SHORT SALES:
“The Do’s, The Don’ts and
The Sure Wish I Hadn’ts”
Presented by:
Douglas G. Smith
Associate Sr. Underwriter &
Michigan State Counsel
Definition

A transaction wherein an underlying lender(s)
agree to accept a reduced payoff amount
rather than the actual amount of the
indebtedness to enable their borrower
(distressed seller) to sell the subject
property.
Market Conditions
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As the result of the following, there has
become a profound increase in mortgage
foreclosures coupled with a decrease in
borrower ability to redeem:
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The downturn in the economy
Depreciation of property values
Variable interest rate mortgages
Negative amortization
100%(+) loans
Decrease in availability of sub-prime loans
The Lender Dilemma

Lenders, having bursting inventories of
properties, sustain significant carrying costs
in maintaining foreclosed property because
of:
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Property taxes
Homeowner’s/liability insurance
Heat/utility expense
Vandalism repair
Property depreciation
Loss Mitigation Departments
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To avoid this overhead, lenders maintain a
department which will entertain offers by
borrowers to discount the amount of the loan
when the borrower is attempting to sell the
property: a short sale.
Two-Party Transactions

Property owners, or their Agent (Negotiator),
negotiate a short sale transaction by
contacting the Loss Mitigation Department of
the lender and petition the lender to take a
lesser amount in satisfaction of the loan to
enable the sale of the property because the
market sales price will not be sufficient to fully
retire the indebtedness.
Two-Party Transactions
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The lender will secure a Broker’s Price
Opinion (BPO) to determine what the current
market value of the property is.
The property owner will be required to
provide the lender, among other
documentation, a purchase agreement
showing the value of the negotiated sale.
Two-Party Transactions

The lender finalizes an amount that they are
willing to take and provides a discounted
payoff letter to facilitate the sale.
[Review the payoff letter carefully to diagnose
unacceptable conditions allowing the lender
the ability to later reject tender of the funds.]
Two-Party Transactions

The lender will stipulate in the payoff letter
that the borrower/seller is not to receive any
proceeds of the sale.
[Note: beware of seller concessions, if any,
and verify that the lender approves those
prior to closing.]
Two-Party Transactions
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An important element of the transaction is
that there should be zero or negative equity
in the borrower/seller in the property. This
can be determined by comparing the actual
or “gross” amount of the indebtedness to the
ultimate sales price.
Two-Party Transactions
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The sale must be an “arms-length”
transaction (preferably involving a realtor) to
avoid a subsequent attack on the transaction
by the underlying lender that there was
inadequate consideration for the sale.
[Sales to a family member or related entity
would not constitute an arms-length
transaction.]
Two-Party Transactions
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If the transaction involves a “negotiator” who
acts on behalf of the borrower, you should
assure that there is a line item on the HUD
showing the payment of the negotiator’s fee.
[Lenders will likely place limits on the amount
of the fee that can be collected.]
Two-Party Transactions

Be aware that if there are subordinate
mortgages/liens against the property, those
lenders/creditors must be approached, payoff
letters secured and the lenders/creditors
must be paid as a part of the work out of the
sale.
Three-Party Transactions
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Some negotiators/interveners choose to take control
of the transaction by having the distressed property
owner convey title into the Intervener, or the owner’s
own beneficial land trust, where the
negotiator/intervener acts as the trustee.
Typically, the negotiator acts through an LLC entity.
[Note: There are many variations of this
procedure…assignments of trust interests, etc…]
Three-Party Transactions
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The negotiator/trustee/intervener will assume the role of finding a
new purchaser and begin negotiations with the underlying
lender(s) to discount the mortgages so that a sale can occur.
The negotiator will provide a purchase agreement to the lender
reflective of the transfer of the owner’s property into the LLC or
into the land trust, treating this transfer as a conveyance
transaction.
[Note: The amount of the consideration reflected on this
purchase agreement is intentionally priced below the true
market value of the property.]
Three-Party Transactions
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The negotiator and the lender use this
purchase agreement to begin the negotiation
process to establish a payoff amount.
The negotiator in the meantime secures a
purchaser and enters into a purchase
agreement with that 3rd party.
Three-Party Transactions
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The closing then, typically, involves the two
consecutive transfers: the first is the transfer
from the distressed owner to the LLC or land
trust and the second, a sale from the trust to
the 3rd party, with funding for the payoff of the
underlying mortgage coming from the
proceeds of the “second sale”.
Three-Party Transactions
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The purchase amount of the second leg
actually reflects the market value of the
property, which sum is hidden from the
underlying lender so that the negotiator can
earn more than just the “fee” charged (and
approved by the lender) in the 2 party
transaction. This transaction potentially
engenders two types of exposure.
Fraud
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“Equity Skimming” is a term used to describe
a fraud perpetrated on the seller of distressed
property wherein the negotiator induces the
short sale borrower/seller to transfer the
property to them/LLC and then sell the
property to a 3rd party, taking (skimming) the
seller’s equity out of the property as a part of
their commission.
Fraud
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“Flips” is a term used to describe a double
sale transaction designed to artificially inflate
the value of the property to make the lender
loan money at a favorable interest rate where
there is no equity in the property or worse,
where the property is so overvalued that the
borrower has no intention of even making a
payment on the loan.
Problems with 3-party
Transactions
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The sole purpose of doing a 3-party
transaction is to hide the ultimate sales price
from the short sale lender thereby concealing
the true market value of the property.
The purchase agreement provided to the
short sale lender is done solely to distort the
value of the property to begin the
negotiations.
Problems with 3-party
Transactions
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There are other “escrow related” irregularities
that can arise with these transactions, such
as excessive charges for unnecessary
document preparation for the assignments of
interests (to the trust or from the trust to
beneficial owners) in the transfer process.
Lawsuits have begun to spring up brought by
short sale lenders against parties to 3-party
transactions for fraud.
Problems with 3-party
Transactions
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FNMA and FHLMC insured loans create their own
problems. These two entities have shown a
reluctance to accept payoffs on 3-party transactions
where they are the recorded, or unrecorded, interest
holder in the mortgage. One may find out after
negotiating with the lender that the lender was
merely the servicer for FNMA or FHLMC and,
without their approval, too, the funds may be
rejected “after” closing and now you have a problem.
Problems with 3-party
Transactions
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The Company is not interested in insuring 3party short sale transactions whether directly,
or in a split closing, and to insure a 3-party
transaction, written approval from the legal
department is required.
Stewart Bulletin MI2010002
General Problems with Short
Sales
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Be aware of payoff letters from the short sale
lender conditioning the acceptance of funds:
subject to final audit language, etc…
Junior mortgage holders or lien claimant’s
interests must be addressed even if
foreclosure has occurred and a sheriff’s deed
is recorded.
General Problems with Short
Sales
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Bankruptcy proceedings for the seller require
approval of the bankruptcy court (potentially a
court order and a deed from the bankruptcy
trustee).
[Note: Securing a lift of automatic sale by the
lender does not “authorize” the sale.]
General Problems with Short
Sales
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Review pay off letters for restrictions on
subsequent sales prohibiting the transfer of
the subject property for a period of time. An
exception on title would be required.
General Problems with Short
Sales
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Acting as an intermediary or negotiator: Please be advised that
Agents/Affiliates and their employees are not authorized to act as
a negotiator on behalf of Stewart Title.
We would highly discourage anyone from actually negotiating on
behalf of the borrower to secure a discounted amount for the
payoff from the short sale lender. This engenders significant
liability for the individual and the Agent.
[Lawsuits are springing up around the Country by the property
owners against their negotiators for negligence in not securing
releases of personal liability under the note, etc…]
Stewart Bulletin SLS2011007 and SLS2009005
Thank you for
attending!
Questions? Please contact:
Douglas Smith
248-368-9900 ext. 107
Doug.smith@stewart.com