Short Sale Information 4 of 4

Here is the final part in my short sale advise blog. It covers the application process for short sales and some other issues.

V.  Short Sale Application Process and Other Issues

Q  20.  What is the process for applying for a short sale?

A  It is always in the best interest of the borrower to keep the lender informed.  If the borrower is in default of the loan and is contemplating a short sale, it would be best for the borrower to let the lender know before the foreclosure proceedings are well under way.  The lender may or may not grant more time to the borrower to find a buyer.  In general, the process goes as follows:

·  First, the borrower must find a buyer for the property.

·  Second, the borrower must prepare all the necessary documents (See Question 17).

·  Third, the borrower must submit all documents to the lender.

·  Fourth, the lender will send out their own appraiser to make sure that the buyer's offer is at fair market value.

·  Fifth, the lender will make a determination on whether or not to agree to the short sale.

Q  21.  What documentation will a lender typically require?

A  Lenders will typically require a distressed borrower to furnish a variety of documents, which could include the following:

·  Written explanation (and proof) of the hardship the borrower is experiencing;

·  Copy of the purchase contract signed by both the buyer and seller (borrower);

·  Copy of the TDS;

·  Proof of the buyer's ability to purchase the property, i.e., a completed loan application, pre-approval by another lender, or evidence of cash on hand (bank statement);

·  Copy of the certified escrow instructions; 

·  Preliminary title report;

·  Estimated net/closing statement certified by an escrow officer acceptable to the lender;

·  Completed and signed IRS Form 4506, "Request for Copy of Tax Form;"

·  Completed and signed personal financial worksheet;

·  Previous two years tax returns;

·  Employment paycheck stubs for the past two months;

·  Profit and loss statement (if the borrower is self-employed);

·  Past three months bank statements.

Q  22.  Does C.A.R. provide any special forms for short sales?

A  Yes. REALTORS® may use C.A.R. form SSL (Short Sale Listing Addendum) when they take the listing and C.A.R. form SSA (Short Sale Addendum) should be available shortly to be used with a purchase agreement.

Q  23.  Where can I obtain additional information?

A  You may consult the seller's lender directly about their policies and what is required to apply for a short sale of a property.  The internal departments that handle short sales differ by lender.  You may try asking for the problem loan department, loan workout department, loss mitigation department, or foreclosure department.

As always, feel free to ask a question or leave a comment below. Take care and see you next week.

Short Sale Information 3 of 4

Here is part 3 of 4 of my short sale information blog. It is about the licensing requirements and questions 12-15. Enjoy.

III.  Licensing Requirements for Short Sales

Q 12.  What is a short sale consultant?

A  A short sale consultant is someone who advises on short sales.  Depending on the agreement between the parties involved, the typical short sale consultant assists a homeowner or listing agent to prepare a short sale application package, submit it to the homeowner’s lender, and negotiate with the lender on the homeowner’s behalf to approve the short sale.

Q 13.  Does a short sale consultant have to be a real estate licensee?

A  Yes.  Generally, if a short sale consultant negotiates real estate loans or performs services for borrowers or lenders, both the short sale consultant and the short sale consulting company must be properly licensed with the California Department of Real Estate (DRE).  More specifically, unless an exemption applies, a real estate license is required for someone who, for compensation or in expectation of compensation, does or negotiates to do any of the following acts on behalf of another:

•  Solicits borrowers or lenders for loans secured by real property;

•  Negotiates loans secured by real property;

•  Performs services for borrowers, lenders or note holders for loans secured by real property; or

•  Collects payments for loans secured by real property.

(Cal. Bus. & Prof. Code § 10131(d).)

To check someone’s license status with the DRE, go to its Web site at http://www2.dre.ca.gov/PublicASP/pplinfo.asp.

Certain exemptions to the licensing laws may apply.  For example, a real estate license is not required if someone merely performs clerical or administrative services, such as assembling a short sale package as long as final determination as to its completeness is made by the broker (see 10 Cal. Code of Reg. § 2841 which lists other permissible clerical activities).  For other exemptions to the licensing laws, see C.A.R.’s legal articles, Licensing Guide for REALTORS® and Licensing Chart for REALTORS®.

Q 14.  Can a licensed short sale consultant collect an advance fee?

A  No, unless certain requirements are met.  An advance fee is a fee charged upfront for services not yet performed.  An advance fee is broadly defined to include a fee claimed, demanded, charged, received, collected or contracted from a principal for negotiating real estate loans (Cal. Bus. & Prof. Code § 10026).  Among other things, no less than ten calendar days before collecting an advance fee, a real estate broker must submit to the DRE the advance fee agreement and all other materials to be used for advertising, promoting, soliciting, or negotiating the advance fee (10 Cal. Code of Reg. § 2970).  Furthermore, if a Notice of Default has been recorded against a property involving one-to-four owner occupied residential units, an advance fee is prohibited for foreclosure-related consulting services under the foreclosure consultant law (Cal. Civ. Code § 2945 et seq.).  For a list of real estate brokers who have received “no objection” letters for their advance fee agreements, go to the DRE Web site at http://www.dre.ca.gov/mlb_adv_fees_list.html.

Q 15.  If a real estate broker collects an advance fee, does it have to be handled in a special way?

A  Yes.  A real estate broker who collects an advance fee must deposit it in a trust account with a bank or other recognized depository.  Amounts may not be withdrawn for the agent’s behalf until actually expended for the benefit of the principal or five days after a verified accounting as specified is mailed to the principal in compliance with Section 2972 of Title 10 of the California Code of Regulations.  (Cal. Bus. & Prof. Code § 10146.)


Remember to leave a comment or ask a question below. Happy Veterans Day. See you next week!

Short Sale Information

Here is the second part of last week’s blog. It covers the effects of short sales on the borrowers. Questions 7 – 11.

II.  Effect On Borrowers of Short Sales

Q  7.  Does a short sale adversely affect a defaulting borrower's credit rating?

A  Yes.  Lenders will report the short sale as being settled for less than the full balance.  This would show up on the borrower's credit report as a negative mark for seven years.  (Cal. Civ. Code § 1785.13.)

Q  8.  Suppose the borrower is late with his/her mortgage payments, causing the lender to begin the foreclosure process by filing a notice of default. Before the foreclosure sale occurs, the borrower pays the lender what is owed on the note. Could these activities appear on the borrower's credit report?

A  Yes. The lender can report to a credit bureau receipt of any payments made 30, 60, 90 or more days after their due date. This may appear on a borrower's credit report as a "foreclosure in process," "foreclosure proceedings," "current was 30," or in some other way. Any such terms, or other similar reporting comments, harm that individual's overall credit rating.

Q   9.  Is the method by which lenders report a short sale a negotiable item?

A  Typically, no.  The short sale is usually reported to credit reporting agencies as settled for less than the full balance. However, a borrower may try to negotiate this at the time the short sale is being arranged.

Q   10.  Are there any special risks to borrowers when negotiating a short sale with their lender?

A  Yes.  In particular, REALTORS® who assist borrowers should be aware and warn their clients of one particular risk.  If the borrower was less than completely honest when using the stated income method in applying for the loan, this information may become apparent to the lender when the documentation listed in Question 17 (such as tax returns and paycheck stubs) are submitted to the lender in the application for short sale approval.  This may put the borrower at great risk of potential liability for their dishonesty. 

Q  11.  Are there any tax effects of a short sale?

A  Yes. The tax implications for the borrower could be so significant that a short sale would not be in the borrower's best interest.  Before a short sale is contemplated, it is strongly recommended that the borrower seek the advice of a professional tax advisor.

Generally speaking, any relief of indebtedness from a short sale, regardless of whether the loan is a recourse or nonrecourse loan, is taxed as ordinary income. There are, however, some exceptions to this rule that may benefit a taxpayer involved in a short sale.  For more information on the tax implications of short sales, see the CAR legal article, Taxation of Foreclosures, Deeds in Lieu of Foreclosure, and Short Sales.

Next week will cover the licensing requirements for short sales. Don’t forget to leave a comment below.