What You Need To Know About Short Payoff Sales by Thomas Lucier
Over the past two years, it seems like everyone and his brother has jumped onto the short payoff sale bandwagon. The problem with ninety-nine percent of the short sales hype that's currently being foisted onto an unsuspecting public, by unscrupulous real estate hucksters peddling overpriced courses and boot camp seminars, is that it's based on misinformation, half-truths, distortions and outright lies. All of this hype has fueled unrealistic expectations on the part of would-be short sale investors, who've been led to believe, that every lender in America will approve a short payoff sale at the drop of a hat.
The Definition Of A Short Payoff Sale
A short payoff sale is generally defined by loan loss mitigation professionals, as: "A sale in which a lender allows the property securing a mortgage or deed of trust loan to be sold for less than the existing loan balance, due to factors such as the borrower’s financial circumstances, the property’s physical condition, and local real estate market conditions.”
Short Payoff Sales Are Lenders Last Resort Before Proceeding With Foreclosure
First things first: In spite of what the self-professed short sale pros and experts may espouse, bona fide short payoff sale transactions are very few and far between. In fact, most lenders will only approve a short payoff sale as a last resort, when foreclosure isn't economically feasible because the borrower is insolvent, and:
1. The property was purchased or refinanced at the top of a seller's market at an over-inflated price, and has had a substantial drop in value.
2. The property was refinanced at one hundred and twenty-five percent of its value that was based on an over-inflated property appraisal report.
3. The property is located in an area where property values have dropped due to a dramatic change in local economic conditions.
4. The property's value has decreased to an amount that's below the loan balance due to local and national economic conditions that are beyond the borrower's control.
5. The property's as is condition has deteriorated to the point where it's not financially feasible for the lender, to put it in a marketable resale condition.
6. The proposed purchase price is more than the lender would be able to sell the property for after foreclosing on the loan.
7. Any sales commission the lender must pay is less than what they would have to pay to sell the property after foreclosing on the loan.
Most Lenders Have A Stringent Hardship Test That Borrowers Must Pass
Contrary to what the short sale seminar promoters would lead you to believe, most lenders have a stringent hardship test that borrowers must pass in order to have the short payoff of their loan approved. In most cases, the borrower must be experiencing one or more of the following financial hardships:
1. The borrower or an immediate member of the borrower's family has experienced a catastrophic illness that has wreaked havoc on their personal finances.
2. The borrower's spouse has died or divorced and they have insufficient income to pay the loan payment.
3. The borrower's employer has transferred them out of the area and they're unable to sell or rent the property.
4. The borrower has been called away to active duty military service for an extended period and lacks the monthly income to pay their loan.
5. The borrower has suffered a disabling injury that precludes them from ever working again.
6. The borrower is unemployed and has no realistic expectations of finding employment in the foreseeable future, due to local economic conditions that are beyond their control.
7. The borrower has become financially insolvent, and there's no realistic expectation that their financial condition will improve within the foreseeable future.
8. The borrower has been incarcerated and no longer has the income to pay the loan payment.
Factors That Influence A Lender's Willingness To Approve Short Payoff Sales
The following factors generally influence a lender's willingness to approve a short payoff sale:
1. The number of nonperforming loans that the lender has in their portfolio.
2. The lender's overall financial condition.
3. The financial condition of the third party investor who owns the loan.
4. The loss mitigation policy of the third party investor who owns the loan.
5. The loss mitigation authority of the lender servicing the loan.
6. The loss mitigation policy and procedures of the government agency insuring or the loan.
Six Factors Lenders Consider During The Short Payoff Sale Approval Process
When deciding whether or not to approve a short payoff sale, lenders consider the six factors:
Factor #1: The borrower's overall financial condition.
Factor #2: The property's as is value.
Factor #3: The cost to put the property into resale condition.
Factor #4: The property's as repaired value.
Factor #5: The cost of securing and maintaining the property while it's being marketed for resale.
Factor #6: The cost of marketing and selling the property.
Final Short Sale Approval Must Come From The Investor Owning The Loan
Lastly, in almost all cases, the lender or loss mitigation company that's servicing a loan in default isn't authorized to approve a short payoff sale. That's because final approval for a short payoff sale usually must come from the investor who actually owns the loan. And oftentimes, it can take thirty days, or longer for an investor like Fannie Mae or Freddie Mac to approve a short payoff sale.
Thomas J. Lucier has been a real estate investor in Tampa, Florida since 1980. Mr. Lucier is the author of six books on real estate investing and managing Florida residential rental property. He is also a Florida licensed mortgage broker, and an active member of the National Association of Real Estate Editors, and the Real Estate Educators Association.
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Published with Permission of Author.
No part of this publication may be copied or reprinted without the express written permission of the Author and/or REIClub.com.
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