There was a time, not so long ago, when a high percentage of the residential closings that we were doing were short sales. Short sales really ramped up following the bursting of the housing bubble and then peaked during the foreclosure crisis.  We all know how we got there and we remember the no doc, no review teaser loans.  Short sales were a fact of life.  We represented both buyers and sellers in short sales.  In both cases, we were at the mercy of the lenders in addressing the ridiculous number of requirements for approvals and then waiting for months on end for the approvals to come back.

Fortunately, those days are behind us. Short sales are rare, but not completely gone.  So, if you are selling you’re house, how do you know if a short sale is right for you and what will a short sale mean for you?  I haven’t thought much about these questions for a while, but like most of my blog posts, I am inspired to write about this now because recently, a new client inquired about short sales.  The client was transferred from South Florida to Atlanta, leaving behind a house with an outstanding mortgage balance (combined 1st and second) of over $800,000.  The house is not yet listed for sale, though the client has already relocated.  The agent expects that the house will sell for under $700,000.  The client wanted to know what to do and what will happen.  His first question was whether we should apply for short sale approval with the lenders now.

The answer is no. Obviously, if the agent is correct, there will be a short sale.  However, until a contract is signed, there is no approval to obtain from the lenders because we don’t know the amount of the deficiency.  And, because there are 2 lenders, the contract might be enough to satisfy the 1st mortgage leaving the 2nd unpaid.  If the 1st insists upon full payment, the dynamics of the negotiations would change completely.

In addition, in order to approve a short sale, lenders require an appraisal of the property. The appraisal must be by an approved appraiser and can’t be too old.  So, we couldn’t submit an appraisal yet.  The appraisal might be stale by the time a contract is signed.

Another factor is the client’s ability to pay the deficiency. If the client is liquid or has net worth or otherwise has income, lenders are less willing to write off the deficiency.  Where 2 lenders are involved, the client has a bigger hurdle, especially if the 1st mortgagee takes all of the sales proceeds.  Attempting to obtain pre-contract approval would bring attention to these issues far too early in the process.

At this point, I suggested to the client that it would be a bad idea to have any conversation with either lender until there was a contract in place. Once a contract has been signed, it should be submitted to each lender for approval and a case made for the short sale.  Here, the arguments have to be made that the client is unable to pay the deficiency.  I explained that lenders are supposed to make this decision on a primarily objective basis, but we can give subjective reasons for an economic hardship.  But, since we are not in the crisis mode any more, it is now difficult to predict how lenders will lenders will react and that the client needs to be prepared to address the deficiency.

Short sales can’t be counted on as escape routes for home owners or as a simple alternative to the foreclosure process any more. Lenders are less willing to write off deficiencies without a compelling economic hardship.  Because there isn’t a back log of short sales to approve, lenders will carefully review every request for short sale.  If you have other options, you should consider them as well.

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        Title Insurance is an important part of every real estate transaction. The insuring of title to real property consists of two distinct steps:  1) the issuance of a preliminary report that describes title conditions, which will serve to limit the title insurance if issued (the “Commitment”); and 2) the final title insurance policy that may have all or some of the limitations to coverage spelled out in the preliminary title report.  The Commitment is really a contract to issue title insurance at a future date when the terms of the Commitment are complied with.

        The Commitment is an essential document in a real estate transaction.  Therefore, mastering the Commitment is an essential part of a successful real estate transaction.  Most real estate contracts specifically require one party to pay for and obtain a Commitment and an owner’s policy.  In the alternative, the real estate contract may call for the seller to provide the buyer either:  (1) evidence that the seller is the titleholder of record; or (2) evidence of the condition of title, along with a specific number of days for the seller to perfect title to the property.  The title evidence that is usually requested to meet this requirement in such a real estate contract is a Commitment.  In either case, failure to provide a Commitment could result in a default under the terms of the real estate contract.

        Schedule B-1 of the Commitment should be your checklist for closing. This Section lists all the requirements that must be satisfied before the policy will be issued.  The purpose of the requirements is to assure that title will properly vest, without exception, other than as set forth on Schedule B-2, in the proposed insured.  Everything is spelled out clearly in Schedule B-1.  All of the documents that you will need and the steps that you have to take to assure clear title are there for you in black in white.  You can simply make a copy of B-1 or add it to your over all checklist.  But until you have all of the items on B-1, you can’t close.

          Schedule B-2 contains the items that will not be covered by the final title policy to be issued.  It contains both the standard exceptions and the specific exceptions to title.  The specific exceptions are the matters that have been found after examination to affect the property and will not be covered when the policy is finally issued.  It is important to always carefully review the commitment and all of the exceptions.  Just because the commitment contains a list of exceptions does not mean that they all apply or are actually exceptions.  If you are representing a buyer or a lender, it is your job to make sure that title is accurate and beneficial to your client and that none of the proposed exceptions will interfere with your client’s proposed use of the property.  If any exception does not actually affect the property, request that the seller and underwriter delete it.  If the exception adversely affects the proposed use of the property, you need to figure out how to delete or revise the exception.  The art of title is negotiation.

         My favorite part of a real estate transaction is negotiating the title commitment. There are at least three people to negotiate a commitment with: the agent, the examiner and the underwriter. If you are the agent, obviously, you aren’t going to negotiate with yourself.  Your interest in negotiating the commitment is going to differ depending whether you represent the borrower or the lender.  But the seller, who has no insurable interest, often gets involved in negotiating commitments because when the title objection letter comes from the buyer, sometimes the best way for the seller to address an objection is to negotiate with the underwriter to change a requirement or delete an improper exception.

        When I receive a new commitment, I review the requirements and exceptions carefully. I review the underlying documents to understand why the examiner included them on the commitment.  I analyze what is going to need to be done to satisfy each of the requirements and make sure that the properties and people and entities set forth in the requirements are the same as those involved in my transaction or are properly related to my transaction.  If the connection is not obvious, I flag the requirement.  As to the exceptions, I read each one and make sure that none would adversely affect the property or the buyer’s intended use, or, if I represent the lender, would violate any term of the loan documents.  And, I make sure that the exceptions actually apply to the property and haven’t otherwise expired.

        After this review, I often have 2 lists, one is a list which I put in a title objection letter to the seller. But the other is a list which I discuss with my examiner, if I am the agent, or with the agent, if I am not.  This list will consist of issues that should be resolved by the title company as opposed to the seller, including satisfaction or deletion of inappropriate requirements and deletion of misplaced exceptions.  The caveat here is that the examiner is just a scrivener.  So if the issue is one where you can show that a document like a partial release was missed in examination, or a mis-spelled name appears, the issues can be quickly resolved.  But anything more complicated requires an underwriter’s attention.  As issues are resolved, Schedules B-1 and B-2 are revised and the Commitment updated.  And finally, at closing, documents are presented, executed, recorded, and the remaining requirements satisfied so that the final policies may be issued.

        The work that goes into insuring title to property prior to closing can be the easiest part of a closing or the most difficult part of a closing. Sometimes one issue can delay a closing for a many weeks.  It is important to take these issues seriously and to work with your attorney and underwriter to resolve all issues.

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