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Chapter 10 |
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SHORT SALE Short
sales in real estate occur when the outstanding obligations (liens and
mortgages) against the property are greater than what the property can be
sold for or more than the value of the property.
The borrower, normally the seller, proposes that the lending
institution accept a compromised or reduced payoff amount on the property.
For this
to occur, the seller must usually be in arrears on the loan.
However, it is possible that a lender may consider a short sale
based on the financial hardship of the borrower/seller without the loan
being in arrears. This should
be confirmed with each individual lending institution.
To begin the process, contact should be made with the lender’s
Loss Mitigation Department. Get
in touch with a decision maker in that department,
and make sure they will consider a short sale and confirm the
requirements. Be sure to
take accurate and complete notes including the names of the people you
have talked with, their position, their phone number, what was discussed,
the date, and the time. Finally,
end by requesting a “ short sale
package” from the lender. REALTORS®
should be prepared to provide the lender with a release of information
“Authorization Letter” signed by the borrower/seller authorizing third
parties such as the listing agent and/or seller’s attorney to negotiate
directly with the lender. A
Comparative Market Analysis (CMA) should be completed and the property
value determined. Prepare a
closing cost estimate and get a payoff of the lien (mortgage) held against
the property. Keep
in mind that in this type of transaction, that all parties are subject to
the timetable of the lender and it can take forty-five (45) to ninety (90)
days or more to get lender approval. Once
that occurs, the process can move quickly to settlement if the parties on
the purchasing side of the transaction have done due diligence.
The
borrower/seller should prepare a “Hardship Letter” explaining why they
cannot fulfill their obligations and why the short sale is necessary.
Also consult with a title company to insure that any title
insurance requirements are met while the process is ongoing.
Then obtain a ratified Contract of Sale contingent
upon the lending institution approving the short sale and provide a
copy to the lending institution. Included
with this package should be a Listing Agreement and a preliminary HUD-1
with all costs of the transaction noted, including real estate
marketing/sales fees as per the Listing Agreement. If
the property is in poor condition or in need of repairs, the lender should
be notified and provided photographs of the necessary repairs along with
written estimates. A second
opinion on the value (CMA) may be requested by the lender and they must give approval for the transaction in order for the short sale to
close. The
lenders decision to proceed with a short payoff
becomes essentially a dollars and sense matter, starting with the
question as to whether the seller is deserving or not.
They will also evaluate whether this method will generate
greater revenue than a foreclosure. Secondly,
the lender will consider the total number of properties that are currently
in arrears and how many are in their Real Estate Owned inventory.
It is likely that if there were any other co-signers on the loan,
the lender would pursue legal action to recoup their losses from the
co-signers. Until
December of 2007, the difference of the payoff and the short sale would
have been counted as income and reported to the IRS.
At that time, the Mortgage Forgiveness Debt Relief Act of 2007 was
passed into law, but that law
is scheduled to expire in January 2010.
At the time of this writing, the State of Maryland had not stated
their position on this tax matter.
Be
sure that an accountant or tax attorney is consulted.
Until the expiration of the Statue of Limitation for recording
liens, the sellers could still be
held liable for the debt, depending on the language in the contract or conditions of approval. Generally,
liens in 2nd or 3rd positions are defaulted entirely
during the short sale. “Do
Better Business…. The Carroll Way!”
August
29, 2008 |