Unfortunately, short sales or short pays are more common every day. The following are a few items that agents and brokers should either learn about or remind themselves of prior to handling a potential short pay transaction.
Pre-Listing Considerations – A seller should know the ramifications of a successful short-pay agreement with the lender. An agent considering taking a
listing on a short-pay should advise the seller, in writing, to seek tax and legal
advice before signing the listing agreement.
o Taxes – The seller likely will be obligated to pay taxes on any debt forgiven by
the lender. The IRS considers debt forgiveness as ordinary income. Consequentially, the difference between the loan amount and the short-pay agreement will be taxed at the seller’s ordinary incom tax rate.
o Credit Score – A lender may handle a short-pay in a number of different ways. It can report the loan as paid in full which would have no adverse credit consequences. A lender may also report the loan as being “satisfied.” Future lenders and credit reporting agencies may consider a “satisfied” loan as being similar to a deed in lieu of foreclosure. This may have a devastating impact on the seller’s credit score.
o Financial disclosures – A seller should know that a lender will likely require detailed financial statements from the seller as a condition to approving a short-pay. Often, less-than-accurate information from the seller was used to obtain the loan the seller now cannot afford. This may cause a seller to refuse to divulge accurate fmancial statements. An agent probably will want to refuse to take a listing in this situation. At the very least, a listing agent should add a term in the listing agreement obligating the seller to cooperate with the lender’s requests.
Multiple Listing Service – The listing should clearly be shown as a short sale. Additionally, provided the local MLS allows for variable commission, there should be a statement that the commission offered to the cooperating agent is subject to lender approval. Often, lenders will require that the agents reduce their commissions before they approve a short-pay.
Considerations of the Buyer’s Agent – A buyer’s agent should run a property profile to determine the amount of outstanding indebtedness. A recent notice of default is a good indicator that a short-pay might be necessary. A buyer’s agent should also calculate likely commissions and closing costs to determine if an offer below the listing price will trigger a short-pay.
Working with the Lender – Prior to negotiating with a lender, an agent should obtain the seller’s written consent to keep the lender informed as to the status of the transaction. An agent should also send a letter to the lender confirming that the agent is not acting on behalf of the lender. This will be helpful in avoiding any claims that the agent is also a fiduciary for the lender.
Marketing Considerations – An agent should be careful when marketing to attract short-pays. No promises or guarantees should be included in any advertisements or flyers. All advertisements should be reviewed by a broker. An agent should be careful when accepting referrals from credit counseling services. Any referring source should be investigated to determine ethics and business practices before taking any referrals.
Contract Formation – When a short-pay appears to be necessary, the CAR Short Sale Addendum should be used. The offer or counter offer should contain a
provision making the execution of the Short Sale Addendum a condition of the transaction.
