A broker’s best mantra in a short sale transaction may be patience, persistence and perseverance.

Short sales

What is a short sale?

A short sale is created when the proceeds of a sale will not cover outstanding debt or obligations on a property. Although short sales often are contemplated in foreclosure situations, the borrower is not necessarily in foreclosure or pre-foreclosure. Short sales can occur when the property value decreases due to a changing market and the property cannot be sold for the amount due on the borrower’s loan.

The sellers have asked whether or not they should continue to make payments on their loan. How should the broker reply to such a question?

Although this is one of the most frequently asked questions, there is no simple yes or no answer. The decision needs to be made on a case-by-case basis. Some lenders will be more willing to negotiate with a borrower who is making the effort to make payments; however, some may believe the borrower’s ability to make payments makes short sales applications less attractive.

The sellers are saying they need their lender to consent to the short sale. Does this make the lender a party to the offer?

One of the potential difficulties in working on short sales is determining who has the authority to make decisions in the negotiations. The broker may explain to the seller there are two sets of negotiations — one with the buyer and one with the lender. The lender does not become a party to the offer to purchase. However, the offer may need to be drafted to include a short sale contingency requiring the lender’s approval. The broker may request contingency language from the lender, or the seller’s attorney may provide the appropriate language.

Can the broker work with the lender for the short sale? Who can confirm the short sale?

The broker may obtain the seller’s consent to talk to the lender on behalf of the borrower. The extent of the broker’s participation may vary depending on the borrower and the lender. Brokers must keep in mind they cannot provide legal advice in the transaction, but otherwise may assist the seller’s attorney or seller in communications with the lender.

It is very important to determine which lender’s representative has authority to make decisions. Ask outright, “Who is the decision maker?” The first contact person you work with may or may not be the right person. Determine the appropriate department; ask if there is a loss mitigation team or department.

What information will the seller have to provide the lender in their decision-making process?

Because each lender may require different documentation, the broker and seller will need to determine if a specific written application is needed for the lender. The information provided will essentially contain much of the same information as the original loan application. The borrower may need to provide financial statements, pay vouchers, tax returns, evidence of other liens and payoff letters from any other lenders. The lender will review the borrower’s financial position, assets and liabilities when deciding whether to consent to a short sale.

What does the lender take into account when deciding about a short sale?

There are myriad components that go into a lender’s decision to agree to a short sale. Basically they fall into four categories: the condition of the collateral (home), the borrower’s financial status, market conditions and the cost of alternatives to the short sale. Although it may be an emotional trial for the borrower, it is a business decision for the lender. The REALTOR^® can help the seller gather the necessary paperwork to facilitate the borrower’s negotiations with the lender(s).

The lender will analyze the property’s condition, including the need for repairs or other costs to make the property more saleable if they were to take title, as well as determine the current market value of the property. The broker may help by providing the lender with statistics such as average days on market, comparable sales and current listings.

The borrower’s financial condition is another variable. One of the most difficult aspects of listing a foreclosure or pre-foreclosure home is having the seller take an honest look at his or her financial situation. The lender will assess the borrower’s ability to pay and the risk of bankruptcy or foreclosure.

The cost of a foreclosure action; the borrower’s financial position; any offer(s) made on the property; the cost of the transaction, including broker’s fees; as well as the lender’s current and potential inventory of REO properties will all be considered.

Lender approval contingencies

Is there a standard lender approval contingency?

Some lenders will not consider a short sale until there is an accepted offer on the table. The buyer and seller can provide for a termination of the offer within a predetermined period of time if the lender has not yet approved the short sale. Determine up front if the lender will issue a written short sale agreement. It is best to get the short sale agreement in writing, but some lenders will not commit in writing.

Disclosures

Does the broker need to disclose that it will be a short sale? If so, when would the disclosure be necessary?

Be transparent up front. If the seller does not include a lender approval contingency, the seller may incur costs and damages if they cannot perform on the transaction. It is up to the broker to make disclosures if he or she knows that a party cannot meet their obligations under the terms of a contract.

Tax issues

What are the tax issues for a borrower who negotiates a short sale with his or her lender?

One of the unforeseen outcomes of a negotiated short sale may be the tax implications to the seller. The Mortgage Forgiveness Debt Relief Act was signed into law by President Bush in December 2007. The new law applies to debt forgiven on a mortgage secured for a principal residence. The general rule in the tax code requires the issuance of a Form 1099 to a borrower who has debt forgiven by a lender. The amount of forgiven debt may be considered income and subject to taxation. However, now there is an exclusion for debt forgiveness on principal residences under the new Act. Sellers may discuss their financial positions with their accountants, CPAs or financial advisors for specific tax advice.

Does a broker have to take a listing where there may be a short sale?

No. One of the most prudent steps a broker can take before entering into a listing is to complete the listing questionnaire checklist. It is an interview process; the broker is interviewing the seller as well as the other way around. Sometimes it is not in the broker’s best interest to take the listing.

Offers of compensation

A broker is in a transaction and now has discovered the seller will be short. Can the broker unilaterally change the cooperative commission to another MLS broker?

No. Pursuant to Standard of Practice 3-2, a listing broker may only modify the MLS offer compensation prior to the submission of an offer to purchase. Standard of Practice 3-2 provides, “REALTORS^® shall, with respect to offers of compensation to another REALTOR^®, timely communicate any change of compensation for cooperative services to the other REALTOR^® prior to the time such REALTOR^® produces an offer to purchase/lease the property.  (Amended 1/94)” Although the broker may choose to renegotiate commission with the seller, such a modification to the listing contract must be made by the broker, and not the salesperson, per the terms of the listing. Any changes to a cooperating broker’s commission must be agreed upon by the cooperating broker. It is best to document such an agreement in writing to avoid misunderstandings later. For more information about MLS offers of compensation and modifying cooperative commissions, see Legal Update 02.01, online at www.wra.org/LU0201.

More information is also available online in the National Association of REALTORS^® Field Guide to Short Sales at
www.realtor.org/libweb.nsf/pages/fg335.

Tracy Rucka is a Staff Attorney for the WRA.