A: Short sales can provide relief to stressed-out borrowers who are strongly considering walking away from their property and allowing a foreclosure. Short sales can result in a win-win transaction for all parties involved (borrower and lenders), and can reduce the credit-hit on borrowers while getting the property off their back sooner than if it were foreclosed on.
RPM Midwest works ONLY with ethical, professional, short sale experts who have a track record of successfully and confidentially helping our clients avoid foreclosure. Contact us today to learn more.
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, whereby 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.[1] Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties. However, approximately 90% of short sales we have seen successfully negotiated have been a “release in full” which means the lender has waived their right to pursue future collection of the deficiency.
A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner. See Credit Implications below…
Process
Often creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the current loan and/or 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 from an appraisal, a Broker Price Opinion (abbreviated BPO), or a Broker Opinion of Value (abbreviated BOV).
One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package. The package should be well organized along with a hardship letter telling the creditor why a short sale is needed. Proper organization of these materials is very important to a successful outcome / sale. It is highly recommended that borrowers work with ethical real estate professionals who are very experienced with short sales.
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 financial crisis of 2007–2011, 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. Typically, the lower the homes value, the longer the process takes. It’s not uncommon for lenders to seemingly ignore short sale applications for properties under $20k.
Additional Parties with an Interest in the Real Estate
Some junior lien holders and other 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. If a Creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations as 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 more lenders on a property, the more likely it is that the short sale will fail. Additionally, it’s unlikely a short sale will work if a property is within 30 days of a foreclosure date.
However, it is our experience that nearly 75% or more of short sales are able to be successfully negotiated and sold prior to foreclosure if:
- The borrower/Owner cooperates promptly and completely with the Realtor’s and/or lender’s requests
- The Realtor is an ethical, professional, short sale expert
- The borrower/Owner does not live in the property, and the property is vacant or easily accessible
Private Debt Negotiation Services and Non-Profit HUD Approved Housing Counselors
Some fee-based negotiators and counselors are regulated by the Federal Trade Commission and possibly their state. They are required by various laws to disclose to borrowers the risks of renegotiating their mortgages and/or selling their property short.
Due to a rapidly changing lending environment, the laws around short sales change often. The Federal government sanctions and recommends borrowers use only HUD approved non-profit organization, who do not charge a fee for their services.
In Ohio and Kentucky, Real estate brokers, who handle a short sale application as part of their real estate services, are allowed to do so without additional licensing or insurance. Real estate brokers can provide excellent, experienced-based service at NO COST to the borrower since their fees are paid by the lender in most transactions.
Credit Implications
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. After a short sale, borrowers may find it difficult to obtain a new mortgage as lender’s underwriting guidelines might reject lending to a borrower who has obtained a short sale in the past.
Both a short sale and foreclosure will negatively impact a borrowers credit rating. The overall impact can vary depending on the borrower and their circumstances. Generally, a short sale will almost always be better than a foreclosure on a credit report, sometimes significantly better….and could result in the borrower being able to finance a house in the future sooner than if they were to get foreclosed on.
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 need to obtain up to date information from multiple professionals, including an accountant, an attorney, and a real estate broker – all of who specialize in loss mitigation and are licensed to practice in the state where the real estate is located.
(The majority of this content is taken from wikipedia’s definition of a short sale and was amended by the author of this post based on professional experience. Author’s comments are in italics.)
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