There have been a substantial number of questions from Buyers and Sellers on Short Sales in recent months. The interests and concerns expressed by the two sides, i.e., the Buyer or Seller, differ widely, as you would expect. The general theme is: “What do I need to know about short sales?”
It is not possible to cover the subject of short sales in a brief summary and do justice to the topic. Short sales are, by their nature, a complex aspect of the current market. We will start with a basic discussion of short sales and then move highlight some aspects of the process of interest to the party seeking to sell the property via a short sale to satisfy the loan obligation (Seller) and the prospective purchaser of the short sale property (Buyer).
Short Sales
A short sale is the result of the Seller’s inability to repay the mortgage on the property. Mortgage payments are delinquent and in many cases the property is “under water.” That is, the amount of the loan on the property is more than the current market value of the property. In reality, it is a last ditch effort on the part of the property owner to avoid foreclosure. A foreclosure has a long term negative impact on the credit rating.
The Seller is asking the lender to allow the sale of the property at a value less than the loan amount. In essence, the lender must absorb a loss on the loan.
Why would a lender want to entertain a short sale that results in a loss on the loan? From the lender’s perspective, there may be several reasons. In essence, it may be lesser of evils.
• In the state of Florida, a foreclosure is a judicial matter that must be approved by the court. The latest data available shows the average time to complete a foreclosure in Florida is 661 days.
• Once the lender foreclosures, he becomes responsible for the ongoing costs for the property, such as taxes, fees, maintenance, etc.
• The lender must sell the property in a very severe “down” market or incur the costs of holding the property until the market improves.
• Generally, the lender recovers more of the loan amount in a short sale than a foreclosure sale.
At this time, short sales are a potent force in the Naples market. Almost two-thirds of the pending sales are short sales.
The Seller
A Seller contemplating the short sale of property is mired in a bad situation and is desperately seeking a Hail Mary solution. Many Sellers look upon a short sale as the last ray of hope in an otherwise bleak landscape.
Probably the best advice that can be given to the Seller is to seek legal and financial counsel before and during the short sale. Do not make a bad situation worse by hasty, uninformed action(s).
The Seller should be aware that, in most cases, the loan is not owned by the lending institution that made the initial loan to the Seller. It is common practice for the loan to be quickly sold to a private party, or, Freddie Mac or Fannie Mae (if the loan qualifies). In many cases, the original lender will continue to service the loan (collect monthly payment, etc.) for a fee. Long term loans may be sold several times during the life of the loan.
While there have been improvements in the short sale process, it is still a paper intensive and frustrating experience for the Seller. The process starts with the lenders determination of the Seller’s eligibility for short sale relief. The lender is under no obligation to agree to a short sale!
This short sale process may be even more frustrating if the lender has contracted out the short sale effort, rather than using in-house staff. Contracting out has become a common practice among large lending institutions with many delinquent property loans
The Seller does not have the authority to accept, negotiate, or reject short sale offers. Any decisions of this nature will be made by the entity controlling the short sale and/or the owner of the loan.
The completion of a short sale does not relieve the Seller of the loan obligations. For example, if the Seller has a loan obligation of $200,000 and the short sale is completed for $150,000, the Seller is not absolved of its responsibility for full payment of the loan amount (in this example, the $50,000).
We understand in Florida, the owner of the loan routinely takes those action(s) necessary to retain its legal rights to pursue collection of the full amount of the loan.
The Buyer
The purchase of a short sale property has been a time consuming and frustrating experience for a Buyer. It is not uncommon for the purchase of a short sale property to consume 6 to 8 months. Short sales typically involve a laborious process; are marked by an inability to communicate with the decision maker; and, the rejection of offers without any rational explanation. In many cases, the Buyer loses interest and withdraws the offer.
There are two types of short sales – a “potential short sale” and an “approved short sale.”
An approved short sale usually means the owner of the loan has agreed to the stated asking price for the property. Buyer’s acceptance of the asking price usually results in a sale.
A potential short sale usually indicates the asking price has not been approved by the owner of the loan. The asking price is often well below current market prices and appears to be a “steal” to the buyer. The asking price rarely has any relation to the amount owed on the loan. Offers are frequently rejected and negotiations involve a prolonged period of time.
An” approved” short sale is clearly more attractive to the Buyer than a “potential” short sale. Unfortunately, most short sales today fall into the potential category. However, recently there appears to be a movement towards more approved short sales.
The Buyer should understand that the process and procedures to accomplish a short sale are established in advance by the entity receiving the offer. In many cases, the terms and conditions of an offer are predetermined by the lender. In most cases the Buyer must accept the property in “as is” condition with the right of inspection. This means the Buyer can have the property inspected, but the loan holder is not responsible for the cost to repair any damage found during the inspection. The Buyer will also be required to provide written proof of funds with the offer. That is, the Buyer must provide proof that the funds for the purchase are currently available.
