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Short Sales Alert

With recent publicity surrounding the plight of subprime mortgages, a slow down in some regional real estate markets and increasing defaults, it is prudent for all licensees to be prepared for dealing with short sales.

Due to the complexities involved, a number of brokerages have adopted special policies and procedures to ensure that their brokers are well equipped to handle Short Sales.

What is a Short Sale?

In its basic form, a short sale occurs when the projected proceeds from a sale are inadequate to pay off the underlying liens and all other costs of closing a transaction, and the the seller does not have ability to provide additional funds to clear up the short fall. As a result, a lender or other creditor may be asked to reduce or discount the amount owed to them. In such cases, the buyer and seller must condition any sale upon lender/creditor approval or rejection within a set period of time.

The following Short Sale tips were the subject of an article several years ago and are worth reviewing due to our changing real estate climate.

Short Sale Tips

1) Due Diligence at Listing Interview: Develop a routine at the early stages of a listing to determine if a Short Sale is present and obtain the seller's written consent to verify from lenders/creditors as to amounts owed and discuss Short Sale issues.

2) RMLS™ Listing Disclosure: RMLS™ Rule 3.25 provides, “Short sale listings shall be denoted as requiring third-party approval to the transaction.”

3) Disclosure in Sale Agreements: Disclose the Short Sale as a contingency in the Sale Agreement, including any counteroffer or addendum. The contingency functions to disclose the Short Sale, provide for the release of the lien which encumbers the property and should indicate that the lender or lien holder must agree upon a reduction in the amount due to fully satisfy the lien. These are the necessary steps which a lender or a third party must agree to in order to achieve a successful closing.

In addition, to protect the buyer, the contingency should contain a deadline for performance to assure that the buyer will obtain a full refund of the buyer’s earnest money deposit if the transaction fails to close. Delays are common when dealing with lenders, so anticipate monitoring of all agreed-upon time lines.

4) “Mid-Stream” Short Sales: In a substantial number of listings, the existence of a Short Sale may not be revealed until after the preliminary title report is issued which discloses liens, judgments or other encumbrances which may render the sale proceeds inadequate to discharge all liens. We have dubbed such instances as “mid-stream” Short Sales.

Once a “mid-stream” Short Sale emerges, we suggest that written disclosure, including use of a contingency in the Sale Agreement, be implemented immediately, similar to a situation where the transaction is recognized as a Short Sale from the beginning.

5) Tax issues: A Short Sale may involve the forgiveness of the seller’s debt which might constitute the recognition of income to the seller under the internal revenue code. As always, prudent listing brokers should be aware of these types of issues and where they arise, the seller should be referred to a competent certified public accountant or tax attorney. This advice should be documented for the broker’s file.

In conclusion, the possibility of Short Sales should be on all brokers’ “radar screens.” Given the necessity of disclosing Short Sales to prospective buyers, we recommend that brokers develop a methodology to ensure that due diligence is exercised in handling Short Sale transactions.

 
This column contains general information only and must not be construed as legal advice. Questions may be submitted directly to Maylie & Grayson by fax at (503) 775-1765, by email at or by mail at 7959 SE Foster Road, Portland, Oregon 97206.

7959 SE Foster Road Portland, Oregon 97206 T. 503.771.7929 F. 503.775.1765 
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