7 Pitfalls to Avoid in a Short Sale

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7 Pitfalls to Avoid in a Short Sale

Don't let it all sink!

So you’re underwater on your home, are you?  Well, you’re not alone.

If you’re like everyone else owing more than it’s worth, you’re probably considering a short sale.  But is a short sale right for you?

Short sale expert, Michael B. Citron, describes a short sale candidate in his book, The Art of the Short Sale, as having “the one key ingredient …  a financial hardship.”  While you can come up with many reasons why you don’t want to pay the mortgage on the house, you must have a good reason why you can’t pay.  Don’t fool yourself into believing the lender won’t care that you have a nice nest-egg sitting in your bank account.   And don’t believe for one moment that simply being underwater on the home is a financial hardship.

So, assuming that you are a candidate for a short sale, here are seven ways you can make sure that your short sale is successful:

Happy Halloween Scarecrow1.  No Straw Buyers or Accepting Money From the Buyer Outside the Closing.

There’s no more sure-fire way to end up in prison than to try to purchase the home from yourself by selling to a friend or relative.  And secretly asking for money back from the buyer after closing is no different. If you would like to find yourself back in homeownership, there are ways you can go about it legally.  For instance, credit restoration expert, Michelle Deeb, explains that the damage to your credit score isn’t permanent and will improve over time.  She explained that “a short sale does not negatively affect your score like a foreclosure or collection does.”

2.  Make Sure the Real Estate Broker Commission is Due Only Upon a Successful Closing.

Some commission agreements state that the agent has earned a commission when an agent finds a buyer.  In a short sale (in fact, in any transaction), however, finding a buyer is only the beginning.  I can appreciate the hard work a real estate agent puts into getting your home under contract, but you wouldn’t want to find yourself owing a commission even though the deal doesn’t close.  This, of course, is not the only listing term that should be negotiated.  An experienced real estate attorney can help advise you on what else you should be looking out for.

3.  Find a Real Estate Agent that is Experienced in Short Sales.

While short sales have been used as a method of pre-foreclosure workouts for years, never have they been so common.  Many agents declare themselves to be experts after only a few successful deals.  Ask for referrals and find out who will actually be doing the negotiating with the lender.  Sometimes the agent hires a loss-mitigator experienced in dealing with lender.  This may not necessarily be disadvantageous to you, but you should then inquire as to the loss-mitigator’s credentials.  Also, be concerned when the loss-mitigator wants to buy the house from you – you may very well end up being the victim of a fraud.

Make sure your contract has the right contingencies.

4.  Contract Contingencies.

As a seller, you want to make sure that the Purchase and Sale Agreement is contingent on all your lenders (there may be more than one) approving the short sale and agreeing to release you of all liability.  From a legal perspective, you may be on the hook with the buyer absent this contingency even though the lender did not agree to the short sale, or agreed to it, but still wants to hold you responsible for the deficiency.  Assuming that you you are experiencing a financial hardship – which is the reason your attempting a short sale in the first place – the buyer may have little incentive to follow through on any legal claim against you.  But why take the chance?  This is another good reason to seek the advice of a real estate attorney and have your contract reviewed.

5.  Take Control of the Closing.

Every jurisdiction is different.  In Florida, depending on the county, the buyer usually controls the closing and chooses the closing agent.  Regardless of what is customary in your county, you should control the closing since the closing agent will be taking an active role in negotiating with the lender.  The extent of the closing agent’s participation will differ from deal to deal, but will, at a minimum, include acquiring the short sale payoff approval and making the actual payment to the lender.  Another good reason to choose your own closing agent is that you can pick one that is a real estate attorney and have him help you through the short sale process in exchange for the closing and title work fee (which the lender pays anyway).  Essentially, you get an attorney to review your contracts for free.

6.  Consult with an Accountant.

Do not accept tax advice from your real estate agent or lawyer.  Just like you wouldn’t want your pharmacist to give you medical advice, why depend on someone other than a CPA to determine your tax liability.  Sure, you might be able to do some research on your own, but why take a chance?  There are exceptions to every rule.   Contrary to what you might have heard, there are certain circumstances that you might not have tax consequences on second homes and investment property.  Again, consult an accountant.

7.  Review Your Lender’s Short Sale Payoff Statement.

This is another great reason to hire an real estate attorney.  There are many different ways that lenders word their short sale approvals.  And it’s all in the wording.  Sometimes they reserve the right to pursue you for the deficiency.  There are other times when the lender is silent about it.  Either way, it is important that the short sale approval be examined and reviewed carefully before you proceed to the closing.

Bonus Tip:  Make sure the agent’s listing agreement allows for a reduction in the commission if the lender refuses to pay the entire amount – it is almost a certainty that they will.

There are many things that can go wrong with a short sale.  Have you experienced a short sale nightmare?  Be sure to comment below and share them with us!

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