Processing from A to Z
With the cyclical nature of the real estate market, there are periods in the economy when mortgage delinquencies are on the rise. This is caused primarily by a combination of high interest rates on mortgages and a slowdown in residential real estate sales. Some homeowners with adjustable interest rates are under particular stress, especially with their rising monthly payments and the resulting distortion in their budget. Under these conditions, more “distress sales”, short sales and foreclosures can be anticipated.
What is a Short Sale?
“Short Sale” refers to a transaction in which the sales price will not generate enough money to cover the payoff of the Seller’s existing loan and closing costs. Working with a willing Lender, a Seller may be able to negotiate a payoff amount which is less than the actual amount that would ordinarily be required to payoff the loan. The lender agrees to accept the equity available in the property, and the Seller receives no proceeds from the sale of the property.
Why would a Lender or Seller find a Short Sale appealing?
Homeowners benefit by avoiding the long-term negative consequences to their credit which are associated with a foreclosure. On the other hand, short sales also appeal to Lenders because they can avoid the substantial expense of a foreclosure proceeding. Most lenders do not want to own the properties used as collateral for their loans, because the maintenance costs and taxes add to their cost and have a negative effect on their bottomline.
What are the First Steps?
- The agent and Seller should start by having an extensive, truthful discussion about the Seller’s financial status. People who are in financial trouble may be hesitant to discuss the details of their unfavorable situation, but honesty and full disclosure are essential to the successful closing of a short sale transaction.
- The Seller should contact the Lender to find out whether the Lender is willing to consider a short payoff arrangement. The process of convincing a Lender to reduce its loan balance to close the transaction is often challenging, requiring the negotiating skills of a seasoned agent. Be mindful of the additional work that short sales require of both the agent and the Seller.
- Ask your Escrow Officer to prepare a “net sheet” as soon as possible and update it regularly as information becomes available. This is a detailed estimated statement of the payoffs and closing costs that will be charged to the Seller at close of escrow.
The short payoff is a condition of closing that must be set out in both the Purchase Agreement and Escrow Instructions. When the Lender’s payoff demand is received in escrow, it is likely to include restrictions on closing costs and the payoff amounts to other lenders and creditors. Throughout the escrow process, the Seller and real estate agent should be proactive about the numbers that the lender will see. Take care to include every possible expense in the Seller’s “net sheet”, and be aware of the “bottom line” as the process unfolds. Your Escrow Officer can advise you immediately of any significant changes or discrepancies. Remember that the Lender will establish a minimum payoff figure which it is prepared to accept, and its willingness to adjust that final figure may vary. Your Escrow Officer will fulfill the important role of reporting the numbers and complying with the short payoff Lender’s requirements. If you have been working with your Escrow Officer to generate preliminary “net sheets” for the Lender, then the Escrow Officer will be anticipating the requirements of these unique transactions and will be able to monitor the transaction to a successful conclusion.
Note: The information is intended to present general guidelines and is not a substitute for personalized financial advice. Always consult with a tax advisor or legal counsel before entering a Short Sale transaction.