LEGAL NOTES

In today’s stagnant Real Estate market, agents are seeing more and more short sales. While short sales can be profitable and beneficial to all parties, it is important to understand how they work and to be aware of potential problems that can occur and common mistakes to avoid.

A short sale occurs when a bank or mortgage lender agrees to discount a homeowner’s loan balance when a homeowner, whose loan balance is greater than the home value, needs to sell his home. The homeowner sells the home for less than the outstanding balance of the loan, and gives the proceeds of the sale to the lender to satisfy the loan.

To help you gain a better understanding of short sales, here are some of their most common pitfalls.

Multiple Lenders
Because the lender is settling for less than what is owed, the lender has the right to approve or disapprove a sale. Short sales can be tricky in general, but it is even harder when there is more than one lender involved.

Not only do you need the cooperation of the first lender, the other mortgage holders need to approve the short sale as well. The short sale may even require approval from the entity that holds the pool of loans if there is a mortgage-backed security in place. This can make things more complicated since the second mortgage lender usually has to absorb most of the loss.

To ensure a smooth transaction with all lenders involved, keep a strong line of communication open with each lender and try to negotiate a contract that works for all parties. To negotiate a short sale, always contact the lender’s loss mitigation department, rather than the collection or customer service department, which focuses on collecting past-due loan payments.

Failure to Disclose
When listing a home as a short sale, it is in your best interest to disclose that a property is a short sale in the comments section of the listing. The contract of sale will require the approval of the lender, and a buyer needs to understand the unique circumstances of the purchase when making a decision about an offer.

Many agents use a disclosure form prepared just for short sales. You can also disclose the short sale in the comments section of the MLS listing.

Long Wait Times
Sometimes it takes only two weeks for a lender to approve a short sale. However, it can often take more than 60 days. For this reason, buyers, sellers and agents must understand and accept this timeframe before they make an offer.

There are a few tricks that may speed up the process. The offer should always be contingent upon the lender's acceptance, and should include language that gives a lender a time frame in which to respond, after which, either party is free to cancel without penalty. If the lender is under no pressure to make a decision, the approval process may take longer. In addition, make sure the offer is given to a bank employee who has the ability to make a decision. Get a name and phone number for the appropriate person to contact, rather than sending an offer blindly to a lender.

Rejection
A lender might reject a short sale for many reasons. If the proposed sales price is too low or the loan is too new, some lenders will turn down an offer. But this doesn’t mean you should give up. Try finding another buyer or even try resubmitting the same sales contract. Often lenders will eventually do whatever it takes to avoid foreclosure because it is costly and time consuming. However, it is also important to encourage sellers to have a backup plan in case the lender decides to foreclose.

Reduced Commissions
As an agent, you know how important commissions are to your business. Short sales can negatively impact your bottom line, as lenders typically ask agents to discount commissions to reduce closing costs. There is always room for negotiation, but be prepared to receive a smaller commission than you are used to. It is also a good idea to inform the buyer’s broker if his percentage will be reduced.

Understand the Short Sale Process
In most cases, short sales are more complex than traditional Real Estate transactions. To make matters worse, agents must deal with sellers who may be in an emotional state because they face losing their homes. For this reason, it is important to be careful to avoid making false statements or promises about the short sale. Fortunately, by educating yourself and understanding how the process works, you can avoid these common pitfalls and ensure a smooth short sale transaction.

Disclaimer: The above is not intended to be, nor is it legal advice, and should not be relied upon for any reason. Even though this article maybe disseminated throughout the U.S., the material covers only Nevada law, and no other. E RealEstateExec and Exec MediaGroup, LLC expresses no opinion on any other state's law, nor about the handling of any particular legal situation. You should consult your attorney, accountant or business advisor before undertaking any action. No attorney-client relationship is created between E RealEstateExec, Exec MediaGroup, LLC and the reader.