“Untold millions of dollars that banks could have recovered from the sale of distressed Florida homes have instead been pocketed as profits by a new breed of property flipper.

These flippers target houses on the verge of foreclosure and persuade banks and mortgage companies to accept lowball buyouts, sometimes by using questionable appraisals and not disclosing that a quick sale at a higher price has already been arranged, experts say.

No one knows how widespread the scheme has become. But a national glut of short sales — pre-foreclosure sales in which the lender agrees to let the house sell for less than the mortgage owed — has spawned a small industry of short-sale flippers, some of whom use these questionable tactics, experts say…”

Read the article: http://www.heraldtribune.com/article/20091115/ARTICLE/911151083/-1/NEWSSITEMAP?tc=autorefresh

“SB 1271 dramatically alters well settled Arizona law on the relationship between Arizona residential real estate owners and their lenders. The bill has far reaching effects, well beyond those testified to in committee… We respectfully request that you amend your Call for Special Session to permit the Arizona Legislature to reconsider these amendments to our laws.”

Read the letter to the governor as well as practical and legal issues with SB 1271: http://www.aaronline.com/documents/GBrewer072209.pdf

by Elizabeth Hurd

The March, April and May issues of Arizona REALTOR® included numerous articles on short sales, REOs, foreclosures and loan modifications. In the June issue, AAR included a quiz to help you determine how much you learned about these hot topics. Find out the answers here!

Q: Do Arizona’s anti-deficiency statutes apply to all properties?
A: No.  For the anti-deficiency statutes to apply, the property at issue must be a duplex or a single family residence; the real property must be two and one-half acres or less; and the loan at issue must be a purchase money mortgage.
A purchase money mortgage is one where the loan proceeds are used to acquire title to the property. A refinance of a purchase money mortgage is also considered a purchase money mortgage for purposes of the statute. A HELOC that is obtained after the close of escrow is generally not considered a purchase money mortgage.
Assuming all three of these requirements are met, the Arizona anti-deficiency statutes apply. What this means is that the lender’s remedy will be limited to regaining possession of the real property at issue through a foreclosure process or otherwise. If the anti-deficiency statutes apply, even if the amount due to the lender exceeds the value of the property, the lender may not pursue the borrower for the difference or deficiency.  The anti-deficiency statutes can be found in A.R.S. Title 33, Chapter 6.1.

Q: Does the Mortgage Forgiveness Debt Relief Act of 2007 exclude any debt forgiven through foreclosure or a short sale from being treated as 1099 income for tax purposes?
A: No.  The Mortgage Forgiveness Debt Relief Act of 2007 (Act) created limited circumstances under which sellers facing a foreclosure can be granted a relief from this requirement if they are able to work out a solution with the lender such as a short sale, where part of the debt is forgiven.  To be afforded protection under the Act, the debt must be considered qualified principal residence indebtedness.  Also, the total debt must be less than $2 million (or $1 million for married couples filing separately).

Q: In a short sale, when do the time periods in the contract begin to run?
a) Upon delivery of the accepted offer to the lender
b) On the date the offer is accepted and signed by both parties
c) Upon delivery of the Short Sale Agreement Notice to the buyer

A: The date of the seller’s delivery of the Short Sale Agreement Notice to the buyer is deemed the date of contract acceptance for purposes of all applicable contract time periods. In other words, although the parties have entered into an enforceable contract, the time periods do not begin to run until the seller has delivered the Agreement Notice. In the event that the seller and lender are unable to reach an acceptable short sale agreement, the seller must notify the buyer and the contract is cancelled due to the unfulfilled short sale contingency. 

Q: My buyer wants to make an offer on a short sale property.  Do I have to lower my commission?
A: No.  As a cooperating broker, you are entitled to the amount of commission specified in the offer of cooperation.  You may enter into an agreement with the listing broker to accept half of whatever commission the lender will allow, although this is not required.  If the listing broker refuses to pay the amount of commission specified in the offer of cooperation, you may pursue them for the balance. 
Commission agreements should be handled professionally at all times.  Understand that the listing broker is in a difficult position, making an offer of cooperation when the lender might come back and condition their acceptance on a lower total commission.  Since you are aware of this possibility before making the offer, it would be wise to come to an agreement beforehand regarding how any commission reductions will be handled.
Note: A.A.C. R4-28-1101(D) states: “A licensee shall not allow a controversy with another licensee to jeopardize, delay, or interfere with the initiation, processing, or finalizing of a transaction on behalf of the client. This prohibition does not obligate a licensee to agree or alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve a controversy.”

Q: I represent the seller in a short sale transaction.  We have received multiple offers on the property.  Must we submit every offer to the lender?
A: No.  All accepted offers must be submitted to the seller.  Once the seller has accepted an offer, it must be submitted to the lender.  Unless otherwise prohibited, the seller may accept subsequent offers as backup offers.  However, once accepted, these backup offers must be submitted to the lender as well.

Q: Are all REOs sold “as is”?
A: Yes.  The bank/seller will normally not offer any warranties or guarantees.  However, in some limited circumstances, the lender may be willing to negotiate a price which allows for needed repairs.  If this is a concern for the buyer, they should submit an inspection report together with estimates on the cost of needed repairs.  There is no guarantee the lender/seller will agree to reduce the price.

Q: Can anyone qualify for a loan modification under Obama’s Making Home Affordable Plan?
A: No.  The Program, effective March 4, 2009, includes many restrictions. The Program is only available for owner-occupied properties, and therefore no investors will qualify. Furthermore, the maximum loan amount for a single family residence is set at $729,750.00.  The plan includes a few different scenarios under which a home owner may qualify to modify their existing loan.  The home owner should talk with their lender honestly about their situation.  The lender will be able to determine if there is a modification option available, based on the information they provide.

Q: Is a foreclosed home owner allowed to remove appliances from the home after foreclosure?
A: Yes.  Appliances, unless they are considered fixtures, are normally classified as personal property and belong to the home owner.  However, any appliances built-in, such as a built-in microwave or range hood, would likely be considered fixtures and stay with the property.  Some foreclosed sellers have been known to “strip” a property after foreclosure.  However, foreclosed home owners should be advised that removal of fixtures constitutes criminal theft pursuant to A.R.S. §13-1802. The lender can file criminal charges accordingly.
Note: The lender may also be able to file a civil lawsuit against the previous owners for “waste” due to the wrongful removal of the fixtures.

Elizabeth Hurd is a curriculum writer who has written continuing education courses for real estate agents, including AAR courses for rCRMS and GRI.

Note: This article was edited on 3/8/10. Under the question that begins, “Q: I represent the seller in a short sale transaction….,” the first portion of the answer was changed from, “A: No.  All accepted offers must be submitted to the lender.” to “A: No.  All accepted offers must be submitted to the seller.”

By Bob Stephens, CRB

Not much! Let’s look at it this way. A regular normal sale contains an offer and an acceptance by the seller. The contract then is packed with contingencies that are pretty much in favor of the buyer. They can walk from the deal in many ways as the deal progresses. The seller does not have this ability unless the buyer breaches the contract. Most notable of the contingencies, usually, is that the buyer must borrow money to buy the house and has a financing contingency to obtain a loan from a lender.

Now let’s look at it in the “short sale” mode. Everything is the same including an OFFER by the buyer and an ACCEPTANCE by the seller, except there is a contingency regarding lenders for BOTH the buyer and the seller. The seller owes MORE to the lender than the house is worth and must now ask the lender to “forgive” some of the money owed to them to be able to close the deal.

As you see, there are two lenders involved in this transaction — one for the buyer and one for the seller. And as always, the lenders make a lot of demands on paperwork to clear their deals and be able to close. The paperwork is just a little different: the seller must be able to prove hardship and document WHY he cannot pay what he owes the lender. On the other hand, the buyer must prove WHY and how he can pay back the lender.
 Neither of these lenders OWNS the house and never will unless they are forced to foreclose on it. The seller’s lender has a lien on it that must be released so that the buyer’s lender has clear title and can then place a new lien on the house.

There is a misconception that the seller’s lender seems to be the only one that has any power. Yes, of course they have some power, but so does the buyer’s lender: the buyer’s lender makes loans as a business to make money; the seller’s lender wants to make the deal so they don’t have the great expense of foreclosure. Too many foreclosures and they will have a real problem getting their loans insured.

I hope this different look at the transactions will make them a little clearer. 

Bob Stephens, CRB, is managing broker of West USA Realty.

The lender can do one of several things:

• Ignore the offer. (This happens.)
• Refuse the offer, either with or without an indication of what net proceeds would be acceptable.
• Ask the seller to bring some or all of the shortfall to escrow. This is a typical first response. If the seller is unable or unwilling to do so, you will need to contact the lender immediately with a letter from the seller to that effect.
• Approve the offer.

If the lender refuses the offer, try to determine the net proceeds the lender would accept. Go back to the buyer and see if he or she will increase the offer to provide those proceeds. This process can be similar to any counteroffer situation, but it takes more time. If the buyer refuses, obtain a cancellation and go your back-up buyers (if any) in order. If there are no back-up offers, ask the lender to give you some time to place the property in the 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 that you may need a new approval from the lender even if the price and terms are exactly the same. Check with the lender.

If the lender approves the offer, it will typically be in the form of a demand to escrow (and possibly to you) 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 your commission. You can certainly argue with the lender about this, but ultimately, the lender will decide. 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.

If the lender approves the short sale, it will not care what problems you might have closing the escrow on time, or what unanticipated costs you face. There will simply be a dollar amount that will need to be available at the close of escrow. Once escrow has the approval letter, you 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.

Reprinted with permission from Realtor.org.

By Frank Dickens, 2007 AAR President

“Close 30 Short Sale Transactions a month!”
“Make $100,000.00 a year selling Bank Owned Properties!”
“Walk away from your debt free!”

Agents are inundated with claims that short sales and foreclosures are the new super-charged revenue generators. Homeowners who have a “Trustees Sale” notice filed receive daily junk mail with “we can help” claims. Do they work?

2009 AAR President Mike Wasmann has appointed a Presidential Advisory Group to identify current issues in the continuing short sale and REO market dominating our real estate economy. Members like J.T. Tsighis of Tucson are serving our NATIONAL ASSOCIATION OF REALTORS® by monitoring our current market and creating tools to assist our members.

In response to emerging trends we are proud to dedicate the next three issues of the Arizona REALTOR® Magazine to short sales, foreclosures, and REO properties. The March, April and May issues will provide information for our members to proactively approach the current market, reduce risks associated with transactions, and provide resources for your clients to obtain the best advice in how to react to their situation.

The fact is there is no magic fix to working with short sales, selling REO properties, or assisting homeowners in retaining their homes. Members must be aware of the potential in the emerging market and assisting property owners; however, our market is not without risks and the need for the best information and tools available.

In the coming months AAR will be aggregating already available resources like the “Short Sale Work Flow” available from NAR, and common links to the best information for your production. Industry partners, attorneys, E&O carriers and experienced brokers will share their expertise in the market.

Our goal is to provide the best information available to assist you in becoming productive, minimizing risks, and helping your clients in these turbulent times. Our hope is the AAR family will help you become the best you can be with the best tools available.

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? The elements of a successful short sale are typically:

The property is worth less than 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.

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.

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? You will need the seller to help 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, you will not be able to help them.

Important Note:  Many troubled loans today are “subprime 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.

The lender is contacted and expresses willingness to entertain a short sale.
Contact the lender’s “loss mitigation” department. Ask for the person who will be responsible for processing the short sale application. Try to speak with the same person each time you call. You will need an authorization letter from the seller verifying that you have 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 that the lender will require. This may vary with each 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 multiple lenders 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.

The property is listed with appropriate caveats and protections for the seller, properly priced, and effectively marketed.

• Seller Protections: When you list the property it is important to have a record of the discussion you have had regarding the short sale with the seller. 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 that the seller bring cash to close escrow, and an agreement by the listing broker to accept the commission as approved by the lender. 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. 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.
  AAR produces a Short Sale Addendum to the Listing Contract. For more information regarding this form, go to AARonline. www.aaronline.com/RM/Aug08.aspx
• 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.
• 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:

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 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 permit, but do not require participants to disclose potential short sales should adopt the following rule:

Section 5.0.1: Participants may, but are not required to, disclose potential short sales to other participants and subscribers. When disclosed, participants may, at their discretion, advise other participants whether and 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.

Alternatively, 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.

• Marketing: Both for the seller’s sake and to generate lender confidence, your short sale listings should be aggressively marketed. Whatever you would do for an ordinary listing, you should do for a short sale listing. Use multiple pictures, virtual tours, websites, and advertising as appropriate. You may want to accelerate the marketing if there is a foreclosure deadline 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 your client. You represent the seller, but everybody should understand that the lender is the true decision-maker. You will want to include the marketing history in the short sale package. Once again, if you have no offers within a reasonable time, adjust the price.

The lender is presented with an offer, accepted by the seller, along with a completed short sale package, hardship letter, and narrative explaining why the short sale is necessary and desirable.

• The Offer
  1. The ideal offer should be from a prequalified or preapproved 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 will be ideal. If you receive a very low offer, you may wish to attempt to negotiate it between the seller and the buyer as in an ordinary sale setting. Certainly you should counter terms that affect the seller in a negative way, such as early possession without compensation or inclusion of seller’s personal property. Remember that it is the seller who “accepts” the offer. Once the offer is fully negotiated between buyer and seller, it should be signed by both, subject to the approval by the lender as discussed elsewhere in this document. Recognize 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 you receive an offer on the low side of “reasonable” from a qualified buyer, you may still want to 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 you receive must be presented to the seller throughout the course of your agency agreement.
  2. AAR produces a Short Sale Addendum to the Residential Resale Real Estate Purchase Contract. For more information regarding the use of this form, go to AARonline. http://www.aaronline.com/RM/Aug08.aspx
  • The Completed Hardship Letter, Short Sale Package, and Narrative
    Every lender is different, and each short sale package can be different as well. You may choose to submit most of the package to the lender when you obtain the listing, and then pass along the offer, or you may wait until you have an offer to submit a complete package. The following are the most common elements. Some will be required, and some are advisable because they help you explain to the lender why the short sale is a good alternative to foreclosure:
    1.  A hardship letter written by the seller describing the seller’s circumstances.
        The seller should be as persuasive as possible in describing why the seller is 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 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 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.
    2. A copy of the purchase contract and all supporting documents signed by both the buyer and seller.
    3. Written proof of the buyer’s ability to purchase the property, i.e., a completed loan application, pre-approval by a lender or evidence of cash on hand (a current bank statement).
    4. A copy of the certified escrow instructions.
    5. A preliminary title report.
    6. 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. You may receive an approval that states “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.
    7. A completed and signed IRS Form 4506, “Request for Copy of Tax Form”.
    8. A completed and signed personal financial worksheet. This will include assets such as other real estate, stocks, bonds, 401Ks, etc.
    9. Tax returns for the previous two years.
    10. Employment paycheck stubs for the past two months.
    11. Profit and Loss statement (if the seller is self-employed)
    12. Bank statements for the past two to three months.
    13. A completed Short Sale Application if the lender provides one. Many don’t.
    14. Your CMA/BPO with supporting sales data. You want to show that the offer you are presenting is the best market price offer the lender is likely to receive.
    15. A short narrative, written by you, 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.
    16. Your marketing history, showings, and feedback. Here again, you need to show the lender that you have made a real effort to get the highest price. They must understand that you have done a better job than they would have and that you have presented them with a quick and attractive solution to a deteriorating situation.
    17. A formal request signed by the seller that the short sale be approved as submitted.

    *Important Note: If there are multiple loans, you will repeat this process for each lender. It can be especially difficult to obtain a short sale approval from a second trust deed holder or other junior lienholder that is “wiped out” in a short sale. You will probably need to request that the first trust deed or mortgage holder offer at least a symbolic sum to the second trust deed holder to secure an approval. Anecdotally, second trust deed holders have recently been accepting partial payments as low as $5,000 on trust deeds of $100,000 or more.

  • Following Up. Once you have submitted the short sale package, 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 the 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.
  • Subsequent Offers.
    1. 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.
    2. 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 will not have a contract even if the lender approves. 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. 

Reprinted with permission from Realtor.org.

Today, as millions of homeowners struggle with what to do when the value of their property becomes less than the mortgage they owe — particularly those recently unemployed or unable to make their monthly payments — there is a growing need for clear, unbiased consumer protection information on these vital topics. Homeowners are encouraged to seek the advice of a trusted pre-foreclosure professional to determine if a short sale is in their best interest, be able to distinguish between their own interests and the interests of lenders, buyers, investors, and real estate-related professionals, and how these different interests may influence their decision. RIS Media’s Top 5 in Real Estate Network has developed a list of questions for homeowners to discuss with their attorneys prior to their pre-foreclosure decision:

1. What are my options as a homeowner when my property is in or heading toward default? What is a better or  more likely outcome for me and why?
   • A short sale or a repayment plan?
   • A short sale or a forbearance plan?
   • A short sale or a loan modification?
   • In the case of an FHA loan, a short sale or a partial claim?
   • A short sale or a short sale/assumption agreement?
   • A short sale or a deed-in-lieu of foreclosure?
   • A short sale or a bankruptcy?
2. How do I know if my property and I may be considered for a short sale?
3. How would I initiate the short sale process?
4. Which process has a more adverse effect on my credit rating: short sale, foreclosure, bankruptcy, or deed-in-lieu of foreclosure?
5. What types of hardships would a lender generally consider favorable toward my appeal for short sale consideration?
6. On average, how long does a short sale process take?
7. What are the tax implications of a short sale?
8. If a lender agrees to the short sale option on my property, can the bank still proceed with a foreclosure?
9. Is there a real estate commission paid in a short sale? If so, who pays it?
10. When is a bankruptcy preferable to a short sale or to a foreclosure?

For more information about short sales and RISMedia’s Top 5 in Real Estate Network ®, please visit www.top5inrealestate.com or contact Member Services at 203-853-2167 ext. 139.

By AAR General Counsel Michelle Lind

The current housing market has resulted in a seemingly ever-increasing number of homeowners in default on their home loans. These homeowners often seek guidance from their REALTOR®. One of the many possible options to a homeowner in default on their loan is to attempt a short sale.

A short sale is a real estate transaction in which the sales price is insufficient to pay the liens encumbering the property and sale costs, but the seller is unable or unwilling to pay the difference. Managing a short sale transaction takes experience and involves inherent legal and financial risks. Therefore, REALTORS® must become educated about the short sale process and always advise their clients in writing to obtain legal and tax advice before proceeding with a short sale. Unless you are confident in your ability to handle such a transaction alone, consult with your broker or manager for advice and guidance.

Seller Considerations
When considering a short sale, the seller must first determine how much is owed on the property. For example, in addition to the delinquent loan, there may be a home equity loan, past due homeowner’s association fees or unpaid property taxes. Then, the seller must add the costs of a sale, such as closing costs, escrow fees and brokerage commissions. All of the seller’s debt and costs must be factored in before determining whether a short sale is feasible.

The seller should also be aware of the downsides to a short sale. A short sale could affect the seller’s credit score. A short sale may appear on the seller’s credit report as “pre-foreclosure redemption,” “paid in full for less than full balance” or other similar term. Further, even if a lender agrees to a short sale, the lender, the VA, or the FHA may not agree to forgive the debt entirely, and may require the seller to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action. For example, a lender may accept the short sale purchase price to “release the lien” on the property as opposed to agreeing to accept the purchase price as “full and final settlement of the debt” on the property. Therefore, the seller should be certain of the terms of any short sale before making a decision and obtain any debt forgiveness agreements with the lender in writing.

Also, a short sale in which the debt is forgiven is a relief of debt and may be treated as income for tax purposes. The Mortgage Forgiveness Debt Relief Act of 2007 created a three-year window for homeowners to pay no taxes on any debt forgiveness they receive; however, only cancelled debt used to buy, build or improve a principal residence or refinance debt incurred for those purposes qualifies for this tax exemption under the Act.

A short sale may involve more documentation than the original loan application since the seller must “reverse qualify” and prove that the seller is financially incapable of paying the loan. The seller must convince the lender that it will fare better by agreeing to a sale for less than the outstanding loan amount.

The AAR Short Sale Addendum to the Listing Contract will assist brokers in educating their sellers about these issues and help prepare them for this process. This Addendum addresses the major issues of concern to a seller and advises the seller to obtain professional tax advice and independent legal counsel regarding the advisability of entering into a short sale agreement.

Purchase Contract Considerations
The purchase contract in a short sale should be contingent upon a short sale agreement acceptable to both the lender and the seller. The AAR Short Sale Addendum to the Residential Resale Purchase Contract provides that the contract will be contingent on an acceptable short sale agreement. This contingency is similar to the buyer’s financing contingency. However, both parties acknowledge that it may take weeks or months to fulfill the contingency by obtaining the lender’s approval of the short sale.

The Addendum also obligates the seller to immediately deliver notice to the buyer that the seller and the lender have entered into a short sale agreement. This notice is defined in the Addendum form as the Short Sale “Agreement Notice.” The date of seller’s delivery of the Short Sale Agreement Notice to the buyer is deemed the date of contract acceptance for purposes of all applicable contract time periods. In other words, although the parties have entered into an enforceable contract, the time periods do not begin to run until the seller has delivered the Agreement Notice. In the event that the seller and lender are unable to reach an acceptable short sale agreement, the seller must notify the buyer and the contract is cancelled due to the unfulfilled short sale contingency.

Brokerage Commission Considerations
Because the lender is accepting less than the full obligation, the lender may demand that the brokers in the transaction reduce their commission as a condition to any short sale agreement. The NATIONAL ASSOCIATION OF REALTORS® (NAR) Code of Ethics Standard of Practice 3-2 requires the listing broker to communicate any changes in offers of compensation before an offer to purchase is produced. Therefore, some listing brokers request that the buyer’s broker address any potential commission reduction issues with them before submitting an offer. The NAR Model MLS Rules and Regulations and Multiple Listing Policy Statement 7.23 were amended to attempt to address some of these issues. The MLS policy changes, which are optional, may be reviewed on the NAR website.

Of course, the brokers involved in a short sale have no obligation to reduce the agreed upon commission. The Commissioner’s Rules do not “obligate a licensee to agree to alter the terms of any employment or compensation agreement or to relinquish the right to maintain an action to resolve a controversy.” See, A.A.C. R4-28-1101(D). Therefore, even if the transaction will not close unless the brokers agree to reduce their commission, the brokers have no duty to do so.

Requests to lower commissions should be handled professionally in all cases and any agreement to alter the previously agreed upon commission structure should be reduced to writing to avoid any misunderstandings or disputes after close of escrow. If the listing broker agrees to reduce the listing commission, the buyer’s broker’s commission is not affected unless the buyer’s broker also agrees. If a buyer’s broker agrees to accept a reduced commission amount, the buyer’s broker is bound by that agreement.

Steps to a Successful Short Sale Transaction
Many brokers report that short sale transactions are often difficult and often fail to close escrow. Documentation and eligibility criteria for short sales vary depending on specific lender and investor guidelines. Further complicating the issue, many lenders are struggling with staff that has a lack of experience with short sales. Additionally, different lenders have different short sale department names, so contacting the person who has the authority to authorize a short sale on behalf of the lender may require some tenacity. The appropriate department may be called loss mitigation, work-out, foreclosure, loan modification or loan reinstatement department.

A well-prepared listing broker can increase the chance of a successful short sale transaction. First, remember that generally speaking, the lender seeks to obtain fair market value for the property. Second, be aware that most lenders will not agree to a short sale unless the seller is insolvent or will either agree to make a cash payment or execute a promissory note at closing. To successfully handle a short sale, a listing broker should be prepared to:

• Obtain all pertinent information from the seller (pay off statements, liabilities, liens, trustee’s sale date, etc.)
• Perform a broker price opinion (BPO) or comparative market analysis (CMA) to determine the property’s fair market value (Freddie Mac also requires that the BPO contain a 90 day “as is” marketing timeframe)
• Calculate all costs of sale
• Advise the seller to explore other workout options other than a short sale (retain the property, loan modification, deed in lieu of foreclosure, foreclosure, bankruptcy)
• Advise the seller in writing to obtain legal and tax advice
• Incorporate the AAR Short Sale Addendum to the Listing Contract in the listing agreement
• Obtain written authorization from the seller to contact the lender(s) if the language in the Addendum is not deemed sufficient and immediately contact the lender for short sale package instructions
• Communicate with junior lienholders and determine their payoff requirements
• Check the MLS rules regarding short sale disclosure requirements
• Ensure that the AAR Short Sale Addendum to the Residential Resale Purchase Contract is incorporated into the contract when an offer is recieved
• Gather the documents necessary for a short sale for delivery to the lender, such as:
  • Seller’s hardship letter
  • Seller’s financial statement
  • Recent pay stubs
  • Executed purchase contract
  • Estimated seller’s closing costs or estimated HUD-1
  • Buyer pre-approval letter
  • Bank statements
  • Credit report

(Sources include: NAR and Freddie Mac)

Short Sale Resources
There are numerous short sale resources. For example, the NAR Short Sales Workflow gives a comprehensive overview of the short sale process (listing, marketing, negotiating and closing properties subject to a potential short sale). The NAR Blue Print is a guide to the short sale process. Freddie Mac has also developed an “Introduction to Short Sales for the Real Estate Professional” webinar and Power Point that covers statistics on delinquencies and workouts, understanding the real estate professional’s perspective on the current environment, retention and liquidation workout options, and the short sales process. These resources and more are located on AARonline.

AAR General Counsel Michelle Lind is a State Bar of Arizona board certified real estate specialist and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.

By J.T. Tsighis, ABR, CRB, CRS, GRI

You have no business doing a short sale unless you know what you are doing.
And how do you know if you know what you are doing?

Well, for starters, make a diligent effort to qualify your competency and knowledge on the subject of short sales by honestly answering the following questions:

DEFINITION: Can I define a “short sale” to my client seller or buyer? Can I communicate it clearly? How do I know if my client understands what has been communicated? Can I prove it?

Do I know the difference between a potential short sale, pre-foreclosure and a foreclosure? Do I know how to explain and distinguish a short sale from other “normal” transactions?

PROCESS: Do I know the process involved in a short sale transaction? Am I able to provide a detailed written step-by-step procedure of what will transpire? Do I know what documents will be required by a lender? Do I know if those documents will be the same or different if there is more than one or two lenders involved? Have I anticipated extraordinary and frustrating circumstances related to working with a lender such as: finding the right decision maker; getting phone calls returned timely or even at all; experiencing inordinate time delays for lenders response to an offer; Am I capable of educating my clients to make sure they understand upfront all the delays and potential difficulties that await them?

REMEDIES: Am I familiar with other remedies that may be explored before I promote the short sale alternative? Can I name them? And if so what are they? Do ­I have a list of resources for my clients to view to help educate them in this endeavor? Have I spent enough time familiarizing myself with these resources to know which may be helpful and which may be harmful to my clients? Do I know how a short sale will impact my seller’s credit rating? Do I tell my client or do I refer that conversation to my clients’ CPA or attorney?

SEMINARS: Have I attended more than one seminar on short sales which focuses my learning on how to assist my client rather than how I can make “a buck” on their misfortune? What will it take for me to feel competent to perform a short sale for my buyer or seller client?

LAWS: Have I become familiar with recent changes in the law that affects potential deficiencies as a result of a short sale? What am I obligated to disclose to my seller or buyer? What are the consequences for working outside of my area of competency? What liability and confidentiality issues occur in a short sale transaction? What are the serious adverse legal, tax and economic consequences in a short sale?

FORMS: Have I read, studied and understood the content of state forms available for listing a potential short sale or selling a short sale property? Do I have a detailed checklist and time line for the documents needed in a short sale?

NEGOTIATIONS: Am I aware that my fee may be negotiated downward in a short sale transaction? Do I know how to handle this negotiation and how it may impact a cooperating broker’s compensation? Am I familiar with MLS requirements on inputting a listing agreement and reporting a short sale? What happens when a lender insists on paying a reduced fee to make the short sale work? Are all short sales “as-is”? How are repairs paid for and handled? What happens when a lender requires the owner to keep the property on the market, even after the owner and buyer have agreed to the terms of a proposed purchase contract? Who is really in control of the short sale transaction? Without legal counsel representation on behalf of the seller, is it my job to negotiate with the lender or that of my seller? Do I have the temperament and stamina to withstand the financial and emotional stress my clients are experiencing? How do I protect and preserve the best interests of my client, myself and that of my company?

Now that you’ve had a chance to silently address some of these questions to qualify your competency, how are you feeling about taking on the short sale challenge? If you’re still unsure, please just “don’t do it” and expose yourself and your clients to unnecessary liability and potential litigation in the future. Statutory obligations aside, pursuing something you know little about can be very costly to you and detrimental to your clients. Be smart. Do the right thing. Refer your client to someone who is an expert at short sales.

On the other hand, if you’re feeling somewhat confident and sense you can handle whatever comes your way because you’re a fast-study or simply because you really need the money, just “don’t do it” unless you discussed it first with your broker. See if they want to support you. Find out what they know about short sales. Ask them if they have the expertise to supervise you; to monitor every step of this unique process. If your broker is unwilling or unable to help you, ask them to recommend someone in your firm who may agree to mentor you for a reasonable fee. Make sure that person, if another agent, has done multiple (more than five) short sale transactions and/or is someone who is capable of sharing their expertise such as an office manager or sales manager.

J.T. Tsighis, ABR, CRB, CRS, GRI is with Realty Executives, Southern Arizona.