Short sale (real estate)
Encyclopedia
A short sale is a sale of real estate
in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to foreclosure
because it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner.
Creditors holding liens against real estate can include Primary Mortgages, Junior lien holders—such as second mortgages, Home Equity Lines of Credit HELOC
lenders, Home Owners Association HOA (special assessment liens)—all of whom will need to approve individual applications for a short sale, should they be asked to take less than what is owed.
Most large creditors have special loss mitigation
departments that evaluate borrowers' applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property from an appraisal
, a Broker Price Opinion (abbreviated BPO
), or a Broker Opinion of Value (abbreviated BOV
). One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package. The package should be well organized along with a hardship letter telling the creditor why a short sale is needed.
Depending on each creditor's policy and the type of loan, creditors may accept applications from borrowers even if the borrower is not in default with their payments. Due to the overwhelming number of defaulting borrowers due to mortgage failures
and other causes as part of the financial crisis of 2007–2011, many creditors have become adept at processing such short sales applications; however, it can still take several months for the process from start to finish, often requiring multiple levels of approval.
on their loan, the insurer will likely also become a third party to these negotiations as the insurance policy may be asked to pay out a claim to offset the Creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales can have a high risk of failure from inability to obtain agreement from all parties or they might not be approved in time to prevent a scheduled foreclosure date.
Due to the risks and benefits from obtaining a short sale approval, the Federal government and individual states have different and often changing laws protecting borrowers.
As of 2011, National and State laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. Borrowers interested in pursuing a short sale should consult first with a HUD approved mortgage counselor for up-to-date and specific advice as it applies to their situation. Also, borrowers need to obtain up to date information from multiple professionals, including an accountant, an attorney, and a real estate broker - all of who specialize in loss mitigation and are licensed to practice in the state where the real estate is located.
reported on a story from entrepreneur Jeremy Brandt
that some creditors have been accused of engaging in fraud during the short sale process. One type of short sale fraud has involved creditors in second position obtaining kickbacks in the form of cash payments from a buyer or real estate agent which was not disclosed to the other creditors.
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt. Any unpaid balance owed to the creditors is known as a deficiency. Short sale agreements do not necessarily release borrowers from their obligations to repay any deficiencies of the loans, unless specifically agreed to between the parties.
A short sale is often used as an alternative to foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
because it mitigates additional fees and costs to both the creditor and borrower; however both will often result in a negative credit report against the property owner.
Process
Often creditors require the borrower to prove they have an economic or financial hardship preventing them from being able to pay the deficiency.Creditors holding liens against real estate can include Primary Mortgages, Junior lien holders—such as second mortgages, Home Equity Lines of Credit HELOC
HELOC
A home equity line of credit is a loan in which the lender agrees to lend a maximum amount within an agreed period , where the collateral is the borrower's equity in his/her house...
lenders, Home Owners Association HOA (special assessment liens)—all of whom will need to approve individual applications for a short sale, should they be asked to take less than what is owed.
Most large creditors have special loss mitigation
Loss mitigation
Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. Loss mitigation works to negotiate mortgage terms for the homeowner...
departments that evaluate borrowers' applications for short sale approval. Often creditors use pre-determined criteria for approving the borrowers and the terms of the sale of the properties. Part of this process typically includes the creditor(s) determining the current market value of the real estate by obtaining an independent evaluation of the property from an appraisal
Real estate appraisal
Real estate appraisal, property valuation or land valuation is the process of valuing real property. The value usually sought is the property's Market Value. Appraisals are needed because compared to, say, corporate stock, real estate transactions occur very infrequently...
, a Broker Price Opinion (abbreviated BPO
Broker's Price Opinion
A Broker’s Price Opinion is the process a hired sales agent utilizes to determine the selling price of a real estate property. BPOs are popularly used in situations where lenders and mortgage companies believe the expense and delay of an appraisal to determine the value of properties is unnecessary...
), or a Broker Opinion of Value (abbreviated BOV
Broker
A broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
). One of the most important aspects for the borrower in this process is putting together a proper real estate short sale package. The package should be well organized along with a hardship letter telling the creditor why a short sale is needed.
Depending on each creditor's policy and the type of loan, creditors may accept applications from borrowers even if the borrower is not in default with their payments. Due to the overwhelming number of defaulting borrowers due to mortgage failures
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
and other causes as part of the financial crisis of 2007–2011, many creditors have become adept at processing such short sales applications; however, it can still take several months for the process from start to finish, often requiring multiple levels of approval.
Additional Parties with an Interest in the Real Estate
Some junior lien holders and other with an interest in the property may object to the amounts other lien holders are receiving. It is possible for any one lien holder to prevent a short sale by refusing to agree to negotiate a reduction in their payoff to release their lien. (Iowa has a procedure, sale free of liens, which allows a foreclosure court to "cram down" a short sale over the the objections of the junior creditors.) If a Creditor has mortgage insuranceLenders mortgage insurance
Lenders Mortgage Insurance , also known as Private mortgage insurance in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan...
on their loan, the insurer will likely also become a third party to these negotiations as the insurance policy may be asked to pay out a claim to offset the Creditor's loss. The wide array of parties, parameters and processes involved in a short sale can make it a complex and highly specialized form of debt renegotiation. Short sales can have a high risk of failure from inability to obtain agreement from all parties or they might not be approved in time to prevent a scheduled foreclosure date.
Private Debt Negotiation Services and Non-Profit HUD Approved Housing Counselors
The Federal Trade Commission and individual States license and regulate debt negotiators and other consultants who, for a fee, advise borrowers and negotiate loan modifications with creditors on the borrower's behalf. These consultants are required by various laws to disclosure to borrowers the risks of renegotiating their mortgages and/or selling their property short. The Federal government sanctions and recommends borrowers use only HUD approved non-profit organization, who do not charge a fee for their services, however such services rarely provide short sale negotiation services. Private debt negotiators, who do short sale negotiations and also charge a fee for their service, are required in some states to be licensed, obtain a fidelity bond and insurance. They might also be limited to the amount they can charge and when these fees are due to be paid by the borrower. In many states Real estate brokers, who handle a short sale application as part of their real estate services, are often allowed to do so without additional licensing or insurance.Due to the risks and benefits from obtaining a short sale approval, the Federal government and individual states have different and often changing laws protecting borrowers.
Credit Implications
A short sale negotiation resulting in a reduction of the amount a borrower owes towards a debt acts as a type of settlement or renegotiation of a borrower's debt. Should the creditor report the debt reduction to credit reporting agencies it can adversely affect a person's credit report. After a short sale borrowers may find it difficult to obtain a new mortgage as lender's underwriting guidelines might reject lending to a borrower who has obtained a short sale in the past.As of 2011, National and State laws and industry standards for both real estate sales and lending are in an ongoing and rapid state of change. Borrowers interested in pursuing a short sale should consult first with a HUD approved mortgage counselor for up-to-date and specific advice as it applies to their situation. Also, borrowers need to obtain up to date information from multiple professionals, including an accountant, an attorney, and a real estate broker - all of who specialize in loss mitigation and are licensed to practice in the state where the real estate is located.
Fraud
In 2011 CNBCCNBC
CNBC is a satellite and cable television business news channel in the U.S., owned and operated by NBCUniversal. The network and its international spinoffs cover business headlines and provide live coverage of financial markets. The combined reach of CNBC and its siblings is 390 million viewers...
reported on a story from entrepreneur Jeremy Brandt
Jeremy Brandt
Jeremy Brandt is an American technology entrepreneur, commentator, and founder of multiple real estate companies including FastHomeOffer.com and 1-800-CashOffer.- Early Life :...
that some creditors have been accused of engaging in fraud during the short sale process. One type of short sale fraud has involved creditors in second position obtaining kickbacks in the form of cash payments from a buyer or real estate agent which was not disclosed to the other creditors.
See also
- Mortgage Forgiveness Debt Relief Act of 2007Mortgage Forgiveness Debt Relief Act of 2007The Mortgage Forgiveness Debt Relief Act was introduced in Congress on September 25, 2007, and became law on December 20, 2007. This act offered relief to homeowners who would formerly owe taxes on forgiven mortgage debt after facing foreclosure. The act extends such relief for three years,...
- U. S. legislation affecting short sales of residential property. - Deed in lieu of foreclosureDeed in lieu of foreclosureA Deed in lieu of foreclosure is a deed instrument in which a mortgagor conveys all interest in a real property to the mortgagee to satisfy a loan that is in default and avoid foreclosure proceedings....
- Guaranteed home saleGuaranteed home saleThe guaranteed home sale is a program offered by some realtors in North America. The program guarantees that a home will be sold for a certain amount of money and by a certain date, or the realtor will purchase the house...
External links
- "Short sale market experiencing growing pains". Tampa Bay Business Journal. March 3, 2008.