Short Sale

 

 






           


A
short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by lien against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount
 owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties. A short sale is often used as an alternative to foreclosure because it mitigates additional fees and costs to both the creditor and borrower. While credit is also typically damaged much less than from a foreclosure, both often result in a negative credit report against the property owner.

Process

Most creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the deficiency.

Creditors holding liens against real estate can include primary mortgages, junior lien holders—such as second mortgages, home equity lines of credit (HELOC) lenders, home owners association HOA (special assessment liens)—all of whom will need to approve individual applications for a short sale, should they be asked to take less than what is owed.

Most large creditors have special loss mitigation departments that evaluate borrowers' applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property with an appraisal, a Broker's Price Opinion, or a broker opinion of value (BOV). One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package including hardship letter explaining why a short sale is needed.

Depending on each creditor's policy and the type of loan, creditors may accept applications from borrowers even if the borrower is not in default with their payments. Due to the overwhelming number of defaulting borrowers due to mortgage failures and other causes as part of the 2008–2012 global financial crisis, many creditors have become adept at processing such short sales applications; however, it can still take several months for the process from start to finish, often requiring multiple levels of approval.

Additional parties   
 
Some junior lien holders and other with an interest in the property may object to the amounts other lien holders are receiving. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. (Iowa has a procedure, sale free of liens, which allows a foreclosure court to "cram down" a short sale over the objections of the junior creditors.) If a creditor has mortgage insurance on their loan, the insurer will likely also become a third party to these negotiations as the insurance policy may be asked to pay out a claim to offset the creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales can have a high risk of failure from inability to obtain agreement from all parties or they might not be approved in time to prevent a scheduled foreclosure date.   

Services and consultants

In the United States, the Federal Trade Commission and individual states license and regulate debt negotiators and other consultants who, for a fee, advise borrowers and negotiate loan modifications with creditors on the borrower's behalf. These consultants are required by various laws to disclose to borrowers the risks of renegotiating their mortgages and/or selling their property short. The federal government sanctions and recommends borrowers use only Department of Housing and Urban Development-approved non-profit organizations, which do not charge a fee for their services; however, such services rarely provide short sale negotiation services.

Private debt negotiators, who do short sale negotiations and also charge a fee for their service, are required in some states to be licensed, obtain a fidelity bond and insurance. They might also be limited to the amount they can charge and when these fees are due to be paid by the borrower. In many states real estate brokers, who handle a short sale application as part of their real estate services, are often allowed to do so without additional licensing or insurance.

Credit implications

A short sale negotiation resulting in a reduction of the amount a borrower owes towards a debt acts as a type of settlement or renegotiation of a borrower's debt. Should the creditor report the debt reduction to credit reporting agencies, it can adversely affect a person's credit report. Despite significant misreporting on the topic, damage to one's credit due to a short sale is really no different than that of a foreclosure. After a short sale, borrowers may find it difficult to obtain a new mortgage as lender's underwriting guidelines might reject lending to a borrower who has obtained a short sale in the past.

As of 2011, national and state laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. Borrowers interested in pursuing a short sale should consult first with a HUD-approved mortgage counselor for up-to-date and specific advice as it applies to their situation. Also, borrowers need to obtain up to date information from multiple professionals, including an accountant, an attorney, and a real estate broker—all of who specialize in loss mitigation and are licensed to practice in the state where the real estate is located.

Fraud

In 2010 CNBC reported on a story from entrepreneur Jeremy Brandt that some creditors have been accused of engaging in fraud during the short sale process. One type of short sale fraud has involved creditors in second position obtaining kickbacks in the form of cash payments from a buyer or real estate agent which was not disclosed to the other creditors.