BY:  Phillip C. Querin, Legal Counsel, Oregon Real Estate Forms Committee

Generally.  Today, many homeowners who bought homes in the last few years did so at the top of the market, paying prices that appeared to be going nowhere but up.  With cheap money and relaxed (some might say “nonexistent”) loan underwriting standards, almost anyone could qualify for a mortgage and buy a home.  Many purchasers took out adjustable rate mortgages with low-but temporary – “teaser” rates that allowed them to purchase more home than they could otherwise afford.  Additionally, between 2004 – 2007, we saw many lenders make 80% loans to buyers, together with a 20% second loan.  (This is known as a “piggy-back” loan.)  This arrangement permitted buyers to get into homes for little or nothing down and avoid mortgage insurance which is normally required when the buyer does not have the necessary 20% downpayment.  Additionally, the lower interest rates ushered in a refinancing boom, which permitted existing owners to tap their home equity for college education, vacations, cars, investments, debt consolidation, and other reasons unrelated to their primary residence.

When the housing market collapsed, values often fell far below the amount of secured debt owed to the banks. Homeowners found that the only way they could sell their home was to ask that their bank consent to sell the home for less than the total mortgage debt against it.  For the last several years, this type of transaction has become known as “short sale.”  It technically means that the gross sale proceeds are insufficient to pay the seller’s recorded mortgage liens and/or other closing costs.  In such cases, the holders of the recorded mortgages must decide whether to grant their consent by agreeing to accept less than the full amount of the loan due to them.  It is this lender decision-making process that slows down the short sale process.  Short sales have become a significant portion of all sales in Oregon and many other states.

The Issue for Realtors®.  The first order of business for a listing agent is to be able to recognize that the seller may need to do a short sale in order to close the transaction. This should become readily apparent if the Realtor’s® Comparative Market Analysis or “CMA” suggests that the value of the home is less than the estimated net sales proceeds generated from the sale after paying off all mortgages and closing costs, including the real estate commission.  Since most multiple listing services, include the RMLS™, now require that short sales be listed as such, this issue must be vetted at the time the listing is taken.

The short sale process can be fraught with problems and dangers.  One party, the seller, is attempting to sell the home for a price that he or she has no control over.  The lender will determine that, once they have their own Broker Price Opinion (“BPO”).  The buyer may be attempting to acquire the property at a substantially discounted price, and may even be making multiple short sale offers at the same time.

The OREF Short Sale Addendum provides that during the period the parties are awaiting bank consent to the short sale, either the seller or buyer may withdraw from the transaction without jeopardy.  This means that until the lender issues its consent and the seller and buyer agree with the terms of that consent, the transaction could fail at any time. Despite the apparent unfairness to the seller, there really is no other practical way to conduct a short sale, since the uncertainty and delay inherent in the process would otherwise make it almost impossible for buyers to commit to participate.

The responsibility for Realtors® is to work short sale transactions diligently, and keep their clients frequently informed.  Often, a Realtor® cannot affect the outcome of a short sale transaction, since much depends upon the lender(s) involved.  In most cases, these lenders are merely servicers of a loan owned by a third party, such as Fannie Mae, Freddie Mac, or some private trust entity.  The third party gives instructions to the lender/servicer, who then issues instructions to the seller’s listing agent.  These instructions are frequently given on a “take-it-or-leave-it” basis.  The listing agent is then required to inform his or her counter part (the buyer’s agent) and seller and buyer are then left to decide whether to agree or disagree with the bank’s requirements.

The Need for Professional Assistance. In short sale transactions, there are multiple issues that are clearly outside of the Realtors’® expertise. For example: (1) If the lender agrees to reduce the indebtedness sufficient to close the transaction, will the seller be taxed on that unpaid amount (i.e. the “debt relief”)?  (2) If so, will the seller avoid the tax under the Mortgage Forgiveness Debt Relief Act of 2007?  (3)  If the bank agrees to remove its lien(s) so the seller can convey marketable title, what happens to the remaining liability under the promissory note?  Can it later be collected from the seller?  (4) Do any Oregon laws apply to protect short sale sellers from personal liability for the debt forgiven by the lender? (5) How will the short sale impact the seller’s credit? (6) Rather than doing a short sale, is there any advantage for the seller to execute and deliver a “Deed in Lieu of Foreclosure” to the lender? (7) Is there any advantage for the lender to simply permit the property to go into foreclosure? (8)  Has the seller considered whether he or she should file for bankruptcy? (9) Does the seller have alternative sources of funds, thus eliminating the need for a short sale or other distressed housing event? (10) Should the seller remain in the property or rent it out?  These questions, some of which require familiarity with legal, tax and consumer credit issues, are best addressed by someone other than the Realtors® themselves.  The sooner the parties, especially the seller, secure professional assistance in addressing these issues, the better.  Realtors® are not experts in these matters and should encourage clients to obtain separate professional assistance.

Role of the Lenders. Once the parties enter into a short sale transaction, they will quickly learn that it is the lenders who will be making most of the major decisions about price, terms and timing of the transaction.  Clear title cannot be conveyed until lenders “lift” their mortgage liens on the property.  Otherwise, there can be no closing.   All time frames set forth in the Sale Agreement will mean little or nothing to the lenders.  They operate according to their own time frame, and sellers, buyers and there Realtors® must fall into line.  The reason for this is clear: if a creditor is being asked to reduce the indebtedness owed, it will need to evaluate multiple issues, which will take time to answer: (1) How does the proposed short sale price compare to the current fair market value?  This will entail the lender securing an opinion of value from their own real estate agent.  This is known as a “Broker Price Opinion, or BPO.”  (2) Is the offered short sale price the buyer’s “last and best” offer, or is he/she prepared to increase their offer?  (3) Are there any other prospective buyers out there who might offer a better price (which would mean less of a loss to the owner of the loan)? (4) Does the seller have any other possible sources of funds besides the buyer’s purchase money, with which to pay down some of the remaining indebtedness? (5) Does the seller actually have a “hardship” qualifying them for the short sale in the first place? (6) Would a straight foreclosure of the property be a better alternative to the owner of the loan?  That is, would a foreclosure sale realize more money to the owner of the loan, than the net short sale proceeds? (7) Are there any other lenders that need to be paid from the closing proceeds? (8) What are the other closing costs – is everything in order on the HUD-1 Settlement Statement?  The lender must be assured that the seller is not receiving some direct or indirect benefit (e.g. money or some other form of consideration) that is not properly disclosed.

Answers to all of these questions, and perhaps others unique to the particular transaction, mean that in a short sale, nothing happens quickly.  Increasing everyone’s frustration with the process is the fact that some lenders may be completely unwilling to sign any written agreements actually committing to the short sale until the very last minute – if at all.  Fortunately, over the past two years, both lenders and Realtors® are becoming more accustomed to the protocols and short sale consents and closings are much better and faster than ever before.

Use of the OREF Short Sale Addendum.  For the past two years, Oregon Real Estate Forms, LLC (“OREF”) has published a Short Sale Addendum which, while not legally required to be used, is the generally accepted short sale form in use throughout Oregon.  Before using it, Realtors® and their clients should closely review it so they understand their rights, duties and liabilities.

General Considerations.  Here are some things to remember when engaged in a short sale:

  1. The seller should be entitled to consider all offers of purchase.  Although much depends on what the lender/servicer wants, sellers do not normally take their property off the market following acceptance of a short sale once they have submitted it for bank approval.
  2. While the seller and seller’s broker will be primarily responsible for securing creditor consent to the short sale, if consent is given, the buyer should have the right to actually see some written confirmation of this.  This may be difficult, since banks do not freely issue binding written consents, and most lender communications contain exceptions and exclusions.  In short, banks try to keep as many options open as possible, so that if something changes, they can retract, or limit a prior consent.
  3. Although today most lenders do not try to tamper with the Realtor’s® commission agreement with their clients, they may ask for some financial “contribution” from the seller, and upon occasion, the seller may look to his or her Realtor® to participate.
  4. Both Realtors® must make sure they adequately explain to their clients the risks associated with short sales and strongly encourage them to secure professional assistance for the legal, tax, and consumer credit issues.
  5. Realtors® should be careful about overselling their short sale skills.  For example, telling a seller that you – the listing agent – will “negotiate” with the second-position lender to get their consent to the sale, may actually be impossible.  The second-position may simply refuse to budge unless the seller pays it some or all of the money due under the loan.

Conclusion.  Today, short sale transactions have been with us for over two years.  They are a staple for some Realtors®, and for others, they are not.  Sellers should seek out the person they are most comfortable with, since the process will take time, and can be frustrating.  Realtors® have to be careful not to oversell their short sale skills.  If they are unfamiliar with the process, they should get another qualified broker involved.  And the good news is that today, for homeowners awash in negative equity and unable to make their mortgage payments, most lenders and servicers now seem to realize that a short sale is a win-win solution for all involved.

©Copyright 2012.  Oregon Real Estate Forms, LLC