Real Estate Short Sale Guide

Realtor commissions can feel up for grabs in any short sale transaction, especially those that do not involve Fannie Mae. To ease the uncertainty, can Realtors be sure that they are going to get all their commission paid during a short sale?

In reality, Realtors cannot be sure that they won’t get their commission reduced by banks, other than Fannie Mae. There are not any rules to protect the Realtor’s commission, but it remains in the power of the Realtor to be professional and take on cases.

Thankfully, on all Fannie Mae loans, banks cannot lower a Realtor’s commission than 6%. Most short sales have seen lowered Realtor commissions to 5%. Unfortunately many Realtors who try to stand their ground on their commission during negotiations are just blown off by the bank as it all depends on how the numbers work out.

Per Fannie Mae:

Effective March 1, 2009, closing of preforeclosures sales may not be conditioned upon a reduction of the total commission to be paid to real estate agents to a level below what was negotiated by the listing agent with the borrower, unless the fee exceeds 6 percent of the sales price of the property in aggregate. Servicers are reminded that they must continue to obtain any approvals that may be required by interested third parties in connection with preforeclosure sales.

Here are some commonly asked questions when dealing with real estate short sales:

1. What is a short sale?

A short sale is a transaction in which the seller’s lender agrees to accept a payoff on the loan that is less than the balance due. The lender is essentially absorbing the loss on the loan(s) and will in most cases agree to pay the costs of the sales, such as real estate commissions.

2. How long does the average short sale take?

It can take anywhere from 28 days to 6 months for a lender to receive a final sign off offer from the buyer and seller. The process frequently will move slowly. Many lenders are looking to improve their speed on this procedure.

3. If a short sale transaction takes as long as 6 months, why is it called “short”?

Clearly not a “short” sale due to the time needed to complete the process, the term short sale is due to price positioning. For a short sale to be completely successfully, the homeowner must establish they are eligible for a short sale by providing supporting documentation such as W-2 forms, bank statements, tax returns and other financial documents.

4. Why would a lender want to do a short sale?

There are quite a number of reasons why a lender would agree to do a short sale. Foreclosures can take time and a lot of money for the lender. The expense of doing a foreclosure: repairs, maintenance, security, eviction, expenses, HOA fees, property taxes and utilities can add up. It’s due to these factors that lenders will choose to do a short sale.

5. Is a short sale an option if the foreclosure has already happened on the property?

Nope. Once the lender has completed the foreclosure process, a short sale is no longer an option for the seller. It is quite vital for the home seller to understand the importance of acting quickly and having early communication with the lender to keep all options open. Speak to the lender and let them know that you are having financial difficulties. If you want to retain the ownership of your home, you may be able to work out other alternatives other than foreclosure.

6. I have a 2nd mortgage, does this make me ineligible for a short sale?

In most cases a short sale can be achieved on a property with multiple loans. Depending on the amount of the loss to the 2nd loan holder, the short sale may be doable under certain circumstances. Requests for short sale consideration must be sent to both lenders.

7. Once you have an offer on the short sale property, what happens next?

Your Realtor will help you with negotiating the best price and terms. Once the negotiations are complete, the offer and all the short sale supporting documentation will be sent to the lender’s loss mitigation department. It is very important for the Realtor to continuously keep in in touch with the bank during this next step.

8. Will I have to pay capital gains taxes if I sell via a short sale?

A short sale will not have bearing on your capital gains taxes. Although, there may be other tax liabilities.

9. Will a short sale affect my credit score?

Yes. Your tax adviser could address you with the specifice issues to your situation.

10. I want to purchase a short sale, but where do I start?

Choose a Realtor who knows how to handle short sales and can work through an difficulties that arise.

11. When purchasing a short sale, do I have to pay escrow fees?

Typically a buyer and seller pay their own fees. In short sales, the lenders may request that certain fees be paid by the buyer as the condition of the sale. Some costs may include: funds owed to the 2nd loan holder, closing costs, delinquent property taxes and HOA dues.

12. How do I find out that I’m eligible for a short sale?

There are many options prior to doing a short sale: loan modifications/refinance, deed in lieu of foreclosure, foreclosure and bankruptcy. There are a number of counselors available to help homeowners decide on the pros and cons of each decision. The complete list of counselors can be found on http://www.hud.gov.

Purchasing a short sale is similar to buying any other home as far as needing to: qualify for a loan, obtaining inspections and closing.  What differs greatly is the timing needed to complete the sale and having the lender involved in the agreement.

The biggest question to ask yourself, is if you have the patience to go t hrough a short sale.  Real estate short sales can take months to complete and during most of that time,  you will not know if you will be getting the house.  The seller may have accepted the offer but the lender has not.  It is really up to the lender(s).

During the past 2 years, banks and lenders have been swamped with real estate short sale requests.  For some lenders, it has been seen that 6 months will pass after an approval.  Recently a great improvement in the timeline to get back the necessary approvals.  Some have been as little as 2 months.

When the lender has finally approved the short sale, it will be subject to your approval for price changes, conditions, inspections, loan contingencies, etc.

Short sales can be a great resource for a good deal. Make sure to do your research, look at comparables and offer a fair market price when dealing with the banks.

Normal steps to start the short sale process

• The homeowner needs to be in distress
• The short sale option needs to be discussed with the homeowner
• The homeowner must sign an authorization release form with the real estate agent
• The homeowner also must sign a sales contract
• Contact the loss mitigation department (bank or lender of loan(s))

What type of property is qualified for a short sale?

• Banks consider short sales for a variety of reasons
• Any home, any size, any style or condition can be considered for a short sale

Fax an offer to the bank

• Include a cover letter with the offer explaining why the offer is less than full price (include comprables, comps)
• A closing statement on how much the bank will net after all fees have been paid
• The homeowners hardship letter
• An estimate on the cost of repairs for the home

What happens to the seller’s credit?

• Try to get the bank to accept the full payment without pursuit of any deficiency judgment.
• Homeowners should speak to their accountant for advice

Are there other options?

• Many lenders are willing to offer loan modification programs after Fannie Mae and Freddie Mac have introduced additional programs.  The options include, extending the loan life, adding delinquent payments to the principal and/or reducing the interest rate.
• The ideal candidate for short sales is still making loan payments and has a good credit rating.
• It may be possible to refinance an adjustable (ARM) rate loan with the Federal Housing Authority (FHA).

What are the seller’s options if the bank or lender rejects the short sale?

• There are a number of reasons a bank will reject a short sale.  Look for another buyer.
• A short sale may be rejected if the loan is less than a year old.  The loan servicer may require that the loan is bought back by the original lender.

What are some financial liabilities that sellers will incur due to a short sale?

• Many lenders may ask the seller to sign a promissory note to all or part of the difference to the short sale.  In these cases, the note gives the lender the right to sue the seller and attach other assets if the note is not paid when due.

Are there tax liability with short sales?

• Check with a tax expert.  The IRS requires the lender to submit a Form 1099 stating the forgiven amount.  Sellers who meet the IRS definition of insolvency (bankrupty or debts exceeding assets), may not have to pay taxes on forgiven amounts.
• The U.S. House of Representatives introduced the Mortgage Cancellation Tax Relief Act which eliminated taxes on forgiven debt on principal residence through either short sale or foreclosure.

Are For Sale By Owners qualified Short Sales?

• They are another source to cut back on costs, but it is very useful to use the assistance of a real estate agent who is experienced in short sales.

Many times a short sale may fall through due to the 2nd lien holder or a PMI company, wanted more money.  But this can also happen quite frequently with the primary lender, as they both play a role in completing a successful short sale.

Here is a scenario:

1) You signed a contract for a “short sale” and the price was listed for $280,000.  The seller accepts the price and you put down an earnest deposit showing your interest in purchasing the home.  After a month, the seller’s agent calls and says the “PMI” company wants $23,000 more or they won’t sell.

You decline to pay more and after a few more weeks, the earnest money is sent back to you and the house is placed back on the market for $299,000.

You still want the house, but do not want to pay more for it.  Since the you and the seller signed the contract, is there a way to purchase the house at the original price?

Answer – A short sale means the buyer is offering less than what is owed on the existing mortgage.  To complete a short sale transaction, all the lenders must agree to accept less than what is owed.  In this case, the principal lender was willing to accept less, but the 2nd lender was not.  Usually the 2nd loan lholder get nothing out of short sales, while the primary lender gets whatever is there.  Recently, more 2nd lenders haven’t been willing to just suck it up and lose everything.

The only thing that may help, As weeks go on and the credit crisis deepends, banks and mortgage lenders are being encouraged to clean up the books and get rid of the real estate on it.  After a few weeks have passed without an offer, the 2nd mortgage lender may be more receptive to getting the property removed from the books.

As for the contract with the seller, you could talk to a real estate attorney about the issue.  Take note, that if the contract stated that the sale was contingent on the seller obtaining the lenders’ permission for the short sale, you won’t be able to force the seller to close.

Although, you could offer to pay a few thousand dollars to get the deal done.

Regular Sale – A sale where the seller has equity in the property.  The buyer and seller will negotiate price and terms of the sale.  The seller is required to provide Disclosures according to California Law and statute.  The transactions in this type of sale are generally much easier to come together as there are time-lines in which the seller needs to follow in the transaction.

Short Sale – A short sale is the sale of the property is less than the loan(s) financed on the property.  The seller’s lender is accepting less than what is owed and is usually purchased “as is” without repairs or warranties since the lender is taking a 30% to 50% loss on the property.  This is why they will not negotiate on the price.  In many areas, they are multiple offers on a home.  If there is more than one loan on the property, all the lenders must approve for the contract to go through.

REO/Bank Owned – REO means real estate owned property that has been foreclosed on or repossessed by banks or lenders.  The properties are sold “as is” without repairs or warranties.  The lender is exampt by law from completing any disclosures.  The process for bank approval can be anywhere from three to 10 days.

Pre-foreclosure Property -A property where the homeowner has fallen behind in their payments of when a NOD has been filed against the property.  There properties may appear to be regular sales.