"Palos Verdes Resident since 1947"

Short Sales — A to Z

Short sales have been in the news the last few years and I’ve handled some of them.  Whether you’re selling or buying, there are a few things you should know before jumping in.

Short sales are, by definition, sales made when the amount owed to lenders is greater than the market value of the property.  Given the decline in values the last few years, there are quite a few of them out there, as there were in the early 1990’s under similar market conditions.  I remember about 1992 handling the first short sale that Home Savings had ever done, when the property owner called me 3 weeks before the house was scheduled to go to Trustee’s Sale — you know the one:  “On the Courthouse steps at such and such an address, near the fountain”.  Given that that was the first time values in So Cal had actually decline since the 1930’s, no one was set up to handle short sales; but, because we were both focused on doing what was best for everyone, we got it done.  For a while, I became the local oracle on short sales.

A couple of other definitions:  for the purpose of this discussion, Lender(s) of Record means the lender(s) holding the loan(s) on the short sale property.  Lender means the buyer’s lender (could be the same, but usually not).

The first step the upside down property owner must take is to prove to the lender(s) of record that he is financially unable to make up the difference between what is owed on the property and the market value.  Clearly, technically, the property owner is on the hook for this, so the lender(s) must agree to take that hit instead.  If the owner has assets, the lender(s) of record may decline to accept a short sale or, alternatively, insist that the property owner contribute to defraying their loss.  The owner is not in as weak a position as it may appear.  The lenders’ only other option is foreclosure, and the property is only worth what it’s worth, whether the current owner sells it or the bank takes it back and sells it as a foreclosure (REO — Real Estate Owned).  Given the time, expense, and downside of potentially having the property “on the books”, a short sale is generally more attractive to the lender than foreclosure.  As the short seller, it’s also more attractive to you, as the hit your credit will take is less severe than if you allowed the property to go to foreclosure.

This is where it starts to get a bit weird:  some lenders will demand that the owner be delinquent on his loan payments before they will consider a short sale, even if the owner has tried to be ethical (or whatever you want to call it) and is current.  Yes folks, you read that correctly.  I suspect that this has to do with how the file will look to a 3rd party — don’t want it to appear that the lender just rolled over — gotta be some distress.  The lender(s) will require all sorts of proof that the owner is flat on his keester — bank statements going back to childhood, tax returns, letters attesting to Dickensian poverty, etc.  And, by the way, updates to all the above during the months it takes the lender to approve the short sale once an offer is accepted, just in case the owner won the Lottery in the meantime.  If there is more than one lender, multiply this by that number.  And, by the way, the forms for each lender are different — can’t just email the same form to each.

Prior to going on the market, the listing agent should establish lines of communication with the lender(s) so that, when an offer is accepted, no unnecessary delay is caused while he figures this out.  It is important also to find out who is actually “holding the paper”.  While Wells Fargo may look like the lender, the chances are that they are only “servicing the loan” and have sold it off to an “investor”, for whom Wells Fargo may or may not have permission to negotiate.  If not, everything will have to be “run by the investor”.

Once past this, or concurrent with it, the property goes on the market.  I have found that you can’t just put the house out there at some bargain basement price to attract offers because a) you will have misled the agents and buyers into unrealistic expectations as to what the lender(s) of record will accept, and b) when that low (but at asking price) offer is received after 3 days, it will look to the lender(s) of record that you were a bit cavalier with their money.

As a short-seller, it is important to understand that, all else being equal, agents and buyers are less attracted to your house because of what they will be getting into (see below), which means that you may end up selling for less than a comparable property that is not upside down.  The fact that it’s a short sale must be disclosed in the listing, so everyone knows.  Somewhere around half the buyers out there cannot buy a short sale for any of a number of reasons:

  1. they have a house in escrow which the lender(s) of record will not accept as a contingency, 
  2. their escrow is closing in 30 days, which is too soon for short sale lender approval,
  3. they just don’t want to get involved in the protracted process of getting the whole thing approved. 

The more “lenders of record” there are, the less attractive your property will be to buyers, as each lender must approve the eventual contract (see below again).  It helps a lot if you have an experienced, local, recognized and respected agent in whose ability to get their offer accepted the buyers’ agents will have faith.  If your house is a short sale in the South Bay listed with an agent in Timbukthree (the other side of Timbuktu) , apart from the obvious illogic of this, you have needlessly created an extra hurdle.

You may have to reduce the price to get action.  This is not all bad, as it demonstrates to the lender(s) a track record of trying to get the best price, rather than just throwing it out there low.  And, obviously, you the seller are not getting a check at the end of this, so it’s not coming out of your pocket.

So an offer is received which, unless your asking price is really low, will likely not be at full price.  If you’re the seller, and assuming the offer is not at asking price, it’s best to make a counter-offer, if for no reason than to show the lender(s) that you at least made an attempt to get the highest price you could.  On the Short Sale Addendum, you also want to make sure the buyer gives you at least 60 days to get lender approval because, even with only one lender, it will be at least that long.

If you’re the buyer, you must include with your offer and prequalification letter and proof of funds (downpayment) as well as a 3% deposit.  Lenders of record will not generally accept contingencies on the close of an escrow, and certainly not on the sale of a property not yet in escrow, or on other money you’re expecting but don’t yet have.

On a short sale, normally an escrow is opened, but nothing that costs the buyer money is done until the lender(s) of record have approved the sale — no point in the buyer spending money inspecting or appraising a house that, after 60 or so days, he finds out he isn’t buying.

So, one or more counter-offers later, you have a signed contract, which is subject to review and approval of the lender(s) of record.  The listing agent should immediately transmit the offer to the lender(s) — remember, he has already established communication.  Under the best circumstances, don’t be sitting by the phone waiting for an answer until after 45-60 days. 

This is where you go to your local office supply place and get new ink cartridges and paper for your printer.  If you are concerned about de-forestation, you’d better consider whether you want to go down this path (or buy stock in Crown Zellerbach), because the number and length of the documents you are about to be asked to fill out and sign will at least involve a visit to your chiropractor.  You have time to do this because it will be at least a month before you hear back from the lender(s) of record.  You can use this time, however, to get your ducks in line, because . . .

Depending upon the policy of the lender(s) of record, you will get one of 3 responses: 

  • Acceptance:  the lender(s) of record have accepted your offer as written and countered.  This will normally take the form of a list of conditions that must be met prior to close of escrow which, normally, the lender requires be within 30 days of this acceptance.  Included in this are the lender’s short sale addenda (basically covering the lender’s corporate rear end), updated financials from the seller because it took the lender at least 60 days to approve, “as-is” sale, cap on termite expenses, affidavit that this is an “arm’s length transaction”, and various other forms depending upon who the lender is.
  • Counter-offer:  this is the most common.  Even though the seller has signed the contract, he did so “subject to approval of lender(s) of record” so, in a sense, the lender(s) is acting as the seller since the contract means nothing without lender approval.  The counter-offer often includes things like price, reducing the agents’ commission, cutting the escrow fees, knocking out the home warranty, etc.  Negotiators for the lenders have a specific list of things they can and cannot approve.  Again, this will generally come with a 30 day deadline for closing escrow.  It will then have to be submitted to the buyer for his agreement.
  • Decline:  this is unusual, and generally only occurs when an offer probably shouldn’t have been submitted in the first place due to buyer’s inability to prove that he can perform.

If there is more than one lender, it can really be fun.  I had one recently where there were 3:  Bank of America had the first TD (Trust Deed), and Wells Fargo had the 2nd and 3rd, which were basically wiped out.  Acquiescence (approval is too strong) of all lender(s) of record must be obtained, and it can occasionally be almost comical (if it weren’t so frustrating) when no lender will approve the contract until the others have.  Hello — does Joseph Heller work there?  Each lender will send out their appraiser to make sure they’re not getting ripped off with a ridiculously low sale price.  Eventually it gets down to the senior lien holder (1st TD) approving it if the 2nd and 3rd will accept a certain payoff figure, for which most 1st TD holders have a formula.  Since the equity position of the junior lien holders (at least in this case) was gone, they were in a weak position (foreclosure by them made no sense and everyone knew it), and they accepted about $13,000 in lieu of the roughly $190,000 they were owed.  In this case, the buyer contributed over half.

If you’re the seller, one thing that bears mentioning here is that it is important to get a “release of liability” from the lender(s), so that they cannot go after you later for the deficiency.  In California, purchase money loans are not subject to Deficiency Judgement, but re-finances (at some point you re-financed your First TD or took a 2nd and/or 3rd) technically are.  The lenders, who have enough on their plates at the moment, will generally provide this, as pursuing a Deficiency Judgement thru the courts is an expensive and time-consuming process in California, but make sure you get it in writing.

With multiple lenders of record, the crazy part is that it will often take so long to get approval from the junior lien holders that the 30 day deadline for closing imposed with approval of the 1st passes.  When, after 45 days, approval of the juniors is obtained with their own 30 day deadline, it’s back to the 1st to get re-approved.  But wait:  so much time has elapsed that they need new information from the seller and buyer.  I’m sure you can see how entertaining this stage of it can be.

Once the lender(s) of record have approved the sale, you’re over the big humps and the normal contingency periods begin:  the buyer has his physical inspection to make sure the property doesn’t have any serious defects, the title is checked, the buyer’s lender gets down to business processing his loan, etc.  Normally those 30-day deadlines imposed by lender(s) of record are soft, since alternatives to extension of them are unattractive to the lender(s) of record. 

If you’ve read this far, you probably have a reason.  Give me at call at 310 613-1076 or email me at [email protected], and we can discuss how all this applies to you.

 

 

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