Short Sale Buyers Need to Know

Question No. 1: I made an offer for a house that was a short sale. After my offer was accepted and the contract had been sent to escrow, I noticed the house still listed as "active" on the multiple listing service. The listing agent claimed that he kept receiving inquiries on the property, and used that to push me to remove inspection and loan contingencies. He said he would only mark the home "pending" once I had removed contingencies.

Is it possible for the seller to accept a second buyer's offer after accepting mine (even if the later offer comes with a higher price? Don't they need me to sign a release before they do that?

If they do accept another offer and go with the second offer, do I have any legal right for compensation? (I believe this would be a "breach of contract" case, but can you confirm it?) --Mike

Question No. 2: The broker on a short-sale house has not acknowledged my offer and will not sign the papers. He says he wants to wait and see if the first offer goes through first. Isn't this an unlawful way of doing things? I do not know if I am a backup buyer or just left out in the cold. Is there anyone I can contact regarding this unethical way of doing things? --Charles

A: Talk about two sides of the same coin! One of you is in contract on a short sale and concerned about whether a second, higher offer could usurp their position. The other is trying to usurp a first-position contract on a short sale. A little education about this area of the short-sale realm will answer both your questions.

Short sales differ from "regular" sales in that a short-seller is selling a home at a net price (after the seller's closing costs) below what the seller owes on the home. As a result, all mortgage lenders and holders of liens on the property must approve the sale before it can take place.

Procedurally, what happens is a buyer makes an offer on the property and the seller accepts that offer and generally requires that the buyer agree to a short-sale addendum, which significantly alters the normal flow of the contract, as well as the legal rights and obligations of both parties -- mostly in order to work in the fact that there's at least one extra party to the contract besides the signatories who must sign off before the deal can be done.

In some cases, the buyer must sign the standard short-sale addendum used by the agents in the area and an addendum required to be signed by the bank(s) involved on the seller's side, who will not consider the short-sale application without the document being signed.

Ultimately, the short-sale addenda prevents the contract from being finalized so as to prohibit the seller from considering or accepting other offers until after the bank(s) and other lien holder(s), if any, agree to the terms of the transaction.

That is, when you are a short-sale buyer, you are notified upfront that the seller does not have the power to create a binding contract -- not unless and until the bank(s) and lien holder(s) sign off on the price and other terms of your offer, including your qualifications.

The short-sale addenda -- both the boilerplate forms brokers and agents use and the bank versions -- add in the banks' and lien holders' approval as a required condition of the contract. Mike, normally, the buyer's contingency periods for inspection and loan don't even begin running until after the bank(s) involved have approved the sale.

While it is strange that the listing agent would pressure you to remove contingencies so soon in a short-sale situation, it is also highly possible that he was waiting to collect additional offers or waiting to make sure that you were actually able to do the transaction as early as possible in the sale.

It sounds like you are without your own broker or agent in the transaction -- if you were, the chances you would have been pressured into prematurely paying for inspections and appraisals, etc., would have been far, far reduced.

In a "regular" non-short sale, the seller cannot kick a buyer out of place in preference of a later, higher offer once the property is in contract, though in a short sale the bank may actually require that the seller submit any and all offers to purchase the property that are received prior to the bank green-lighting the transaction, so that the bank can take the highest offer and minimize its losses.

Mike, the bottom line for you is that, strictly because your transaction is a short sale, it is highly possible that the seller may retain the legal right to boot your offer out of first place for a higher offer up until the point that the bank approves your offer.

However, Charles, unless their mortgage lender requires them to, it is not the case that the seller is obligated to do anything with your backup/second-in-time offer -- neither is the listing agent's behavior unethical, in your situation, as the agent is being upfront and honest with you about the seller already being in contract.

For both of you, I'll advise you as I advise any and every buyer in a short-sale situation: Do not count your chickens until the bank approves your contract! That is, until the bank has approved your offer, do not spend money on an appraisal, do not spend money on inspections, and do not stop looking for a home.

If you do, you do so at your own risk -- the risk of losing the cash you've spent if the bank does not approve your offer for any reason.

The seller -- to answer your second question, Mike -- does not owe you any compensation for breach of contract, unless you were already notified that the bank had already approved your offer.

Inman News

Personal Bankruptcy a Controversial Means to Stay Afloat

Cash-strapped, jobless and denied a loan modification, Del Phillips faced the same straits as millions of homeowners who risk losing their homes to mortgage lenders.

Some have struggled unsuccessfully to keep their homes, and others have just walked away. Phillips decided he wanted revenge and was willing to ruin his credit record for it.

When a short sale didn't work out as planned, the 32-year-old Chicagoan opted for Chapter 7 bankruptcy liquidation, a move that will leave Phillips with little except for the scant possessions in his one-bedroom condo. It also will leave his lender, Chase, with little except for, eventually, a condo that has lost value. Meanwhile, Phillips continues to live there, mortgage-free.

"I don't feel shameful for what I've done," Phillips said. "I've gotten past being shameful."

Phillips' move may seem an extreme riff on the difficult decisions homeowners make to unburden themselves of debt owed on properties that have lost substantial value. Lawyers and housing counselors say, however, that personal bankruptcy filings are becoming more commonplace as debt-holders seek sums due them, particularly on second "piggyback" mortgages used to buy homes.

"It's a big trend," said Dan Lindsey, a supervisory attorney at the Legal Assistance Foundation of Metropolitan Chicago. "Banks are having a hard enough time dealing with the first mortgages. The second (mortgages), there's no equity there to collect, so they're being charged off and sold to debt buyers and rearing their ugly heads later. It's a drastic last resort to file Chapter 7, but in some cases it's appropriate."

Phillips bought the one-bedroom condo, tucked into a courtyard building, in May 2007 for $212,500, securing a first mortgage of $159,375 and a $53,125 second note, both from Chase Bank, according to county records. In January 2009, he lost his public affairs job, began drawing on his savings and, in April 2009, after the government began its Home Affordable Modification Program, applied for a mortgage loan modification from Chase.

Customer service representatives with Chase, he said, told him to keep paying the monthly mortgage of about $1,400 while he awaited a decision on his application. In September, the still-unemployed Phillips was turned down for a modification because, as the letter stated, his hardship "is not of a permanent nature."

Phillips decided to stop paying the mortgage and try to sell his condo in a short sale, in which a homeowner sells the property, with the lender's approval, for less than the amount owed on the mortgage. A short sale typically does not tarnish an individual's credit history as much as a foreclosure.

Short sales have been portrayed as a salve in the housing crisis, although lenders have been slow to approve them. In Phillips' case, though, an approval for the offer on his condo came with a catch. Chase notified Phillips that it would still have the legal right to pursue him at a later date for the approximately $54,000 owed on the second mortgage.

"A short sale may satisfy the first lien, but the customer could still be responsible for the second lien," said a spokesman for Chase, while declining to discuss Phillips specifically.

Phillips sought help from Neighborhood Housing Services of Chicago Inc., a federal government-approved counseling agency, which broached the idea of filing personal bankruptcy.

"(Phillips) did everything right. He had good credit, and then he lost his job," said Michael van Zalingen, director of homeownership services for Neighborhood Housing Services. "If your lender isn't interested in helping you, or the only thing you qualify for hurts your household, I don't think you have any moral obligation to stay bound in that mortgage or paying to that company when it no longer makes economic sense for you."

Phillips bristled at the bankruptcy suggestion, but after consulting with an attorney, in late February he filed for Chapter 7 bankruptcy, not the Chapter 13 that would have negotiated his debts, including those with Chase.

"My other option was to say, 'I'll roll the dice with the bank,' " Phillips said. "Will they really come after me? I wouldn't put it past the bank industry to do that. It's going to kill me to pay a bank for a house I no longer owned. I was, like, there's no way I'm going to pay the bank another dime."

Lawyers say they are hearing about more instances of mortgage lenders selling the delinquent second loans used to buy homes during the industry's heyday to third parties that are then pursuing debtors.

"He's not outside the norm," said Stephen Cleary, a Chicago attorney and board member of the Northwest Side Housing Center. "He can now sleep at night. The mental anguish has been relieved."

For the year ended March 31, personal bankruptcy filings nationwide rose 28 percent, to almost 1.5 million cases, according to the administrative office of the U.S. Courts.

Still unemployed, Phillips says he wishes he had back the more than $12,000 he paid toward his mortgage while he sought a loan modification that never materialized. For now, he's using part of his jobless benefits to pay his condo association fees while he looks for a job and considers moving out of state. Late last month he was served with a loan default notice by Chase, and Phillips estimates he'll be able to stay in his condo seven more months while the foreclosure action works its way through the courts.

"I'm not a deadbeat," Phillips said. "I've had to be very shrewd, like most business people. ... I'm looking out for my best interests, and this is my best interests."
(c) 2010, Chicago Tribune

Federal Short Sale Guidance Out

Short sale procedures for loan servicers are standardized in guidelines released under the federal government's Making Home Affordable loan modification initiative for troubled home owners. The guidelines create a path for a short-sale or deed-in-lieu of foreclosure for eligible borrowers for whom loan modification isn't a viable option. The guidelines provide $1,500 in federal funds to help borrowers relocate, $1,000 to help servicers offset their processing costs, and up to $1,000 to investors to secure release of subordinate liens. For each $3 an investor pays to secure the release of a lien, the investor receives $1 in assistance. The guidelines prohibit a reduction in agreed-upon commissions (if they're not more than 6 percent) and take effect April 5, 2010, but can be implemented by servicers at any time. Fannie Mae and Freddie Mac are expected to follow this release with their own rules based on these guidelines.

Read NAR summary.

Read the entire guidelines.

Realtors Help Buyers Attain Short Sales Success

San Diego, CA - November 16, 2009 - (RealEstateRama) — Not all buyers are suited for a short sale. This was one of the messages delivered at “Short Sales from the Buyer’s Perspective” during the 2009 REALTORS® Conference & Expo today.

According to the latest Realtors® Confidence Index, one out of 10 recent buyers purchased a home through a short sale. The survey also showed that Realtors® are concerned about the hurdles buyers face in short sales.

Primary reasons that short sales fail, include an incomplete short sale package, an offer that is too low, and inaccurate appraisals. Buyers who are good candidates for short sales are very patient – it can take some lenders four months or longer to approve a short sale – have their financing in order, and don’t have any contingencies in their purchase offer.

“Short sale buyers need to have the time to be able to wait for the lender’s approval; some lenders get several hundred contacts every day. Buyers must also be willing to make an offer that has a reasonable chance of closing and take guidance from their agent. If the offered price is too low, there is a good chance the lender won’t respond or approve the contract.”

“As short sales become more commonplace, both buyers and sellers need the help of seasoned, experienced professionals to help them navigate the complexities of a short sale transaction,” said National Association of Realtors® President Charles McMillan. “As the first, best source for real estate information, Realtors® provide valuable insights and experience that can help buyers realize their homeownership goals, whether through a short sale or other means.”

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.2 million members involved in all aspects of the residential and commercial real estate industries.

Short Sales: The Basics

Due to current economic conditions, the number of short sale properties on the market is rising. Clicking here will show you more information on: short sales and their challenges, the government's efforts to address these challenges, and tools to help you navigate the short sale process.

FHA Program to Help Struggling Home Owners

The newly enhanced FHA Making Home Affordable Loan Modification program will help cash-strapped home owners reduce their monthly mortgage payments and stay in their homes, NAR says. Read more >

Making Home Affordable Program

The Obama Administration has announced updates to its Making Home Affordable program that include a more uniform process for handling short sales. It is another step in helping more people stay out of the foreclosure nightmare. A summary of these changes can be found on REALTOR.org. Information about Making Home Affordable can be found at: http://makinghomeaffordable.gov/.

Foreclosures, Short Sales Weigh Down Prices

NAR has released its first-quarter report on median home prices in 152 metropolitan statistical areas, showing that prices dropped 13.8 percent from the year earlier. Read more >

Metro Home Prices Down on Distressed Sales

Short sales and foreclosures account for almost half of sales nationally. Read more >

Requirements for a Short Sale

Typically a Short Sale package (for a conventional loan) will include the following:
Hardship Letter, Copy of Listing Agreement, 2 Months Bank statements (all accounts including retirement and 401K), 2 months paycheck stubs, estimated HUD statement, payoff quote from senior lien, letter of authorization to release information to Realtor.

Short Sale Results in Tax Liability for Sellers

The IRS properly imposed a penalty on a taxpayer for failing to include as income almost $75,000 in debt forgiveness in his 2003 tax return when he sold his property in a short sale, ruled the United States Tax Court, affirming the IRS's decision. Note: In December 2007, President Bush signed into law the "Mortgage Forgiveness Debt Relief Act of 2007." The law applies to debt forgiven in 2007, 2008, or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief, the IRS says.

What's a Short Sale?

A short sale occurs when a property is sold and the lender agrees to accept a discounted payoff, meaning the lender will release the lien that is secured to the property upon receipt of less money than is actually owed.