Understanding the Short Sale Process
Guidelines For Handling A Short Sale
I. What is a Short Sale Situation?
· A Short Sale has occurred if title has transferred for a sales price insufficient to pay the total of all liens and costs of sale; and the Seller was not required to pay additional sums at closing to fully pay all deficiencies.
· A potential Short Sale exists if the listing broker reasonably believes:
(i) the listing price may not be sufficient to fully pay all encumbrances and costs of sale; and
(ii) the Seller is unwilling or unable to bring sufficient liquid assets to the closing.
II. What IS NOT a Short Sale Situation?
· A Short Sale does not exist simply because the seller is willing – or has – to sell property for a price less than the seller owes to lienors.
· A lender will not consider the situation to be a Short Sale if a seller has other assets which are available to pay a deficiency.
· The member will not generally consider the situation to be a Short Sale if the property is an investment or second home, and not a primary residence
III. Checklist for a Short Sale Transaction
· Purchase Price is insufficient to satisfy all liens, encumbrances, commissions and costs of sale;
· Due to hardship it is not practical for Seller to retain Property;
· Seller desires to avoid foreclosure and is willing to cooperate with brokers and lender to pursue and complete a Short Sale;
· Lender is willing to timely consider a Short Sale;
· The Property is listed at an appropriate price;
· The plan for marketing of the Property provides protection for Seller and appropriate disclosure for cooperating brokers and potential buyers;
· Lender is delivered its completed Short Sale package, including an offer at an acceptable market price, and a statement demonstrating the need for a Short Sale; and
· Lender accepts the offer, the Property closes, no proceeds are paid to the Seller, the loan is satisfied, and Seller’s liability under the loan is fully satisfied.
IV. How to Determine Whether you Have a Potential Short Sale Situation
· Obtain applicable financial information from the Seller
· Know the applicable laws, rules, regulations, policies and procedures
· State and Federal laws and regulations
(a) Licensee disclosure limitations – Chapter 475, F.S.
· Seller’s motivating facts and circumstances are confidential
(b) Judicial Foreclosure Procedures – general time periods for actions:
· Demand Letter (optional) – 31 to 120+ days after default
· Complaint – 31 to 120+ days after default
· Answer/Default – 20 days after service
· Judgment – 30 to 60+ days after Answer/Default
Sets Priorities among lienors
Orders Judicial Sale
· Judicial Sale – 20+ days after Judgment
Cutoff of Owner’s rights
Cutoff of junior lienors’ rights
· Equity of redemption – exercisable prior to time of Judicial Sale
Reestablishes owner’s rights
Reestablishes junior lienors’ rights
· Deficiency Judgment may be obtained
(c) Forgiveness of indebtedness concerns and safe harbors
· Income tax liability
· Exemption for “primary residence debt”
Acquisition debt
Improvement debt
· NAR Rules and Code of Ethics
Article I of the Code -
“…when representing a buyer, seller or other client as an agent, REALTORS® pledge themselves to protect and promote the interests of their client. This obligation to the client is primary, but it does not relieve REALTORS® of their obligation to treat all parties honestly.”
Sta of Practice 1-9 –
Requires Realtors® to preserve confidential information (as defined by state law) provided by their clients.
Realtors® shall not knowingly reveal confidential information of clients unless a client consents after full disclosure.
·
“Section 1C: Short Sale Listings:
In instances where the listing broker becomes aware that the listing price may not be sufficient to permit seller to fully satisfy all encumbrances and pay seller’s closing costs, including the listing broker’s offer of compensation (a “Short Sale Circumstance”), the listing broker may:
(1) Obtain seller’s informed written consent (in either the listing agreement or an addendum thereto) to disclose the Short Sale Circumstance to cooperating brokers, buyers and the public;
(2) Clearly and promptly disclose the Short Sale Circumstance to all cooperating brokers and, when and if appropriate, disclose that the sale of the listed property may be conditioned upon the approval of a court, a lender, or other third party. Such disclosures may occur at any time, but it is suggested they occur at the time of
‘Listing price may not be sufficient to cover all encumbrances, closing costs, or other seller charges and sale of Property at full listing price may be conditioned upon approval of third parties. Call for details.’
An offer of compensation to cooperating brokers which states that it may be adjusted after execution of a contract for sale and purchase by a third party without the consent of the cooperating broker, is not an unconditional offer of compensation under these rules.
Contracts which are subject to approval by a court, lender or other third party must be reported as “pending” consistent with Article 4 Section 15 of these Rules.”
· Adopt and follow your company’s policies and procedures (to the extent consistent with applicable laws, etc.)
· Consider a policy of always advising all Sellers facing Short Sale circumstances to seek legal, tax and financial advice before proceeding with a Short Sale to address following issues:
(a) Foreclosure procedures and effect on credit
· Deficiency judgments
· Tax liability for forgiveness of indebtedness – 1099s
· Tax exemption from forgiveness of indebtedness
(b) Bankruptcy procedures
(c) Current financial disclosures to Seller’s existing lender
· Consider a policy requiring the company’s licensees to obtain the Seller’s consent to disclose short sale circumstances before entering into a listing agreement with the seller,
· Consider a policy requiring disclosure to all potential buyers of the issues they may face when entering into a Short Sale transaction (See Attachment).
V. Determine and Discuss Seller’s Short Sale Financial Condition and Options
· Determine amount necessary to payoff all obligations encumbering the Property.
· Determine priority of multiple liens - (to determine those parties who must be satisfied)
· Junior lienors may accept reduced payoffs.
· Approval for reduced payoffs of government liens may require substantial time.
· Perform a
· Determine whether Seller has other assets sufficient to pay deficiency.
· Discuss Seller’s options
· Retain Property and maintain loan(s) in good standing;
· Renegotiate loan(s) with the lender(s) - reduction of principal or arrearages, or resetting rate or term;
· Sell Property and bring cash to closing to satisfy deficiency;
· Offer lender a deed in lieu of foreclosure;
· Permit lien(s) to be to foreclosed;
· Negotiate a Short Sale.
VI. Obtain Short Sale Disclosure Authorization in the Listing Agreement
· Obtain the Seller’s written consent to disclose to cooperating brokers and potential buyers the circumstances constituting a Short Sale.
· Suggested language to be inserted in a listing agreement:
“Seller hereby authorizes Listing Broker to disclose to cooperating brokers (whether serving as a transaction broker, single agent, or non-representation), the Mid-Florida Regional Multiple Listing Service, Inc. (“MFRMLS”) or other mls organizations, potential buyers, lenders, and closing agents and others who are or may become involved in the sale of the Property (the “Interested Parties”) that the proceeds available to Seller from a sale of the Property may not be sufficient to pay or satisfy all closing costs, taxes and other prorations, outstanding mortgages and other liens encumbering the Property, and the commission due under this Listing Agreement (the “Confidential Information”). Seller acknowledges that without this consent Listing Broker would not be authorized to disclose the Confidential Information and that the disclosure of the Confidential Information may indicate to the Interested Parties Seller’s motivation for selling the Property, thereby potentially affecting adversely Seller’s negotiations with such Interested Parties. Seller further consents to allow Listing Broker and its cooperating brokers to make the approval of Seller's lender(s) a contingency to: (i) any contract for the sale and purchase of the Property, (ii) the HUD-1 or other Settlement Statement, (iii) payment of any portion of the commission due under this Listing Agreement to cooperating brokers, and (iv) all other documentation related to this transaction, and to describe this contingency in the MFRMLS (in accordance with its Rules and Regulations), the Seller's Disclosure and in the purchase and sale contract or a contract addendum.”
VII. Obtain Short Sale Documentation
· Obtain Seller’s written letter authorizing each of Seller’s lien holders to communicate directly with you as to the status of the loan and the terms upon which the lender is willing to complete a Short Sale; the written authorization should include:
· the lien holder’s name and its loan number;
· your name and the name of the Closing Agent.
· Obtain Seller’s documentation to complete each lien holder’s Short Sale package, to include:
· Seller’s “Hardship Letter”
· Financial Statement with last two years tax returns and applicable K-1s, W-2s, and 1099s
· Two most recent pay stubs.
· Two most recent personal bank statements (complete with all pages)
VIII. Listing and Marketing the Short Sale Property
· Promptly list the Property on the
· An unconditional offer of compensation must be made to cooperating brokers expressed in either a dollar amount or a percentage of the gross selling price. (See MFRMLS Rules Section 4.18)
· An offer of compensation permitted to be unilaterally modified by a third party without the consent of both listing broker and cooperating broker is not considered to be “unconditional” – it is not expressed in either a dollar amount or a percentage of the gross selling price.
· Contact the Primary Lien Holder’s Loss Mitigation Department to advise them that the Property is being listed
· Keep lien holders informed of all the marketing efforts, showings, and offers received.
· Maintain log of all licensees that show Property.
· Maintain records of all showing activity.
· Maintain records of all advertising and marketing materials.
· Be prepared to reduce Purchase Price periodically or as directed by the lien holder(s).
IX. Optional Disclosure of Short Sale Circumstances
· MFRMLS Rules allow disclosure, at your option, of Short Sale circumstances in the Broker Remarks and Public Remarks sections of the listing;
· If you elect to disclose Short Sale circumstances, MFRMLS Rules require the following disclosure language to be used:
“Listing price may not be sufficient to cover all encumbrances, closing costs, or other seller charges and sale of Property at full listing price may be conditioned upon approval of third parties. Call for details.”
· It is suggested the following disclosure language also be inserted in a Seller’s Property Condition Disclosure:
“Seller advises Buyer that any contract for sale, addendums and the terms thereof and the HUD 1 Settlement Statement are required to be approved by Seller’s lender.”
X. Handling Short Sale Offers to Purchase
· Review the Short Sale circumstances and lender’s procedures with the selling broker, and the potential loss of the brokerage commission IF LENDER DOES NOT APPROVE THE CONTRACT.
· Avoid, if possible, buyer concessions in the offer.
· Include in the Contract for Sale and Purchase a clause regarding Short Sales, such as:
“Buyer acknowledges that this Contract and the disbursement of funds are contingent upon approval by Seller’s lender(s) of both this Contract and the Settlement HUD 1 Statement to be issued. If such approvals are not obtained within ____ days (if blank, then 45 days) after Effective Date, then either party may deliver written notice to the other party terminating this Contract, in which event Buyer shall be refunded the Deposit, thereby releasing Buyer and Seller from all further obligations under this Contract.”
· Inform Primary Lien Holder’s Loss Mitigation Department of all offers to purchase.
· Consider whether it is necessary for Seller to demonstrate to lender that Seller has attempted to obtain maximum sale price by countering offers at full listing price (or, at lien holder’s direction, if any).
· Consider negotiating discounts with all service providers.
XI. Handling the Short Sale after Execution of Contract
· Promptly change status of listing to “Pending.”
· Notify lien holder(s) of executed Contract and provide copies of all documentation.
· Obtain Short Sale package if necessary. (OBTAIN AS SOON AS POSSIBLE!)
· Obtain documentation requested by the lien holder(s) from Seller (see above).
· Advise Closing Agent of the Short Sale and procedures to be followed.
· Request Closing Agent to accelerate payoff demands.
· Obtain and distribute as soon as possible an estimated HUD 1 (including payoffs for all liens).
· Deliver Short Sale package to a designated individual in the lien holder’s Loss Mitigation Department.
· Encourage Buyer to complete all inspections as if this were a normal transaction.
· Encourage Buyer’s lender to complete the loan package subject to final appraisal.
· Maintain constant contact with, and provide updates to, Selling Broker and the Primary Lien Holder’s Loss Mitigation Department.
· Confirm lender’s receipt of Short Sale package within 5 days after submittal.
Monitor foreclosure process and date of judicial sale. (Timely seek needed extensions from Loss Mitigation or Foreclosure Department.)
· Obtain appraisal promptly after lienor’s approval of Short Sale
· Obtain updated HUD 1 from Closing Agent and compare to payoff that lien holder has agreed to accept – any discrepancy must be addressed immediately.
SOLICITORS, 009900, 000010, 102243453.1, Short Sale Procedures
