SHORT SALES: FIVE COMMON MISSTEPS
BURNS LAW LLC
The recent increase of short sales has created an influx in the real estate market for an alternative to foreclosures. While experienced real estate attorneys may find a larger portion of their practice shifting towards short sales, lesser experienced lawyers and even unrepresented sellers are now handling these transactions. The short sale procedure can have many pitfalls, some more obvious than others, which should not be undertaken without proper insight.
WHAT CAN MAKE THE SHORT SALE PROCESS COMPLICATED?
A common misconception amongst those unfamiliar with a short sale is the complexity involved in the transaction. Realtors or agents who are not well versed in making short sale offer deals often follow steps better suited with purchases, which can adversely affect their clients and eventually could cost the entire deal. The general idea that a lien holder will accept a prearranged offer for a short sale in due course clouds and inhibits the entire process. By front loading the research, preparation and negotiation prior to an offer, under the idea that the sale will be carefully scrutinized, one can overcome the complex nature created by many common missteps.
WHAT ARE THE MOST COMMON MISSTEPS IN A SHORT SALE?
The five most common missteps that can not only complicate and prolong a short sale, but ultimately negate an acceptance are outlined below. To ensure a stronger likelihood of closing a deal, consider these five tips:
1. Qualify the Buyer, Qualify the Seller, Qualify the Lien Holder
Not every foreclosure or late payment situation will automatically allow for a seller to arrange a short sale. A lien holder, if it chooses to even entertain a short sale offer, will require initial qualifications of both parties. In regards to the seller, if a seller is asking for debt forgiveness, the lien holder may require a hardship letter that outlines specific reasons why the seller cannot afford to pay back the shortfall difference. Sellers who have available assets will be at a significant disadvantage if they opt for a short sale over a repayment plan with the lien holder. Additionally, a monthly budget spreadsheet, asset and liability statement and a well written hardship letter can offer more convincing evidence that there are little or no assets and no disposable income. In regards to a buyer, if a buyer who requires lending has less than favorable credit, a short job history, high debt to income ratios or other factors that would affect their likelihood in obtaining credit for a purchase, a lender may not qualify the buyer for the transaction. A buyer should submit a loan prequalification letter or a preapproval letter in conjunction with the offer to increase the chances for qualification. Finally, in regards to a lien holder, one should practice due diligence and ensure that the lien holder is in fact the holder of the note. Sometimes, a lien holder has sold off its interest on the property or is simply servicing the loan and thus has no authority to approve a short sale. By immediately hiring a title company to check the public records for an assignment of the deed of trust, and obtaining copies of the recorded paperwork that evidences who is the holder of the note, the time and nature of future steps have been insured to be more effective.
2. Collect Money From the Buyer as Soon as Possible and Secure the Funds
Often a seller will not only neglect to collect money from a buyer before making the offer of sale to the lien holder, but in many cases, will not properly secure the necessary funds. Make a Short Sale Offer with a strong earnest money deposit in an amount between 1% and 3% of the sales price. A strong deposit lets the lien holder know you have a serious buyer. Next, deposit the funds into a trust account. Lien holders prefer that the funds are available, deposited in a neutral professional account and that there is a high commitment level to the deal.
3. Be Reasonable With an Offer Price
Another common mistake in a short sale is the misconception that a lien holder will have to accept any offer because there is a preference towards closing a sale versus foreclosing. Lien holders will perform a cost benefit analysis like any other reasonable lender and conclude with the process and numbers that best serves their interest. A seller should check the comparable sales in the area and determine whether some short sale listings are deliberately priced under fair market value to attract initial offers. This strategy of under pricing seriously inhibits the process as it often skews numbers and catches the attention of less than serious or capable buyers. Remember, the lien holder will make the final determination whether to accept or decline the offer.
4. Give the Lien Holder a Reasonable Amount of Time for Approval
While it is possible to receive a short sale acceptance from the lien holder within a 30 day period, many approvals take 60 or more days. If the contracting parties initially agree to wait 120 days and are prepared to immediately act if approval arrives prior to their deadline the deal will have a much stronger chance of closing. A major pitfall is a buyer who wishes to close in 30 to 60 days and then walks if the deal is not accepted within the time frame.
5. Waive Repairs and Pay Fees
The more limitations that are attached to a short sale, the more likely the deal will not get done. First, a buyer should not request a seller to pay for special reports or make repairs because this will ultimately lower the lien holder’s bottom line. The home should be purchased “As Is” without limitations. This however does not mean a buyer should waive inspections. While the inspection period should be shortened versus a purchase, it should not be waived; but again, should not be passed off to the seller. Second, a buyer should agree to pay a seller’s fees. In a typical purchase, especially in a buyer’s market or in a first time buyer’s transaction, it is not uncommon for a buyer to request the seller to pay fees that are ordinarily the buyer’s responsibility. However, in a short sale, those fees are passed off to the lien holder. Thus, an offer to pay seller’s fees means a willingness to pay the lien holder more at closing than the actual offer price suggests.
ARE THERE OTHER MISTAKES MADE DURING THE PROCESS?
There are a number of very common mistakes that inhibit a short sale from actually closing. Experienced attorneys can implement specific strategies and fine tune the steps taken during the short sale process.
Burns Law LLC handles short sales as a part of its real estate law practice. Should you be facing foreclosure, or are considering a short sale, or have questions about the short sale process, contact our office in Glenolden, in the heart of Delaware County Pennsylvania, for a consultation.