Short sales are once again becoming more of a commonplace on a number of properties that were purchased over the last few years with the 100% financing. 

In the past, to accomplish a short sale, the title company would have to prepare and present to the payoff lender a HUD-1 settlement statement reflecting all of the terms of the ratified contract minus the payoff(s).  The lender would then review the terms and reduce their payoff to meet the shortage.  In addition, the payoff lender would also insist that others would have to reduce their fees/earnings in order for the deal to close.  Therefore, the broker’s commission would get reduced, the settlement fees and water escrows reduced, and so on.

From time to time, the lender would have required the seller to complete a financial information sheet to confirm their financial status and confirm their inability to pay the determined shortage.. 

Today,  payoff lenders are realizing that with the drop in appraised values and the cost of foreclosing and reselling, they are better off attempting to negotiate the payoffs to complete a transaction as opposed to owning yet another property.  However, their procedures have become more rigid. 

Although the lenders are willing to negotiate their payoffs, the seller (customer) is required to prove that they cannot possibly satisfy the shortage.  The lenders are requesting authorizations to release information to the “negotiator,” a financial information sheet, a hardship letter, copy of paystubs, copies of tax returns, the listing agreement with the listing broker, and a copy of the offer.  Once all of those pieces are in place, then will they consider the offer and reducing the payoff to meet the needs of the parties.  Keep in mind however, that the lender can still insist on reducing fees of any of the other parties involved in order for the transaction to close.

I have always advised listing agents in this predicament to disclose in the remarks that the contract must be approved by a third party.  Unfortunately, this serves as notice that there is an issue with the property, however, it fairly discloses upfront to all of the parties that the offer will be reviewed by people other than the seller and only then, can it be ratified.  Furthermore, it gives additional notice to the agents that there is the possibility that if a short sale scenario exists, their commission might be affected based on the MRIS listing and the short sale lender.

We are becoming more and more accustomed to negotiating on behalf of the seller with the seller’s authorization.  What we are finding is that the lenders prefer an offer on the table before any discussion of a reduction in the payoff. Although, preparing the documents in advance for the payoff lender will allow them the opportunity to prepare themselves for what is to come once an offer is received.