There are Seven Risks to Short Sales

Originally posted 2009-04-24 13:13:44. Republished by Blog Post Promoter

Short sales are on the rise in many markets, so it is important to know the risk.  The risks are:

• tax misrepresentation
• secondary debt misrepresentation
• lender requesting inappropriate seller contributions
• fiduciary care breach
• no oversight by Realtor of loss mitigation company
• no license requirement for loss mitigation company
• transactions not being listed on HUD-1

Tax misrepresentation is especially troublesome because the mortgage debt forgiveness act that was passed in December of 2007 does not cover all types of mortgages.  It does not apply to cash out refinance.  It only applies to first mortgages.  Unbeknown to most taypayers, there is a dollar limitation on the mortgage forgiveness act of $1 million for married couples filing seperately and $2 million for joint filers.

The secondary debt or second mortgage may or may not be forgiven once the short sale has been approved.  This is because of the order of succession.  The property taxes are first, then the primary mortgage, and then the second mortgage are paid.  Still yet, in some states the mechanic liens or utilities liens may supersede the primary mortgage.  With the latter being said, the mortgage forgiveness act only covers the primary mortgage; therefore, if there is not enough funds to cover the second mortgage the homeowner could still be responsible for that mortgage.

It is important to know whether the state that you reside in is a non-recourse state.  Non-recourse means that the lender can not force the seller to contribute funds in a retirement account or bank account to cover the funds still owed to the bank if the approved short sale amount is less than the amount owed to the lender.  For instance, the lender approves the short sale for $80,000, and the seller has $10,000 in a retirement account in a recourse state the lender can make the seller sign a promissory not in the amount of $10,000 as a condition of the sale of the property.

Do not allow the investor to handle the negotiation of the short sale with the lender because you run the risk of the investor getting a good on the purchase of the property and the seller getting a bad deal on the sale of the property.  The seller could be left paying more to the lender to sell the property to the investor because the investor may have an end buyer that is willing to pay two times the amount to purchase the property from the investor.

Another risk is that the Realtor cannot let the loss mitigation take total control of the short sale due to some companies not being legit company and still others have overworked personnel.

Ensure that your state does not require a license for loss mitigation.

Do not accept cash out side of closing your short sale because it is illegal.  All transactions must be in writng and part of the HUD-1.  It is also unethical for the lender to take a loss and the sell to walk away with money.

Short sales have come a long way and can be negotiated.  In the recent past, though, the short sale could be negotiated and never close due to stalling tactics by the lender.

Now the seller and the buyer can rest assured the short sale will be completed quicker and close sooner because the federal government has stepped in to assist.