Short sale transactions have earned a reputation for being nothing less than a nightmare to handle, and for good cause. Because of the multitude of parties and economic interests involved, the dynamics of a short sale are entirely different from those of a traditional or conventional real estate transaction. Short sales require the expenditure of a tremendous amount of time and effort, often with no guarantee that the transaction will succeed or that the attorney will be compensated. Because of these factors short sales demand that lawyers employ a different methodology to be successful.
To be effective at handling short sales, not only must the attorney get the buyer and seller to reach an agreement on the terms of the sale contract, but the attorney also must convince an unemotional third party, namely, the investor who ultimately owns the loan, that it is in the investor’s best interests not to acquire the property through foreclosure but instead to approve a sale that will result in a financial loss to it and its shareholders.
Toss into this mix some additional facts: that the attorney typically will not be negotiating with the investor(s) directly but will be working through a third-party loan servicer (for example, Bank of America, Wells Fargo, or GMAC, among others); that the approval process can often take months to complete from the time the original contract is accepted; that the seller will generally be required to submit an array of financial information including a detailed financial disclosure form along with supporting documents that will need to be updated on a regular basis; and that other parties who are indirectly involved in the transaction, such as private mortgage insurers, junior lienholders, and judgment creditors seeking to enforce their rights, have very different and competing interests that the attorney will need to mediate. The end result is a complexity of elements that give short sales their deserved reputation.
As such it is no wonder that even seasoned attorneys opt to steer clear of short sale transactions altogether. But, if the recent changes adopted by Fannie Mae and Freddie Mac are taken into consideration and combined with the right approach, careful planning, and above all patience and perseverance, an attorney can learn to navigate a short sale with relative confidence and attain a high degree of success for his or her client.
As with most legal situations, whether or not a short sale will succeed depends largely on the particular set of facts and circumstances facing each client. But even though each client has a unique set of facts, following a few simple guidelines will increase the chances of success. By exploring some steps common to most transactions, this article seeks to provide additional insights into the short sale process for both the seasoned and the novice practitioner to make their participation in a short sale both professionally and financially rewarding.
Establishing the Client’s Expectations
In large part, most short sales are not truly voluntary. Sellers coming to an attorney for representation typically have experienced some significant financial hardship such as the death of a wage earner, divorce, health issues, or loss of employment that has resulted in their loans becoming delinquent. Facing foreclosure and damaged credit, and possibly still unemployed, they may have been told that a short sale is the only real option available to them when in fact that is not actually true.
An argument has been made that the only parties that truly benefit from such deals are the real estate agents, title companies, banks, and of course the attorneys who participate in these transactions. Other options, however, may serve the client’s needs better. These options may include loan modification, a forbearance, refinancing, a deed in lieu of foreclosure, consent foreclosure, and bankruptcy, among others. Each option has particular advantages and disadvantages that should be considered in relation to the client’s current goals.
Thus, the attorney’s first step in the process of successfully working a short sale is to determine the client’s objectives, review any available alternative options, and then proceed in a fashion best designed to meet those objectives. If it is the client’s goal to retain possession of the property for as long as possible, then, given the length of time it now takes a lender to acquire a property through the foreclosure process, a short sale transaction, which by its very nature will expedite the client’s exit from the property and leave the client with little or no cash, may not be in the client’s best interest.
Assuming the client makes a decision to proceed with the short sale, the second order of business should be to discuss with the client the attorney’s fee structure and how payment will be made. One should keep in mind the amount of time an attorney is required to commit to successfully complete a short sale transaction and recognize that short sale transactions are not appropriate for the fixed rate billing practices that have been adopted by many real estate attorneys. Also with a short sale, although the seller is the client, a third-party investor must ultimately approve the deal. When reviewing a short sale request, each investor will determine the “net value” or bottom line that it will need to obtain from the sale, and to reach this amount the investor can exercise control over what will be paid out of the transaction. Thus, if the attorney does not have a written service agreement with the seller as to when, how, and by whom the attorney will be compensated, and the attorney agrees to receive compensation strictly from the proceeds of the sale, the attorney may find the investor reducing or even eliminating the attorney’s fees as a condition of the sale and have very little, if anything, to say about it.
Trust, But Verify
As much as lawyers would like to believe that clients are aware of the mortgages and other possible liens affecting their properties, the reality is often different. Many sellers are simply unaware of who may have a legal claim against their properties.
Because nothing can stop a short sale as quickly as finding additional mortgages or liens on the property, the attorney should make it a priority to order a title search. Potential claims against the property can include IRS tax liens, mechanic’s liens, civil judgments, homeowner association liens, and so on. If any of these items is found, the attorney needs to lay out a strategy to contact the creditor and see what will be required to have its lien released, before spending hours with the loan servicer attempting to negotiate the sale.
Because many private third-party judgment creditors are not willing to release their lien claims for anything less than full payment, it may be more advantageous for the seller to file a Chapter 13 bankruptcy and seek an order discharging the lien claim, in effect stripping it from the title, before proceeding with a short sale. Again, such circumstances will give the attorney an opportunity to review the client’s ultimate goals and re-evaluate the client’s exit strategies. If bankruptcy is a better option, the short sale may need to be put on hold.
Is the Sales Price Realistic?
As previously discussed, before agreeing to accept a short sale, the investors holding the loan will determine the net value that they will need to acquire from the collateral to release their lien. What this actual number is and how the investors reach it are details seldom disclosed to the public; the obvious reason is that the investors want to encourage any potential buyer to make its highest bid on the property.
Although it is typically not the purview of the attorney to be concerned with the price at which the seller has agreed to sell his property, a short sale is an exception to the rule. Considering the amount of time that the attorney will devote to getting a short sale approved, it is critical to attempt to determine whether the value of the buyer’s offer is reasonable; otherwise the attorney is simply wasting everyone’s time, all while the client’s property moves closer and closer to foreclosure and a sheriff’s sale.
Ultimately, as part of nearly every short sale package, the loan servicer will request a Broker Price Opinion (BPO) for the property. This is an opinion of the property’s fair market value as determined by a local licensed real estate agent who is not a party to the transaction. As a general guide, if the offer on the table is more than 10% below the BPO, there is greater risk of having the offer ultimately rejected by the investor.
Identify the Loan You Are Dealing With
Assuming the attorney has determined that a short sale is the best option for the client and that the sales price being offered is a reasonable reflection of the property’s current fair market value, the next step should be to determine the type of loan at issue. In the end, the type of loan will determine how the short sale process will proceed.
For example, if the client has a loan with the Federal Housing Authority (an FHA Loan), the requirements for a short sale process are different from those for a conventional loan. Under the Department of Housing and Urban Development guidelines, before a homeowner with an FHA insured loan can participate in a short sale, the borrower must exhaust all of his or her home retention options first. As part of considering all home retention options, the homeowner will need to complete the modification review process with the lender before becoming eligible to be considered for an FHA short sale. Only after these options have been exhausted may the borrower obtain “pre-approval” by the lender to participate in a short sale. So an FHA short sale cannot proceed unless the attorney gets FHA approval; and the attorney cannot get FHA approval until all home retention options have been exhausted by the homeowner.
Once pre-approved, HUD will allow the seller to participate in a pre-foreclosure sale program only if the following conditions are met:
- The transaction must be at arm’s-length, that is, none of the parties to the transaction, including the real estate agents involved, can have a relationship to each other.
- The property must be listed with a licensed real estate broker.
- The homeowner must be at least 31 days delinquent when the home is sold.
- The homeowner must keep the home on the market for at least four months.
- Although certain exceptions do apply, typically the home must be owner-occupied.
- A real estate agent’s commission cannot exceed 6%.
- The homeowner must be able to document his or her inability to make the mortgage payments.
- HUD will not pay for points, provide home warranties, lender’s title insurance, or repair credits.
- HUD will pay the investor up to $1,000 if the sale closes within three months of the date of application.
- HUD will authorize up to $1,500 for the discharge of secondary liens. The property cannot be an investment property.
If approved, an FHA-approved short sale will enable the seller to completely satisfy the debt on the property even though the sales proceeds are inadequate to pay off the entire debt, leaving the borrower with no deficiency judgment to worry about. In addition, if the short sale closes within 90 days of the initial application, HUD will provide a seller incentive of $1,000 (after 90 days this incentive is reduced to $750). But not every short sale contract will be accepted by HUD.
Keep in mind the previous step about determining whether or not the sales price being offered is close enough to the current fair market price of the home for the investor to accept. In this regard the attorney needs to be aware that the real estate agent is obligated to present every offer made on a listing to the client, and because in most cases the seller is hoping to secure a release from the balance of the debt owed on the property and is most likely leaving the property with little or no money from the sale, there is a tendency on the part of the parties to accept even below-market price offers and submit them to the lender with the hope that they will be accepted. With FHA guaranteed loans, HUD employs a three-tiered “net proceeds” requirement that works as follows. During the first 30 days on the market the homeowner can accept only offers that will result in at least 88% of the appraised value of the home. During the next 30 days this amount drops to 86%, and after the first 60 days only offers of at least 84% of the appraised value will be acceptable. Even though the agreed sales price is one of the contract terms attorneys are typically prohibited from changing in the approved sale contracts being used by many real estate agents today, the attorney still needs to objectively compare the sales price being offered with the property’s current fair market value. If the price will not be high enough to meet the investor’s requirements, the attorney needs to advise the client and determine whether or not that offer is one to which the attorney and client want to commit their time and resources.
Like FHA loans, VA loans are not issued by the government but are guaranteed by the government. The short sale process for a home with a mortgage backed by a VA loan is similar to that of a traditional short sale, but the transaction is referred to as an “offer in compromise” or a “compromise sale.” Notwithstanding the name, the process is essentially the same as a standard short sale with a couple of major differences.
First, there is in effect no short sale because, if approved, the VA will pay the remaining balance of the mortgage and closing costs. As a result, the lender receives the full balance owed by the veteran. In addition, as of January 2011, the veteran is entitled to $1,500 for relocation assistance.
There is one significant caveat. Although the veteran will not be obligated to pay back the shortfall to his lender if his loan was issued after December 31, 1989, the veteran may not use the VA entitlement in the future to purchase another home until the VA is paid back its portion of the claim. Thus, should the VA agree to pay the difference between the sales proceeds and the total debt to complete the compromise sale process, the portion of the homeowner’s entitlement used to guarantee this loan will remain tied up until the VA is reimbursed in full.
The main requirement for a successful compromise sale is that the veteran is experiencing severe financial hardship that prohibits him from meeting his mortgage obligation. Suitable hardships include
- major medical expenses,
- a decrease in income,
- death of one of the principal wage earners in the household, and
- involuntary relocation.
In addition, the sales price of the home must be reflective of current fair market value, closing costs must be “reasonable,” and the compromise sale must ultimately result in the VA acquiring more money than had the property gone through the foreclosure process.
New Guidelines for Fannie Mae and Freddie Mac Loans
As with FHA and VA loans, loans that are owned by or guaranteed by Fannie Mae and Freddie Mac have their own requirements that must be met for the investor to approve a short sale. Again, the type of loan at issue must be identified. Fortunately this is something that can easily be accomplished by accessing the following web sites: http://loanlookup.fanniemae.com/loanlookup or www.FreddieMac.com/corporate.
In August 2012, the Federal Housing Finance Authority (FHFA) announced a new set of short sale guidelines that are designed to assist struggling homeowners. FHFA News Release, August 21, 2012, www.fhfa.gov/webfiles/24211/ShortSalesPR FactFinal.pdf. By consolidating their programs and adopting standardized procedures for homeowners possessing Fannie Mae or Freddie Mac loans, the goal of the FHFA is to provide servicers with more clear and consistent guidelines. Ultimately, this consolidation will make it easier for loan servicers to process and execute short sales and provide a much needed alternative to borrowers facing foreclosure.
Under prior guidelines, Fannie Mae and Freddie Mac did not allow a borrower facing imminent default of his or her mortgage obligation to qualify for pre-foreclosure relief. Standard Short Sale/HAFA II and Deed-in-Lieu of Foreclosure Requirements, Fannie Mae Servicing Guide Announcement SVC-2012-19, August 22, 2012, at 3, www.fanniemae.com/content/announce ment/svc1219.pdf. In fact, to qualify for assistance, a borrower had to be seriously delinquent, meaning that the borrower had to have at least two payments that were 31 days or more in arrears. Unfortunately, this rule encouraged some homeowners who were meeting their mortgage obligations to voluntarily default on their payments in a desperate attempt to qualify for relief. Regrettably, such actions typically only exasperated a borrower’s financial distress by racking up additional late fees and penalties, damaging the borrower’s credit, and adding the additional stress and uncertainty associated with a foreclosure action, all without any certainty that a short sale would be approved by the servicer.
In addition, every borrower was required to submit a completed Borrower Response Package, in which the borrower provided a thorough and detailed financial disclosure of all of the borrower’s assets, to complete a Hardship Affidavit (Fannie Mae Hardship Affidavit Form 194), and to supply an array of documents supporting the borrower’s claims. The purpose of the Hardship Affidavit was to establish that the borrower was unable to maintain the mortgage payments, typically because of a reduction in income or increased monthly obligations caused by the loan resetting (ARMs), additional medical expenses, consumer debt, or increased utilities or property taxes. Copies of the borrower’s tax returns, bank statements, W-2s, and check stubs were often required by the servicer. The gathering and reviewing of these documents took time, which resulted in typical delays of several months before the servicer would be in a position to approve of the sale.
Further adding to the uncertainty of completing a short sale were the additional roadblocks created by second lienholders who refused to release their lien claims unless they received amounts that were much higher than what the servicer would approve. When junior lienholders held out for more money, the short sale was often jeopardized.
Qualifying Borrowers That Are Current on Their Mortgage Obligations
The FHFA’s new guidelines attempt to address many of these shortcomings, particularly for homeowners who are current on their mortgage obligations but in a position where default is imminent.
Under the new guidelines, as long as the homeowner can demonstrate that he is suffering a recognized “hardship,” servicers can expedite the short sale process without any additional approvals from Fannie Mae or Freddie Mac. FHFA News Release, supra. The hardships enumerated by FHFA are:
- • death of a borrower or death of the primary or secondary wage earner in the household;
- • unemployment;
- • increased housing expenses (that is, ARM loan rate adjustments);
- • disasters (natural or man-made);
- • business failure;
- • long-term or permanent illness or disability of borrower, co-borrower, or dependent family member;
- • divorce or legal separation of a borrower or co-borrower; and
- • employment transfer/relocation (including Permanent Change of Station order for military personnel) greater than 50 miles from current primary residence.
Note that if a borrower faces a hardship not listed above and provides relevant documentation to the servicer, the servicer must review the Borrower Response Package and make a determination on whether the short sale request is legitimate. It must then submit that recommendation to Fannie Mae/Freddie Mac for approval. Standard Short Sale, supra, at 4.
Streamlined Short Sale Approach for Borrowers Most in Need
In addition, the new guidelines have all but eliminated the need to provide a Borrower’s Response Package for borrowers deemed most in need, that is, who are 90 days or more delinquent in their mortgage payments, have credit scores of less than 620, and have serious financial hardships. These borrowers are deemed qualified for a short sale and are exempt from the requirements to make any cash contribution or sign a promissory note as part of the short sale process.
These borrowers also will qualify for a “relocation” incentive of up to $3,000 from Fannie Mae to be paid following the successful completion of a short sale. There are exceptions to this policy. The incentive is not available to borrowers required to contribute funds or execute a promissory note, a military borrower who receives a Dislocation Allowance (DLA) or other governmental relocation assistance, or a borrower receiving relocation assistance from any other source. Id. at 14.
For borrowers that qualify, these changes should significantly cut the delays associated with getting a short sale approved.
Military Personnel with Permanent Change of Station (PCS) Orders
The new guidelines also provide special treatment for service members who are being relocated. Military personnel with PCS orders are automatically eligible for short sales, even if they are current on their existing mortgage obligations. In addition, these personnel will be under “no obligation to contribute funds to cover the shortfall between the outstanding loan balance and the sales price on their homes.” FHFA News Release, supra, at 2. Likewise, nonmilitary borrowers who need to relocate more than 50 miles from their current home for a job transfer or new employment opportunity qualify for a short sale even if the borrower is current on his or her mortgage payments. Id. (attached fact sheet at 2).
Dealing with Second Mortgages
In addressing the logjam that has been created by junior lienholders refusing to release their lien claims in deals that have otherwise been approved for a short sale by the servicer, Fannie Mae and Freddie Mac are now requiring subordinate lienholders to accept from the proceeds of the short sale the sum of $6,000 in exchange for a release of their lien claims and a full release of liability for the borrower. Standard Short Sale, supra, at 11 (Note: it does not matter how many subordinate lienholders there are. The $6,000 amount is an aggregate amount.).
Waiving the Right to Pursue Deficiencies
Unless the borrower qualifies for the streamlined documentation short sale process, is active military personnel with PCS orders, or the collection of a deficiency is otherwise exempt by applicable law, the guidelines require the borrower to be evaluated to determine if the borrower will either be required to make what FHFA refers to as a “reasonable contribution” or be asked to execute a promissory note as a condition of approving the short sale. FHFA News Release, supra (attached fact sheet at 2).
When determining whether a borrower who is delinquent on mortgage payments or in imminent default will have to make a cash contribution, the servicer is required to examine the borrower’s financial health, and the servicer does so by examining the disclosures the borrower made on the Uniform Borrower Assistance Form. Fannie Mae/Freddie Mac Form 710.
[I]f the borrower’s cash reserves, including assets such as cash, savings, money market funds, marketable stocks or bonds (excluding retirement accounts), . . . are:
• in excess of the greater of $10,000; or
• six times the contractual monthly mortgage loan payment including principal, interest, and tax and insurance escrows (PITI). (If the servicer does not escrow for taxes and insurance, it must estimate the borrower’s monthly tax and insurance premium amounts.)
If a borrower has cash reserves of more than $50,000, the servicer must request written approval from Fannie Mae for the contribution amount.
If the servicer determines that the borrower has the capacity to make a cash contribution, the servicer must initially request a contribution of 20% of the borrower’s cash reserves, not to exceed the deficiency.
Standard Short Sale, supra, at 6.
The contemplated 20% contribution to the shortage is not written in stone. If a borrower who is more than 30 days delinquent on his payment is either unwilling or unable to pay 20% of his cash reserves, the servicer may negotiate a lower cash contribution, “but [the borrower] must provide an explanation in the mortgage loan servicing file of the specific circumstances that limited the borrower’s ability to make a contribution.” Id. Likewise, when the borrower
is offered a short sale under the imminent default standard and is either unwilling or unable to contribute 20% of their cash reserves, the servicer must request approval from Fannie Mae to accept less than the 20% contribution. However, if the borrower’s hardship is death of the primary wage earner, the servicer may negotiate a borrower’s cash contribution for less than 20% of the cash reserve, but must provide an explanation in the mortgage loan servicing file of the specific circumstances that limited the borrower’s ability to make a contribution.
In situations in which cash reserves are unavailable, the servicer must then evaluate the borrower to see if a contribution can be secured through the use of a promissory note. (Fannie Mae provides a promissory note template (Form 190) at eFannieMae.com.) Use of this note is not mandatory. To determine whether or not a borrower is an appropriate candidate for a promissory note the servicer is required to examine the future debt-to-income ratio of the borrower (that is, “back-end-ratio”). If the borrower’s total monthly debt is less than 55%, there is an initial determination that the borrower has the capacity to make a promissory note contribution. The borrower’s total monthly debt includes the borrower’s future housing expenses, monthly payments on all installment debts with more than 10 months remaining, credit card payments, alimony, child support, separate maintenance payments if more than 10 months remaining, car lease payments, as well as any negative rental income from other investment properties owned. If the actual future housing expenses of the borrower are not known, the servicer is to use 75% of the borrowers current monthly mortgage payment (PITI, including sums for assessment fees) to determine eligibility. Standard Short Sale, supra, at 8.
Once this determination is made, the servicer, as part of the short sale package, must initially request the borrower to execute a 5- to 10-year promissory note at zero interest, with a monthly payment that does not exceed one-half of the difference between the borrower’s future monthly housing expenses and 55%. The actual promissory note balance is the final monthly amount negotiated between the borrower and the servicer multiplied by the negotiated term (60 or 120 months), not to exceed the deficiency amount. Promissory notes are not required if the note balance is less than $5,000.
So, assuming that a borrower had a future total monthly debt ratio of 49% with a gross monthly income of $4,000 his initial monthly payments under the formula would be $120. (Initial monthly promissory note payment = (55% – future total monthly debt ratio) ÷ 2 x gross monthly income.) Assuming further a five-year payback, then total amount contributed by the borrower would be $7,200. Again, as with borrowers making cash contributions, if the borrower is unwilling or unable to agree to a monthly promissory note payment based on the prescribed calculation, the servicer is given the authority to negotiate a lower payment but must provide an explanation in the mortgage loan servicing file of the specific circumstances that limited the borrower’s ability to make the payment.
At the completion of the short sale, the borrower will be released from any liability for deficiency and will be in a position to qualify for another Fannie Mae/Freddie Mac guaranteed mortgage within two years.
For loans that do not fall within the purview of the variety of federal programs offering federally funded assistance, the ability to complete a short sale will depend on the requirements of the individual investor. The attorney needs to contact the loan servicer to determine what its short sale requirements and conditions are.
At this point, the attorney should have a good understanding of the type of loan that the client has, as well as the specific requirements that must be met for the loan servicer to consider and approve the short sale application. The next task is to assemble and submit the documents needed to support the client’s request.
Although many of the documents relied on from lender to lender are similar in form and function, loan servicers often deal with a variety of investors that have different requirements, and some will only accept forms created by their own short sale departments. Thus, it is always a good idea to check with the loan servicer to determine what it will need.
As a general rule of thumb, the servicer will require the following documents:
- • a Third-Party Authorization signed by the mortgagor giving the attorney authorization to deal with the lender;
- • a hardship letter;
- • a signed sales agreement (note: if the buyer of a short sale is a business entity—a partnership, corporation, or LLC—the servicer will require that a partnership agreement identifying the partners or Articles of Incorporation be provided as well);
- • a servicer’s Short Sale Addendum;
- • a signed listing agreement;
- • a seller financial statement reflecting income, assets, and liabilities;
- • current pay stubs;
- • two months of bank statements (six, if self-employed);
- • two-to-three years of tax returns; and
- • a Form 4506 tax return release.
To facilitate the process of reviewing and approving a short sale request, most servicers request that all required documents be submitted at one time. Although collecting all of the required information can be a tedious and time-consuming task, it deserves the attorney’s full attention because files that are submitted with documents that are inconsistent, incomplete, or missing will not be considered by the loan servicer. The author understands that 60% to 70% of all short sale requests are rejected because of incomplete or inaccurate documentation. In addition, it is not uncommon for loan servicers to request that certain documents, such as check stubs, bank statements, and so on, be periodically updated from time to time, so it is a good practice to have the client provide these documents on a monthly basis.
As a practical matter, many loan servicers rely on the “Equator” computer program to process short sales. All documents are submitted electronically through Equator.com and most of the communications between the loan servicer (that is, the negotiator) and the mortgagor are handled electronically. Establishing an account is free, and tutorials are available at the site.
Assessing the Damage
Once the attorney has gathered all the necessary documents and verified that they have been properly completed, signed, and submitted, the next step is the preparation of a preliminary HUD-1 statement. Again, the attorney must exercise some discretion when preparing this document. Any “approved” contributions, such as HAFA Relocation Assistance or Seller’s Incentives must be properly reflected on the HUD, typically in the 500 section on the front page of the HUD. Furthermore, overestimating the seller’s expenses runs the risk that the investor will reject the sale as providing an insufficient “net” to it. On the other hand, underestimating the actual expenses may cause the lender to approve the short sale but only at an unrealizable number. An attorney who has not followed all of the prior steps may not be aware of such items as water liens, overdue assessments, city or village ordinance violations, sold taxes, and so on, all of which will affect the investor’s bottom line. This will lead to a preliminary HUD that provides a larger net to the investor than what is actually possible, which in turn can lead to the investor looking to the buyer to increase the sales price offered for the property, or asking other third parties, such as real estate agents and attorneys, to reduce their fees as a condition of approving the short sale.
Once the HUD statement is approved, the investor will submit the entire file for review, a process that in itself can take several weeks, but if all the appropriate information is provided, an approval should be made within 30 days.
The Elephant in the Room
Up to this point this article’s focus has concentrated on matters that almost exclusively concern the seller and the seller’s lender. But an equally important and unpredictable player in the short sale transaction is the purchaser. Although the new guidelines affecting Fannie Mae and Freddie Mac loans should expedite the short sale process for those sellers that qualify, the reality of short sales is that they typically take months to obtain lender approval.
Although an investor may not be bothered by the extended delays often encountered in pursuing a short sale, the same cannot be said for purchasers who are looking to acquire the home as their residence. Anyone who handles transactional real estate knows that buying a home is as much of an emotional decision for the buyer as it is a financial one, and as far as emotions go, time can affect the desirability of proceeding with a purchase. Thus, the longer it takes to complete a short sale, the greater the chances that the buyer will lose interest in the property and walk away. Although many short sale contract addendums attempt to address this problem by preventing either party from terminating the agreement until the seller is given sufficient time, on average 90 days, to obtain approval from the property’s lienholders, these addendums do not necessarily address the concerns of the buyers. For example, a buyer may be reluctant to undertake the property inspection or order the appraisal on the property (both actions that require the buyer to spend money) until the short sale is actually approved.
Obviously, delaying the time the buyer has to inspect the property or qualify for a loan can only jeopardize the sale. To avoid these problems, the seller’s attorney should actively communicate with the buyer’s representative throughout the entire short sale process to reassure the buyer that the attorney is diligently pursuing the short sale and to make sure that the purchaser will be in a position to close when the lender approves.
When representing the seller in a short sale, one should keep in mind that until the seller contacts an attorney, his or her primary source of information has probably been a real estate agent and perhaps the Internet. As such the “advantages” of participating in a short sale may be misunderstood or oversold. One of the duties of the seller’s attorney is to see that the seller is aware of all of the options and to employ the one that best fits the particular circumstances at the time.
If participating in a short sale is determined to be in the client’s best interests, the attorney needs to be knowledgeable enough about short sales to effectively and expeditiously navigate the client through the process. Fortunately, by streamlining the short sale approval process and providing servicers with the ability to make decisions without going back to Fannie Mae or Freddie Mac for final approval, FHFA has taken major strides toward providing borrowers with new options for avoiding foreclosure. Michael Terry, Rubicon Associates, LLC, Fannie and Freddie Short Sale Guidelines—Positive for Housing, August 27, 2012, http://seeking alpha.com/article/829021-fannie-and-freddie-short-sale-guidelines-positive- for-housing (“One of the potential outcomes of this program is pulling forward what would be distressed sales at short sale prices. Although some owners continue to make payments even though they are upside down and in distress, these borrowers will now be able to engage in a short sale instead of adding to the REO inventory and at typically higher realized prices”).
For transactional attorneys handling short sales, these changes should assist in lessening the amount of time the attorney will have to commit to gathering and transmitting financial information to the servicer, especially for delinquent borrowers and military personnel who qualify for the streamlined procedure. More importantly, they provide an additional remedy for clients who are struggling to keep current with their mortgage payments.