Be realistic about the value. Short sellers cannot usually afford to try a high price first,
then to adjust it down over time. Include all costs of sale, such as commissions, closing
costs, any interest and penalties on loans or taxes in default. In your best judgment, will
there be positive proceeds, or does the seller owe more than the property is currently worth
after all selling costs?
E. Finally, find out whether the loan(s) that might be subject to a deficiency in a
short sale are ‘Recourse’ or ‘Non-Recourse’.
In a ‘Recourse’ loan, the borrower retains personal liability for any deficiency after a sale or foreclosure. The lender has ‘recourse’ to the personal assets of the borrower to make up any
deficiency. In a ‘Non-Recourse’ loan, the lender is limited to whatever funds are available
from its security interest in the property itself, and cannot force the borrower to repay any
deficiency. Each state has its own rules, and in some states a loan can be either ‘Recourse’ or
‘Non-Recourse’ , depending on factors such as whether it was money loaned for a purchase or a refinance. These are legal questions. Do not try to answer them yourself. Always recommend professional legal, credit, and tax advice.
3. Meet with the Seller to Discuss and Evaluate the Options
A. The Seller Owes More Than the Property is Worth
Once you conclude that the seller owes more than the property is now worth. It is important
at this point that you advise the seller, in writing, to obtain separate Legal, Credit, and Tax Advice. Since the decisions the seller will be making all have legal, financial, tax, and credit implications.
A short sale should never be the first choice, because it carries with it serious negative credit,
and, possibly tax consequences.
Potential short sellers should always be advised that any action they take other than full
payment of the mortgage note will have negative credit consequences.
Sellers should be encouraged to consult with a HUD-approved credit counseling agency prior
to making any decisions.
Sellers should be cautioned that when selecting a credit counselor to carefully check the
credentials of the agency as not every credit counselor or foreclosure rescue specialist is
going to be HUD-approved.
B. What options are available to the seller?
In a rough order of ‘the least damage to credit’ to ‘the most damage to credit’, they are:
1. Keep the Property. If the seller is unhappy that the property value is less than the
loan balance, but is otherwise under no pressure to sell, keeping the property can be the
best solution. Even if there is some short term financial distress, it need not result in
loss of the property. Ask if there is family or other resources that can carry the seller
through if there is some financial stress. Because of the lack of equity, a refinance may
not be possible, but be aware of any special ‘Hardship Refinance’ programs a particular
lender may offer, but these often change frequently. If the sellers must move, could they
rent the property (even at a negative cash flow) and sell it later in a better market?
2. Sell the Property and Bring Cash to Close Escrow. This might not sound appealing,
but it can be a good choice for sellers who are in a financial position to pay a deficiency from
other liquid assets. This approach avoids the credit damage that even a successful short
sale will cause. An alternative in some circumstances is for the seller to agree to convert
any deficiency into a personal note, or a note on another property owned by the seller.
REALTORS® should always advise sellers to consult appropriate legal and tax professionals
before considering such a decision. (Note.2)
3. Attempt a Workout with the Lender. Lenders are increasingly interested in helping
financially distressed homeowners stay in their homes. In some cases, lenders have been
willing to reduce or roll back interest rates, or reduce the allowable payment, to help sellers
avoid short sales and foreclosures. It is not generally advisable for the agent to take the lead
in representing a property owner in a workout. Workouts are not real estate transactions.
They are complex contract modifications, and to date, relatively few homeowners in distress
have been able to come to a permanent agreement with their lender. The homeowner should
be advised to consult an attorney if this is the option they choose. Note that new laws and
emerging policies and procedures by Fannie Mae, Freddie Mac, the VA, the FHA, and private
lenders make the workout option more complex, but also present greater opportunities for
financially distressed homeowners.
4. Offer the Lender a ‘Deed in Lieu of Foreclosure’. If the seller owes more money than
the property is worth, is unable to make payments, and is likely to lose the property in
foreclosure in the near future, offering to trade the property to the lender in exchange for the cancellation of the note might make sense. This approach is more likely to be successful in
states with very long foreclosure timelines. The lender can obtain the property much sooner,
and may feel that the mitigation of loss is worth the cancellation of the note. Like workouts,
this is a contract negotiation, and should be undertaken only after consulting with an attorney.
5. Offer the Lender a ‘Short Sale’. We will discuss the short sale process in greater detail
below. Be aware that, on occasion, lenders have “approved” short sales which have included
personal notes for the deficiency, and unwitting sellers have signed the notes without a full understanding of the consequences. Note that the lender is not a principal in the transaction.
The agent represents the seller, not the lender. In a short sale, the offer is negotiated with the seller, just as in a traditional sale. The offer is then submitted to the lender, not for an
“acceptance” but for approval of the terms and net proceeds. (Note 3)
The Elements Of A Successful Short Sale Are Generally These:
• The property is worth less than is owed.
• The seller has some hardship that makes it impossible or extremely impractical for
the seller to keep the property.
• The seller is cooperative and willing to work with a real estate broker to package the
short sale.
• The lender is contacted and expresses willingness to entertain a short sale.
• The property is listed, with appropriate caveats and protections for the seller, properly
priced, and effectively marketed.
• The lender is presented with an offer, accepted by the seller, along with a completed
short sale package and narrative explaining why the short sale is necessary and desirable.
• The lender approves the offer and escrow closes as usual. No proceeds go to the seller.
6. Allow the Property to go to Foreclosure. Usually this is the worst option. It does the
most damage to a property owner’s credit. There are circumstances, however, in which it
might make sense for a property owner who has no other resources with which to obtain
housing to simply stay in the property as long as possible. Also, as a practical matter, if you
are contacted by a homeowner who is days or a few weeks away from a foreclosure sale, it
will be difficult to stop the sale, though it is always worth trying.
4. Taking and Servicing the Short Sale Listing – A Typical Workflow
Assuming that after full reflection and consultation with appropriate legal, credit, and tax
professionals, the homeowner decides that a short sale makes the best sense. What are the
factors that will lead to a successful short sale?
A. The property is worth less then is owed.
Establish this by doing a careful CMA or BPO, taking into account that the market may be
declining. Pay special attention to similar properties that did not sell. The lender will need
to see clearly that there is no chance that the property will sell for enough to cover all liens
and closing costs. Short sales are considered by buyers to be distressed properties, and will
typically command somewhat less than a non-distressed price. Remember that the lender
may be thousands of miles away and not at all familiar with your market. Incorporate local
newspaper articles about the local market and MLS statistics to strengthen your analysis.
B. The seller has some hardship that makes it impossible or extremely impractical
for the seller to keep the property.
What are hardships as defined by most lenders? Most lenders focus on and require ‘changed financial circumstances’. Loss of job, unusual medical costs, death of an owner, natural
disasters, even extended military service for reservists, can be hardships. There should be a
nexus between the hardship and the need to sell. A job loss leading to a problem paying the
mortgage is obvious, but an illness might require a family to move closer to specialized
medical help, so even without an unbearable financial hardship, the homeowner simply
cannot stay. Lenders do not consider a decline in value alone to be a hardship.
C. The seller is cooperative and willing to work with a real estate broker to package
the short sale.
Is the seller cooperative and willing to sell? The seller will need to write a narrative of the
hardship involved. The seller will be asked by the creditor to reveal all details of the seller’s
financial situation. If there is a formal short sale application, the seller will have to complete
it. This can be embarrassing, and some sellers simply won’t do it. Prepare them and make
sure they are willing to do what is required. If they are uncooperative, the agent will not be
able to help them.
Important Note: Many troubled loans today are ‘sub-prime loans’ and/or ‘stated income
loans’. Be especially careful to explain in writing to all sellers that any representations of the
seller’s financial status that were made on the initial loan application will be scrutinized in
the short sale application process. Sellers may expose themselves to charges of loan fraud if
the short sale application information they provide is inconsistent with the material provided
on the initial loan application. In other words, if the seller represented on the original loan application that his income was $10,000/month, but on the short sale application represents
that his income recently dropped from a high of $5,000/month to $3,000/month, this will raise
the question of loan fraud. If the seller is concerned or has questions, it is advisable for the
seller to consult with an attorney before completing a short sale application.
D. The lender is contacted and expresses willingness to entertain a short sale.
Contact the lender’s ‘Loss Mitigation’ department. Ask for the person responsible for
processing the short sale application. Try to speak with the same person each time you
call. Agents need an authorization letter from the seller verifying that he or she has
permission to speak with the lender on the seller’s behalf. Let the lender know the
situation and your proposed short sale solution. Ask for a list of documents the lender
will require. This may vary by lender. Ask for copies of any proprietary documents the
lender specifically wants to see, such as a particular short sale application form or an
income and assets sheet. These also will vary by lender. The lender may ask you and
other area brokers to do a Broker Price Opinion (BPO) to verify your evaluation. If there
is more than one loan subject to a shortfall, you will need to contact each lender and go
through the same process. Some lenders are proactive and will immediately send the
short sale requirements to you. Others will be non-committal. Even institutions go into
denial when faced with bad news. Unless the lender indicates that it will categorically
refuse a short sale under any circumstance (a rare occurrence), you can proceed with
the next steps.
E. The property is listed with appropriate caveats and protections for the seller,
properly priced, and effectively marketed.
1. Seller Protections: When an agent lists the property, it is important to have a written
record of the discussion they had regarding the short sale with the seller. Here are others:
A. The listing agreement should state that the seller’s acceptance of any offer will be subject
to the lender’s approval of the offer without requiring the seller bring cash to close escrow,
and an agreement by the listing broker to accept the commission as approved by the lender.
B. Offers to purchase the property would need the same caveat regarding lender approval.
This protects the seller against agreeing unconditionally to sell the home, only to have the
lender disapprove the short sale. In such a case, the seller could be sued for specific
performance or damages by a frustrated buyer.
C. The seller should also explicitly acknowledge that the seller will receive no proceeds,
that there are significant tax, credit, and legal ramifications to a short sale, and that the
seller has been strongly urged to consult with an attorney and a tax advisor before signing
the listing.
D. Many states and real estate companies have addendums to the listing agreement that
cover these topics.
2. Pricing: It makes no sense in a short sale setting to start with an unreasonably high price.
Some sellers will ask that you price the property at a “break-even” price for them initially.
Use your best judgment, and follow your broker’s policies and procedures, but know that a
price that attracts no offers will hurt your seller. If the foreclosure clock is already running,
you may run out of time. Price the home at a realistic market price today. Adjust the price
quickly if you see no activity or if you have no offers. To make the short sale work, you will
need to get an offer to the lender quickly.
3. Commissions: Short sales present a special problem with conditional compensation
being offered to a cooperating broker. As a listing agent, you are not entirely sure what your commission will be until the terms of a short sale are approved by the lender. Your MLS may
have adopted NAR-approved language such as the following based upon changes adopted by
NAR at the May, 2008 meeting:
4. Lender Approval Listings: Multiple Listing Services must give participants the ability
to disclose to other participants any potential for a short sale. As used in these rules, Short
Sales are defined as a transaction where title transfers; where the sale price is insufficient to
pay the total of all liens and costs of sale; and where the seller does not bring sufficient liquid
assets to the closing to cure all deficiencies. Multiple Listing Services may, as a matter of
local discretion, require participants to disclose potential short sales when participants know
that a transaction is a potential short sale. In any instance where a participant discloses a
potential short sale, they must also be permitted to communicate to other participants how
any reduction in the gross commission established in the listing contract required by the
lender as a condition of approving the sale will be apportioned between listing and
cooperating participants. All confidential disclosures and confidential information related
to Short Sales must be communicated through dedicated fields or confidential ‘remarks’
available only to participants and subscribers.
Multiple Listing Services that require participants to disclose potential short sales should
adopt the following rule:
Section 5.0.1: Participants must disclose potential short sales when reasonably known to
the listing participants. When disclosed, participants may, at their discretion, advise other
participants whether and how any reduction in the gross commission established in the
listing agreement, required by the lender as a condition of approving the sale, will be
apportioned between listing and cooperating participants.
5. Marketing: Both for the seller’s sake and to generate lender confidence, agent’s short
sale listings should be aggressively marketed. Whatever the agent would do for an ordinary
listing, they should do for a Short Sale listing. Use multiple pictures, virtual tours, websites,
and advertising as appropriate. Agents may want to accelerate the marketing if a foreclosure
deadline is looming. The lender will need to understand that you have done everything
possible to sell the property at the highest price. The lender is not the agent’s client. He or
she represents the seller, but everybody should understand that the lender is the true
decision-maker. Agents will want to include the property’s marketing history in their Short
Sale package. Once again, if there are no offers within a reasonable time, the agent should
adjust the price.
PART 3:
WHAT A BUYER'S AGENT AND THEIR CLIENTS NEED TO KNOW IN ORDER TO PURCHASE A SHORT SALE LISTING
The Lender is presented with an offer, accepted by the Seller, with the Seller’s completed
'Short Sale Package', the Seller's hardship letter, and a narrative explaining why the Short
Sale is necessary and desirable.
1. The Offer
A. The ideal offer should be from a Pre-Approved Buyer, with no unusual contingencies,
such as the sale of the Buyer’s existing residence. It should be flexible in terms of closing.
The ideal offer might provide the close of Escrow to occur 30 days after buyer’s receipt of
acceptance of the short sale by the Lender. The ideal Buyer is willing to be patient.
Of course, not all offers are ideal. If a very low offer is received, the Seller's agent should
attempt to negotiate the price between the seller and the buyer with a counter offer, as in
an ordinary sale scenario. Certainly, all Seller's agents should counter terms that affect
the Seller in a negative way, such as early possession without compensation, or inclusion
of the Seller’s personal property.
Remember that it is the Seller who ‘accepts’ the offer. When the offer is fully negotiated
between the Buyer and Seller, it should be signed by both, subject to the approval by the
Lender as previously discussed in this document. Be aware that Lenders will want to see
‘as-is’ offers without credits for repair or closing costs paid to buyers. Policies regarding
short sale counter offers vary widely around the country, and also between brokers.
Experience suggests that if the Seller's agent receives an offer on the low side of “reasonable”
from a 'qualified' Buyer, the agent may still want to advise their Seller to accept, and pass
the offer along to the Lender.
In a short sale it is more important to get the lender a bona fide offer than it is to negotiate
the perfect sale price. The very fact that an offer is presented to the lender for approval
may persuade the lender to put the foreclosure process on hold, at least temporarily. The
lender will have every opportunity to disapprove the offer and request a different price.
Of course, just as in a traditional sale, all offers received must be presented to the Seller
throughout the course of your agency agreement.
B. If your state or local Association of REALTORS®, or your broker, provides a 'Short Sale
Addendum', use it in any counter offer you make. It is designed to protect the Seller against
liability to the Buyer in the event the Lender disapproves the Short Sale.
2. The Completed Hardship Letter, Short Sale Package, and the Agent’s Narrative
A. Every lender is different, and each short sale package can be different as well.
Agents may choose to submit most of the package to the Lender when they obtain the listing,
and then pass along the offer, or wait until they have an offer to submit a complete package.
The following are the most common elements of a 'Short Sale Package. While most items will
be required, some are advisable because they help the Seller's Agent explain to the Lender
why the Short Sale is a good alternative to foreclosure:
B. A hardship letter written by the seller describing his circumstances.
The Seller should be as persuasive as possible in describing why they are in no position to
continue with his or her financial obligations to the lender. This letter can make or break
the Short Sale. The reasons given by the Seller should be compelling, and the Seller should
be both honest and frank in their disclosures to the Lender.
Include all corroborating material. If the Seller was fired, include the termination letter.
If the Seller has medical bills, summarize them. If the Seller is ill or disabled, the Seller
should explain how that has made it impossible for the Seller to keep the property. If there
are tax problems, the Seller should describe and fully document them. If the property was
damaged and not covered by insurance, as in several recent natural disasters, the Seller
should document the damage and the denial of the claim.
C. A copy of the purchase contract and all supporting documents signed by both the Buyer
and the Seller.
D. Written proof of the buyer's ability to purchase the property.
Examples: A completed loan application; Pre-Approval by a Lender; or Evidence of Cash on
Hand (A Current Bank Statement usually suffices).
E. A copy of the certified escrow instructions.
F. A preliminary title report if applicable in your state.
G. An Estimated Net/Closing Statement (HUD-1) certified by an Escrow Officer who is
acceptable to the Lender.
It is very important that this estimate be as complete and accurate as possible. Many
Lenders will reference the closing statement in their acceptance or rejection. An approval
may be received stating: “Lender will accept net proceeds of no less than $273,565 no later
than November 30, 2009”. If the estimate of net proceeds is wrong for any reason, you may
have to attempt to renegotiate with the Lender.
H. A completed and signed IRS Form 4506, "Request for Copy of Tax Form”.
I. A completed and signed personal financial worksheet.
This will include Seller's assets such as other real estate, stocks, bonds, 401Ks, etc.
J. Seller's Tax returns for the previous two years.
K. Seller's Employment paycheck stubs for the past two months.
L. Profit and Loss statement (Required if the Seller is self-employed)
M. Seller's Bank account statements for the past two to three months.
N. A completed Short Sale Application if the Lender provided one. (Many don’t.)
O. CMA/BPO with supporting sales data.
Seller's agent needs to show that the offer they are presenting is the best market price offer
the Lender is likely to receive.
P. A short narrative:
Written by the by one or both agents, about the market and market trends in the immediate
area of the property being sold. Highlight such data as average time on the market, number
of short sale and REO listings in the MLS and price trends. Support your conclusions with
material such as recent economic data and newspaper articles. The decision maker may well
be in another state, and will not necessarily understand why the property is suddenly worth
less than the loan.
Q. A marketing history, showings, and feedbacks.
Here again, the Listing Agent needs to show the Lender that he or she has made a real effort
to get the highest price. The lender must understand that the listing agent has done a better
job than they could have, and that they have been presented with a quick, and an attractive
solution to a deteriorating situation.
R. A formal request
Signed by the Seller, entreating the Lender to approve the Short Sale as submitted.
*An Important Note:
If there are multiple loans, the Seller's Agent will have to repeat this entire process with
each lender. It can be especially difficult to obtain a short sale approval from a Second
Trust Deed holder, or any other Junior (Subordinate) Lien holder, who will be “Wiped Out”
in a Short Sale. The Seller's agent will probably need to request that the First Trust Deed or
Mortgage Holder offer at least a symbolic sum to the Second, or other Subordinate Trust
Deed Holders to secure the Short Sale approval from them.
Anecdotally, Second Trust Deed Holders have recently been accepting payments as low as
$5,000 on Trust Deeds of $100,000 or more.
3. Following Up.
Once the Seller's agent has submitted the 'Short Sale Package', it is a good idea to stay in
touch with the Lender every day if possible. Make sure they acknowledge that the package
is complete. Try to talk to the same person in the Loss Mitigation Department each time,
and document your conversations. This is not a happy decision for the Lender. It will get
shoved to the bottom of their ‘to-do list’ over and over again. Lenders are infamous for
‘losing’ Short Sale paperwork. Keep the Seller and the Buyer’s Agent up to date. If there is
a ‘drop-dead’ time limit to the offer, remind the Lender of it often.
4. Subsequent Offers.
A. There are different opinions and practices concerning whether to submit all offers
received to the Lender, or whether to limit the submission to the first offer the Seller
accepts. Many lenders will require in writing that all offers be submitted, as a condition
of reviewing the 'Short Sale Package'. Consult with your broker concerning the broker’s
policy regarding subsequent offers. Remember, once again, that all offers must be
submitted to the seller, even if they are not then submitted to the Lender.
B. In some areas, Agents are simply submitting all offers to the lender without having the
Seller negotiate or accept any particular offer. Recognize that, without an accepted offer
signed by both Buyer and Seller, you do not have a binding sales contract, even if the Lender
approves it.
This approach presents certain practical and risk management issues. Consult with your
broker about this practice if it appears to be common in your area, or if you are inclined to
follow the practice.
5. The Lender Response and the Close of Escrow
A. The Lender can do one of several things:
1. Ignore the offer; (This does happen.)
2. Refuse the offer;
With or without an indication of what net proceeds would be acceptable
3. Ask the seller to bring some or all of the shortfall to escrow.
This is a Lender's Typical First Response. If the Seller is unable or unwilling to do so,
the Seller's agent needs to contact the Lender immediately with a letter from the Seller
to that effect.
4. Approve the offer.
B. If the Lender refuses the offer:
Seller's Agent should try to determine the net proceeds the lender would accept. Go back to
the Buyer's Agent , and see if he or she can get the offer increased, to provide those proceeds.
This process is similar to any counter offer situation, but it takes more time. If the Buyer
refuses, obtain a cancellation, and go to the back-up Buyers (if any) in order.
If there are no back-up offers, ask the Lender to give you the time to list the property in MLS
as an ‘Approved Short Sale’ at the price and terms the Lender will accept. If you then obtain
a Buyer who agrees to that price and those terms, you can proceed to close normally.
Note: An agent may need a new approval from the lender on an ‘Approved Short Sale’ even if
the price and terms are exactly the same. Check with the individual Lender.
C. If the lender approves the offer:
Approval is typically in the form of a demand to escrow, (and possibly to the agent) to the
effect that the Lender will accept no less than 'X' dollars in proceeds no later than 'X' date.
The Lender may also attempt to reduce the Agent’s commissions. You can certainly argue
with the lender about this, but ultimately, the Lender will decide. Always remember that
the Lender is not accepting the offer, but is simply agreeing to a smaller payment that the
Lender would otherwise be entitled to. This is why it is so important that the estimated
closing statement be accurate. When the Lender approves the Short Sale, any problems
in closing the Escrow on time, or unanticipated costs are of no concern. Simply put, the
Lender just wants the specified dollar amount available at the close of Escrow.
Once Escrow has the approval letter, it can proceed to close in the ordinary way. The
Buyer may have requested in the purchase contract that the Seller move prior to the close
of Escrow, so there are no holdover or possession problems. Remember that the Seller is
responsible for all the usual disclosures in your State, County, and City. The Seller is still
the owner of the property, and the Seller will be conveying title. You will be responsible for
all the usual duties of a Real Estate Agent in your State, County, and City.
6. A Final Note:
Be aware that the 'Loss Mitigation' and the 'Foreclosure Departments' are often different
entities, and are staffed by different individuals. The Foreclosure Department might not be
aware of what the Loss Mitigation Department has agreed to. In some cases, this has led to
the property being foreclosed even after the Loss Mitigation Department has agreed to a
Short Sale. Try to speak with the Foreclosure Department directly if the foreclosure date is
close to your estimated closing date.
PART 4: Acknowledgements
David Silver Westrick and Bill Lublin served as principal authors of the two parts to this
Exhibit. Appreciation is extended to the entire membership of the work group for their
contributions, but special thanks go to James J. Tsighis, Terisita Bersach, K. Michelle Lind,
Mariwyn Evans, M. Anthony Carr, Bob Hunt, Mildred Wilkins, and the Wisconsin, Utah,
Colorado, California, and Arizona Associations for providing valuable information on the
Short Sale Process.
PART 5: Footnotes
Note 1. Disclaimer: Nothing in these pages is intended to constitute legal advice. This material is intended
to give real estate licensees an overview of the short sale process from the point of view of the real estate
practitioner, some tools to help sellers through it, and a large dose of caution. A short sale or a foreclosure is
a catastrophic event for any property owner, and has serious legal, credit, and tax implications. Always advise
a property owner in writing to obtain legal, credit, and tax advice before undertaking a short sale.
Note 2. Article 13 REALTORS® shall not engage in activities which constitute the unauthorized practice
of law, and shall recommend that legal counsel be obtained when the interest of any party to the transaction
requires it.
N0te 3. There are tax consequences associated with these options, some of which have changed under the
Mortgage Forgiveness Debt Relief Act of 2007.
Under the new law passed in December 2007, up to $2 million of qualifying mortgage debt forgiven on
the taxpayer’s principal residence in 2007, 2008 or 2009 will not be treated as income for the taxpayer.
The limit is $1 million for a married person filing a separate return.
Mortgage debt reduced (forgiven) through restructuring, such as a workout or a short sale, as well as
mortgage debt forgiven in connection with a foreclosure, all qualify for the tax exclusion.
The Act applies only to principal residences, not vacation homes or investment property. Also, the
exclusion applies only to “acquisition indebtedness”, which is generally defined as debt used to originally
build, purchase, or improve a property.
Although short sales tend to minimize the difference between what is owed and the proceeds turned over
to the lender, thereby minimizing the taxable income potentially accruing to the seller, the possibility of a
tax liability remains.
Sellers should be advised to consult with tax or legal counsel regarding the impact of the new law, and other
tax rules as they apply to their circumstances.
