Thursday, June 18, 2009

Short Sales Knowing When to Fold Them

Short sales are becoming fairly common practice in the real estate market these days and anyone who has completed one knows that you had better be prepared for rough riding when you get the seller to sign a listing contract when they are upside down.

If the term “short sale” is unfamiliar to you, it refers to a situation when the sale of a home will not net enough to cover the mortgage and closing expenses. It is a problem which occurs frequently in today’s market place.

Whether the consumer is upside down because of refinancing, new construction “trickeration,” the economy in general, or having used an exotic loan product which resulted in owing more than the home is worth - the end result is they are stuck and want you to help them get out.
This is not the kind of listing timid real estate sales people, brand new agents or folks who want to close “just one more before Christmas” should take on. Short sales are fast becoming both an integral and significant part of the market, so the rest of you agents should read this article very carefully, turn the page back and keep it handy as a ready reference as you go off into “short sale land.”
You’re out there, wading in the water and doing an admirable job of trying to get the lender to agree to a short pay-off on a transaction which is rapidly headed toward foreclosure. You’re making headway (you think) but you “gotta know when to fold em” and walk away. The risk to your brokerage firm as well as yourself is significant if you do not recognize when you are no longer able to help and need to withdraw the listing and move on.
WARNINGS: There are a number of opportunities for you to remove yourself from a short sale transaction. Your broker and your errors and omissions insurance company would both appreciate it if you:

1. Understand when these opportunities present themselves

2. Act prudently by not only removing yourself but by also documenting that by the use of a mutual release or similar document.
When any of the following occur, you should remove yourself from the listing as quickly as possible:
Judicial Foreclosure
Notice of Sheriff’s Action
I know you heard differently someplace else, but I am prepared to explain to you why removing yourself is the right option.
BANKRUPTCY: The borrower files bankruptcy, either 7 or 13. The filing of bankruptcy is a legal action, in fact a lawsuit, against all creditors. Their lender is one of those creditors. The house is not available for sale while it is under the protection of the trustee of the bankruptcy court. It can not be sold, gifted or otherwise transferred. Release the listing immediately once you are informed. It should not be re-listed unless, or until, you have written authorization from the trustee to do so. It would be a mistake to hold the listing hoping that the trustee will let you sell it after the bankruptcy has been completed. One of the trustee’s possible options is to instruct the borrower to sign a deed-in-lieu of foreclosure in favor of the lender. This means there will not be an opportunity to sell the property at all unless you later get the listing from the lender who has become entitled.
JUDICIAL FORECLOSURE: The borrower’s court date for judicial foreclosure has arrived and you do NOT have a signed letter authorizing a short sale with a closing date prior to the foreclosure date. The lender will become entitled on the date of foreclosure; the borrower who might still be legally entitled to possession does not have the legal right to transfer title. It is mutual release time.
NOTICE OF SHERIFF’S SALE: The borrower informs you, or you become aware, that a sheriff’s sale has been scheduled on the It does not matter that the lender is suddenly anxious to work with you to facilitate a short sale. State law states that the home is to be offered at sheriff’s auction, so you need to remove yourself from this transaction until such time as it has gone to the auction and the redemption period (which ends on the day of confirmation of a sheriff’s sale) has expired. The borrower’s right to redemption is a strong consumer right.
I am very aware that many short sales are being completed during this window of time. Nonetheless, state law says that they should not be, and as a licensee it would be in your best interest to refrain from any sale between judicial foreclosure and the end of the confirmation period.

Do not participate in circumventing that right by working with an investor or other buyer and the lender at this juncture. The foreclosure is still on the borrower’s record. A short sale does not save their credit. The foreclosure (when judicial) has already occurred and is documented.

A lender assuring you that they will not report it does not UNDO the fact that it is recorded as a foreclosure in local court records and that the borrower needs to answer honestly when they apply for a new mortgage, that “YES” they had a foreclosure in 2006. You may offer them hope, but no real substance, and the risk that you might later be accused of facilitating the signing over of their redemption rights is a risk you need to avoid. Keep it ethical. You might approach the lender later about representing them once the redemption period has ended; but for now, utilize the mutual release.

It’s always better to be SAFE professionally than to be sorry. You should be as diligent in the completion of files as you are in opening them. Your success rate (in life as well as in real estate) is tied to how well you recognize the age old principle of knowing when to fold.
By Mildred Wilkins, Founder and President of Home Ownership Matters, LLC.