With the extension of deficiency waiver tax relief, we have seen no slowdown with respect to short sales, and do not anticipate a slowdown in the foreseeable future. With that in mind, we wanted to remind anyone who routinely handles short sales to consider the following:
- Do not forget about how critical it is to assess the strength of the buyer (and in some cases, the experience of the agent representing the buyer). Will the buyer put up their deposit upon contract execution rather than after approval, and if so, how much? Will the buyer perform their inspections up front, rather than waiting for approval. Is the buyer an entity that is purchasing the property for investment? Does the buyer need financing that could take more time than the short sale lender will provide to close? While none of these issues necessarily mean that your short sale will fail, they are “yellow” flags.
- Are the parties under the mistaken impression that the lender must approve a short sale? They do not, especially if it is a smaller bank or investor. It is at their discretion, and they essentially hold all of the cards, including the decision as to price and closing time frame.
- If your buyer is not paying cash, do they have a pre-approval letter and can they provide proof of funds for the down payment? Does such buyer understand that upon approval, they will likely have 30 days to finalize their financing and close? While these concepts seem basic, it is a key component that can cause substantial delays in the short sale process, and in many cases, cause the short sale to fail altogether.
- Do the parties understand that ALL lien holders have a say in the process (banks, judgment creditors, associations, etc), and EACH has the right to make their own independent determination?
- Do the parties understand that ANY lienholder has the right to retain their ability to pursue the deficiency, and in many cases, a second lender will indeed retain such right. The borrower should not be led to believe that in a two lender situation, they will absolutely have their entire deficiency balance waived by both lenders. If so, the borrower is being set up for disappointment (or worse), and the deal could easily fail a as result.
- Does anyone still believe that threatening a lender that the seller or buyer will “walk” (and therefore the lender will get “nothing”) actually works in this day and age! It does not, and the lenders are rarely, if ever persuaded by such threats. Lenders continue to make “unusual decisions”, and therefore do not set your clients up for disappointment by promising anything. If the proposed price does not meet the lender’s sometimes arbitrary requirements, then the short sale will not get approved. Threats to the lender rarely, if ever work. Remember, in any short sale, it is the borrower who is asking the lender to do them a favor, not vice versa.
- Is cash really king? Whether the buyer is a cash buyer or needs financing makes little difference to the lender. In fact, an argument can be made that cash buyers (who are typically investors) are less attractive to lenders as investors are substantially more likely to cancel a short sale than an end user.
As always, we recommend that anyone considering a short sale (buyer or seller) consult with an experienced real estate attorney. More importantly, never make any promises or representations to a party involved in a short sale transaction about what a bank may or may not do unless such statements are substantially qualified or you are prepared for the possibility of making a misrepresentation.
This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.
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