Rhode Island Law Blog

Tomassi Law Associates Offers Short Sale Help

Friday, May 27th, 2011 | Real estate, Short Sale

SHORT SALES

 A “short sale” is an agreement between a borrower and his/her lender whereby the lender agrees to accept less money than what it is owed in order to allow the property to be sold and the borrower to be released from further payment obligations.  For example, if the owner owes $300,000 to ABC Bank but the fair market value of the house is $250,000 and the owner is able to secure a buyer for the house at that price, the lender agrees to accept the $250,000 allowing the seller to sell the property, pay all of his/her closing costs and release the mortgage lien(s) on the property.  A short sale allows the owner to stay in the property until it is sold, many times rent free and allows the owner to be relieved of the property and the associated costs such as taxes, insurance and maintenance.  Without the ability to sell the property with a short sale, the owner would be stuck with the property unless and until the bank forecloses or the owner files bankruptcy. 

Over the past couple of years, foreclosures have been on the rise throughout the country.  Rhode Island is no exception.  However, foreclosures can be avoided by a properly negotiated short sale.  Short sales can be a valuable and useful alternative to foreclosure and bankruptcy, when done properly, because they have the potential of allowing a property owner to avoid bankruptcy and foreclosure, even if the property owner owes more to the lender than the property is worth. 

Tomassi Law Associates, LLC is an experienced law practice representing sellers through the complex short sale process.  Tomassi Law offers free consultations to go over all of your options.  In addition, there is no fee to the Seller.  Our fee is paid at the successful closing of your property out of the proceeds to the bank.  Call Tomassi Law today at 401-782-2005 or e-mail Jared M. Tomassi at jtomassi@jtomassilaw.com.

WILL MY LENDER APPROVE A SHORT SALE?

The answer to this question is it depends.  Every lender has its own rules and procedures for approving short sales.   Generally however, a short sale request has a better chance of approval if the following criteria are met:

• The sales price being suggested for the short sale must represent the fair market value of the property.  Upon receipt of a short sale request a lender will conduct its own market analysis on your property by assigning an appraisal, often referred to as a broker price opinion (BPO).  The lender will evaluate the sales price and the fair market value of the property in order to determine if it is better off accepting the short sale or foreclosing on the property.
• The owner must be able to demonstrate a financial hardship.  In addition to the owner’s inability to meet his/her monthly expenses including the monthly mortgage payment, the owner must demonstrate that he/she lacks the financial means to pay the shortfall on the mortgage.   
• A fully executed purchase and sales contract with a ready, willing and able buyer.  The lender will generally not approve a short sale request until the owner has a buyer ready to purchase. The lender will also require a copy of the listing agreement with the real estate agent as well as proof of funds for the prospective buyer.
• The seller cannot receive any proceeds from the sale of the property.  After accounting for closing costs, the net proceeds of the sale will go to the lender in its entirety to be applied towards the mortgage balance.  There are a few exceptions to this rule depending on the type of mortgage you have. 
• A proposed/estimated HUD/closing Settlement Statement must be submitted to the lender with the short sale package.  The HUD settlement sheet will demonstrate to the lender exactly how much it will net from the proposed short sale before it agrees to the short sale request.  The lender is specifically reviewing that all of the closing costs are reasonable and that appropriate parties are involved and that nobody is getting any funds that should be going toward the mortgage.
• The proposed sales transaction must be an “arms-length” transaction.  This simply means that the buyer cannot be related to the owner.  There are very few exceptions to this rule.
• The owner must not remain in the property after the proposed sale has been consummated.  Basically, the new buyer cannot have an arrangement with the seller to buy the property and allow the seller to stay in the property and rent from the new buyer.

There are many other factors that are involved in the short sale approval process.  However, if all of the above factors are in place, properly documented and properly presented to the lender, the short sale has a greater chance of being approved. 

WHAT ARE THE BENEFITS OF A SHORT SALE?

A short sale has many benefits to the owner including the following:

• Avoid foreclosure. 
• Avoid bankruptcy. 
• Avoid a deficiency judgment.  In the case of a foreclosure the lender still has rights to pursue the owner for the difference between what is owed on the mortgage and what the property sold for at auction including attorney fees and expenses.  This is not the case in a properly negotiated short sale.  A short sale allows the owner to eliminate the debt and the lender agreeing to forego their rights to a deficiency judgment.
• Protect your credit score.  The effect of a short sale on your credit score is much less than a foreclosure or bankruptcy.  Research has shown that a short sale stays on your credit report for approximately 18 months as opposed to 7 – 10 years for a foreclosure or bankruptcy.  Short sales also do not reduce your credit score as greatly as a foreclosure or bankruptcy.  Based on our experience and research a foreclosure or bankruptcy could cost you 200 to 300 points as opposed to a short sale that only cost 80 – 120 points. 
• Paid closing costs.  The lender typically pays the closing costs for the seller.  These costs are deducted from the net that the lender receives at settlement.
• If the property is a primary residence and meets the other criteria of the IRS exemption or if the owner is insolvent, the forgiveness of debt is not usually considered a taxable event for the homeowner.

WILL A SHORT SALE APPLICATION PREVENT OR STOP A FORECLOSURE ACTION?

Unfortunately one department does not communicate with the other department for the lender in most cases.  The lender will start and process a foreclosure in accordance with its company policy regardless if a short sale is being negotiated at the same time.  The lender does not want to stall the foreclosure process in the event that the short sale is not approved or if the purchase transaction otherwise falls apart.  However, if the short sale has been approved but the actual closing is scheduled after a foreclosure auction date, we are often able to get the lender to postpone the foreclosure to allow the short sale to close.  Lenders take anywhere from one to three months to make a decision on a short sale.  Therefore, it is important to start the short sale process as soon as possible and to work with an attorney in connection with a short sale, especially if a foreclosure action has already been commenced.

DO I NEED AN ATTORNEY TO ASSIST WITH A SHORT SALE?

It is our position that using an attorney with experience in the short sale process is very important and increases your chances of getting the short sale approved.  If you are behind in your mortgage payments and in danger of losing your home, you need to get advice from the right people as soon as possible.  Be cautious of real estate agents who state that they specialize in short sales.  Real estate agents are not licensed to practice law and render legal advice; which is precisely what you need in this situation.  Handling the legal aspects of a short sale incorrectly can result in significant complications for the owner.  Real estate agents are necessary to finding you a ready, willing and able buyer.  But they should not be negotiating your short sale or rendering legal advice to you.  I have handled several closings where the real estate agent handled the short sale for the owner.  We represented the buyer.  The short sale approval did not include the forbearance of the lenders right to pursue the deficiency against the owner.  This could have resulted in a significant financial hardship to the owner if we did not fix it for them.  The short sale was not properly negotiated with the legal interests and rights of the owner in mind.  Furthermore, we have had many clients contact us the year following their short sale regarding the enormous tax liability that they were now facing.  They explained that their real estate agent handled the short sale and never advised them of the tax consequences or how to avoid them.  This is not a knock on real estate agents but a word of caution to owners considering a short sale.  Each professional has their defined roles in the transactions and legal advice and short sale negotiations must be left to attorneys to handle to protect the owner.

Tomassi Law Associates, LLC can recommend trustworthy professionals to assist you in teh short sale process such as an experienced realtor and accountant.

In addition, owners need to be cautious of scam artists, investors and other unscrupulous individuals trying to make money from people who are in danger of losing their homes in a foreclosure. 

Finally, it does not cost you anything out of your pocket.  An attorney is part of the closing costs for the purchase.  As stated previously, the lender pays the closing costs out of the proceeds of the sale.  Tomassi Law Associates does not charge an hourly rate to the owner and does not require the owner to pay a retainer.

Tomassi Law Associates, LLC will provide you with a free consultation to go over your individual situation and to evaluate your options.  In the event that a short sale is your best option, we will explain the process to you and handle all aspects from start to finish – right through the closing.  We will prepare, draft and present the short sale package to the lender and negotiate the short sale approval on your behalf.  We will coordinate the successful closing with the buyer and buyer’s attorney and ensure that the closing is conducted properly.

Contact Attorney Jared Tomassi at 401-782-2005 or at jtomassi@jtomassilaw.com to schedule a free consultation today.  Don’t wait until a foreclosure has been commenced against you.

Tags: attorney, bankruptcy, borrower, delinquency, foreclsoure, lawyer, lender, owner, Real estate, seller, short sale

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