My wife was happy when I told her that I was writing an offer for a client.
“The property is a ’short sale’ ” I told her.
”Great!” she said. “That means that your commission check will come quickly. Why don’t you do more transactions like that?”
Well…she assumed that ’short’ meant short-time-wise. Not so! Short, in this usage, means short of money. If this property sells for the price for which it is listed, the owner will not receive enough money to pay of the lender (or lenders, in many cases) who hold a deed of trust(s) (lien or liens) on the property. If the buyer expects get a grant deed to the property in their name, the lender must reconvey their deed of trust. Since there will not be enough money to repay the lender, will the lender reconvey?
You have heard he expression, “I am short of cash.” Exactly! In this transaction, the cash is short of the amount needed to gain ownership of the property. In order for this transaction to work, the lender will have to agree to forgive part of the debt. The lender will take what they can get, forgive the difference and reconvey the deed so the new owner can have clear title to the property. This means that the lender will take a partial loss on the outstanding loan. The amount forgiven will be the difference between the purchase price and the amount of the outstanding loan.
In more and more cases, the lender will, in fact, reconvey (release) the property because (a) the property has dropped in value and no longer provides adequate collateral for the existing loan and/or (b) refusing to co-operate in a short sale transaction will only lead to the lender’s eventual need to foreclose on the property and/or (c) failure to accept a short sale offer will lead to delay in selling the property…perhaps after foreclosure…and risk of further deterioraton in market value for the property.
If the lender must foreclose and become the owner of the property, then the lender becomes responsible for upkeep, taxes, insurance and other carrying expenses. Then, the new owner (the lender) still has to sell the property in a market which is continuing to deteriorate for properties of this kind. Lenders do not make money on foreclosures! They make money by lending money and earning interest…which assumes that the loan is repaid. Repayment is not happening in a short sale.
The lender is going to take a beating on a problem loan. The owner can not/will not pay. The lender’s income/loan repayment stops. The lender can accept a short sale and take a beating. The lender can wait, foreclose, incur carrying expenses and sell the property to take what may be an even worse beating. Maybe the first beating-the short sale-is the lesser beating.
In any event, the lender is in charge, not the owner of the peoperty. It is the lender who makes the decision to accept the sale price, not the owner. The owner is “upside down” in the property and gets nothing from the sale. The owner has no equity and has probably stopped making payments.
Not a pretty picture for the lender (Why did they make this loan, anyway? But that’s a whole different issue?) or the owner. We have not covered numerous other details relative to short sales: credit harm to the owner/seller, tax consequences to the owner for debt forgiveness, lender’s pursuit of repayment from the owner on a deficinecy basis…and more.
This may be a real good deal for the buyer…or did the buyer just buy a house at its current value in today’s market?
