Short Sale

Short Sale. What is it? And how does it work?

After the last two posts, Liens, Grantors, Grantees, Mortgagor, Mortgagee......... and Title Insurance and Foreclosure, this post will be short and sweet.

A short sale is the sale of a house, where the balanced owed on the mortgage is greater than the proceeds from the sale of the house. The seller/mortgagor turns over the proceeds from the sale of the house to the lender/mortgagee. The seller/mortgagor may be by this action able to satisfy the debt entirely, however, they may not, and they could still be liable for a deficiency balance.

It works through the lender's loss mitigation department. The lender must agree to discount the loan balance due. Usually, unless there is a Notice of Default issued, a Lender will not accept a short sale offer. The best thing for a seller/mortgagor to do is to contact the loss mitigation department or have their agent do it for them and get the check list of items they need to begin the process. The seller/mortgagor will have to prove a hardship and will need to provide tax returns, bank statements, perhaps w-2's, etc.. Each lender/mortgagee should have a check list of the items, which need to be provided for them to entertain doing a short sale for you, the seller. It is one of those things that is best to address all of the possibilities as soon as possible. Have the payoff ordered and a title report ordered. You should know exactly where you stand as soon as possible keeping in mind, the response time may be slow from the lender.

Buyers should be prepared to put in an offer and any possible additional paper work required by the lender and then, wait. The response time will not be the normal 2-5 days, which you get from a private seller. Be prepared to wait from 3 weeks to 3 months for an answer. Some of the banks have become very organized and can get it turned around in a month or so. Others, however, are overwhelmed or slow, and may take up to 3 months to respond.

Sellers are willing to go this route to avoid foreclosure as are lenders. The foreclosure process can be far lengthier and more expensive for the lenders than accepting a short sale, and this option offers the possibility of a cheaper conclusion for them.

Title Insurance and Foreclosure

Following my last post, Liens, Grantors, Grantees, Mortgagor, Mortgagee........., I think it is worth also explaining Title Insurance and Foreclosure in an attempt to get to the subject of short sales. If you did not read the last post, it may be helpful to read it before reading what is outlined herein.

As a buyer or if you are refinancing, you will hear about or deal with title insurance. It has been my experience that most people have little understanding of what title insurance actually is. In the simplest terms, there are two basic types of title insurance. The first type is the Owner's Policy, and the second type is the Loan Policy. There are other types of title insurance, but these are the two types you, the home owner, will need to be concerned with in 99% (not a scientific number) of the cases. The exception may be if you are involved with some type of leasehold property.

The Owner's Policy insures your title to the property. It insures that your title to the property is free and clear of all judgments, liens and encumbrances. When you buy a property, either you or perhaps your agent will order title insurance. The title company will run a public record search. They will check for any public utility, taxes, judgments, liens, mortgages, bankruptcies, restrictions, exceptions, etc.. They will produce a title report, which is a proposal for insurance. I am not sure if every state looks the same, but in Pennsylvania, the title report is broken down into four schedules: A, B, B2, and C.

Schedule A gives basic information. It shows the date through which the title search is valid. This date is referred to as the cover date. It is the date through which the title company was able to search the public record. It also shows the file number, property address, who currently owns the property, and which policies the title company is proposing to insure, the proposed insured names and the amounts insured. In a basic home purchase, there should be two proposed insured parties. The first is the home buyer/grantee for an Owner's Policy of Title Insurance, and the second is the lender/mortgagee for a Loan Policy of Title Insurance.

Schedule B lists all of the items, which need to be addressed to clear title and insure. Thus, it shows the documents, which need to be executed such as a Deed, Mortgage, Affidavits, perhaps a Power of Attorny, etc.. It also shows taxes, mortgages, judgments, liens, etc, which need to be paid to clear the title.

Schedule B2 shows exceptions, conditions, restrictions, etc.. This section discloses the rights of others to the property. There may be previously granted oil rights, gas rights, mineral rights, etc., easements for roads, utilities and pipelines, which can limit the ability of where and how the buyer can use the property, or possibly rights that have been granted to others such as neighbors for access over the land, companies for irrigation, etc. The review of this schedule is important, because these rights supercede the buyer’s rights on their future property. The title insurance will not offer any protection to the buyer for any of these issues.

Schedule C covers the legal description. This schedule can vary from state to state. In Pennsylvania, the legal description is a metes and bounds description followed by a recital, which shows the dates of deed and recording to get from the last owner to the current owner. The recital may include a description of dates and estates to provide the chain of title from the last seller to the present seller. Thus, if the Smiths bought a property in 1960, the recital will show the date of the deed, the date it was recorded in the public record and the book and page where it was recorded, and name the parties who conveyed the property to them. If both of the Smiths passed away, then it will show their dates of deaths and their estates and the parties assigned to be administrators or executors.

So, you have ordered title insurance. The title company has run a search and produced a title report. They will send you a copy of the title report and the seller will receive a copy either from you or from the title insurance company. The seller will go through the report and produce payoffs and bills to clear the title at settlement. They will also be required to produce identification and perhaps legal documents: there may be divorce decrees, wills, etc. These items may need to be reviewed by the title insurance company and additional requirements added to the title report.

The buyer will also be searched in the process of the title search. There may be items that the buyer is required to payoff also. For example, in Pennsylvania, if you have outstanding child or spousal support payments, you will be required to payoff the support before buying the property.

At settlement, the title insurance company will require everything to be paid that the report reflects. They will take the title report and "mark it up". They will mark all items paid and proven "REMOVED". There are other items, especially those found on Schedule B2, that will be marked "EXCEPTED". The excepted items will be still in effect and not covered by the title insurance. Therefore, items like roads and easements and rights will still be in effect and your title insurance will have no bearing on these issues. Typically in Philadelphia, there is a party wall or an alleyway, which others have rights to. After you buy the property and receive your insurance, the others will still have rights to the party walls and alleyways or any other excepted items.

When the settlement is scheduled, the title insurance will run an additional search called a bring down. The bring down will simply be an update to the complete search. They try to close the "GAP DATE", which is the original cover date to get as close to settlement date as possible. Additional items may be found on the bring down. When they insure your title, the title insurance company insures you through the date your deed and mortgage are recorded. They have additional risk in this gap period, where the records can not be searched prior to settlement and until they record your deed. It is pretty straight forward that if they are insuring a clear title for you, they are insuring that nothing is standing in the way between you and your title. There are not taxes due, no judgments, no mortgages on the property, etc.. If something should come up at a later date, the title company is on the hook.

The Loan Policy is a little more complicated. The Loan Policies guarantees a lien position. When you are buying a house and have one mortgage with which you are buying the property. The mortgage is referred to as a purchase money mortgage. It is a first mortgage and should have a first lien position. The title insurance insures that everything is paid off and there are no liens, which will come before this lien.

There is another concept, which is referred to as priority of liens, which is the order in which creditors are paid when borrower's assets are liquidated. When dealing with real estate in Philadelphia, taxes, water and sewer, and gas (PGW) take priority. Even after the loan policy of title insurance is issued, these three items retain a senior lien position to the mortgage. The mortgage will always be subordinate to taxes, water and sewer, and gas (PGW) in Philadelphia. Thus, if you should default and get taken through the foreclosure process, the eventual winner of the sheriff's sale will not only have to pay off the lender/first lien holder, but also the senior liens: taxes, water and sewer, and gas. If there is a second mortgage and judgments, etc., the taxes, water and sewer, gas and first mortgagee would need to get paid off, but the remaining items would get removed.

Now, of course the process and subject of priority of liens, foreclosure and sheriff sale is much more complicated than above described, and further complicated by state liens and IRS liens, which have certain priority positions. There are notification rules and certain processes which apply, etc. that I will not get into in this post.

Thus, when a lender forecloses on a property, they must go through the legal expense of foreclosing, must pay the municipal items and any liens, which are senior to their own. If another party bids against them at a sheriff sale, then the party winning the bid must pay those same costs and expenses.

Now, we keep hearing about a thing called a short sale. A short sale generally happens when a borrower is being foreclosed upon. With the lenders co-operation, the borrower lists the property for sale. The hope is to sell the property and avoid two things. First, to avoid going through with the actual foreclosure, and second, to sell the property and avoid, on the lender's part, the possibility of taking the property back at the sheriff sale. If the lender takes it back, then they have the added burden to market and sell said property. I will go further into this process in the next post.

Liens, Grantors, Grantees, Mortgagor, Mortgagee.........

Another blogger reading my last post, Why Should You Understand Terms a Realtor Uses?, suggested I should write a post on SHORT SALES since it is a term used quite often these days in the news. In order to write such an article, I think there are a few other ideas I should write about first to make the idea of a short sale clear.

Since I am writing about real estate, I will address the idea of a mortgage. First and foremost, a mortgage is a lien. Of course, the next question is: what is a lien? A lien is a right to retain the lawful possession of another's property until the owner of the property fulfills a legal duty or obligation. In the case of a mortgage, the legal obligation is to pay off the loan. When the loan is paid off, then the lien/mortgage/obligation is removed from the property.

To start at the very beginning, when you buy a property, you receive something called a deed. Most of us understand what a deed is, but just in case you are completely new to buying real estate I will explain. A deed is a legal instrument, which gives you title to or ownership of a property. The grantor (seller) signs the deed to you, the grantee (the buyer). In exchange, you pay some consideration to the grantor for that property. The grantor "gives" you or conveys the property and title to the property to you with a deed for this exchange.

In the same way, when you borrow money from a lender to buy the property, the lender will require you to sign two legal instruments. The first of which is a NOTE. The note is the promise to pay the loan or debt back and spells out the terms upon which you will pay the lender back. The second legal instrument is the mortgage.

Now, the idea of the mortgage is often confused. You actually give the mortgage/lien against your property to the lender in exchange for the money you are borrowing. You are paid for this lien. Thus, you are the mortgagor and the lender is the mortgagee. Think of it in the following way: the "OR" has the thing of value and the "EE" has the money to buy either the whole of the property or interest in the property. Therefore, the grantor owns property and is willing to take the money or some other consideration from the grantee in exchange. Likewise, the mortgagor has property and is willing to sell off an interest in the property in exchange for money. The mortgage or lien is the interest another party has in your property in exchange for something of value, which is usually money.

Thus, you, the grantee now own property, but also have a lien against the property in the form of the mortgage. Therefore, you cannot sell the property without satisfying the lien holder (in this case, the mortgagee). So, when you go to sell the property, you must completely pay off the mortgage before conveying your title to the property to a new owner. Of course, there are exceptions to this idea, but in general terms, this method is how it will work with the normal residential transaction. There are places where buyers/grantees will take a property with existing liens; it is not the usual circumstance, however.

I believe the idea of giving a lien or mortgage to the lenders gets confused, because the lender prepares the actual document. Very simply, they are not going to agree to lend you the money unless you sign "the document", which legally covers their interest.

Of course, this explanation is oversimplified, and anyone, who has signed a mortgage and note knows that it seems like endless pages to sign and initial. I have tried herein, however, to explain, at the most basic level, the documents/instruments involved in a residential real estate transaction and the meaning of these documents/instruments in the same transaction.

Why Should You Understand Terms a Realtor Uses?

Why Should You Understand Terms a Realtor Uses? Well, truth be known, there is no reason why any buyer or seller should understand the terms or abbreviations a Realtor uses. We, the real estate community, are so used to throwing the words around, that we forget that the terms are not in common use, but instead, used for conversation with a very limited number of people.

I have noticed sometimes people ask me what something means and sometimes they don't and sometimes they look puzzled. They do, however, often come back with the incorrect responses. I, in this situation, blame myself for the poor communication. So, I will try to list as many terms of which I commonly use and hear to clue you into their meaning so that you will know right off what they mean.

ACTIVE You will see ACTIVE used on the property listing or on the MLS (see definition below) or hear people use it. What it means is that the property is up for sale and available.

UNDER CONTRACT Generally speaking, you will hear this term used. It means that there has been an offer made, and an offer accepted. There is a contract in place, but the property has not closed or settled yet. It is possible that this property comes back onto the market.

PENDING You will usually see this term on the MLS or on property listings. It means the same thing as UNDER CONTRACT. It refers to a property awaiting completion of the contract. It is possible that the contract does not get fully executed, however, it is in process to go to settlement or closing.

WITHDRAWN You will hear this term spoken or on the MLS. Withdrawn means the owner(s)/seller(s) has(have) taken the property off the market and it is no longer for sale.

EXPIRED You will see this term used on the MLS or property listings. It means that the contract between the listing agent and the seller has run out of time. The seller is no longer obligated to sell the property through that specific listing agent. There are exceptions, however. If certain things went on during the contract and happened after the contract was completed, the seller could still be obligated to the listing agent.

SETTLED This word means that the Agreement of Sale has been fully executed, and the property has changed hands or has been sold.

SETTLEMENT This term refers to the meeting, where the sellers and buyers get together and complete the Agreement of Sale by physically signing the Deed from seller to buyer while the buyer pays the seller for the property. This description is an over simplified version of a settlement.

CLOSING This word is used as a synonym for SETTLEMENT.

SETTLEMENT SHEET A settlement sheet is also referred to as a HUD-1. The HUD-1 is a form used at settlement to itemize all charges for sellers and buyers to give a complete list of the sellers' and buyers' incoming and outgoing funds in a real estate transaction.

HUD-1 See settlement sheet.

CONTINGENCY A Contingency will be seen in an Agreement of Sale. It is a contractual item in the Agreement of Sale, which allows for a special exception to the contract. For example, we often write a contingency into the contract, which allows a buyer to do a home inspection, and get out of the contract if they do not like the results of the home inspection while retaining their deposit monies. Every contract, however, does not have contingencies.

COMP Short for Comparable. See COMPARABLE.

COMPARABLE or COMPARABLE PROPERTY You will hear the word "COMP" thrown around, and it is abused greatly in today's market place. A "COMP" or COMPARABLE or COMPARABLE PROPERTY is a property, which has sold very recently and is similar in nature to the property trying to be priced for sale. The subject property is compared to the "COMP". If a "COMP" has something like central air that the subject property does not have, then the cost of the central air is subtracted from the price at which the "COMP" sold. If the "COMP" does not have something that the subject property has then it is added to the price at which the "COMP" sold. It is using these comps and analysis, that allows your Realtor to price your property. Many websites run comps for the general public, but be warned, they are very sketchy at best. It really only somewhat takes neighborhood and size into consideration and not condition.

Many times people will ask me to send them COMPS. I can send what I think are COMPS, but without seeing the subject property it is very difficult. Remember, the COMPS are CLOSED properties. More than not, I get some kind of communication after sending these requested COMPS that they would like to buy or see these COMPS. The COMPS have just recently sold and are not available. Thus, when asking for COMPS, please realize that they are not available.

MLS The MLS or Multiple Listing Service is a computer-based service which provides real estate professionals with detailed listings of most homes currently on the market.

CMA A CMA is a Comparative Market Analysis. It is an in analysis of a homes worth in the current market. Your real estate agent or realtor will use this method to give you a price range for which your property should sell.

Of course, this is a small list of terms, which I have provided, but hopefully, if you are thinking about buying or selling a property this list may help you understand and communicate better in the process of dealing with your old or new or future real estate.