Foreclosure vs Short Sale

As with most legal questions, it depends.



First, it depends on which state the property is located in. There are some states with anti-deficiency statutes that preclude banks pursuing the remaining balance on the loan (the legal term for the remaining balance is “deficiency”). However, anti-deficiency statutes are not common, so this question will often require another level of analysis.
Next, it will depend on the investor of the loan. Loans that are backed by Fannie, Freddie, FHA, and VA will allow for a full waiver of deficiency upon completion of the short sale and full compliance of the terms of the short sale approval. However, there are some narrow exceptions that may require the seller to make a cash contribution at closing to offset a sum of the outstanding balance in order to be granted a full waiver of the rest. These requested cash contributions are the exception to the rule and can even can be countered by the seller in some circumstances.



Finally, if a private investor has backed the loan, the waiver of deficiency will depend on that particular investors policy. Some privately held banks will negotiate the deficiency on a case-by-case basis. Although policies can vary, most of these private banks will primarily focus on the seller’s financial position in determining whether to waive all or part of the deficiency.

A law firm licensed in Missouri and Illinois with extensive success in facilitating short sale transactions, our firm specializes in working with lenders to obtain an approval for the short sale in order to get the subject property sold.

A short sale is when a homeowner is able to sell their home for less than what they owe their lender for their mortgage.  If banks never accepted short payoffs, then the homeowner would have no choice and either could never sell their home, or they would have to bring the cash difference to the table (typically tens of thousands of dollars), or they would walk away resulting in a foreclosure, which would devastate their credit.  Millions of homeowners are behind on their mortgage due to job loss, loss of income, medical problems, death of a spouse, losing a business due to the economy, divorce, a bad loan they never really qualified for.  Up to the recession and market crash of 2008, the only generally accepted option was foreclosure.

Solution:  Short Sale.  Get the lender to accept an amount below the mortgage payoff and waive the deficiency against the homeowner.  In most cases, all closing costs are built into the deal where the lender pays the closing costs.  Lenders generally demand fair market value for the property – which in a short sale is significantly below the mortgage balance. 

No.  Absolutely not.  It is replete with legal issues, risks, deficiency issues (amounting to tens or hundreds of thousands of dollars of liability to the Seller), tax implications which can be huge, foreclosure attorneys that need to be dealt with, bankruptcy courts/attorneys, divorce attorneys, U.S. attorneys in the release of tax liens, collections agencies, debt collector law firms, mortgage fraud, fraudulent short sale transactions by the buyer, etc.

The number one reason a distressed homeowner should proceed with a short sale is to protect their ability to obtain financing in the future. Most short sales result in a “settlement” status on their credit report as opposed to “foreclosure”. Fannie Mae and Freddie Mac guidelines are much more favorable to borrowers with short sale on their credit report, typically allowing a borrower to obtain financing for a new home within a couple of years. In sharp contrast, a foreclosure remains on a credit report for seven years, making it very difficult to finance another house, a car, open a new business, or even qualify for credit cards. Any loans received will most likely bear very high interest rates. Bottom line: the end result of a short sale is minor when compared to the consequences of a foreclosure. Foreclosures have a devastating effect on credit history, job security, employment opportunities, security clearances, military and law enforcement careers, and the most serious of all – the ability to purchase a home in the future. Also, a foreclosure becomes public record, which is searchable by anyone, and can never be removed.

A Short Sale offers a fresh start, eliminating debt, while minimizing damage to credit and avoiding eviction proceedings.

A qualified attorney should be involved in the transaction immediately! We receive numerous Sales Agreements from real estate agents who have spent a lot of time and money on their listing only to become frustrated when we inform them that the transaction cannot be negotiated!   Wouldn’t it be nice to find out if the deal will go through before you even take a listing and spend your precious time and hard earned money?  Now you can, by referring the client to this firm.  The reason you hear horror stories of Short Sales taking forever only to have your commission cut is because the real estate agent failed to qualify the transaction through an experienced attorney.  Do not end up like one of the daily agents we speak to who has wasted their time and money on a hopeless sale!  There is no consultation fee whatsoever; we’ll speak to whomever you’d like in order to ensure you concentrate your effort towards worthy endeavors.

A real estate agent cannot give legal advice as to deficiency judgments or if there will be a complete release of liability or pending foreclosures, stopping foreclosures, interpreting bank approval letters, tax advice, otherwise the agent begins to negotiate legal terms which result in a legal settlement that is binding against the homeowner. . . and can put the homeowner at grave risk. . . which is the practice of law.  Giving advice as to legal issues from a nonattorney is the Unauthorized Practice of Law, a Class 1 misdemeanor.  Furthermore, ones Errors and Omissions policy would typically exclude any unauthorized practice of law.

A crucial part of the SHORT SALE process is negotiating the terms of the short sale. In order to provide the best possible result, we gather the relevant information from the seller, prepare a hardship package to submit to the bank, perform a preliminary title search on the property to determine what liens, mortgages and taxes are due on the property if one has not already been done, and negotiate with the bank in an attempt to have them accept a lower payoff on the mortgage than is currently due…potentially avoiding the credit impact and economic ramifications of a foreclosure or bankruptcy. Most importantly, regular updates and status reports are provided to realtors and homeowners as to the short sale process. Communication is everything and will never be compromised. We will be a team in the short sale process requiring a continuous flow of communication. The Firm assists in each of the following steps, which are all critical in the path to short sale approval:

• Prequalifying the homeowner
• Assemble excellent lender packages
• Directly and immediately respond to negotiators’ calls and emails
• Immediately provide well-written market narratives and critical analyses proving price
• Ensure that appraisers and bank BPO agents understand the subject property’s challenges
• Immediately provide additional documentation required by the lender
• Keep the parties well-informed and in the deal
• Document all tasks in detail for transaction-saving reference
• Provide creative solutions to banks’ demands such as promissory notes and cash contributions
• Applying 17 years of negotiations skills to ensure success

There is no charge for the initial consultation or pre-qual. We will spend as much time as necessary speaking with the prospective seller and agent to determine if the seller is qualified for a short sale and answer any questions. Our standard fee is $3500 for our short sale negotiation fee AND for the legal representation of the Seller. We have been extremely successful at having our attorney fees paid by the lender as a part of closing costs.  Many times, we will cut our fees to get the deal to close. In some cases, an advanced fee will be required from the Seller to initiate representation, BUT that determination is made on a case-by-case basis. Factors that determine whether an advanced fee will be required include the number of liens on the property, the servicer, the investor, and the need to stop a pending foreclosure sale.   Also, in other instances, the Seller may have to bring money to the table to clear other liens such as HOA, MSD, and other judgments.

In the vast majority of short sales, the commissions will be 6%.  All GSE loans are 6%, however this commission may be cut down if the agent is a dual agent and represents both seller and buyer.  Also, if a buyer is also a real estate agent, the lender will usually not pay the buyer a commission.

The bank will have to be convinced that the seller deserves to be approved for a short sale. They will need to disclose to the mortgage lender financial hardships, including layoffs, loss of jobs, divorce, medical issues. Some or all of the following would be required: hardship letter signed by the homeowners, 2 yrs tax returns, recent pay stubs, bank statements, authorization for the negotiator to discuss the mortgage with the lender. Lenders also request listing history, recent sold properties, repair estimates and photos, second mortgage payoffs if any, and other lien information. Lenders will furnish their requirements as to sellers’ assets, liabilities, income, and obligations. Our hardship package aims to fit within each Lender’s parameters. Each lender has different parameters, a different short sale policy. The contract must not be contingent upon the sale or closing of another property, also the seller cannot do owner-financing or carry-backs. The Lender often times verifies with the buyers lender that they are pre approved with no contingencies. Also, properties with multiple mortgages, 2nd liens are not the best short sale candidates but it can work.

Short sales may take longer to close than more conventional sales, so plan accordingly. However, it is well worth it. Again, the alternative – foreclosure.

Most lenders will request a BPO (broker’s price opinion) or full appraisal of the property. In some cases they will use a drive-by value or a computer analysis comparing other similar homes that have sold. In this real estate market, this is very difficult – there are few sold homes! This is where the negotiation begins. Some factors negotiated are such things as close proximity to power lines, railroads tracks, busy streets, high numbers of neighborhood foreclosures (blight), declining market, repairs needed, the banks loss severity rate in a foreclosure to justify our offer price. Also negotiated hard is the lenders’ Loss Severity.

• Lenders cannot consider a short sale if the borrower is in an active bankruptcy. The bankruptcy would have to be discharged or dismissed prior to the lender considering a reduced payoff.
• There are many bankruptcies that are filed to save a homeowner from the deficiency judgment or shortage in the sale of their home – when really all they needed was a short sale of their home!
• A bankruptcy stays on the homeowners credit report for 10 years.
• Bankruptcies typically only delay the inevitable. . . a foreclosure. Then the homeowner has both a bankruptcy AND a foreclosure on their credit report. The worst case scenario for anyone.

Foreclosure is devastating to one’s credit report. Someone who goes the short sale route generally can buy a home in less than 2 yrs, compared 5 yrs + after a foreclosure. Many employers run credit checks on prospective employees and foreclosure is one of the top items that will put a potential new hire in jeopardy. Also, current employers may run credit checks and a foreclosure can put a current position in jeopardy. Security clearances (law enforcement) and government positions can be jeopardized by a foreclosure. Additionally, interest  rates will be markedly high on credit cards and any credit with a foreclosure or a deed in lieu on one’s credit report.

• The lender can still pursue the former homeowner with a Judgment for any deficiency after the property sells under foreclosure which is typically 25% more than the deficiency resulting from a short sale if it is not waived. This foreclosure deficiency tacks on attorney fees, costs to sell the property, property preservation fees, insurance, taxes, and the like.
• Foreclosures eliminates the chance of a homeowner to repurchase another home for years after a foreclosure is reported on one’s credit.  So, realtors are excluded from the foreclosure process and transactions, plus they have just lost another potential buyer of another home. . . for years.
• From the lenders standpoint – see Loss Severity Rate above! Enough said.

An agent should not be answering these questions.   The questions above are best answered by an attorney who answers these questions on a daily basis.  You do not want to make any representations as to this nature, since your client can hold you accountable after the closing due to something they misunderstood.  At Kayser & Associates we make your job as easy as possible by asking you do one thing: sell the home as close to the “fair market value” as possible. That’s it. Do not answer any legal questions asked by your clients.  Simply refer them to this firm and we will handle everything.

In general from submittal of the short sale offer (not including the time it will take to get an offer after the property is listed) to bank approval (not including the 30 days or so it takes to close after approval) is usually 45-60 days.  It is case by case depending on who the lender is, if it is a GSE loan, mortgage insurance, number of mortgages, participation of the borrower/seller, the load at the loss mitigations dept at the lender.  Fixed timelines of milestones at the banks processing center.  The efficiency of the lender, investors such as Fannie Mae, Freddie Mac, VA, FHA.

It is NOT too late! With a team of experienced professionals on your side, you can get a foreclosure sale canceled or postponed to allow time for short sale approval. Banks are generally able to recover more money in a short sale than a foreclosure sale, so the bank will often benefit in a short sale as well.

However, time is of the essence when the foreclosure process begins, so you must act quickly. A qualified attorney should be involved in the transaction immediately!

You must be prepared to respond to document requests on a timely basis. The documents required must be complete and compliant with lender specifications.

• You must have a genuine drive to succeed in the process. A motivated seller is far more likely to receive a favorable outcome than one who is unmotivated.

• You must have a team of professionals experienced with short sales working with you including a real estate agent and attorney.

• Finally, you must take care of your property. The condition of the home is YOUR responsibility until the closing is complete!