This is a re-print of an article I wrote for Real Estate Executive Magazine for this month’s issue.
Mind the P&L, as in Payoffs and Liens
Understanding your seller’s complete financial picture has long been a best practice of top producing REALTORS but that task has become more important and more complicated. It’s not just declining home values and hard financial times that have forced many homeowners into positions where they owe considerably more than their home is worth. Many homeowners thought they were improving their financial health with a loan modification only to find they are further underwater than when they started.
Has your seller modified their loan, taken a HomeSaver Advance or participated in HAMP? If so, there are likely balances owed that are not reflected on the mortgage statement or payoff because these modifications likely created special liens. These special liens require additional research to determine what is owed and to whom. These situations as well as negative escrows are common and can quickly change a retail sale into a short sale. Most mortgage companies are willing to accept a short payoff but the process can be time consuming and mentally taxing for both the seller and buyer. REALTORS should approach these short sale situations with extreme caution as completing a short sale involves additional risk for the REALTOR and in most cases a lawyer may be required to protect both the seller and the REALTOR.
In a short sale situation, the mortgage company may try to keep your seller on the hook for the shortfall. If your seller is not prepared for this they may attempt to hold their REALTOR accountable in a breach of fiduciary responsibility claim. Complete debt forgiveness should always be the objective in a short sale. The IRS has ruled that debt forgiveness on a homestead does not have to be treated as income even if the mortgage company issues the homeowner a 1099, this has been the case since 2007.
Additional common stumbling blocks are credit card judgments, child support deficiencies, delinquent property taxes, 3rd part liens, HOAs, IRS liens, probate and divorce decrees can all prevent the sale if the seller doesn’t have enough cash to bring to the closing table. Many of these issues can be set aside or negotiated down with the proper techniques and legal assistance.
Resolving these issues well in advance of taking your deal to title is the only way to ensure your deal closes. When your retail deal becomes a short sale, find a local expert who not only has experience in negotiating with mortgage companies and other creditors but one who will seek to protect both you and your seller from future legal liabilities.
- The Bank Slayer
Thanks for a great article. I’ve been searching for this kind information for a while and had not found it until today. It’s rare to find well written articles like this anymore so I thoroughly enjoyed this one. Thanks again for sharing this information.