going through and will always work in your best interests.

Your Realtor will guide you through the Short Sale process. In many ways this is similar to a “normal” sale; the home is listed in MLS and a Lock Box with a key is installed placed on your home to allow Realtors to show the home. When a Purchase Offer is received, you will review it with your Agent.

Experience is important here, as your Realtor must know what terms will likely be acceptable to the Lender. It is a waste of time to accept an offer that will be rejected months later.

Your Realtor must also review the Purchase Contract to protect your financial interests. There may be terms in the Purchase Contract that will result in a financial expense or obligation to the Homeowner, and these should be reviewed and altered if necessary.

The ability of the Buyer to meet the financial requirements to purchase your home must also be considered. If the potential Buyer may have difficulty obtaining loan approval, it is best to find that out before agreeing to the Purchase Contract. Reviewing and Negotiating Contracts will be discussed in depth in another article.

My Short Sale Offer is Accepted; Now What?

You wait. How long? Nobody knows. In many transactions you really do not know how long before the Lender(s) will look at the file. Several steps must occur before the Lender will respond to the Offer:

The Short Sale Package Must Be Complete: Lenders will not look at a Purchase Contract unless the file is complete. Some of the documentation may be hard to find, and many owners freeze up when writing the Hardship Letter, which is why we encourage our clients to begin working on the package immediately. You are only allowed five days in the contract to submit the package once you have an offer accepted, so advance preparation is important.

The File Sits and Waits:The file may wait but your Realtor should not. They should be calling the Lender to ensure the package is received, complete and begin building relationships with the Lender’s team.

A Negotiator is Assigned:Your Realtor will work closely with the Negotiator to obtain Contract Approval. This will likely require a large number of calls and long waits on hold as the Negotiators are extremely busy and difficult to reach.

If there is more than one loan on the home, then Agents must negotiate terms between each Lender as well. The Lender that holds the 2^nd Lien will likely be asked to accept $3,000 or less of the loan balance, which may be $50,000 or more. The Lender of the 1^st Lien may be short $100,000, but we must get them to give up a portion of that in order to gain approval by the 2^nd Lien.

A BPO (Appraisal) is Ordered:The Lender orders either a BPO (Broker Price Opinion) or an Appraisal of the property to determine actual Market Value. An Appraisal is performed by a Licensed Appraiser but Lenders often use “independent” Real Estate Agents to prepare a BPO, which is very similar to an Appraisal but costs about 1/3 as much.

An Acceptance Letter is Sent:The Negotiator’s response to the offer is in the form of an Acceptance Letter. The Letter will either state that the current offer is accepted or it will indicate an amount that the Lender is willing to accept. If there are two Lenders, two Acceptance Letters are required.

If the price on the Acceptance Letter(s) is the same as the offer that was submitted, the Contract is complete and the Buyer must begin their inspections of the property. Short Sale Contracts usually provide for a 10 day Inspection Period that commences on the date the Acceptance Letter is received. The Buyer must also close the sale within 30 days unless the period has been changed in the contract.

Escrow is Closed:Once Inspections have been completed and the Buyer has received final loan approval, all documents transferring the property are signed and the sale is “closed”. Once the sale has been recorded by Pima County, the Buyer may take possession of the property.

That’s it, in a perfect world. Each Short Sale is unique, and new issues come up frequently. There is also a major, government sponsored Short Sale program called HAMP to be released in April. Participation by Lenders is voluntary, so it will be interesting to see how they respond.

In closing, please know that Short Sales are complex transactions and there are many steps and details involved in each one. Each Lender has different rules, and they often change them as well. If there are two Lenders involved, the difficulty increases substantially as Realtors must negotiate between both Lenders and the Seller.

Short Sales are not for inexperienced Realtors. Do you recall the messages on Reality shows that state, “Warning: Do not attempt this at home. Professionals only. ” Realtors should have a minimum of three and preferably five Short Sale closings to have the experience required to be successful in this market.

Disclaimer:The above article is, to the best of our knowledge and belief, an accurate representation of the facts. It is informational and not intended to be a source for financial or legal advice. We are not qualified to provide financial or legal assistance; however, we are licensed and experienced in the sale or purchase of Real Estate, and we will gladly provide guidance and recommendations in this area.

Rob & Catherine Hallberg, CSR, GRI, ABR, SFR, MRE

Associate Brokers, Long Realty

More Articles on Short Sales and Foreclosures

Buying Lender Owned (Foreclosure) Properties

Foreclosures: A Buyer’s Overview

Lender Addendums: Buyer Beware

Getting Your Offer Accepted

Foreclosure Lists: What They Are & Are Not

Inspections: Protecting Your Interests

Reality Show: Short Sale & Foreclosure Lore

Frequently Asked Questions

Next Article: To Be Determined