Oct

29

Attorney Peter Marx Explains Short Sales

Filed Under Home Finance, Real Estate |

Peter Marx

Earlier this fall, Chicago attorney Peter Marx came to our weekly sales meeting at Coldwell Banker’s Gold Coast Office. He had been invited to speak to us about “short sales.”

Until this year, I had never been involved in a short sale. Now, I have good friends who purchased a condo in a conversion in 2005 and have since seen the interest rate on their loan reset to an excessive rate (over 9%) and the husband lose his job. My team and I at Coldwell Banker have been trying to help them sell their condo for a price in excess of their mortgage amount but have received no offers. So, just last week, we canceled and relisted their home at a price that is more than 10% below the principal balance on their mortgage. When we get a buyer, we will work with Peter to contact their lender and negotiate a short sale.

Given that short sales are becoming more frequent in our Chicago area residential market, I asked Peter if he would consider writing a guest post for the blog that I could share with our readers. If you’re considering a short sale yourself or are just curious about this arrangement that has been grabbing headlines, you will find Peter’s post very helpful. - Jenny

In my fourteen years of real estate practice, I have never seen the conditions we are experiencing in the real estate market today. This is a very difficult market for anybody involved in real estate, but it is especially challenging for people trying to sell property. Some sellers have found themselves in a position where they owe more money on their property than it will sell for on the market. Others are behind on mortgage payments due to adjustable rate mortgages or other dangerous creative financing that was previously available. Still others are in trouble simply because they bought at the peak of the market, and since then, the property values in their neighborhood have dropped significantly.

Regardless of the reason why the property owner is in trouble, a “short sale” is a viable solution for many of these situations. A short sale is when a lender (lien holder) agrees to accept a loan payoff that is less than the full amount due on the mortgage. While this may, in some cases, adversely affect the homeowner’s credit score, it is not as damaging to a person’s credit as a foreclosure or a bankruptcy. In some cases, if a person has significant other debts that they cannot pay (e.g. credit cards, car loans, etc.) a bankruptcy may be more suitable. However, if the only debt problem is real estate, a short sale is a good option for many homeowners.

The following are some of the requirements necessary to have a bank approve a short sale:

The Seller can receive no proceeds. All customary closing costs (i.e. commission, taxes, title fees, attorney’s fees) are paid by the bank.

- There is no guarantee the bank will approve the sale.

- The real estate sales contract and any Realtor commissions must be stated as “contingent upon the approval of the lender”.

- The seller must accept an offer. Then the bank must approve the terms of the offer as well as sign off on the seller’s financial hardship circumstances.

- The seller (homeowner) will need to prove a financial hardship in order for the bank to approve their “short sale”. This will be done by the negotiating attorney providing the contract, title report, proposed settlement statement and extensive financial information to the bank. (i.e. the seller’s income/asset/debt statements, bank statements, hardship letters, tax returns, employment information, etc).

- The bank will do its own research on the property to confirm that the sale price is justified. They do this by having a local real estate agent complete a BPO (Broker’s Price Opinion). This is the equivalent of their appraisal. Therefore, it is very important that the property is not sold at a price far below the market value. The listing real estate agent must make sure there are comparative sales similar to the sales price that is accepted or the bank will reject the transaction.

It is very important that the Seller, listing agent and the attorney handling the short sale negotiation with the bank are all efficient, experienced and detailed in their work. The following is a timeline of steps that should be taken to complete a short sale:

1. The seller lists the property for sale with a Realtor after agreeing on a competitive listing price that is in line with the prices for other similar homes that sold recently.

2. The seller meets with their short sale attorney to retain them to negotiate the transaction with the seller’s lender(s), and executes a client authorization agreement to allow the attorney to communicate with their lender.

3. The seller gathers all requested financial and hardship information and provides it to their attorney.

4. The seller’s Realtor provides a copy of the listing agreement, comparable sales, and marketing history to the seller’s short sale attorney.

5. An offer is received and negotiated between a buyer and the seller. Once the parties reach agreement, the contact is signed by the buyer and the seller. The bank does not sign the contract. They only approve the contract and sale.

6. The contract, client authorization agreement, listing agreement, settlement statement, hardship information and all financial information are submitted to the Seller’s lender or lenders if there are two loans. (This is typical if a homeowner took out an equity line of credit against their home.)

7. The seller’s file is eventually assigned to a specific loss mitigation negotiator at the bank(s).

8. In approximately 60-120 days, the bank(s) complete their price opinion and provide an approval or denial of the short sale.

There is no guarantee that the “short sale” will be approved. The risks increase if there are two loans as the second lender is often not offered enough money by the first lien holder (lender) to satisfy them, and so they reject the sale. Other potential risks and potentially fatal problems for a short sale are as follows:

- Some short sale lenders will not approve of payments of mechanics liens, outstanding homeowners or association dues.

- Most lenders will reject a short sale if there are federal tax liens on a property.

- If the Seller has significant liquid assets (not retirement accounts), the bank will often ask them to pay the shortage owed on the mortgage from these assets.

- Often times, the second lien holder will expect the seller to remain liable, through a promissory note, for the balance of the mortgage that is released from the property. For example, if the seller owes $50,000 on a second loan and the second lender is only offered $2,000 by the first lender, who has priority over them, that second lien holder may have the seller sign a promissory note to repay the remaining $48,000 after the sale.

- Lenders have the option of assessing tax liability to the seller for the amount forgiven (in the form of a 1099).

While the above issues can be obstacles in the way of a short sale, there is always a chance of negotiating with the bank or increasing a sales price to convince a lender to agree to a specific short sale.It is important to know about the Debt Forgiveness Act that was passed in December 2007. This allows lenders to write off as a loss the amount forgiven in a short sale for the borrower’s principal residence. Therefore, lenders generally will not seek additional recovery or compensation from the seller if the short sale is approved. However, as discussed above, there are always exceptions, every short sale is unique, and lenders may respond differently.

Completing a short sale is a complicated process. However, if you hire an attorney who specializes in these transactions and an experienced Realtor, a short sale can be a tremendous alternative to foreclosure, bankruptcy or financial disaster.

Feel free to contact attorney Peter Marx for all your real estate, legal, and short sale needs. Peter can be reached at (773) 283-8960 or at petermarxlaw@aol.com.


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