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Short Sales In New Jersey

In my twenty-seven years as a real estate lawyer, I have never seen the conditions we are experiencing in the real estate market today. This is a very difficult market for anybody involved in real estate, but it is especially challenging for people trying to sell their home.  Many sellers have found themselves in a position where they owe more money on their property than it will sell for on the market. Others are behind on mortgage payments due to adjustable rate mortgages or other dangerous creative financing that was readily available not too many years ago. Still others are in trouble simply because they bought at the peak of the market, and property values have dropped significantly since then. Regardless of the reason why the homeowner is in trouble, a “short sale” is a viable solution for many of these situations.

What is a Short Sale?

A short sale is when a lender (lien holder) agrees to accept a loan payoff that is less than the full amount due on the mortgage. While this may, in some cases, adversely affect the homeowner’s credit score, it is not as damaging to a person’s credit as a foreclosure or a bankruptcy. In some cases, if a person has significant other debts that they cannot pay (e.g. credit cards, car loans, etc.) a bankruptcy may be a better and more permanent solution. However, if the only debt problem is real estate, a short sale is a good option for many homeowners. The short payoff must be approved by the lender, but if it looks like you can afford to pay the mortgage, the short sale will most likely not be approved.

Requirements for a Short Sale?

The following are some of the requirements necessary to have a bank approve a short sale: The Seller can receive no proceeds. All customary closing costs (i.e. commission, taxes, title fees, attorney’s fees) are paid by the bank.

The Short Sale Process

The real estate sales contract and any Realtor commissions must state that both are “contingent upon the approval of the lender”. The seller must accept an offer. Then the bank must approve the terms of the offer as well as sign-off on the seller’s financial hardship circumstances. The seller (homeowner) will need to prove a financial hardship in order for the bank to approve the “short sale”. This will be done by the negotiating attorney providing the contract, title report, proposed settlement statement and extensive financial information to the bank. (i.e. the seller’s income/asset/debt statements, bank statements, hardship letters, tax returns, employment information, etc). The bank will do its own research on the property to confirm that the sale price is justified. They do this by having a local real estate agent complete a BPO (Broker’s Price Opinion). This is their equivalent of an appraisal. Therefore, it is very important that you do not try to sell the property at a price unreasonably below the market value. The listing real estate agent must make sure there are comparative sales similar to the sales price that is accepted, or the bank will reject the transaction. It is very important that the Seller, listing agent and the attorney handling the short sale negotiation with the bank are all efficient, experienced and detailed in their work.

The following is a timeline of steps that should be taken to complete a short sale: 1. The seller lists the property for sale with a Realtor after agreeing on a competitive listing price that is in line with the prices for other similar homes that sold recently. 2. The seller meets with their short sale attorney to retain them to negotiate the transaction with the seller’s lender(s), and executes a client authorization agreement to allow the attorney to communicate with their lender. 3. The seller gathers all requested financial and hardship information and provides it to their attorney. 4. The seller’s Realtor provides a copy of the listing agreement, comparable sales, and marketing history to the seller’s short sale attorney. 5. An offer is received and negotiated between a buyer and the seller. Once the parties reach agreement, the contract is signed by the buyer and the seller. The bank does not sign the contract. They only approve the contract and sale. 6. The contract, client authorization agreement, listing agreement, settlement statement, hardship information and all financial information are submitted to the Seller’s lender or lenders if there are two loans. (This is typical if a homeowner took out an equity line of credit against their home.) 7. The seller’s file is eventually assigned to a specific loss mitigation negotiator at the bank(s). 8. In approximately 60-120 days, the bank completes is price opinion and provides an approval or denial of the short sale.

There is no guarantee that the “short sale” will be approved. The risks increase if there are two loans as the second lender is often not offered enough money by the first lien holder (lender) to satisfy them, and so they reject the sale. Other potential risks and potentially fatal problems for a short sale are as follows: Some short sale lenders will not approve of payments of mechanics’ liens, outstanding homeowners’ or association dues. Most lenders will reject a short sale if there are federal tax liens on a property. If the Seller has significant liquid assets (not retirement accounts), the bank will often ask them to pay the shortage owed on the mortgage from these assets. Often times, the second lien holder will expect the seller to remain liable, through a promissory note, for the balance of the mortgage that is released from the property. For example, if the seller owes $50,000 on a second loan and the second lender is only offered $2,000 by the first lender, who has priority over them, that second lien holder may have the seller sign a promissory note to repay the remaining $48,000 after the sale. Lenders have the option of assessing tax liability to the seller for the amount forgiven (in the form of a 1099).   This is called “forgiveness of debt” income.

While the above issues can be obstacles in the way of a short sale, there is always the possibility of negotiating with the bank or getting the buyer to increase the sales price to get the lender to agree to a specific short sale.

Liability for Deficiency

The “Deficiency” is the difference between what the lender will yield from the short sale and the amount owed on the loan. In other words, the amount you are asking then to forgive. It is important to know that lenders do not generally waive the deficiency, and specifically state in the short sale approval that the deficiency will not be waived. In other words, the lender reserves the right to seek payment in full at some point in the future. However, there are always exceptions. Every short sale is unique, and lenders may respond differently based on the circumstances.

Completing a short sale is a complicated process. However, if you hire an attorney who specializes in these transactions, and utilize an experienced Realtor, a short sale can be a tremendous alternative to foreclosure, bankruptcy or financial disaster. Feel free to contact attorney Gary F. Woodend for all your real estate, legal, and short sale needs. Gary can be reached at (609) 654-5489 or at gfwoodend@aol.com.