Under the current financial situation, Sellers are confronted with transactions where the funds at closing cannot cover the repayment owed to the lenders. Short Sales are distinct from “upside down” deals, foreclosures, or bankruptcies. An upside down deal occurs when the Seller is forced to bring money to closing in order to transfer title. By bringing money to closing, all involved in the transaction – from lenders, to REALTORS®, to title companies, to attorneys, to various other vendors – are paid, in full.
In a foreclosure, the lender sues the Unit Owner for non-payment of the monthly mortgage payments, late fees, costs, and/or expenses. Lenders who resort to foreclosure seek repayment of the mortgage and other expenses, in full, by a specific, expedited date (the expedited date is due to the owners’ failure to make timely payments thus allowing the lender to call the loan due). If the full payment is not made, the property may be sold for the amount owed to the bank. This procedure is called a Sheriff’s Sale. At the sale, the lender bids the amount owed. If another party bids more than the lender, the higher bidder may eventually own the property. (Once the sale is approved, the Sheriff’s Deed is extended and the closing is finalized.) If there are no other bidders, the lender will end up owning the property.
A bankruptcy is an individual’s or corporation’s opportunity to either restructure debt (Chapter 13 for individuals or Chapter 11 for corporations) or avoid debt entirely (Chapter 7 for individuals). In a bankruptcy, an owner may reaffirm a loan owed to a lender under terms agreed between the owner and the bank.
In a short sale, there are no proceeds of sale (the Seller does not get a check) and the lender does not receive full repayment of the amount due. Though short sales had occurred in the past, short sales are more prevalent now. With the more frequent requests has come a more streamlined approach to short sales by banks. First, there must be a contract for the sale/purchase of the property. Second, each bank has developed its own checklist of documents and information needed to allow the Bank to renew the short sale request. Included within the typical “checklist” are the following:
- A preliminary closing statement showing the Seller will not receive any proceeds;
- A copy of the contract to sell the property;
- The title policy for the property;
- The commission statement from the REALTOR®;
- The listing agreement with the REALTOR®;
- The last two years tax returns for the Seller(s);
- The last two pay stubs for the Seller(s);
- The account statements for all checking and savings accounts;
- The deeds or any other property owned by the Seller(s); and
- A hardship letter from the Seller(s) indicating why the lender should receive less than what is owed.
For practical purposes, the lender does not prefer short sales because such sales represent the Lender’s willingness to accept less. From an internal accounting standpoint, whereas a foreclosure includes the Lender’s request for the full balance, a short sale falls “short” of this. From an internal accounting standpoint, a short sale is worse than a foreclosure for the lender. As a result, it is not uncommon for a bank to consider the terms of a short sale for four to six months before accepting or rejecting the terms of the deal. If accepted, the closing moves forward. If rejected, the house remains on the market and/or the Lender starts or moves forward with a foreclosure proceeding.
In any case, our firm can help clients through this meticulous, arduous process.