Given the existing market condition and reports that things are not likely to change substantially in the 3-5 year future, short sales aren’t going anywhere. Short sales continue to grow in popularity, at least conceptually. Many sellers are uneasy about “walking” from their mortgage. As such, sellers feel somewhat reassured that they may be able to mitigate the negative impact of foreclosure by pursuing a short sale. However, as briefly discussed below, there are important issues, and perhaps misunderstandings, concerning short sales which directly impact your ability, as the seller’s agent, to provide the highest quality services to your client.
First and foremost, unless you are an accountant or attorney licensed in Arizona, you are not permitted to give your clients financial, legal or tax advice regarding a short sale transaction. Nevertheless, this does not stop your clients from seeking your opinion. Regardless, before discussing a short sale with your clients, you should always recommend that they consult with an attorney, accountant or other qualified adviser. To be safe, such recommendation should be in writing.
Another important first step is to determine whether or not your client is serious about pursuing a short sale. We all know short sales are terribly time consuming and work-intense. Most lenders are in no hurry to sign-off on a proposed short sale. Thus, short sale transactions typically take anywhere from 6-12 months to complete (if they don’t get shot down by the lender first). Many agents spend an enormous amount of time and effort trying to help a client who really doesn’t care enough to see the transaction through. It is important your clients are honest with you. Obtain a credit report that shows other properties they own. If the client has other assets they could liquidate to cover any potential deficiency, a short sale is likely not a viable option. The key is to be thorough and efficient from the start. This will save everyone time and headache throughout the process.
It is also important to understand the nature of a short sale. A short sale permits the conveyance of the property without paying the secured lienholders the full amount owed. A short sale does not address the underlying indebtedness being released. As such, a short sale is separate and apart from the enforcement of any promissory note or related obligations which can be, and often times are, enforced (to some extent) as part of or subsequent the short sale transaction.
Lienholders generally only agree to a short sale when they realize that a short sale is the best means at recovery on the underlying debt obligations. Foreclosures almost invariably drastically reduce the net amount obtained by the lender in comparison to a short sale. Nevertheless, lenders don’t make short sales easy for anyone. On the bright side, many lenders are now telling agents and sellers upfront what they are willing to accept on a short sale. However, lenders still require sellers (and their agents) to submit a myriad of documents, explanation letters, and various financial reports justifying the short sale. Such “busy work” is often a time consuming and slow process. Even then, after all the hard work, the lender may reject the proposed short sale. However, don’t fret, rejections are typically just a snap shot at a particular point in time. Sellers and their agents who later re-approach the lender with a revised proposition or an entirely different offer may get the lender’s acceptance. Tenacity, patience, hard work and determination are the keys to any successful short sale.
Yet, at the end of the day, the question remains: Is a short sale advantageous? The first step in answering this question is to determine whether or not the underlying loan is a non-recourse debt. Arizona is an anti-deficiency State. Thus, for purchase money loans on qualified property, the lender cannot pursue the borrower for any deficiency, regardless of whether it’s a first, second or third loan.
Whether or not the loan is non-recourse, there remains debate about whether a seller can waive statutory anti-deficiency protections. Lenders often require sellers to sign documents acknowledging the deficiency and waiving potential legal defenses. If the loan is a recourse loan, signing such a document is likely meaningless. However, if the loan is non-recourse, signing an acknowledgment and/or waiver will likely create an enforceable obligation. It is therefore imperative that your clients understand the legal effects of every document they sign when undergoing a short sale.
Additionally, notwithstanding the rumors to the contrary, short sales are treated very much the same as foreclosures on your client’s credit history. Foreclosures take a minimum of 6 months to complete, often 12-18 months is the average. If a short sale transaction can be completed in less than 6 months, it may prove more beneficial to your client’s credit as the number of months your client was in default will be less than a foreclosure. Additionally, arguably, your client may be able to obtain a loan easier if he/she can rationalize a poor credit score by a short sale verse foreclosure since short sales are often seen as an attempt to help the lender and mitigate the lender’s overall losses.
Lastly, short sales may trigger tax liability. Forgiven debt is a taxable event and is ordinarily assessed at the seller’s income rate. This can have a major impact on your client, especially considering that Uncle Sam is not so forgiving when he doesn’t get paid. In addition, to potential tax issues, sellers may lose the “time benefit” of a foreclosure. Because foreclosures take considerable time to complete, sellers can often stay in their home for longer periods without having to make any payments. For disciplined sellers, this allows them an opportunity to save money, which they would have otherwise used to pay their lender, and perhaps put the savings toward a down payment or rental on another property and avoid becoming homeless.
All in all, short sales are much easier in theory than they are in practice. However, with the right upfront planning, the process does not have to be difficult and can often be expedited and made easier.