Short Sales: An escrow perspective on expectations and transaction management.

With short sales a large part of the real estate sales fabric in our Puget Sound region, it is imperative to have a realistic approach to understanding the complexities of the transaction. What can you expect? What is escrow’s role and how can I best prepare my clients for the transaction?

By now, most everyone understands that a short sale is a transaction in which existing liens/loans on a property exceed that of the current market value or that of an existing purchase agreement. For example, if outstanding loans are $550,000 and the home has a current offer on it for $395,000, a short sale is created. In this scenario, the existing lien holders (lender) are asked to release the encumbrances and agree to take less in paying off the loans. This does not necessarily relieve the borrower that is selling their home from the debt.

Expectations

• It may take quite a long time (up to 3 months) to receive confirmation from a lenders loss mitigation department that a short sale is approved.
• It is crucial that you collaborate with escrow to obtain an accurate accounting of costs to submit to a lender. Eliminating escrow from the loop and reducing their function will inevitably cause transactional challenges. Escrow offices are very experienced in short sales.
  
• Escrow can give an initial estimate PROVIDED escrow has title and other accurate information. It is not uncommon for agents to request estimated HUD’s prepared by escrow. Be aware that they are just that, estimates.
• Short sales may or may not get approved in time before a home is sold at Foreclosure.
• In aggregate, while short sales in our region are not occuring as much as in other regions of the country, you have to remember that you are competing with all the other short sales (which are many) in the other regions of our country.
• As a condition of approval, in most cases sellers cannot receive a penny from this type of transaction.

How can I best prepare my clients?

• The potential to purchase a home at a very good price may outweigh the risk of the uncertainty of a short sale not closing.
• This is an unconventional sale. Maintain open communication, probably even suspending traditional negotiation that takes place when agents represent the best interests of other parties. This is a transaction in which everyone is working towards a sale. Lenders are going to lose, sellers are going to lose the home , blemish their credit and the sale may or may not close. In that case, the buyer has lost valuable time and expense.
• If you are working with a buyer, it is important that the buyer be well qualified and have financing ready to go.
• Sometimes, short sales go without a hitch. Don’t be surprised if this is the case. They can be unpredictable.

Escrow’s Role:

• Congruent with escrows function as a neutral party, escrow does not normally get involved with negotiating a short sale with a lender. But, escrow does play an important role that cannot be more emphasized.
• Escrow has a large database of lenders that they work with on a daily basis along with contact numbers for lien release departments, payoff departments, loss mitigation and subordination departments.
• Escrow prepares Settlement Statements and assists in obtaining relevant short-sale packages that may be different from one lender to another. When you work with distressed sales on a frequent basis such as escrow does, please do not hesitate to call us for questions. Escrow is here to help.

Debt foregivenss/ Tax consequenses:

• It is imperative that you contact a tax professional and possibly an attorney who can give you advice about whether or not the existing debt will be forgiven and the tax implications that short sales present.