Beware the Short Sale!

James L. Goldsmith, Esquire

There is no wondering why the "short sale" is such a hot topic these days. Articles and courses abound that entice the sales agent to seize the short sale as a new opportunity to increase productivity and make money. For most of you, this is not the panacea that will restore your bottom line.

A short sale involves the sale of real estate, with marketable title, for less than what is owed on mortgages and the other encumbrances of record. Generally, a short sale only occurs when a mortgage lender is willing to accept less than what is owed on the note in exchange for a release of its mortgage. Lenders and other creditors are willing to do this in lieu of foreclosing, or purchasing at a sheriff's sale, because it may be quicker, net as much money for the creditor and is less complicated. Lenders have little interest in owning real estate and far more interest in recouping as much money owed as quickly as is possible.

Those of you with experience selling repossessed properties know there is money to be made in niche markets. You also know that without great knowledge and expertise, you expose yourselves to hard work, little reward, and increased liability. This is not intended as a primer on making money through short sales. Consider this a warning designed to help you recognize the short sale so that you can encounter it knowingly.

More than at any other time in recent history, a listing agent has reason to explore the seller's financial condition. You have a right to be selective. Why take a listing when the property cannot be sold at an amount that allows for satisfaction of the encumbrances with enough left to pay a commission?

Engage the sellers in a frank discussion as to the existence and status of mortgages, loans and other liens that have effect title. For a number of reasons listing agents have, in recent years, shied away from frank discussions with and sellers about their financial viability. Develop a protocol for dealing with these sensitive issues. Certainly, you will want to mention at the outset of your discussion, that the information will be maintained in confidence. Ask to see monthly statements or other documents that corroborate the account balances. If written materials are not available, obtain loan numbers or other identifying information that will enable the owner to obtain, in your presence, the information necessary for your evaluation.

Too few licensees know how to search for mortgages at the office of the recorder of deeds. The conversion to computerized records makes this a much easier task in many counties. Knowing how to determine whether the property is encumbered is invaluable and may be considered as an important step to be taken before or shortly after securing the listing.

If you've determined, after accepting a listing, that the property is heavily encumbered, what do you do? If you proceed with marketing the property, you may be disappointed that you were unable to sell the property for a sufficient amount to cover liens as well as your commission. If you've made this discovery early enough, you at least have the opportunity of working with the mortgage lender, the seller and seller's lawyer, to reach an agreement with the lender that will enable a sale of the property that allows a reasonable commission. In the event that you determine that a short sale cannot be accomplished, you at least have the ability to terminate the listing agreement. Remember, your agreement to market the property is contingent upon the seller's ability to convey marketable title when a buyer is found.

To those of you who are familiar with negotiating a short sale, more power to you. There will obviously be more properties for you to list in the ensuing months. For those of you who are tempted by the prospect, beware, proceed cautiously, work with a mentor, and educate yourself.