Short Sales…. Getting the Approval!

As a seller, if you are looking to sell your home via short sale you need to be aware of some of the road blocks ahead of you.  And buyers out there bidding on short sale listings: your agent needs to know the questions to ask to ensure you aren’t wasting your time waiting around for short sale approval on a property you’ve now fell in love with. 

Here are some basic snaffoos that you need to avoid:

1. Multiple loans currently on the property: If there are two loans and they are with different banks, the second lien holder will demand some sort of pay-off from the proceeds of the sale.  It gets tricky in this case because the first lien holder will also need to agree to receive less in their net on the sale in order to allow for second holder pay-off.  Typically, the second lien holder will agree to a payment that’s a fraction of what is owed.  But the time to move into escrow will, no doubt, be longer if there are two banks involve.  Buyer’s agents should ask if there are multiple loans and the nature of those loans.
2. Second loan was not “purchase money”:  If the second loan was taken to cash in on the equity of the home or was a home equity line of credit that has now been utilized, the lien holder can attempt to hold the seller liable to pay off the balance of that loan (can you say “yikes!”).  Sometimes the second lien holder is bluffing and will not attempt to collect.  But be aware, it is my understanding that legally they can come after that seller and this would be a deal killer.
3. Investment property being sold via short sale: The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. This means that in the case of a property that does not qualify as a principle residence for the seller, that seller could have a significant tax levied because the debt relieved can be considered income by the federal government. Many sellers don’t even realize this because they don’t hire an attorney/CPA to determine all implications of their request for short pay on the loan.
4. Back taxes, back HOAs and other liens: Most often (especially on Condominiums) the current property owner not only stops paying their mortgage, they stop paying taxes, HOAs, etc and liens are placed on the property.  You need to be sure that the estimated HUD submitted to the bank includes the payout on all of these liens.  Otherwise, someone has to come up with the case after short sale approval has been received. 

These are the major issues we’ve seen in our extensive and recent experience in representing buyers and sellers in purchasing or selling San Diego Real Estate.  Let me know if you have any specific questions!   Happy shopping!

Tara