If the client has equity in the property and cannot afford the regular payments necessary to retain the property, a voluntary sale, pursuant to a contract of sale, is often a solution. If a homeowner has decided that their best option is to voluntarily sell their property, a voluntary sale can save for the client the equity in the property which would be realized upon such a voluntary sale.
A short sale is a voluntary sale in a situation where the bank that holds the mortgage agrees to take less than the full payoff for the mortgage in full satisfaction of the mortgage. This is commonly sought by a homeowner who wants to sell but whose house is “upside down” or where the mortgage balance exceeds the fair market value of the property. Our office can help you negotiate a short sale since such negotiation can be involved with the bank asking for information and documentation to support such request.
Because a foreclosure action creates deadlines and pitfalls that are not present in a regular sale of a property, a client needs to have proper representation in selling a house that is in foreclosure. There are issues at both the contract and closing stage that need to be resolved for the foreclosure action to be properly resolved upon a sale of the property. If the client is selling the property while protected by a Chapter 13, there are additional considerations that are essential for the client to properly evaluate.
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The Law Office of Ronald D. Weiss has helped many homeowners by representing them in real estate deals, especially when they are selling their property to prevent foreclosure. Often a voluntary sale is the client’s ultimate goal while the client pursues other legal options to hold back the foreclosure process.
Many of the voluntary sales that proceed in foreclosure and pre-foreclosure situations are “Short-Sales” which give the mortgage holder less than its full payoff based on the inability to sell the house to satisfy the full mortgage payoff. Short sales require a negotiated settlement with the mortgage holder which needs to be convinced that it should quickly agree to a short payoff (please see our Section on Negotiated Settlements). Short sales also require the drafting of a real estate sales contract to contain special provisions protect the homeowner. Short sales require that the homeowner have both a motivated potential buyer, who is willing to wait for the homeowner to negotiate a short sale agreement with the lender, and a lender willing to agree to such short sale. Because, a short sale requires such coordination, it is not always easy to proceed by short sale with a third party buyer, and ofter the short sale buyer, is friendly with the homeowner, and motivated by the goal of helping the homeowner.
If you are considering a voluntary sale of your property, the Law Office of Ronald D. Weiss, P.C., can also assist you by recommending real estate brokers who specialize in selling under such conditions and who would charge a discounted commission.
A real estate deal to sell the property would bring the loan current since the arrears on the loan would need to be paid off in full at the time of closing. Usually a sale of the property would be a non-retention option, in that the property would no longer be a welcoming long term abode to the client once he sold it. However where the Homeowner/Borrower has friendly allies, they could purchase the property in their name, and after its purchased allow the Homeowner to pay rent for a period of time until the Homeowner restores their credit sufficiently to be able to purchase the Property back. Where there is still equity in the property this retention option is a regular real estate deal. But where the property is upside down, with the mortgage balance exceeding the fair market value of the property, a short sale becomes possible. In such a situation the short sale buyer would usually make an offer below fair market value and often get a deal that was based on the price of distressed property (at least 10% below fair market value; but often a higher discount accounting for potential wear/tear, lack of updating and damage to the property requiring extensive renovations). Here, if the Homeowner eventually purchases the property back, the Homeowner essentially erased much of the arrears, interest and costs due to the default.
A Voluntary Third-Party Sale – A Voluntary Sale of the Property does not require a formal agreement with the lender, as long as the lender receives a full payoff at the closing and all other liens or encumbrances on the property are paid and/or resolved. A Voluntary Sale is different than an involuntary sale at a foreclosure auction in that it is conducted and controlled by the property owner. A Voluntary Sale to a Third Party is considered a non-retention option because the property owner almost always needs to vacate after selling the property. A Voluntary Sale to a Friendly Party on the other hand is considered to be a Retention Option if the friendly party allows the property owner to remain in possession at the property. In a regular voluntary sale there is enough equity in the property to allow all liens to get paid in full and any profit, beyond paying necessary expenses at the closing, would go to the property owner.
A Voluntary Third-Party Short Sale – A Third-Party Sale happens where unlike in a regular sale there is negative equity in the property and lenders need to allow a lessened payoff to close a sale. One of the most common non-retention options is a short sale to a third party which at the end causes the homeowner to have to turn over possession to the third party buyer. If the buyer is not friendly and or allied with the homeowner/ seller, the third party is looking to invest or possess the property and almost always wants to gain possession. A Voluntary Short Sale is different than a regular sale in that there is more owed in liens against the property than the proceeds available at the sale to pay off the liens. Therefore agreements are needed with any lien holder that is getting less than the full payoff of their claim. That is especially true of what is usually the first position lien on the property which is the main/first mortgage on the property. To do a short sale it is much simpler if there are no secondary liens agains the property. However to the extent they exist they can be dealt with differently. Where first lien and/or secondary liens are very upside down, they may allow the closing for significantly less than what is owed to them as long as they are convinced that they received the best, or at least a reasonable deal under the circumstances. If there are multiple liens on a property they all need to agree to a lessened payoff amount to allow the sale to proceed or other terms that allow all the lien holders to release their liens. Typically the lenders agreeing to lessened payoffs also agree not to pursue a deficiency. Such forgiveness while it is common raises a question as to whether the former property owner would be on the hook for “debt forgiveness taxes” to the IRS which regards the forgiveness of debt as a taxable event unless the transferor is insolvent or was rendered insolvent by the transaction. Most homeowners in foreclosure can show that they are insolvent and therefor this potential tax is not usually an issue.
Whether the owner pursues a Sale (where there is equity) or a short sale (usually where there is negative equity and the mortgage is upside down) the procedures are similar. They vary in that the in the Short Sale a Short Sale Agreement is needed with the Lender who needs to accept less than the full payoff to close. In a regular sale no such agreement is needed since the lender will get the full payoff. In both there needs to be a listing of the property in order to find a buyer. With a short sale this is a formal requirement for at least 60 days because the lender needs to know that the the potential short sale buyer is competitive and the highest possible purchaser for a property that was marketed to the public. In both a Sale and a Short Sale, the following are needed: payoffs for all liens, a title report, a deed from the owner to the buyer and satisfaction and release of lien from the lender based on the payoff of the full mortgage debt in a regular sale or a payoff of the agreed short sale amount in a short sale. The title report is essential since secondary liens, if they are substantial and not totally upside down can get in the way of a short sale.
Our experience with negotiating options regarding distressed property allow us to best determine with you a strategy that best protects your interests. We can help you determine if a voluntary sale is a good option and if it is whether it should be a regular or a short sale and whether it should be a third-party sale or a friendly sale. Our concentrations in negotiations, modifications, bankruptcy and litigation when it applies to distressed property allows us to assess your options not only in the beginning of handling your matter, but also later on if your situation has changed and you wish to change your plans and pursue alternative options.
Please call us at (631) 271-3737, or e-mail us at firstname.lastname@example.org for a free consultation to discuss such short sale and voluntary sale options in greater detail.