The 411 on “Short Sales” and Foreclosures

We’ve all heard the terms “short sale” and foreclosures, but what do they really mean to you as a homeowner? What do they mean to homebuyers? to Realtors? Through this multi-part series we will explore what these terms mean and how they could apply to you.

Part 1:  What do I need to know before entering a Short Sale?

Before we get any farther it is important to understand what a Short Sale is.  Defined as the sale of a property at a value lower then the current outstanding loan balance, Short Sales occur because a seller is upside down (owner owes more then their home is worth) and unable to pay for their mortgage obligations, real estate commissions, closing costs, taxes, Homeowners Association (HOA) dues and assessments, or liens.

There are three main parties involves with every short sale. The Seller who is the borrower on the original loan that is being negotiated. The Buyer who is the borrower on the new loan that is being used to purchase the property if financed. The Loss Mitigator or Negotiator is the primary contact for the lender who will sign off on the short sale.

As a Realtor how do I know my client is upside down? In order to determine if there is a shortage you need to ask the seller to provide all current mortgage information.Make sure and ask if there is a second mortgage on the property or if there are any liens. In a Short Sale situation, the first mortgage lender has priority. Primary lenders will not take a backseat to a lien payment or to secondary lenders, both of which can  stop a Short Sale from happening. Second mortgages become an issue when the Seller has taken out their second mortgage with a different bank. The second bank must take whatever money the primary lender allows, which is often a very low amount. However, secondary lenders are often willing to negotiate because in the event of a foreclosure they recoup nothing. It is also important to note that the Seller cannot give the secondary lender more then the 1st lender allows because it is fraud.

In addition to current mortgage information, one must also look at tax records and run a comparative market analysis, complete a net sellers sheet and ask for a seller side only HUD. Once all this information has been collected and a shortage has been determined, you can begin the Short Sale process.

It is critical in a Short Sale that you as the Negotiator have all of the information about your clients finances and the history of the property. With the overwhelming number of Short Sales transactions occurring on a daily basis, details are what determine who is approved and who is denied.

Keep in mind that a title cannot be transferred before or during  a Short Sale. This means that the seller must be the same borrower on the original loan used to purchase the home. This condition can be waved in the event of death or divorce. In addition short sales must be “arms length transactions,” meaning no one involved in a short sale can be related. Why? This is done to prevent fraud and make sure that homes are being sold as close to true market value as possible.

So what happens if your Short Sale is rejected and you as the homeowner are still upside down? Foreclosure.

Lookout for part two of the 411 on “Short Sales” and Foreclosure series where we will discuss the details of foreclosures.

All information presented in this series is courtesy of the National Association of Home Builders‘ presentation “Short Sales and Foreclosures” given by O’Kelley & Sorohan Attorneys At Law, LLC