When is a property officially a "Short Sale"?

4Mar/104

When is a property officially a "Short Sale"?

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Continuing the great and enlightening discussion on the topic of short sales it has come time for the bane of the web: a poll. Actually polls are not the bane of the web but they are also usually skewed and completely unscientific when used in this manner. However, which is the same as but, your opinion and perspective is invited on this particular matter.

Having taught and “done” short sales for a number of years, in fact well before they were one of the biggest buzz-words in the industry, I have had the chance to work with many agents, sellers, buyer, banks, and lenders in multiple aspects of the process. Still there are “gaps” in understanding, approach and even the timing of a short sale. Moreover, and more personally important to me as the lender offering financing to people who are purchasing short sales, the timing of when a property officially becomes a short sale.

Many of you, some very dear to me, have made sure I understand the MLS in various areas, require a property which is upside down to be listed as a “short sale”. This has, can and will produce a couple of buyer damaging situations and for that reason is well worth addressing in detail, in public and with an open agenda.

The legal definition of short sale wherein regards real property is the sale of a property for an amount less than the amount due to the existing lender(s) to whom the payoff is owed. I don’t think anyone will argue with the meaning of that statement although some may offer different verbiage. So we can all agree on the definition.

More and more we lenders are getting contracts from buyers and their agents for us to proceed with a mortgage application on short sale properties where the short sale has not yet been accepted by the existing lender(s). In other words a non-valid contract. Then there may or may not be pressure from the buyer/buyer’s agent to proceed with the loan process not knowing if the short sale will even be approved by the existing lender(s).

The cost to the customer is credit fees (if charged), appraisal fees, inspection fees, fees associated with verifying their employment, income and assets if charged by those third part providers, time, dreams, and hope.

The cost to the new lender (loan officer, set up person, processor, underwriter) is hours and hours which could be spent on someone who has brought a viable transaction in for a loan application. The most important of people affected is the customer.

Here’s the catch – many short sale acceptances come with a 10 day validity period. Ten days? According to the new RESPA guidelines the loan officer can’t even accept documentation from the customer until all 6 triggers have been met and one of those triggers is a property address. In reality there is no address until there is a valid, fully executed contract which, on a short sale, requires acceptance of the short sale by the existing lender(s). Ten days to get an appraisal, inspection if needed, the title work, verify all assets and income from the customers, get it into underwriting, cleared and funded in 10 days.

It “can” happen and often does but not on every transaction. It takes massive coordination to close a loan in 10 days. ASK FOR 21.

So here’s the catch. Should MLSs be educated to the difference between “short sale” and perhaps a category called “requires short sale” instead of short sale? After all, it is not a short sale until …

Please take a moment and answer the one question poll to the right. Your feedback truly is valuable. Your comments, as always are invited.

Tagged as: atlanta, Real Estate, short sales Leave a comment

Comments (4) Trackbacks (1) ( subscribe to comments on this post )

James Malanowski
March 4th, 2010 - 18:09

I would agree with you on the definition but not on the contract.

If a seller accepts a buyer’s offer on a property that needs a short sale approval it is a valid contract with a seller contingency. No different from a contract with the several buyer contingencies that are commonly found in an agreement to purchase.

Why would you not proceed with the loan process? Other than the obvious costs to a buyer there is no reason not to proceed with the approval process. Worst-case, the buyer has lost money on the appraisal and inspection. Everything else you do (for the most part) can be carried over once a replacement property has been identified if the short sale is not approved.

( REPLY )
kencook
March 5th, 2010 - 09:39

Hi James thanks for your input it’s exactly what we need for a good open exchange. It is very different from other contingencies when you have a third party who can simply refuse to agree as opposed to having easily remedied contingencies like small repair items or title issues. Further, we (lenders) do not proceed with the loan process until due diligence is completed – without a valid appraisal, for example, the file never gets to processing. It stays in the setup department.

Having been a lender and an upper level executive for a lender I can tell you it’s not a valid contract until it has the signature of the person with the right to agree to the sales price. The NAR can call it anything they want – it’s not closing at that price without the Loss Mitigator’s signature.

You question “Why would you not proceed with the loan process?”

There are as many as a dozen busy people who work on the loan.
> There is the loan officer who must follow stringent federal guidelines on when she can do certain things.
> There is the setup person who must order verifications of taxes, employment, mortgage/rent, run background checks on the buyer, seller and agents.
> There is the processor who must create a coherent book of information containing as many as 200 pages or more of well documented information gathered from the borrower and third parties.
> There is the appraisal cost to the buyer and possibly the cost of an inspection – which I would never pay for unless I had a valid contract.
> There is the title agent who does the title clearing and if there are any issues must follow the channels to clear the title.
> There is the underwriter who WILL NOT clear the file without a valid contract.
… and I left out a few like the compliance department, the underwriting setup person, the branch manager who may be required to review every file, the insurance agent who prepares the policy and issues the documentation ….

So, if you think it’s okay to waste (gamble) the time of all those people when they could be working on your customer’s good file with an approved contract instead of gambling on your competitor’s unapproved short sale then okay. That’s your vote – but I would recommend not opening a mortgage company and running it that way

As far as being “carried over” the rules have changed. With the new RESPA guidelines we pretty much have to start over and if it was an FHA loan now we’re definitely starting over with a new casefile. Not to mention the title work is void, the appraisal is void, the insurance has to be redrawn, we have to maintain the documents on the original application and start another application because of the new MDIA disclosures. So it’s not as simple as just “keeping it on the books” anymore.

We may be able to use paystubs and bank statements but usually getting those is simple and comprises only one tiny step in the process. If it has been more than 30 days since the original application we’ll be getting those anyway so essentially it is completely starting over.

( REPLY )
James Malanowski
March 7th, 2010 - 14:19

Sorry for the delay in getting back here … No e-mail subscription to comments = I forget to check.

I guess I should have been a bit more specific … I don’t see why a lender would not move forward with all the BUYER approval issues. Pay stubs, VOE, etc etc. If the buyer doesn’t want to pay for the appraisal until they have short-sale approval I get it, but (in my opinion) there is no excuse for a lender not to make sure the buyer is fully approved even if the property is not ready yet.

Especially in this time of short-sale listings leading to 10 day closings is it not prudent to make sure that all that can be done is done so that when the short-sale is approved all that needs to get done would be the title report and appraisal?

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Angel Gosa
October 9th, 2010 - 09:56

I apologize I can’t add to it as I have no experience with real estate, but can you help me as you seem to be like a wealth of knowledge. My own house mates and I are seeking for a residence to rent. We have lived collectively for a couple of years but want to move right away. We searched at a really great location recently but we were told that our own credit ratings are not good enough to lease the property . The realtor offered to manually change out credit ratings to be able to rent the property . I really feel like this is going to get me personally into some problems in the long run. Is

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