Home :: Attorneys :: Roger H. Miller III :: February 2008
Short Sales
By: ROGER H.
MILLER
February, 2008
There has been a lot of buzz lately about
“short sales.” What is a short sale you might ask? A short sale is a
sale of real property for less than the amount owed under the mortgage
on the property. Because the sale is for less than the mortgage balance,
the mortgage-holder must consent to the sale.
Why would a lender consent to a short sale?
Several reasons. For instance, if the borrower is not making the
payments under the mortgage. Also, many homeowners simply cannot afford
their mortgage payments due to adjustment of interest rates, job loss,
or a variety of other factors. The property may no longer be worth what
is owed under the mortgage and the borrower may not have any other
assets that could be used to satisfy the mortgage. Lastly, the
alternatives, such as foreclosure, can be more costly to the lender than
consenting to the short sale.
What should a borrower do if he or she will
not be able to continue to make the mortgage payments? First, contact
the lender early, such as before going into default or soon thereafter.
Find out what information the lender requires to consider a short sale
or other foreclosure alternatives such as a deed in lieu of foreclosure,
or restructuring of the loan. If the borrower wants any other third
parties to be able to communicate with the lender, then the borrower
should submit the lender’s specific authorization form, or should send a
signed, notarized letter, referencing the loan number and identifying
the third party. Examples of items that lenders frequently require are:
a personal financial statement showing any other assets that the
borrower may own; a bona fide offer or contract for the purchase of the
property; and, an appraisal or comparative market analysis.
A lender may require a borrower to pay the
lender amounts in excess of the sale proceeds, or may require the
borrower to execute an unsecured promissory note. If the lender forgives
any unpaid mortgage balance, then the borrower will be issued a 1099 in
the amount of the forgiven debt, which may be taxable as income to the
borrower.
A lender may place certain other conditions on the sale such as a
reduction in the real estate brokers’ commissions or other sale related
expenses.
Ultimately, a lender must believe that a
short sale is in its financial best interest. A study found that the
cost to a lender associated with foreclosure averages about $58,000 for
taxes, insurance, maintenance, etc., and, on average, the lender owns
the property for 18 months. In the current market, a lender should
seriously consider a short sale if the offer is reasonable and there is
no equity in the property.
Getting a short sale approved by a lender
can be a time-consuming and frustrating process as the borrower
navigates through a matrix of voice automated systems and customer
service representatives working in a myriad of departments. That is why
it is essential that borrowers start early and find out exactly what
their lender needs to evaluate the proposed short sale.
If you have questions or concerns regarding
a short sale, you should contact a local real estate attorney.
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