I recently had an “investor” contact me about selling six of his properties. It was referral from another brokerage that declined to take the listings, as the properties were being sold as a Short Sale Subject To the existing mortgage. Even though I passed on the listings, I thought it might be helpful to readers, especially sellers, to discuss the issue.
A Short Sale Subject To (the mortgage) is when a third party takes title without assuming or paying off the existing mortgage. That is, the original owner is still on the hook for the mortgage. This is pitched by the investor as a “last ditch” effort to save the seller. The investor finds a buyer and gets a contract, then negotiates the sale with the lender for an amount less than the contracted price. The investor then pockets the difference between the lender’s sale price and the buyer’s contract offer.
I’m always suspicious of these deals. It usually requires the investor to not disclose the presence of the offer to the lender. This is where there is a problem for the real estate practitioner, since we have to disclose all material facts (with certain limited exceptions).
Thanks to some great title people and a broker friend of mine, I received the latest information that some title companies will no longer insure these types of transactions. I also learned that within the last couple of weeks, several major lenders are disallowing these types of transactions and are changing their policies to state that they will void the transaction if this scenario occurs. The argument is that the lender is entitled to the actual amount of the end buyer’s offer.
Considering the recent recent passage of Arizona SB 1271, an amendment to the state’s Anti-Deficency Statute, this investor “loophole” could soon be closed, as it requires the homeowner to have lived in their home for the most recent six months prior to a trustee sale, in order to be exempt from the lender. The argument is that an owner-occupant homeowner will still be protected, while investors (with renters) will not.
Problem is, the investor holding the deed and pursuing the short sale will often have the seller move out, then put a month-to-month renter into the property to generate cash flow, while a buyer is being found and the sale is being negotiated. Under SB 1271, this negates the seller’s anti-deficiency protections. Note that it’s not clear whether a challenge to the law will result in SB 1271 actually being implemented on September 30, 2009.
Recent Truth In Lending Act (”TILA”) changes may also affect ths type of deal as the timelines can easily change if there is a change in terms of the end buyer’s mortgage. This could result in moving a close of escrow date and adding needless complication or even negating the sale.
Of course I doubt that someone not disclosing a buyer’s offer to the lender will disclose the ramifications SB 1271, TILA, and other disclosure issues to the seller before they take title to a property. These transactions are ripe for lawsuits, particularly against the real estate practitioner that sells the property.
I’d like to hear comments from homeowners, investors, and real estate practitioners as their experiences with these types of transactions. As always, please correct me where I’m wrong!
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