I asked if I could publish this article about short sales by Danette, because she has a unique view of the process as an escrow closer. –Lynette
Short Sales
By Danette Johnson, of Ballard Escrow
A short sale is when a seller doesn’t have enough equity in their property to fully pay off the underlying mortgage debt and negotiates a reduced payoff with one or more lenders holding a security interest in the property. So long as the lender agrees to accept less than the amount needed to pay the debt in full, the seller is able to proceed with the sale of their property — shorting the lender or lenders the full balance due under the terms of the original loan.
With real estate values declining, sellers may consider a short sale as the answer to avoid foreclosure. Anyone considering a short sale — sellers and listing agents and perhaps more significantly buyers and selling agents – should be educated in the world of short sales to formulate their plan of attack.
It is important to understand that a short sale does NOT protect a seller’s credit rating. Once a payment is late or missed, the lender may report the late payment to the credit agencies. Upon completion of the sale, it may appear as a “charge off” or a “pre-foreclosure” on their credit rating. Hence, short sales not only adversely affect the seller’s credit rating, but sellers need also be aware that they remain liable for the unpaid balance of the loan or loans being paid short unless the lender(s) agree in writing to excuse payment and confirm in writing that the debt is paid in full. Without something in writing from the lender confirming that all further payment of debt is excused, sellers may find that one or more of their lenders, post closing, will pursue payment of any unpaid loan balances by obtaining a judgement or a lien. Short sale approvals are also frequently conditioned upon the seller’s agreement to pay some portion of the remaining debt after closing.
Buyers need to be educated about the process of a short sale transaction. Buyers may see a property advertised as a “short sale” and believe that property will be sold at bargain basement pricing, and therefore a wonderful opportunity for them. However, buyers beware, as short sales are plagued with delays and seemingly endless extensions of closing dates. We find that more often than not, buyers end up extremely frustrated with the constant delay and re-negotiations by the lenders and finanlly just walk away from the transaction. And, because of the fluctuating closing date, even buyers with the patience to wait the process out should be wary when locking in their financing until absolutely certain that their closing date will accommodate their lock-in deadlines. With interest rates again predicted to fall to record lows, short sales could cause a buyer to miss out on a very low interest rate while waiting out the lender’s approval of the short sale. Interest rate fluctuations can mean the difference in qualifying for a buyer’s dream home or losing the opportunity to take advantage of the low rates anticipated for 2009. These frustrations should give pause and lead selling agents to question the wisdom of subjecting buyers to a short sale.
It would be helpful if our industry had a list of specific requirements that lenders consider when approving a short sale transaction. If such a list existed, more certainty in the process would exist, and it would be easier to evaluate the property up front. To date we have found the approval process to be riddled with tentative approvals, then new conditions, and out of nowhere a new department or supervisor steps in to review what was believed to have been a pre-approved short sale. Unfortunately the work-out departments within the lending institutions are currently overwhelmed and appear to be under-trained, underpaid and under-valued by the lending institutions as a whole. With lending regulations in turmoil and lenders continuing layoffs, short sales with preliminary approval may never reach final approval. Our experience over the last couple of years at Ballard Escrow tells us that short sales require a minimum of six months to close. We are also finding that short sale transactions are closing with very low success rates of five to ten percent. That means 90-95 percent are rescinded, often as a result of the buyers simply giving up and perhaps taking themselves out of the market altogether as a result of the negative experience of dealing with a short sale.
All of these issues combined should cause everyone to question the wisdom of dealing with properties that are subject to a short sale. Be ready for a fight, or run for your life. The choice is yours.
Tags:
closing,
Escrow,
Lender,
Short Sale 