An old and familiar term in the securities profession now appears all the time in the real estate business: The Short Sale. Simply put, a short sale occurs when the property being sold is valued less than its mortgage obligation. The homeowner’s equity and a portion of the lenders interest are lost due to market conditions. For the property to be sold the lender(s) agree to accept less money than they are owed. Sounds great, right? Well, sometimes. Read on.

Local brokerage firms report significant listing and escrow activity on short sale properties. Our own firm counts them as about 40% of our open escrows. Buyers find more and more properties marketed as short sales while the sellers and real estate industry all struggle to complete sales in an environment made even more difficult by banks behaving badly.

A properly executed short sale can be a win-win for all parties. The homeseller liquidates a property they can no longer afford. The buyer gets a bonafide bargain and the neighborhood avoids the blight of a yet another foreclosed property. The real estate brokers earn commissions and affiliated businesses such as title insurers, mortgage brokers, home warranty providers and home inspectors all benefit. The trickledown effect to home improvement contractors, furniture stores and other related industries should not be underestimated either.

By avoiding foreclosure, the home seller shortens the credit blemish on their FICO score to a manageable amount of time that often allows them to purchase a replacement home within 18 to 24 months. Here are a few important steps:

Be realistic about your actual need to short sell: All requests for mortgage debt relief will require full financial disclosure – commonly called a “hardship package”. You may be required to participate in the federal government HAMP and HAFA programs that at times necessitate application and subsequent denial of a loan modification request as a prerequisite to short sell. A cautionary note here: Retirement funds are normally off-limits for consideration by banks. It’s a good idea to get as much money shielded in retirement accounts as is practical prior to submitting any financial data to a lender.

Don’t wait until you can no longer make mortgage payments to start the short sale process: We have had great success using a strategy that informs the lender of a time-certain date when the homeowner will no longer have the ability to make payments – ideally at least 120 days from the submittal of the first offer and hardship package. This puts the lender on notice and gives them a reasonable amount of time to close the transaction before legal costs and reporting obligations mount.

Your lender is NOT your friend. Your lender is a DEBT COLLECTOR: I don’t talk to a single colleague across the country who doesn’t have a horror-story about clients being kicked by an industry that owes its very existence to the largesse of the American taxpayer. With the massive deceit around loan modifications, the banking industry has done little to assist homeowners in their darkest hour since the 1930’s. So, in filling out financial data, be careful not to provide your lender with a path to other assets. Remember, in the case where your mortgage is a “recourse” loan; expect your lender to pursue you for any deficiency after the sale. Many of the large banks -yes the very ones your tax dollars saved from collapse- routinely sell their recourse loan deficiencies to third party debt collectors.

IMPORTANT: If you maintain a checking, money market or savings account at the same institution carrying your mortgage, you should consider moving that money to an unrelated bank or credit union: Big and small banks alike routinely appropriate the total amount of funds in checking and savings accounts to satisfy outstanding debts. They are not required to warn you in advance and so I am warning you now.

Be wary of real estate brokers who offer a short sale “at no cost to you.” Lenders commonly extract “cash contributions” from homeowners at closing. Cash demands range from a few thousand dollars to 25% or more of the outstanding mortgage balance. This gun-to-the-head tactic comes at a time when the home seller is out of cash to begin with and often derails the transaction when neither party nor the brokers can meet the demand. Be aware that your lender may make this demand.

If your property is located within a HOA, continue to make your HOA payments: Failure to do so may force the HOA to record a lien against the property that will hamper the actual sale. Besides, if the HOA is beleaguered by delinquencies, it may not pass muster with strict new lending guidelines effectively preventing new loans on any properties within your complex, including your own.

Send your real estate questions to info@argsd.com