understanding short sales

Overcoming Obstacles in Short Sales.

by

Peggy SantmyerABR,CREI,GRI,SRES,TAH

Texas Brokers License No 0135010

[email protected]

© all rights reserved 2009

mailto:[email protected]

Reasons sellers are in financial trouble with their mortgage:

• Sellers who could afford their home when they bought it, but have since lost their job

• They may have taken a different job but it pays much less and they realistically need to downsize.

• Sellers who were out of work for health or other reasons for a period of time and can pay the payments now but cannot catch up on the back payments.

Reasons sellers are in financial trouble with their mortgage:

• Sellers who could afford their home at the interest rate they started with when they bought it but the rate has adjusted due to an ARM and they cannot afford the higher payment with the adjusted rate.

• Sellers who were not completely honest regarding their income, and got a "no doc" They may have felt optimistic when they were approved but were not realistic and never could afford the home.

Good real estate agents

• Counsel their clients• Encourage the client to communicate with

their lender

When Giving Up the Home is Inevitable

• The Seller’s agent:• Must do a realistic CMA

• Do a Seller’s net sheet

• Determine if a short sale will be needed and if the owner will qualify

Two types of short sales:

1. The lender forgives the debt. (This is considered debt forgiveness and at times has been taxable income for IRS purposes; clients should check with a tax consultant.)

2. The lender requires the seller to sign a note to

repay the difference between the amount due on the mortgage and the amount they receive at the time of the sale. In this instance, the debt is not forgiven.

When the Owner Can Pay the Shortage

• If the homeowners can afford to pay the shortage, the lender will expect them to pay it. Either way, the homeowner must communicate with the lender.

Mortgage Debt Relief Act of 2007

• Typically allows taxpayers to exclude income from the discharge of debt reduced through mortgage restructuring or foreclosure on their principal residence.

• It applies to debt forgiven from 2007-2012. • The maximum amount of debt eligible for

exclusion for a qualified principal residence is $2 million or $1 million if married filing separately

Seller representation on a short sale

• Communicate with the lender at the Client’s (Seller’s) direction.

• Start preparing the Short Sale Package at the beginning of the listing period.

• Obtain the Owner/Clients co-operation in preparing the package

• List the property at a marketable value.


• Present all offers to the Seller of the property.• Help the Seller negotiate the best offer.• Deliver the option money and the earnest

money timely.• Present the Short Sale package to all lien

holders• Present subsequent offers to the Seller. Send

to Lenders at Seller’s direction.


• If the Lender refuses to accept the contract as written, present what they are willing to accept to the Buyer or the Seller and prepare an amendment to the contract for both signatures and send to the Lender(s).

• Provide the Title Company with all Contracts and Amendments.

The Short Sale Package

• A letter from the seller authorizing the lender to communicate with the listing agent.

• Current pay stubs showing YTD income. If the client is self employed, then provide a copy of the previous year’s income tax paperwork.

• A copy of the homeowner’s current bank statements and disclosure of all assets.


• A hardship letter that explains why the homeowner needs to sell and why he cannot pay the shortage. The letter should relay to the lender the circumstances that led to the situation, why the current situation will not allow the owner to pay in full and try to negotiate with the lender to accept less than full payment.

• A Comparable Market Analysis (CMA) including actives, pendings and solds from the last six months.


• Copies of the purchase agreement and listing agreement. (REALTORS® should be prepared for the lender to try to re-negotiate the commission).

• A net sheet showing the lender’s net

• Last four digits of the social security number

• Some lenders require a preliminary HUD-1

• A loan qualification letter from the Buyer’s Lender

Confidentiality vs. disclosure

• REALTORS® shall be honest and truthful in their real estate communications and shall present a true picture in their advertising, marketing, and other representations.

• REALTORS ® may disclose that this will be a short sale in MLS private remarks

Risk Management Forms

• Two Texas Association of REALTORS® forms that agents may want to include in their listing package are the

• Request for Mortgage Information (TAR1413) and the

• Seller's Authorization to Release and Advertise Certain Information (TAR1412).

Contract procedures

• The parties are the Buyer and the Seller• Contract is negotiated and signed by the

parties( Buyer and Seller) • The effective date is filled in.• The Short Sale Addendum will make the

Contract contingent upon the Seller’s Lenders approval

• MLS Rules apply to reporting contingency contracts (Active-Contingent)

Contract procedures

Earnest money is delivered to the Title Company at the time of contract.

Option money is delivered to the Seller at the time of

contract.

Short Sale Addendum

• Paragraph F states that for a buyer who has the option to terminate, the time for giving notice begins immediately as of the effective date.

• Paragraph D states that when the lender approves the sale and the seller notifies the buyer of that approval, the effective date of the contract will be amended to that date, restarting the number of days for the option period. (The buyer will have time to do inspections after lender approval. )

• Paragraph D also gives the buyer the right to establish a date beyond which he would not want to wait for lender approval and then the contract terminates automatically.

Other Considerations

Multiple offers on a short sale Seller can negotiate a back up offer.

Use the Short Sale Addendum and theBack Up Addendum.

Buyer representation on a short sale

• Educate the Buyer• Are they a good candidate for a short sale?• Do they understand the challenges of a short

sale?

Warn About Rescue Scams

• The rescuer charges excessive fees for telephone calls or paperwork that the homeowner could have easily done himself.

• Bailout schemes where the owner gives title to the rescuer

believing they can stay in the home and buy it back later. • Tactics where the owner does not realize that they are

surrendering ownership of the home.

• The scams frequently prey on very vulnerable, desperate, or financially uneducated homeowners.

• Use only HUD approved counselors.

Hope to see you in class!

Peggy Santmyer

understanding short sales

Business