Short Sales

Short Sales

A “Short Sale” transaction (also known as a short payoff) occurs when the proceeds from a sale are less than the outstanding balance of the mortgage or mortgages encumbering the properties, and the seller is unable to pay the shortfall. In many cases the value of the property has declined and the seller is in default and already facing foreclosure. In order to avoid the costs involved in pursuing a foreclosure and the possibility of acquiring the foreclosed property, the existing lender agrees to release the mortgage in exchange for an amount less than the outstanding balance of the mortgage debt. The terms of the short payoff may be negotiated by the seller directly with the existing lender, or through a third party, sometimes known as a foreclosure consultant.

One issue to be very cautious and aware of is equity skimming schemes that can accompany some short sale transactions. In such situations, distressed owners are contacted by companies claiming to be able to help or assist the homeowner. The company offers to negotiate with the existing lender in exchange to title to the property from the distressed owner, negotiates a short sale, then resells the property for a substantial profit. That company’s agreement with the distressed owner may include a share of the profit upon resale. These arrangements are not typically known by the settlement agent.

Here is the problem, other than this looks very much like an illegal flip, if the existing lender is induced to accept a lower payoff than market forces might otherwise indicate, the existing lender may subsequently seek to set aside the short sale transaction and/or ask the court to impose a constructive trust on the property. In these cases your title company needs to be sure that the existing lender is in total agreement with the terms of the short sale and should have an appropriate written communication in the file. They also need to be certain that a release of the existing mortgage is obtained as soon as possible after the closing.

From the purchaser’s perspective, the transaction proceeds in the same manner as a conventional purchase.

Any questions can be directed to Benchmark Title at 618-239-3750. Please feel free to call or email:  

John Howe President Doreen Miller, Esq. Vice President and General Counsel

Michelle Null VP Escrow Operations Bethany Bond Marketing Director

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