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Short Sales and Deficiency – Common Questions



The ABCs of the Release of Deficiency

When I checked my email the other day morning, I had an email from a Realtor® friend who had some questions about short sales and deficiency. They were good questions and questions that are fairly indicative of the kind that novice short sale agents may have when working short sales.  So, I thought I would share them here:

How do I know that the bank gave full deficiency release on the loan?

The short sale approval letter (or letters) clearly states how the bank will be addressing the deficiency. In the state of California, these approval letters are generally signed and acknowledged by the sellers prior to close of escrow. It’s a good idea for sellers to carefully review the letters, and consult with an attorney or an accountant if they have any questions or concerns about the text in the approval letters.

Many states have anti-deficiency laws (for example, In California, we have SB 931). So, it’s important to become familiar with the anti-deficiency laws in your state.

What forms should I have in my files that assure the seller that their debt is fully satisfied?

First off, always keep a copy of the short sale approval letter with the sellers’ signature. Additionally, each state has its own short sale forms and own rules with regard to compliance. The California Association of Realtors® form called the Short Sale Information and Advisory that advises the seller that there may be legal, tax, and credit consequences to a short sale. This form also advises the short sale seller to seek advice from lawyers and accountants whenever necessary. This form and a copy of your lien holder approval letter should be in every file. See the short sale approval letters for clarification on how the bank will be addressing the unpaid mortgage debt.

Most recently, the Federal Trade Commission has new disclosure rules (MARS – Mortgage Assistance Relief Services). So, your state may have specific forms that address this new FTC ruling.

What do I do if the seller does not like the text in the approval letter?

If the seller has concerns or questions about a short sale approval letter, than s/he should seek the advice of a qualified attorney or an accountant. Additionally, the seller could put those concerns in writing and they can be forwarded to the mortgage lender, so that the mortgage lender could provide a further explanation. Just last week, I had a short sale seller with questions about a 1099 from Litton Loan Servicing. We forwarded her questions to Litton and they responded immediately with clarification.

This Realtor’s transaction recently closed and I wish that she had asked these questions prior to close of escrow. It’s definitely important to review the approval letter prior to closing. If the approval letter does not fit the bill for the seller, than the deal should not close. Not closing and losing a little bit of commission is far better than closing and being plagued with any long term problems that could be associated with that closed short sale transaction.


Photo: flickr creative commons by SMJJP

Melissa Zavala is the Broker/Owner of Broadpoint Properties and Head Honcho of Short Sale Expeditor®, and Chief Executive Officer of Transaction 911. Before landing in real estate, she had careers in education and publishing. Most recently, she has been able to use her teaching and organizational skills while traveling the world over—dispelling myths about the distressed property market, engaging and motivating real estate agents, and sharing her passion for real estate. When she isn’t speaking or writing, Melissa enjoys practicing yoga, walking the dog, and vacationing at beach resorts.

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  1. Travis Foote

    June 28, 2011 at 7:01 am

    If the property being sold is the seller's primary residence, then does this really matter? Or does the law signed by Bush in 2007 only apply to the IRS taxing the seller on the forgiven debt?

    • Melissa Zavala

      June 28, 2011 at 9:01 am

      Aaah. Good question. The tax issues and the liability issues are separate concerns.

  2. Ben Fisher

    June 28, 2011 at 9:50 am

    Good info thank you!

  3. north Kingstown short sale agents

    July 5, 2011 at 8:27 am

    Melissa, as the short sale guru in your area you are always sharing important information for a homeowner contemplating a short sale. That short sale approval letter with the waiver of deficiency is like gold and it is surprising that realtors or clients might think about that after the fact. At least you put homeowners on notice to have that at the forefront now…thanks

  4. Kris van Gool

    July 6, 2011 at 2:12 pm

    Great information. Thanks for keep us in the loop

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Disputing a property’s value in a short sale: turn a no into a go

During a short sale, there may be various obstacles, with misaligned property values ranking near the top, but it doesn’t have to be a dealbreaker!



magic eight ball

magic eight ball

It’s about getting your way

Were you on the debate team in high school? Were you really effective at convincing your parent or guardian to let you do things that you shouldn’t have been doing? How are your objection-handling skills? Can you flip a no into a go?

When working on short sales, there is one aspect of the process that may require those excellent negotiation or debate skills: disputing the property value. In a short sale, the short sale lender sends an appraiser or broker to the property and this individual conducts a Broker Price Opinion or an appraisal, using special forms provided by the short sale lender.

After this individual completes the Broker Price Opinion or the appraisal, he or she will return it to the short sale lender. Shortly thereafter, the short sale lender will be ready to talk about the purchase price. Will the lender accept the offer on the table or is the lender looking for more? If the lender is seeking an offer for a lot more than the one on the table, mentally prepare for the fact that you will need to conduct a value dispute.

Value Dispute Process

While each of the different short sale lenders (including Fannie Mae) has their own policies and procedures for value dispute, all these procedures have some things in common. Follow the steps below in order to conduct an effective value dispute.

  1. Inquire about forms. Ask your short sale lender if there are specific forms that you need to complete in order to conduct a value dispute. Obtain those forms if necessary.
  2. Gather information. Your goal is to convince the lender to accept the buyer’s offer, so you need to demonstrate that your offer is in line with the value of the property. Collect data that proves this point, such as reports from the MLS, Trulia, Zillow, or your local title company.
  3. Take photos. If there are parts of the property that are substandard and possibly were not revealed to the lender by the individual conducting the BPO, take photos of those items. Perhaps the kitchen has no flooring, or there is a 40-year old roof. Take photos to demonstrate these defects.
  4. Obtain bids. For any defects on the property, obtain a minimum of two bids from licensed contractors. For example, obtain two bids from roofers or structural engineers if necessary
  5. Write a report. Think back to high school English class if necessary. Write a short essay that references your information, photos, and bids, and explains how these items support your buyer’s value. This is not something that you whip up in five minutes. Spend time preparing a compelling appeal.

It is entirely possible that some lenders will not be particularly open-minded when it comes to valuation dispute. However, more times than not, an effective value dispute leads to short sale approval.

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Short sale standoffs: how to avoid getting hit

The short sale process can feel a lot like a wild west standoff, but there are ways to come out victorious, so let’s talk about those methods:



short sales standoff

short sales standoff

What is a short sale standoff?

If you are a short sale listing agent, a short sale processor, or a short sale negotiator then you probably already know about the short sale standoff. That’s when you are processing a short sale with more than one lien holder and neither will agree to the terms offered by the other. Or… better yet, each one will not move any further in the short sale process until they see the short sale approval letter from the other lien holder.

Scenario #1 – You are processing a short sale with two different mortgage-servicing companies. Bank 1 employees tell you that they will proceed with the short sale, and they will offer Bank 2 a certain amount to release their lien. You call Bank 2 and tell them the good news. Unfortunately, the folks at Bank 2 want more money. If Bank 1 and Bank 2 do not agree, then you are in a standoff.

Scenario #2 – You are processing a short sale with two different mortgage-servicing companies. Bank 1 employees tell you that they cannot generate your approval letter until you present them with the approval letter from Bank 2. Bank 2 employees tell you the exact same thing. Clearly, in this situation, you are in a standoff.

How to Avoid the Standoff

If you are in the middle of a standoff, then you are likely very frustrated. You’ve gotten pretty far in the short sale process and you are likely receiving lots of pressure from all of the parties to the transaction. And, the lenders are not helping much by creating the standoff.

Here are some ideas for how to get out of the situation:

  • Go back to the first lien holder and ask them if they are willing to give the second lien holder more money.
  • Go to the second lien holder and tell them that the first lien holder has insisted on a maximum amount and see if they will budge.
  • If no one will budge, find out why. Is this a Fannie Mae or Freddie Mac loan? If so, they have a maximum that they allow the second. And, if you alert the second of that information, they may become more compliant.
  • Worst case: someone will have to pay the difference. Depending on the laws in your state, it could be the buyer, the seller, or the agents (yuck). No matter what, make sure that this contribution is disclosed to all parties and appears on the short sale settlement statement at closing.
  • In Scenario #2, someone’s got to give in. Try explaining to both sides where you are and see if one will agree to generate their approval letter. If not, follow the tips provided in this Agent Genius article and take your complaint to the streets.

One thing about short sales is that the problems that arise can be difficult to resolve merely because of the number of parties involved—and all from remote locations. Imagine how much easier this would be if all parties sat at the same table and broke bread? If we all sat at the same table, then we wouldn’t need armor in order to avoid the flying bullets from the short sale standoff.

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Short sale approval letters don’t arrive in the blink of an eye

Short sale approval letters may look like they’ve been obtained simply by experts, but it takes time and doesn’t just happen with luck.



short sales

short sale approval

Short sale approval: getting prepared, making it happen

People always ask me how it is that I obtain short sale approval letters with such ease. The truth is, that while I have more short sale processing and negotiating experience than most agents and brokers, I don’t just blink my eyes like Jeannie and make those short sale approval letters appear. I often sweat it, just like everyone else.

Despite the fact that I do not have magical powers, I do have something else on my side—education. One of the most important things than can lead to short sale success for any and all agents is education.

Experience dictates that agents that learn about the short sale process
have increased short sale closings.

Short sale education opportunities abound

There are many ways to become educated about the short sale process and make getting short sale approval letters look easy to obtain. These include:

  • Classes at your local board of Realtors®
  • Free short sale webinars and workshops
  • The short sale or foreclosure specialist designations

As the distressed property arena grows and changes, it is important to always stay abreast of policy changes that may impact how you do your job and how you process any short sale that lands on your plate.

The most important thing to do is to read, read, read. Follow short sale specialists and those who blog about short sales on AGBeat, Google+, facebook, and twitter. Set up a Google Alert for the term ‘short sale’ and you will receive Google’s top short sale picks daily in your email inbox. Visit mortgagor websites to read up on their specific policies and procedures.

Don’t take on too much

And, when you get a call from a prospective short sale seller, make sure that you don’t bit off more than you can chew. Agents in most of America right now are clamoring for listings since we are in the midst of a listing shortage. But, if you are going to take on a short sale, be sure that it is a deal that you can close. And, if you have your doubts, why not partner up with a local agent that can mentor your and assist you in getting the job done? After all, half a commission check is better than none!

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