RE78R13: Short Sales

Approved Feb. 26, 2013

1. What is a "Short Sale"?

  1. The sale of real estate where the proceeds from the sale of the property provide insufficient funds to pay the existing liens and expenses related to the sale of the property.
  2. Sometimes referred to as "Underwater Loans"
  3. Three Party transaction (Seller, Buyer and Mortgagee-lender)
  1. Why do a "Short Sale"?
    1. Avoid Foreclosure
    2. Reduce risk of negative impact on Seller's credit rating
    3. Sellers regain control of their financial life
    4. Sellers stop depleting other financial assets
  2. Negotiating the "Short Sale" Pay-offs
    1. Sellers must give written authorization to contact the Sellers Mortgagee lender(s)
    2. Contact Lien Holder Loss Mitigation Departments to start the process
    3. Identify Lender's requirements for short pay-offs and approvals
    4. Prepare Financial and Hardship Packages for Seller of the property
    5. Negotiate between multiple lien holders for pay off percentages
    6. Brokerage commissions is by negotiation
      1. Fannie Mae loans cannot be compromised by mortgagee (lender) unless exceeds 6%
    7. Mortgagee (Lender) may award funds to Seller for moving expenses
    8. Role of Attorney
    9. Role of Attorney General's Office in the negotiating process, HomeCorps
  3. Reasons why "Short Sale" maybe rejected
    1. Offer is too low / Offer too low based on buyer's financials
    2. Loss Mitigation package is incomplete
    3. Hidden assets of the Seller
    4. Out of State Lender's/Mortgagor's staff may not be familiar with Massachusetts' rules and regulations
  4. Broker's Price Opinion (BPO)
    1. Used to determine value of property
      1. If higher than offer Lender will reject the "Short Sale"
      2. Short sale comparables vs. current market sale comparables
    2. Types of Broker Price Opinion (BPO)
    1. Drive by-exterior of property-estimated value of property
    2. Interior BPO- interior condition plus estimated repairs for any existing damage
    3. BPO vs. Comparative Market Analysis (CMA)
  5. Challenges in negotiating "Short Sales"
    1. Marketing to state that offers are subject to 3rd party approval
    2. "Offer" and "Purchase and Sale Agreement" must clearly state property is a "Short Sale" property and requires Lender Approval
    3. Time (realistic date for acceptance of Offer and Closing Date)
    4. Buyer must be flexible (delay can effect Buyers financing, rates, etc.)
    5. Denial of "Short Sale"
    6. Determine Market Value
      1. Shorten comparable period
      2. Consider Foreclosure comps
      3. Review pending Sales
    7. Lender, Freddie or Fannie Mae may have regulations that may prevent the sale
  6. Tax Issues
    1. Deficiency Statement signed by Seller
    2. 1099 Form forgiveness of debt is taxable income
    3. C.P.A. advice recommended to Seller
    4. Mortgage Debt Relief Act of 2007 (MDRA)
    1. Act expires 12/31/13 unless extended by Congress
    2. Massachusetts does not recognize MDRA
  7. Seller Options
    1. Payoff amount required by Lender unacceptable to Seller-sale rejected
    2. Seller may consider Bankruptcy after "short sale" closing
    3. Lender has sole discretion whether to cancel debt or take action to collect difference between amount owed and amount collected

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