NEGOTIATING SHORT SALES

What is a short sale?

Simply put, a short sale is a sale where the mortgagee agrees to release or maybe even satisfy the mortgage lien for less than the amount owed.

What is the difference between a release and a satisfaction?

A release can be given to the mortgagor.  This benefits the mortgagor who can then be dropped from a foreclosure suit and benefits the mortgagee who can then still proceed with its rights against others.

A satisfaction completely removes the mortgage lien.  However, it does not necessarily relieve the mortgagor from his or her obligation under the promissory note.

In drafting contracts, how should it be phrased?

The owner/mortgagor would like to have the contract contingent upon the mortgagee’s acceptance of the purchase price and fully satisfying the mortgage and promissory note.   The Florida’s Realtor Association has come up with a standard addendum.  However, it should be noted that mortgagees are not bound by the terms of the contract.   In a recent case I handled, the mortgagee would not release my client from the promissory note.    Because of this, my client was not obligated to close.   However, with interest accruing each month and property values diminishing, it was in her best interest to waive this contingency and close.

What is a deficiency?

The deficiency is the difference between the amount of money realized from the short sale of the property and the total amount owed (which includes accrued interest, advanced costs, attorney’s fees, etc.) under the promissory note.    This is an unsecured obligation which can be discharged by bankruptcy.

What are most mortgagees going to require for a short sale?

Most mortgagees are going to require an appraisal to confirm that current market price is indeed less than what is owed on the mortgage.   Most will also want complete financial affidavits from the mortgagor to verify there are no other sources of income or assets available to pay the amount of indebtedness.  The amount of documentation will vary.   The best approach is to get as much together as possible and present it all at once instead of by piecemeal.  If your clients are not willing to give you full and complete financial disclosure, then don’t bother wasting your time.

Who do I negotiate with?

This has been the biggest problem with short sales.  In a lot of situations all of the communications are with the loan servicer who has limited authority to negotiate.  In some cases, no one even knows who the mortgagee is.

Once a foreclosure suit is filed, attorneys are limited to dealing with opposing counsel.  This is where realtors can be extremely useful.  You can negotiate directly with the mortgagee, who ultimately is the final decision maker with respect to pursuing or dropping a foreclosure lawsuit.  However, most settlement proposals will be conditioned upon approval of and payment to attorneys handling the foreclosure sale.

What are the main points that should be addressed in negotiating a short sale with the mortgagee?

• Make sure dealing with proper authorized agent.  Get name, title and contact information.
• Stress the likelihood of incurring further losses in pursuing the foreclosure, the costs of managing and marketing the property after the foreclosure sale and deterioration in value.
• Try to get mortgagee to release underlying obligation or at a minimum not to pursue a deficiency. 
• Try to avoid a judgment being entered.
• Do not waive any rights owner/mortgagor might have. 
• Follow up all verbal conversations with written documentation.

What should I explain to the owner/mortgagor?

“Full disclosure” is the operative phrase.  Need to clarify nature of your relationship.  Need to reveal any potential conflicts of interest or business or family relationships you may have with other participants. 

Make sure owner/mortgagor understands difference between mortgage and underlying promissory note and understands concept of deficiency.

In event short sale is approved and lender agrees not to pursue deficiency, owner/mortgagor need to be aware that loss is reported to IRS which will deem as income for that taxable year.  The problem with this is that tax liability is not dischargeable.   Recognizing this to be a major stumbling block, Congress enacted a law where this will not be taxable income for sellers of principal residences for the next couple of years.