Short Sale

Today’s market is finding more and more properties appearing for sale in the Multiple Listing Service (MLS).  Many owners have decided they want to let their property(ies) go.  Most of them are asking their lenders to “forgive debt” and attempting to “cut their losses” with agreement from the lender.  Many of these sales are by homeowners who are trying to sell their primary residence.  Others are investors who have been unable to make their investment purchase work for whatever reason.

The lenders made the original loan and now are being asked to discount the amount of the debt rather than foreclose on the property.  Many of the original loans were performed by a mortgage broker who “originated the loan” with the buyer and then “sold the loan” (i.e. transferred the loan to a different loan company — one who “services” the loan; i.e. receives and processes the monthly payments from the borrower).  So, the offer comes to the seller through the listing agent, who has made it known in the MLS that this sale is “contingent on lender approval.”

The next step is the one frustrating the buyer, the seller and both the listing agent (representing the seller) and the buyer-agent (representing the buyer).  It is the long wait for the bank or lender to make a decision.  We have seen banks/lenders take four-to-six weeks normally, and not uncommonly six-to-twelve weeks for a decision to finally be made and often the offer after this long wait is rejected. 

In talking to several escrow officers we hear that most of the cancellations are occurring when the buyer gets tired of waiting and in frustration simply withdraws and cancels the escrow and goes to find a different property to purchase.  No one can truly blame the buyer after a reasonable period of time for cancelling such an escrow.

Other issues facing the seller for an acceptable acceptance by the bank/lender is how much is forgiven?  Will the seller have to pay taxes to the Internal Revenue Service (IRS) for the amount forgiven (which is viewed by the IRS as “ordinary income”)?  (Note:  Talk to your tax advisor regarding the bill signed into law by the President, called “The Debt Forgiveness Act” that applies to homeowners with personal residence.  Namely, no investors need apply for this one.  This forgiveness only applies for personal residence.)

Again, another question for your tax advisor:  the debt forgiveness is for the original “mortgage money loan” (money loaned to the buyer for the original purchase — established by the value of the home at the time of the purchase).  It is my understanding, in discussing this with an attorney with a legal hotline service, that the “Arizona Deficit Disclosure” allows the bank/lender to go ONLY after the property “and NOT the borrower” for any deficency. 

However, be aware that two other issues are not up for discussion:  1) was the house re-financed, and if so, was additional monies received, namely “cash out” to the borrower.  If so, that money may be interpreted as “a personal loan” (debt consolidation, college loan funds, car loan, property modification, etc.).  This opens another discussion of both the “debt forgiveness vs. personal loan)  (Note:  Again, check with your tax advisor), and, 2) was the loan a “Home Equity Line of Credit” (HELOC).  It is not uncommon for the bank/lender to ask the seller to sign an agreement to “repay the amount of funds forgiven” on a HELOC.  This is clearly a personal loan secured by both the property and a “personal guarantee” by the borrower.  Now will the seller sign this to get the property sold and closed or not?  So many questions; so few answers.  As the Designated Broker of a large firm I see various and confused answers given by agents in the industry which frustrate the buyer, the seller, and usually the other agents.

“Game playing” of all sorts is also taking place in the MLS marketing of homes.  Some listing agents hide the fact that they have an accepted offer and continue to market the home as though it were not in escrow.  (A clear violation of the MLS rules.)  Other agents do not have the seller sign the contract and submit the offer to the bank as though it were signed and is truly a contract, when it is not — if not signed.  Some will do other variations to avoid noting in the MLS system that they have an offer to keep the house showing as “active” in the MLS to attract additional offers.  So, the system has been compromised in efforts to get the house sold while “cheating the system” with other buyers and agents in the market place.

Those agents who play-by-the-rules and mark the MLS as “pending” or “AWC” (accepted with contingency) are put into a “waiting game” with the bank/lender keeping the house off the market only to have days go by without an acceptance from the bank/lender and run-the-seller-out-of-days on the forthcoming foreclosure date.  If the agent could find another buyer in time they could perhaps sell the house before the seller goes into foreclosure.  It seems that something needs to be done, but what?  No one has the solution and therein is the problem. 

Actually, we know the solution, but how can we force the banks/lenders to make an immediate answer of yes/no, so the seller could re-enter the property back on the market with an acceptable sales price for the next buyer?  If only the banks/lenders would apply the “Golden Rule” in these sales.  Meanwhile, we will remain frustrated and do the best we can.

C Dale Hillard