Short Sale or Short Payoff Transactions
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 liens against the property–usually mortgages– and the property owner cannot repay the full amounts of these liens or mortgages. Instead, the mortgage or lien holders agree to release their liens on the real estate for 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; however both will often result in a negative credit report against the property owner.
Often 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 first 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 from an appraisal, a Broker Price Opinion (abbreviated BPO), or a Broker Opinion of Value (abbreviated BOV). One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package. The package should be well organized along with a hardship letter telling the creditor 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 financial crisis of 2007–, 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.
The Mortgage Forgiveness Act of 2007 provides tax relief in some circumstances for short sellers through 2013, making short selling an even more attractive option.
Although there are usually no proceeds flowing to a seller in a short sale transaction, the 10% withholding requirement nevertheless applies. Therefore, it becomes crucial to identify a FIRPTA transaction as soon as the contract is submitted for processing. Since it takes months if not longer from contract to closing a short sale transaction, the seller may have sufficient time to apply and receive a Withholding Certification from the IRS prior to closing.
Additional Parties with an Interest in the Real Estate
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. 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.
Mason Title Assistance
Short sales are complicated transactions. They may involve a seller, mortgage holders, a buyer, a mortgage insurance company, realtors, a title company, a lawyer, other creditors and perhaps others. Each party’s interests must be taken into account and each step requires full disclosure to all parties. Negotiations can drag on for weeks or months as a lender decides whether to allow the short sale or force foreclosure. Mason Title & Escrow Company can help make short sales as efficient and streamlined as possible. Our short sale service includes:
- Immediately preparing a title insurance commitment upon receipt of the order to reveal open mortgages, liens, foreclosure, bankruptcy, HOA actions, etc so the parties know before they begin what they might be facing.
- Assist with the gathering and submission of lender required documents to initiate the short sale process.
- Assist with communication between all the parties to the transaction as the short sale progresses
- Acting as escrow or settlement agent to close the transaction once approved
- Recording legal documents
- Issuing title insurance policies for the transaction