1)   NORMALIZING SHORT SALE TRANSACTIONS
 
Short Sale transactions appear to be a share of our market that will be present for the foreseeable future.  Because they are a relatively new concept, however, our industry has not yet developed norms for handling the various issues that present themselves in short sale transactions.  This article will identify some of the issues that are routinely presented by short sale transactions and suggest approaches that would be appropriate.
 
First, it is important to clarify what is meant by the term “short sale”.  A short sale results when a real property seller owes more to lien holders than the property is worth and the seller refuses or lacks the financial wherewithal to pay the difference, plus closing costs.  Before seller can clear title and close a sale to the buyer, seller must receive debt reduction from lien holders whose liens exceed sale proceeds.

 
In many cases, a short sale seller will also be a distressed homeowner, but not in all cases.  Recall that a “distressed homeowner” is one who is already 30 days delinquent or believes they will become delinquent in mortgage payments within four months or who is already significantly delinquent in payment of property taxes.  If a short sale seller is also distressed, then an agent’s ability to represent seller is dependent upon agent having their broker’s permission to represent a distressed homeowner and a “DH” (distressed home) listing agreement signed by seller.  In addition, if agent intends to contact a distressed homeowner’s lender, as discussed later in this article, agent must have a separate written agreement with seller, authorizing agent to contact the lender.  This separate written agreement is in addition to the DH listing agreement and should be prepared by broker’s legal counsel or company attorney.
 
Advertising a Short Sale
 
The fact that the sale will be a short sale is a material fact that must be disclosed.  A “material fact” is defined by the Agency Law as information that significantly, adversely, affects a party’s ability to complete the transaction.  Material facts must be disclosed by the agents involved in a transaction.  Because seller cannot complete the sale of the property without reduction of secured debt by lien holders, sellers’ agents must notify potential buyers of the fact that seller’s performance of any purchase agreement will be conditioned on the approval of seller’s lien holder(s).  This disclosure should be made in an MLS listing printout.
 
When listing agent lists the property and learns that the transaction will be a short sale, agent should immediately contact seller’s lender.  Agent needs to determine the department or person with whom agent will communicate regarding the necessary reduction of secured debt.  Agent also needs to determine that there is some willingness on the part of seller’s lender to reduce secured debt.  Sometimes, a second or third position creditor will have so little to gain from the transaction that they are unwilling to reduce the debt owing to them at all.  If listing agent encounters that type of resistance from a creditor, then agent needs to consider carefully whether it is worth listing the property at all.  It would not be fair to a buyer and buyer’s agent to attract an offer from that buyer if seller’s creditors intended to make no reduction in the debt owing.
 
Making an Offer on a Short Sale
 
When buyer’s agent writes an offer on a short sale listing, the offer should always include a short sale addendum, statewide form 22SS.  The addendum provides the contingency language seller will need to condition seller’s obligation to close on seller’s lenders’ reduction of secured debt.  But, 22SS provides two elements that are more important to buyer.  First, 22SS allows buyer to select a provision giving buyer the right to terminate the purchase agreement anytime prior to seller’s lender’s approval.  Additionally, for the purposes of computing time, 22SS establishes mutual agreement as the date on which lender’s approval is delivered to buyer.  Although buyer and seller have a binding purchase agreement, buyer need not conduct inspections or appraisals of the property until buyer knows that buyer’s purchase agreement is approved by seller’s lender.  Moreover, buyer has no obligation to deposit earnest money until buyer’s purchase agreement is approved by seller’s lender.
 
Presenting Offers to the Short Sale Lender
 
The vast majority of short sale lenders have an expectation that all offers presented on seller’s property will be presented to lender.  Lender is being asked to release its security interest, and in many cases, walk away from money that it loaned to seller, on the representation that the property is worth less than seller’s secured debt.  Accordingly, lenders have a right and an expectation to know all of the terms of all of the offers presented to seller.  As a result, in most transactions, sellers should check the box on 22SS indicating that seller “may” accept competing offers from competing buyers for presentation to seller’s creditors.  Seller’s agent should then immediately present all offers received to seller’s lender.  It would, in most transactions, be contrary to seller’s best interests to refrain from presenting all offers to lender.
 
If higher offers come in after the first offer is presented, then lender is likely to take the higher offer, reducing the risk to seller if lender requires seller to remain liable for any of the unpaid principal.  Lender is also more likely to move more quickly to take a more desirable offer.   If, however, a competing offer is lower, it will be good for lender to see that as well, so that lender will take assurance that the first offer under consideration is truly a reflection of the highest value of the property.
 
Regardless of the number of offers presented, part of the service that listing agent can provide to seller is to persuade seller’s lender that the offer is an accurate reflection of the actual value of the property and therefore, in lender’s best interest to accept.  Listing agent should be prepared to present a market value analysis to lender supporting the pricing of buyer’s offer.  Listing agent must also be prepared to exercise patience and professionalism.  Agent will have to find a way to keep seller’s file at the attention of the short sale department or responsible lender representative without being antagonistic.
 
Receipt of Short Sale Agreement
 
When lender approves buyer’s purchase agreement, lender will send seller a Short Sale Package or Short Sale Agreement.  Agent should advise seller to seek legal counsel for assistance in assessing the terms of the short sale agreement.  There are two issues that must always be addressed in negotiating short sales.  First, some lenders will require seller to carry the reduced secured debt as an unsecured obligation for which seller will be liable in the future.  This is the type of obligation that, if unpaid, could result in a judgment lien against any other real property owned by seller now or later.  Other lenders will consider that the short sale constitutes a true forgiveness of all debt owing by seller and will agree to never seek recovery of the forgiven amounts. 
 
Second, if the lien being reduced was recorded because the seller took a cash back refinance, then it is possible that the amount of debt forgiven will be considered as income to seller for tax purposes.  In other words, seller could be required to pay income tax on the amount of the forgiven debt. This issue is quite complicated and seller should be advised to consult with a tax specialist regarding this issue.
 
Depending on how these two issues, and others, are resolved, it is possible that it would be in seller’s best interests to let the property go to foreclosure rather than selling the property as a short sale.  Agent should advise seller to seek legal counsel for assistance in considering these issues and the overall benefits and risks of proceeding with the short sale.
 
Reduction in Commission Amount
 
Listing agents and buyers’ agents alike should know that when lender is asked to reduce the amount owing under a deed of trust, lender is going to consider all options for minimizing the loss to lender.  One way for lender to minimize its loss is to require a reduction in commissions paid to the agents.  Since the proceeds of the sale are likely going to have to cover not only the lien amounts but also seller’s closing costs, lender will attempt to reduce seller’s closing costs as much as possible.  This typically results in a reduction of the commission paid to the agents.  Some lenders have a set amount that they will pay as real estate commissions.  Others base the amount paid on the details of the particular transaction. 
 
There is no way to anticipate, with certainty, what any lender is going to do in a particular transaction.  Accordingly, agents need to stay alert to this issue, recognizing that the lender is largely in control.  Ultimately, if the lender does not believe that the total revenues to lender are enough, then the sale will not be approved.  Neither agent can be compelled to reduce their commission to the amount approved by seller’s lender but both agents must also recognize that the sale will not close, and no commissions will be paid, without seller’s lender’s approval.