By Mark S. Steier
The short sale is a sale of real property for less than the secured liens owed on the property. With foreclosures up fifty percent statewide and property values falling, the number of short sales is dramatically increasing. As a result of the high incidence of subprime loans, including mortgages with teaser rates as low as 1% and so-called “liar” based on little or no documentation, many borrowers are unable to make the monthly payments when the interest rates on such loans get reset. In many instances, the monthly payment is at least 25% higher. Because of the slowing economy, many conventional loans are also into default. Not surprisingly, lenders institute foreclosure proceedings and borrowers whose properties are “underwater” endeavor to get short sales approved.
For such borrowers, a short sale may keep the property out of foreclosure and thereby preserve their credit rating. Short sales may be a way to successfully resolve a pending foreclosure, since, very often, the lender will forgive some or all of the indebtedness owed. Under prior law, such forgiveness constituted income to the borrower; however, under current law, if the property is the borrower’s principal residence, there is no income tax consequence of any portion of the loan forgiven.
Our office counsels many borrowers in these situations. In addition, we represent a number of clients who are looking to purchase properties which are in foreclosure or the subject of short sale negotiations.
Regarding someone wishing to purchase such a property, an important element of the transaction is patience. It usually takes a substantial period of time-perhaps three months, sometimes more-to get a short sale approved by the seller’s lender.
When we represent such a seller, we often utilize the services of a short sale specialist who is skilled in negotiating with workout departments and who sometimes can speed up the process. Since there are a number of documents that such a seller needs to produce to satisfy their lender’s requirements, when representing such a seller, we request that the seller provide us with all of the requested financial information as soon as the property is listed for sale.
In order to get a short sale approved by a lender, in addition to providing necessary financial information, the contract between the buyer and the seller must include the following provisions:
- The property must be sold “as is” and with no seller concessions;
- The contact must be subject to the approval of the seller’s lender; and
- The real estate commission is to be paid only in the event of transfer of title.
Deciding whether or not to approve a short sale, the seller’s lender will do an appraisal of the property to make sure it is selling for a fair price. We have closed a number of transactions for buyers and sellers of short sale properties and would be happy to work with you on your purchase or sale of property which is in foreclosure, or is a short sale situation.
Please feel free to contact Attorney Mark Steier at (860) 756-0387. He would be happy to schedule a meeting with you in my West Hartford or Avon location.