OUR SHORT SALE JOURNAL, 2007 - SOME TRIUMPHS, BUT SEVERAL HEARTACHES!
SLOW-TO-ACT LENDERS SCUTTLE THREE DEAN'S TEAM PENDING SHORT SALE TRANSACTIONS THIS YEAR
Put in layman's terms, a "Short Sale" is one where the seller's lender agrees to a release a mortgage lien on a property even if the house is sold for less than what is owed on the mortgage. For homeowners running behind on their payments, selling short prevents foreclosure. Many qualified real estate consultants, and, unfortunately, some unethical agents, look to short sale as a source of business, and have for many years.
In today's shifting Chicago Real Estate market, however, short selling is not easy, and not risk free either. It is also very time intensive, with high chance of failure.
According to Stephen Bashaw, a Lisle IL Real Estate Attorney, in a presentation recently to the Illinois Real Estate Lawyers Association, only about one percent of sellers approaching foreclosure are able to successfully negotiate a short sale with their lender. (See Marilyn Kennedy Melia's article in last Sunday's Chicago Tribune).
In order to get a lender to even CONSIDER a short sale, you need a pending contract on the property, a "Letter of Explanation" from the seller, summary market data from the seller's real estate consultant, a payoff letter from the lender, and a mocked-up closing statement projecting closing costs, broker's and attorney fees, and the estimated net proceeds the lender will receive after all expenses for sale.
Most lenders have their own forms package, and the required forms often take several weeks to receive and complete, for submission to the lender. Often times, finding the right contact person in the lender's Loss Mitigation Department is a test of patience, and many Loss Mitigation reps, overwhelmed by the high level of foreclosures and request for loan restructuring in today's real estate market, are very unresponsive.
Remember, as well, that attorneys and real estate consultants contacting the bank for proprietary information on the seller's loan must first have a completed Authorization Letter, signed by the seller, to even speak about the seller to the lender's representative.
A further complicating factor today is the prevalence of MULTIPLE LOANS against a seller's property. In recent years, many borrowers with borderline credit and limited down payment funds leveraged up to 100% of the value of the property - sometimes even more (we encountered a buyer last year who borrowed 106% of the original home's value, when he purchased in 2005!) It was easy, up until about a year or so ago, for the borrower to get one loan, with Lender A, for 80% of the home's value, plus a second loan, from a completely different lender at a much higher interest rate, to make up the difference.
The addition of the second lender for this "balance loan" creates more complications. Often, the First Mortgage Holder only offers a small amount to the Second Mortgage holder (usually, only $1,000 or so) to clear his lien. If the second lender refuses, the whole transaction would die.
All of these factors, taken together, add time to the pending sale transaction. In many cases, the potential buyer gets quickly tired of waiting for the necessary approvals, and the deal fails. Other times, the bank responds back with a higher sales price than the buyer originally offered, the buyer refuses, and the transaction falls apart.
An important final issue for the seller to consider - even if the lender accepts less than what is owed on the property in order to complete the sale, they might issue a 1099 income statement to the IRS for the forgiven debt, requiring the unfortunate seller to pay income tax on a fairly sizable amount. In some cases, lenders settle, then file a "Deficiency Judgment" in court, to later get the difference. It is critical to obtain the lender's waiver of deficiency judgment, and discuss the 1099 reporting of the forgiven debt, as part of the short sale negotiation.
In 2007, Dean's Team worked on five short sale transactions here in the Chicago area - two in the Chicago Neighborhoods of West Ridge, Gladstone Park, and Irving Park, and two in the Chicago Suburbs of Elmwood Park and Norridge. Of those five, two had sales close successfully. In both cases, there was only one lender involved. In one of these, the seller brought some of the shortage amount to the closing table himself.
Three others could not get timely approval from the lenders, and the buyers got discouraged and walked away from the transaction. In two of these cases, the First Mortgage Lender negotiated acceptable terms, but the Second Lender was not as flexible as they needed to be.
Today, two of these properties are heading to Sheriff's Sale in Cook County IL. The other seller is attempting to re-negotiate his two loans with the lenders involved. All three of these situations, heart wrenching, for both the sellers, and our Team members who represented them.
If you are a home seller considering short sale, or simply an observer with questions, let us know. We work with several professionals who are expert in this area, and we, along with our colleagues, can give you some truthful, real-world advice here.
DEAN MOSS & DEAN'S TEAM CHICAGO
