Philip J. Bernstein Real Estate Law Blog on Lawyers.com

What is a "Short Sale"?

Wednesday, September 16, 2009 by Philip J. Bernstein

A short sale in
regard to real estate occurs when the net proceeds that a seller will realize
are less than the pay off amount of the existing loan or loans. Short
sales are becoming more frequent since the downturn in the real estate market
has lead many homeowners to be "upside down"-when a homeowner owes more on his
or her mortgage that the homes fair market value.

Short sales are a
way to avoid foreclosure and a possible deficiency judgment. A
deficiency judgment can be entered when the property sells for less than the
outstanding mortgage(s) at a foreclosure sale. Short sales can be of
benefit to a homeowner to preserve one's credit by avoiding a foreclosure and a
possible deficiency judgment.

If a homeowner
desires to "sell short", he or she will have to get the approval of his or her
lender(s). When seeking the approval, the lender(s) will want many things
submitted including but not necessarily limited to, the contract for sale, a
copy of the listing agreement, a listing history, and perhaps financial
information like tax returns, bank statements, a a preliminary Closing Statement
showing all costs and expenses and payment of the entire net proceeds to the
lender(s).

A lender is not
required to approve a short sale but, if approved, the homeowner/seller will not
be able to receive any of the sale proceeds--it will all go to the
lender(s).

A short sale can add
much time to the closing process. In my recent experiences, the additional
time to obtain approval can add as little as 30 days to a "normal" closing
process to as much as several months.

Caution: in
getting a short sale approved, make sure that you will be released from personal
liability on any outstanding note (mortgage). I recently saw an instance
where a second lender (the lender for a home equity line of credit who is
subservient to a first mortgage), approved the short sale and then turned around
and sued the homeowner/borrower/seller not in foreclosure, but for breach of
contract--failure to pay the note. Thus, the lender allowed the sale to
occur but still sought money from the seller.

From a legal fee
standpoint, attorneys will generally charge much more than a typical closing due
to the increased amount of work (from the sellers side) and time involved from
start to finish.

For more
information, please contact our office.

Posted at 14:48 PM

Topic: Real Estate