Estate attorney Douglas C. Sinski. (Courtesy Photo: Sinski)
- What is a short sale - simply stated, a short sale is a situation whereby a lender, (mortgagee), agrees to accept less than the full amount of the outstanding loan balance due on the sale of the property. (The borrower is the mortgagor).
Given that many mortgages today are "underwater," (the borrower owes more than the house is worth), and the borrower may also be behind in mortgage payments, lenders are making a business decision to cut their losses and accept less than the amount due, rather than go through a time-consuming and costly foreclosure process.
I recently spoke with two real estate agents who have been involved in short sales: Elizabeth Capozzoli
, who is with Town & Country Real Estate, and Cornelia Dodge
, an agent with Devlin McNiff.
I also spoke with real estate attorney, Douglas C. Sinski
, Managing General Partner of the law firm, Schwartz & Sinski, P.C. Coincidentally, Doug was the attorney in a deal in which Cornelia participated.
Doug, are there any federal or state laws that specifically relate to short sales?
Devlin McNiff Real Estate Associate Broker Cornelia Dodge. (Courtesy Photo: Dodge)
"The Home Equity Prevention Act" went into effect on February 1, 2007 in New York State. Basically, it was intended to protect homeowners of one to four family residences from 'home equity theft,' especially by what are known as 'equity purchasers.' It also applies to 'covered contracts.' The basic intent of the law is to protect the home owner and to prevent fraud."
Doug, what about the real estate broker's fees, attorney's fees, etc.?
"All fees must be paid out of the proceeds of the sale and disclosed on a HUD-1 Form. The seller is not permitted to walk away from the the closing with any money from the sale."
Is the amount of the difference between what was owed and what is accepted by the lender taxable income to the seller, Doug?
"It depends on other factors, but yes, the lender may issue a 1099. Also, the borrower may still be held responsible for the difference between the accepted amount and the amount due."
Could that result in a deficiency judgment against the seller?
"Yes, it could."
I don't intend for this to sound like a commercial, Doug, but it is obvious to me that these transactions require special legal expertise. Whom do you typically represent, the seller or the buyer with respect to short sales?
"It breaks down just about 50-50."
And when do you typically become involved in the transaction?
"Usually I'm contacted by the seller, buyer, or the real estate broker after there is an offer and acceptance."
Elizabeth Capozzoli with Town & Country Real Estate. (Courtesy Photo: Capozzoli)
It would seem to me, considering the complexity of these transactions, the sooner the better, even before the property goes on the market.
"Yes. Absolutely. It's better to determine if you are a candidate for a short-sale and what issues related to the property, such as other liens could affect the transaction. Not only does the holder of the first mortgage have to consent to the short sale but so does the holder of any second mortgage. Tax liens and 'mechanics liens' also enter into the picture. Whether I represent the seller or buyer, these are important issues that must be addressed."
How long, in your experience, do short sales typically take to complete, Doug?
"Six to nine months. And the lender may walk away from the deal before it closes if they are not satisfied."
Liz, how many short sales have you been involved in, whom have you represented, buyer or seller, and how many deals have closed?
"I have been involved in 30 transactions, 25 on the seller-side, five on the buyer-side - 15 have closed. I was on the seller-side in all of those."
In what geographical areas have you been involved?
"Hampton Bays to Springs in East Hampton. These are the areas where the median incomes are lower than in other areas of the Hamptons."
Based on your experience, Liz, what are the most common reasons that home owners find themselves in the position whereby a short sale might be the answer for them?
"Hardship, whether it's due to a death, illness, divorce, lost wages, loss of rental income. You must be able to demonstrate hardship in order for a lender to consider a short sale."
If you are contacted by a seller who is considering a short sale, what are the most important issues that you would consider, Liz?"
"Can they meet the bank's hardship tests? There is no point in going the short sale route if you can't provide the bank with the documentation they require. When I first started doing short sales, they could take 11 months. Now lenders have set up departments to handle them, and if the necessary documentation is provided, it can be done in 90 days."
"It's very important that the house be priced right. The banks require a Broker Price Opinion, which is really a Comparative Market Analysis. Sellers and buyers who are not realistic about price are not good candidates for a short sale."
How much of your business has been short sales, Liz"
"About 50 percent."
Cornelia, you were involved in one short sale, and I didn't know it when we first spoke about it, but Doug was the attorney representing the seller.
"Yes, that's true. I was also representing the seller."
What was your experience?
"Given the amount of time and effort that I had to put into it, it wasn't profitable when compared to other ways I could have spent that time. The property was over-improved, which made the seller's price expectations unrealistic. It also had certificates of occupancy issues as well as issues with the pool."
"We had to go through a series of price adjustments, low-ball offers by buyers, and when we finally did get signed contracts, the bank sold the loan to another bank before we closed, so we had to start the process all over again. "
"I had to show the property until closing."
"The final blow was that we had to reduce our commission by a third. It just wasn't worth it, all things considered."
Elizabeth, Claudia, Doug. Thank you for your time and sharing your knowledge.
: John will be teaching a 22.5 hours Real Estate Continuing Education class at Long Island University in Riverhead on August 15, August 17, and August 19. For information and registration contact Rosemary Malone at 631-287-8334 or by email at firstname.lastname@example.org.
John is a St. John's University graduate, licensed Real Estate broker, lecturer, teaches real estate license classes at LIU and NYU, and acts as a consultant to the real estate industry.