In order to understand the process mortgage holders use to determine if they accept or reject short sale requests, one must try and see their point of view. Typically, the term short sale refers to a sale of property where the mortgage balance exceeds the value of the property. Typically, in exchange for receiving the proceeds, the lender is asked to waive their rights to pursue a lawsuit against the property owner for the deficiency.
If the lender declines the short sale request, they can eventually complete the foreclosure and then go on to pursue a Deficiency Judgment. A Deficiency Judgment is an unsecured money judgment against a borrower or guarantor whose mortgage foreclosure sale did not produce sufficient funds to pay the mortgage balance, in full. This judgment would be entered against the defendants in the action who originally executed Notes and Guarantees, however, pursuant to RPAPL 1371, the judgment would be limited to the difference between the mortgage balance and the property’s fair market value anyway! If the lender gives up the right to pursue a Deficiency Judgment, they can immediately receive payment of the proceeds, although that sum will be less than the total amount owed.
The decision to accept a short sale can be impacted by the position of the decision maker. One should consider, if the decision maker will directly benefit from the liquidation of the asset or is a salaried employee subject to criticism for waiving the right to a Deficiency Judgment. The former will be more aggressive in attempting to liquidate the asset whereas the latter will be more concerned with justifying the decision to waive the deficiency. With this in mind, your strategy should be tailored accordingly.
To expedite the process, the lender must be satisfied with the following areas:
- The price is reasonable.
- The Obligors (Borrowers and Guarantors) do not have such substantial assets that they would pay the obligation, regardless of the value of the mortgaged premises.
- All reasonable expenses paid from the purchase price (reducing the amount being paid to the lender), are necessary to consummate the short sale.
The first requirement is achieved by providing property access to the lender’s representative and allowing them to inspect the premises. It’s important to note that lenders will rarely, if ever, accept an appraisal performed by anyone other than their own representative, therefore paying for your own appraisal is not cost efficient.
The second requirement is achieved by providing a financial statement, which may be required to be in the form of an affidavit. Often, defendants are reluctant to disclose their assets because they fear the lender will use that information if the foreclosure is completed. While it is a risk that must be considered, major residential lenders rarely pursue Deficiency Judgments and unless you provide them with all required information, your short sale request will be denied.
Finally, the contract of sale should provide that current liens exceed the purchase price and that the sale is contingent upon the lender’s consent. The contract must be executed by all parties and be included in the short sale package for the lender to process the short sale application.
The seller’s attorney should also prepare a proposed HUD-1 Form showing the expenses to be paid from the short sale proceeds as well as the net amount available to pay the lender. The lender will carefully review the real estate brokers’ commissions, the seller’s attorney fees, any subordinate liens and other closing costs being paid from seller’s proceeds to ensure they are not excessive. Of course, what is excessive to a lender who is not being paid in full may be less than what was expected by the real estate brokers, seller’s attorney and subordinate lienholders, so these should be negotiated in advance with the lender’s parameters in mind!
Once the short sale package is received, if all paperwork is in order, the process should be quick, but don’t expect it to be!. Each lender has their own bureaucracy and approval process, so it’s best to plan for an additional delay when entering into a short sale. Communication is key; expectations must be realistic; patience is a virtue!
What have your short sale experiences been like?