Real Estate Lawyer and Denver Divorce Blog. (Vol 1.18)
By Craig Franklin Chambers Esq. 7851 S. Elati Street #204, Littleton, CO 80120
The Littleton Lawyer
As a Colorado lawyer specializing in residential real estate law and residential real estate transactions, divorce and family law in Denver, Englewood, Highlands Ranch, South Jeffco, and Littleton, Colorado, and as a licensed real estate broker with over thirty years of experience, clients often question me about short sales.
In the Denver-area real estate market, there are numerous types of "foreclosures" including bank-owned properties, HUD-owned or government-owned properties, and Fannie Mae properties.
A short sale is a home that is owned by an individual who is behind on his mortgage payments and is marketing the home for less than is owed on the property. The real estate transaction is a purchase contract between the buyer and the seller, subject to approval by the lender. A foreclosure may or may not have been started by the lender, or the foreclosure may have been started and then held in abeyance.
A short sale is an alternative to foreclosure. The main exit strategy of a seller is to sell the property. If the debt on the property exceeds the home's value, the property can't be sold, and if the homeowner can no longer afford the payments, the payments do not get made and eventually the lender forecloses of the property.
A short sale avoids the foreclosure process because the lender basically agrees take a loss on the property and accepts less of a payoff than is owed on the property. Rather than go through the lengthy foreclosure process and auction the home back to the lender at a public trustee sale, the property is sold directly to a third party buyer now at a discounted price.
The short sale saves the lender the extended loss it might take in uncollectable lost payments, penalties, and interest and it saves on attorneys fees and the costs of a foreclosure. It frees up the homeowner from his loan obligations from the property he can no longer afford. Because the short sale is an agreement between the lender and homeowner, a short sale often means the outstanding loan deficiency is forgiven by the lender.
For the buyer, distressed properties such as short sales are often the best value, even though distressed properties often need the most work.
A short sale is sometimes the best deal on paper, but it is only a good deal if it closes. If you have a deadline for your purchase, such as a wedding or the upcoming birth of a child, a short-sale, unless it is pre-approved because a prior deal fell, is probably not going to be your best option.
Another negative, a short-sale seller is not receiving any money from the transaction. He lists his home as a short sale because he believes that a short sale will have a less negative impact on his credit. A short-sale seller may not be in position to help the buyer with closing costs or inspection issues, which in turn can affect whether a new lender will loan on the property.
What works in principle does not always work well in practice. Realtors often advise sellers to stop making their mortgage payments and list properties at low prices expecting that the lender will agree to a short sale.
But lenders are reluctant to approve losses on loans they lent as secured by homes absent severe hardship. And because the lender makes his money by lending money, not on bad loans or short sales, they dedicate very little of their time and effort to closing the short sale transactions.
Many real estate brokers are overly optimistic about the odds of a bank accepting a short sale. Only a fraction of the short sales ever close, and the listing real estate brokers involved need to be experienced in short sale transactions and have contacts with the lender in order to bring the deal to closing.
With banks, under Colorado statutes, all agreement between the bank and the borrower have to be in writing to be binding. The lenders are notorious for acting in bad faith. Often the lender will orally tell a borrower they will do a short sale or a loan modification, and at the same time proceed with the foreclosure.
If you are a homeowner, be careful before you stop paying your mortgage and market your home as a short sale. There is no obligation for a lender to take a loss on a property and sell it for substantially less.
With the improved real estate market, there may now be equity in your home, and, depending on your needs, there may be other options available to you that are more likely to succeed or are easier.