Some companies will allow transferees to enter a BVO program with a short sale, others will not. If, as I suspect, banks refine and speed up the process, it is likely that more employees will become eligible. This is a good thing in so far as it may reduce reluctance to move, and it may reduce the need for other financial incentives now paid by employers in order to incent the employee to move.
Here is a brief checklist of issues that must be dealt with in a short sale. It is not exhaustive, in that many state and local issues may also be involved. And each lender has its own requirements. However, these issues should touch on most of the items that distinguish a short sale from a regular sale.
A much more thorough and practical discussion written by Bruce Perlman will appear in the July edition of Mobility.
Where the transferee is the seller (departure side of the relocation):
- Open negotiations with lender (probably the servicer is the best place to start); use of a broker or licensed short sale negotiator is often advantageous. Here one finds out the lender’s policies, and hopefully receives the initial short sale letter listing the necessary paperwork. It is important to scrutinize any initial paperwork for the terms, and especially to be on the lookout for claw back or other terms which might make the sale conditional on post closing lender acceptance of documents. Few purchasers will accept these conditions, and they are absolutely a problem in a two sale relocation policy.
- One question that often arises is the effect of a short sale on the sellers’ credit. Unfortunately, it is not an easy one to answer precisely, but it is universally true that there is most often a very serious negative effect, perhaps as much as a 50 – 200 point deduction from the presale FICO score (the higher the original score, the more the deduction). And generally short sales, like bankruptcies, remain on the credit report for seven years. It may be possible to negotiate with the bank to have it provide “paid in full” credit reporting on the transaction, depending on the circumstances. Another important tip is that short sale negotiations need not be started with the mortgage in a delinquent status, which would also adversely affects one’s credit score.
- Assemble the documentation. If a hardship letter is required (some banks require it before any other documentation, and will not agree to a sale without first approving it), one should be drafted, and will likely include the fact that the house is seriously underwater, that the seller does not have assets sufficient to pay the deficiency in a sale at the current time, and that the employee has been offered a job by the employer in another location. Appraisals, BMAs, or BPOs will be required early in the process, so the facts underlying the value of the house need be proven early on. If the traditional hardship factors are present, such as unemployment (of a spouse), illness, divorce, death in the family and the like, these make a more powerful argument for the short sale, as does bankruptcy.
- Most often lenders will require full financial disclosure from the seller, in order to prove that there are no hidden assets that could go to pay off the loan.
- It is absolutely important to fully and honestly disclose whatever information the bank requires, including the existence and amount of relocation benefits, and the fact that the house will be entered into a relocation transaction. Relocations still are strange to many lenders, and a careful explanation of the two sale process is critical. Remember that the laws regarding mortgage fraud are applicable to all aspects of the short sale.
- If the house will be sold in a BVO program, the bank will likely want to see both contracts.
- A rule of thumb in short sales is that there may be profit in these transactions, but none goes to the sellers. That being said, writing down of some part of the principal of an underwater house is a pretty good deal.
- Know the tax consequences of a short sale. Pete Scott has addressed this here:
Where the transferee is the buyer (destination side of the relocation):
- Understand that the process will take much more time than a normal sale.
- Be certain that there is a clause in the contract of sale that provides a time contingency for bank approval; this is important so as to protect any earnest money or escrow that is involved. Legally, the contract is not valid until the bank agrees (signs), but the time contingency provides protection to the buyer if the bank is unduly slow in its decision making (which could be based upon the buyer’s disclosures). Of course, make sure the proper contract is used; a regular sale contract is unacceptable since the bank must agree. In some cases buyers may use a standard contract as a negotiating tool with the bank, but this is not a good idea from a buyer’s point of view, and should be avoided, in my opinion.
- Purchaser’s title insurance is an absolute requirement to protect the buyer from any possibility of claw back based upon fraud or misrepresentation by the seller in the short sale process.