Reasons a Short Sale May Fail

A deficiency is the difference between your total mortgage debt and what the lender earns in the short sale of your home. If your debt obligation is $250,000 but the lender only brings in $210,000 of revenue from the sale, that leaves a deficiency of $40,000. While your real estate professional should be able to negotiate for the deficiency to be waived in some cases, some lenders may still choose to pursue it after the sale. The right real estate agent will be able to keep you informed about the lenders ability to sue; the lender should agree in writing that they fully release you from any outstanding debt. If negotiations are unsuccessful, you may also be able to avoid paying the deficiency by agreeing to pay a smaller amount than the total owed. Bankruptcy may be an option as well that needs to be discussed with your attorney should the lender refuse to release their claim.

In some short sale negotiations, the lender may be willing to agree to the proposed short sale terms, but with a catch. They will allow the sale to free the homeowner from their existing debt, but they may require them to make a cash contribution or to sign a long-term promissory note. The exact amount of contribution requested will vary from deal to deal usually based on individual’s financial situation. For example, you are experiencing a hardship but have two investment properties generating income… The lender may, for example, require that you agree to a $15,000 interest free promissory note. These notes are essentially you signing a promise to repay the debt at some point in the future.

If you have taken out more than one mortgage on the home, a home equity line of credit (HELOC), or have any other liens on the home from debtors, the short sale process becomes much more complicated. Since all lien holders must release their liens to get a clear title on the home, everyone must be on board with the deal. You now not only have to convince your primary lender, but also all junior lien holders, to agree to the sale. In order for this to happen, the primary (also referred to as the “senior”) lien holder will often offer a portion of the payout to these junior lien holders to convince them to release their liens. The issue here is that everyone usually wants more money. The primary lien holder wants to reduce their losses as much as possible, but the junior lien holders also want as much as possible out of the deal. Getting all parties satisfied with their payout can sometimes be very difficult. Certain banks are even notorious for refusing to take anything other than their full debt payment. This could mean needing to pay off certain debtors in full out of pocket or convincing the primary lien holder to take less money. Hiring a Realtor who has been successful in past negotiations will improve your chances of success when navigating these complicated situations.

If you neglect to open negotiations with the junior lien holders from the beginning, it may delay the process near the final stages and kill the deal. If the lien holders choose to be difficult in releasing their interest in the property, it may require a good deal of negotiating to satisfy them. Although they have less equity in the home, their approval is just as important if you want the deal to succeed.

Some debts may need to be payed before the sale can be completed or may follow the homeowner even after the short sale. Waiting until a later stage of the short sale process to run a title check may reveal these debts and complicate the process. The primary mortgage lender will usually not pay these debts, so if the homeowner doesn’t have the money to pay the amount owed, they may not be able to complete the sale. We run a title check early in the process to ensure that you’re aware of all liens and/or judgments on the home so that they can be dealt with accordingly.

When faced with losing money on a foreclosure or short sale, lenders will sometimes offer to restructure the mortgage repayment so that the homeowner can afford it. Even if restructuring was denied in the past, a change in circumstance may cause the lender to reconsider. We would not call this a ‘fail’ as it can offer a homeowner a second chance… If restructuring or refinancing terms are acceptable to the homeowner, it is worth considering. If however the lender offers to refinance or to restructure but you feel the terms will continue your hardship, we will negotiate for a short sale with a goal of the bank approving it. On a rare occasion your lender reviews the homeowners situation and feels the individual does not qualify for a short sale and instead will only offer loan modification.

If the short sale process takes a while, homeowner’s circumstances may change in a way that disqualifies them from the short sale option. For example, let’s say a homeowner lost their job and could no longer afford their mortgage. Due to the change, they decided that they had to short sell their home. The lender examines their finances and approves the short sale. However, during the several months that it took to complete the short sale, the homeowner regained employment. Due to their ability to now repay the original debt, they no longer qualify for the short sale option. And yes, the lender will check your financial situation several times throughout the short sale process to verify it has stayed the same.

If a home experiences some form of damage during the short sale process, the cost of repairing these damages usually won’t be covered by the lender. The damage could be the result of natural causes like a fire, lightning or a falling tree. The home may alternatively suffer water damage from a burst pipe or be damaged during vandalization. Regardless of the cause, the damages will reduce the property’s value and will likely require repair before a sale is approved. We may be forced to find a new buyer on a very tight schedule and your lender may or may not cooperate.

If a property is vacant, on a very rare occasion, the servicing guidelines of the mortgage may prevent a short sale from being approved. Short sales are more likely to be approved if the home is occupied.

The short sale process can take weeks or even months to be completed. The process is likely to be dragged out further by uncooperative junior lien holders and refusals of the initial offers. The back and forth that is usually involved in these negotiations can be time consuming and participants in the deal may become frustrated by the waiting. If the buyer or seller has unrealistic expectations about how quickly the process will be completed, they may bail on the deal after waiting longer than they had hoped.

If your loan has been sold off in a Pooling and Servicing Agreement (PSA), the servicing guidelines may prevent a short sale. Investors that possess the PSA may also deny the short sale if the guidelines of the PSA provide incentives for foreclosure that would be more profitable to its investors than a short sale.

It is important to ensure that the buyer will be able to hold up their end of the deal. The last thing we want is to go through the majority of the short sale process, get everything approved, and then discover that the buyer can’t even afford to purchase the home after all. During the early stages of the short sale process, it is our goal to ensure that the potential buyer is pre-approved for a loan large enough to purchase the home. Failing to do so might cause the deal to fall through.

This is another reason that hiring a competent and experience real estate professional is important. Failing to prepare the documents in time, accidental omission of critical information, and incorrect dating or signing of the documents are all serious issues that could drag the process out. Preparing the documents in advance and reviewing them closely is important to avoid further complicating the process.

Unpaid fees will need to be paid by someone, but who the responsibility falls to in these sales is, however, up for debate. Unpaid Homeowner’s Association fees, utilities, and closing costs are all possible examples. For example, the buyer may not want to pay for the closing costs and request a credit. However, the lender may refuse to grant the credit as they’re already losing money on the sale. These are just additional small negotiations within the grand negotiation of a short sale, as well as, additional conflicts that could potentially kill the deal.

Somewhere towards the middle of the short sale process, when you are approved for the short sale and we have a qualified buyer under contract, the bank will order one or two Broker Price Opinions (BPO’s). These BPOs are completed either by two independent real estate agents or by independent appraisals. Your lender is trying to verify that the price they buyer is offering for the property is a ‘fair’ market price with consideration to local market circumstances, location of the home as well as the condition of the home and any necessary repairs. For example if we have a buyer that is under contract to purchase your home for $200,000 but the BPO comes back at $207,000, the bank will require the buyer to raise their purchase price to $207,000. As you may imagine, the buyer may not be very thrilled and may walk away. We would then return the property to the market and look for another buyer willing to pay $207,000 for the house. Sometimes these BPOs are accurate and sometimes they are not. The ‘approved’ price of $207,000 may or may not reflect what the house is worth. Appealing this price is very difficult and sometimes the best course of action is to wait 60-90 days and ask the bank to re-order the BPOs.

Each situation will vary based on the individual lenders policies. If you are considering selling your house via a short sale price, please reach out to us for a confidential consultation. We are happy to answer your questions and help you determine if the process is right for you.