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Tips for Handling Short Sale Transactions for the Buyer and Seller
By Steven R. Greenberg
With the wave of short sales in the current real estate market, it is difficult, if not impossible for a REALTOR® to not be involved in a short sale transaction. This article will address some of the issues when representing a Buyer or Seller in a short sale.
A. Screen the Seller. Is this really a hardship situation? As part of the short sale application, the Seller will have to demonstrate to the existing lender(s) a significant financial hardship. It will be necessary to prove that the Seller is unable to meet financial obligations in connection with the property and does not otherwise have the resources available to make the payments. The existing lender is guarding against the Seller who is merely trying to unload a bad investment. If the Seller will not meet the financial hardship requirement, the REALTOR® is wasting time and mis-allocating resources that could be better used to market properties with real potential for sale.
Also in terms of screening the Seller, it is important for the REALTOR® to ascertain whether the Seller is insisting on a release of liability under the Note and loan documents or is the Seller only looking for the release of the property from the lien of the mortgage. It should be noted that the FAR Short Sale Addendum addresses only the former and not the latter. If the existing lender(s) will not consider a release of the Seller’s liability under the Note and loan documents and yet the Seller will not sell the property if the Seller is not relieved of such personal liability, the REALTOR® is wasting time and misallocating valuable resources.
Another area of concern for the REALTOR® in connection with the listing of a short sale property is whether there are any judgments or liens encumbering the property other than the mortgage(s) to be paid. Oftentimes, the Seller has other financial problems by the time the property is to be sold that have resulted in judgments or liens which may have attached to the property. Accordingly, the REALTOR® should ascertain the status of title to the property vis-a-vis all encumbrances on the title to the property prior to taking the listing and again prior to the entering into a contract to short sell the property. It is very possible that the short sale is approved only to find out that the Seller is unable to deliver marketable title to the property.
Finally, it is important to know whether the property is currently in foreclosure. There are no assurances that the foreclosing lender to whom a short sale application is submitted will agree to delay the foreclosure action. This author has been involved in a couple of short sale transactions in which the property was lost in foreclosure while the short sale application was pending notwithstanding several requests for a delay in the foreclosure proceedings. The REALTOR® should obtain confirmation from the existing lender(s) that the foreclosure action will be delayed pending a response to the short sale application.
B. Screen the Buyer. Is the Buyer willing to wait up to four months or more to find out whether the existing lender(s) will approve the short sale? If not, the Buyer may not be a good candidate for a short sale purchase. Also, is the Buyer willing to enter into an “As Is” contract? Rarely does the existing lender(s) approve the payment of repairs since those repairs will reduce the net proceeds to the existing lender(s).
C. Avoid Giving Tax and Legal Advice. The REALTOR® should absolutely avoid giving tax or legal advice to the Seller both as to the tax implications of the short sale and the potential remaining liability under the Note and loan documents. These are matters that are best left to the professionals and is certainly a trap for the REALTOR®. The listing agent in a short sale should always use the FAR Short Sale Addendum to Exclusive Right of Sale Listing Agreement, which provides in pertinent part, “…Seller acknowledges that…(b) sale of the Property is possible if the Lender agrees to take less than what was owed as a payoff and that the Lender may require the Seller to pay the difference of what was owed as a deficiency judgment… and (d) if the short sale is successful and there is no deficiency judgment, the discount received may become a taxable event to the Seller…Seller is advised to consult with the appropriate legal, tax and financial professionals.”
Short sale transactions can be very challenging and time consuming with no assurances of success. However, they represent a significant portion of the sales in this difficult market. REALTORS® should prepare themselves in order to provide assistance to their clients and maximize the chances of a favorable outcome.
BIO
Steven R. Greenberg has practiced Real Estate law in Sarasota since 1986 and is a shareholder in the law firm of Icard, Merrill, Cullis, Timm, Furen & Ginsburg, P.A. He is board certified by the Florida Bar in real property law and frequently lectures on matters involving real estate transactions. Steven may be reached at (941) 365-6216 or by calling Linda Witt, Director of Marketing, directly at (941) 586-4412 or by email at REinfo@icardmerrill.com [2].
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