Chapter 5
HOW TO SELL A PROPERTY
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens' full amounts and where the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any shortfalls on the loans, unless specifically agreed to between the parties. However, in California, legislation was passed to preclude deficiencies after a short sale is approved. The same is true of lenders on first loans and lenders on second loans — once the short sale is approved; no deficiencies are permitted after the short sale.
A short sale is often used as an
alternative to foreclosure because it mitigates additional
fees and costs to both the creditor and borrower. Both often result in a
negative credit report against the property owner.
There have been 2.2 million short sales
in the United States during the subprime mortgage crisis.
Most creditors require the borrower to
prove they have an economic or financial hardship preventing them from being
able to pay the deficiency.
Creditors holding liens against real
estate can include primary mortgages, junior lien holders—such as second
mortgages, home equity lines of credit (HELOC) lenders, home
owners association HOA (special assessment liens)—all of whom will need to
approve individual
applications for a short sale, should they be asked to take less than what is
owed.
Most large
creditors have special loss mitigation departments that evaluate
borrowers' applications for short sale approval. Often creditors use
pre-determined criteria for approving the borrowers and the terms of the sale
of the properties. Part of this process typically includes the creditor(s)
determining the current market value of the real estate by obtaining an
independent evaluation of the property with an appraisal, a Broker's Price Opinion, or a broker
opinion of value (BOV). One of the most important aspects for the borrower in
this process is putting together a proper real estate short-sale package,
including hardship letter explaining why a short sale is needed.
Depending on each creditor's policy and
the type of loan, creditors may accept applications from borrowers even if the
borrower is not in default with their payments. Due to the overwhelming number
of defaulting borrowers due to mortgage failures and other causes as part
of the 2008–2012 global financial crisis,
many creditors have become adept at processing such short sales applications;
however, it can still take several months for the process from start to finish,
often requiring multiple levels of approval.
Additional parties
Some junior lien holders and others
with an interest in the property may object to the amounts other lien holders
are receiving. It is possible for any one lien holder to prevent a short sale
by refusing to agree to negotiate a reduction in their payoff to release their
lien. (Iowa has a procedure, sale free of liens, which allows a foreclosure
court to "cram down" a short sale over the objections of the junior
creditors.) If a creditor has mortgage insurance on their loan, the
insurer will likely also become a third party to these negotiations, since the
insurance policy may be asked to pay out a claim to offset the creditor's loss.
The wide array of parties, parameters and processes involved in a short sale
can make it a complex and highly specialized form of debt renegotiation. Short
sales can have a high risk of failure from inability to obtain agreement from
all parties, or they might not be approved in time to prevent a scheduled
foreclosure date.
The Federal Trade Commission (FTC) and
individual states license and regulate debt negotiators and other consultants
who, for a fee, advise borrowers and negotiate loan modifications with
creditors on the borrower's behalf. These consultants are required by various
laws to disclose to borrowers the risks of renegotiating their mortgages and/or
selling their property short. The federal government sanctions and recommends
borrowers use Licensed Real Estate Agents, because the bank will pay
commissions and closing costs.
A short sale negotiation resulting in a
reduction of the amount a borrower owes towards a debt acts as a type of
settlement or renegotiation of a borrower's debt. Should the creditor report
the debt reduction to credit reporting agencies, it can adversely affect a
person's credit report. Despite significant misreporting on the topic, damage
to one's credit due to a short sale is really no different from that of a foreclosure.
After a short sale, borrowers may find it difficult to obtain a new mortgage
because lender's underwriting guidelines might reject lending to a borrower who
has obtained a short sale in the past. As of 2011, national and state laws and
industry standards for both real estate sales and lending are in an ongoing and
rapid state of change. Borrowers interested in pursuing a short sale should
consult first with a HUD-approved mortgage counselor for up-to-date and
specific advice as it applies to their situation. Also, borrowers need to
obtain up-to-date information from multiple professionals, including an accountant,
an attorney, and a real estate broker—all of whom should be specialized in loss
mitigation and should be licensed to practice in the state where the real
estate is located.
On August 15, 2013, the Federal Housing
Administration instituted a new program called “Back-To-Work-Extenuating
Circumstances” to assist potential borrowers who faced financial hardship
during the recession. This program provides a second chance for mortgage
applicants who have experienced financial hardship such as unemployment or a
severe reduction in income beyond the borrower’s control. This program is
designed to assist borrowers with a recent history of foreclosure, judgment,
short sale, bankruptcy, loan modification, or deed-in-lieu by acknowledging
that their credit history may not fully reflect their ability or propensity to
repay a mortgage. Prospective borrowers that have experienced an economic event
and can document that the event was out of their control, that they have
recovered, and that they have completed housing counseling can apply for an
FHA-insured mortgage that will allow up to 96.50% financing.
In 2010 J. Brandt
reported that some creditors have been accused of engaging in fraud during the
short sale process. One type of short sale fraud has involved creditors in
second position obtaining kickbacks in the form of cash payments from a buyer
or real estate agent which was not disclosed to the other creditors.
DR. KARL WALLACE D.D.S.
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