Recently I attended a seminar at the local Board with regard to short sales and foreclosures. The focus was on short sales for the most part driven largely by the number of questions. The presentation and discussions were by a local title company, a real estate attorney, and a CPA who is also a member of the Board.
I broke down the subject covered into three categories: 1) protecting yourself as a REALTOR, 2) protecting your buyer, and 3) working with and protecting sellers.
1) With regard to protecting yourself there are issues of liability to protect against and there is protecting your income (commission). The liability items are nothing new - don't act outside the scope of your licensure by providing advice and information such as legal, tax, and financial issues. These subjects will come up quite a bit in short sale situations. Covered in items 2) and 3) are the use of listing and sale contract addendums that can help with full disclosure. The bottom line is that the mortgage holder is looking to minimize their losses and not become property owners. The most cost effective way to deal with mortgagees that cannot make their payments and where the proceeds from a sale are insufficient to cover the outstanding balance is for the mortgagor to accept something less than what is owed. Rest assured, the mortgagor will be looking everywhere to minimize their losses and the real estate commission is a prime target and it is almost always reduced. Under these conditions a short sale situation exists - i.e. the sale is short of sufficient funds to pay off the note and other expenses. No attempt is made here to discuss how and why so many of these have come about. That's a whole other discussion. It was reported that 968 foreclosures were filed for in Lee County FL in June of 2007!
To the point on protecting your commission...trouble arises if you're the listing agent when a fixed amount, expressed as a percentage of sales price, as commissions paid to the buyer's agent is offered in the MLS when the mortgagor requires a reduced total commission as a condition for their consent to the sale. All contracts for purchase in short sales are contingent on the mortgagor's approval. If you are the listing agent, you will be on the hook to pay the advertised amount to the buyer's agent thereby drastically reducing your income on the deal after a whole lot of work.
2) With regard to working with buyers you should make sure that the buyer's eyes are wide open, disclose everything, prepare the buyer for potential delays, and the possibility that the deal won't close on time or at all due to all the approvals required. Remember, most mortgages are sold in blocks to investors and each block that is sold has a set of stipulations between the seller of the mortgages and the investor group. So depending on the stipulations and the number of short sales that have already been done and the length of time since the mortgage was taken out each one must be evaluated. What a mortgagor did for one note may not apply to the next one.
The real estate attorney offered an addendum to attach to every purchase contract to help protect the buyer (and seller) and to provide an out if some predetermined amount of time has passed without action by the lender in addition to other details. There is a slight difference in the addendum depending which side you are working. The difference provides for the seller to continue to market the property in search of a higher price and provides for the initial buyer to have first right of refusal to match the new, higher price.
3) With regard to working with sellers, in particular before even accepting a listing do your homework. I've read other articles that talk about agents "finding out" that a short sale situation exists after listing the property. Simply, this should not happen. Do your homework first by i) looking at when the property was purchased - 6, 12, 18 months prior can be a red flag, ii) check the mortgage recorded, is it for more than what you think the listing price will be?, iii) ask your title company to provide a draft net closing sheet, iv) check for lis pendens...
Once you know what the story is you can adjust accordingly and begin to line up all the information the mortgagor will require to approve a sale when a contract comes in. In addition to the sales contract addendums mentioned above the real estate attorney also recommended a listing contract addendum. Among other items the addendum requires the seller to cooperate in every way possible to facilitate the sale (in fact it authorizes financial information to be released to you), agree to reduce the price by some amount every X days until sold (good faith to sell, lender's like this), broker will agree to a reasonable reduction in commission, and the amount offered to cooperating brokers will be reduced also proportionately.
Other Information
I didn't talk about it but there are also potential adverse tax consequences of a short sale for the seller that you should understand and advise your clients to consult a proper financial advisor. There is a big difference with regard to credit scores, too, between a short sale and letting it go to foreclosure. The former is clearly preferable with regard to credit scores.
When a mortgagor agrees to a sale and release of mortgage lean the note obligation must still be dealt with in one way or another. It could be forgiven in part or in full or it may become a personal note.
Disclaimer: It's not my intent to provide legal or other specific advice to you and I therefore suggest that you talk to your broker and legal council to determine how it's best it is for you to proceed. This is a complicated subject and learning about it before you dive in is advisable.
