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Short Sales

Short Sales Short & Sweet

The term Short Sale is a term that is becoming more and more common place nowadays with more borrowers falling behind on mortgage payments.  Home prices in general have had a substantial decrease over the past few years, and many people bought these homes with heavy amounts of leverage leaving them with no equity.   The Short Sale is not a highly complex process, but it can be time consuming and very frustrating especially when dealing with large banks.

A short sale is when a lien holder accepts less than the full payoff of the debt to release its lien on the property thus allowing it to sell.  For example, a borrower bought a price of property for $100,000 that is now worth only $70,000.  In order for this sale to close, either the borrower has to come to the closing table with a big check, or the lien holder will have to agree to accept $70,000 minus closing costs.  Some lien holders will accept this loss and still hold the borrower liable for the difference.  The only way to avoid paying this debt would be to file for chapter 7 bankruptcy and have this debt discharged by a court.

A few years ago a borrower would be able to put the house on the market and quickly sell the property for $120,000.  What is more common today is more homeowners bought their property with 100% financing so most of these properties have no equity in them.  Once late fees are added to the above example the borrower may owe $105,000 or greater on real estate that is only worth $70,000.

Why would a lender agree to a Short Sale?  Usually because the borrower is already behind on payments and the property does not have any equity.  Most banks will offer other alternatives before the short sale; however a lot of homeowners simply cannot afford to keep making payments on their homes.  If the lender forecloses on this property it will incur additional fees for the cost of the foreclosure process and not be able to sell the property to recover the principle balance.  Lenders also face holding costs when they take title to a property;  Locks must be changed and maintenance, such as lawn care, must be done because most cities will impose fines if the grass is allowed to become over grown or if the property falls into excessive disrepair.

It is important to note that the lender is never under any obligation to accept a short sale.  It is an economic decision that a lender will make if it believes it to be in its own best interest.  To approve a short sale most lenders require a short sale package to be submitted.  This package is a series of documents that contain items such as tax returns, pay stubs, a hardship letter (explaining why payments can’t be made), purchase contract, and preliminary settlement statement.  The borrower can not profit from the transaction at all.  The lender wants evidence that the lien should be released to avoid incurring further losses.

Subordinate lien holders, better known as second mortgages and equity lines, are involved in this process as well.  If a borrower is foreclosed upon by the first lien holder the foreclosure will extinguish the subordinate lien.  More often than not there is not enough equity to satisfy the first lien, minus fees, let alone any subordinate liens.  This usually, but not always, gives the borrower more leverage when negotiating with the second lien holder.

That is a very brief description of a short sale.  Real estate brokers must disclose short sales when such a situation becomes known.  The National Association of Realtors requires that disclosure in the MLS sheet be made when knowledge of a default becomes known.  The language of the disclosure would sound something similar to: “List price may not be sufficient to cover all encumbrances, closing costs,  or other seller charges, and sale of property may be conditioned upon approval of third parties”.  To protect your seller make sure the offer to purchase is accompanied by an appropriate short sale addendum that specifies that the offer is contingent upon the approval of a third party.  This was the seller is not deemed to be in breach of contract if the lender does not accept the payoff offered.

For additional information you may call 866-806-0277 or visit

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