Stick to the Terms
You or your clients might not like the bank's short-sale conditions, but any deviation from the rules is risky.
November 1, 2010
If you work with buyers or sellers on short-sale transactions, you’re probably aware of the various terms lenders can impose as conditions of their agreement to a short payoff. These terms, typically set forth in an estoppel letter or a short-sale agreement, range from how much commission you may earn to who may purchase the property.
If you or your clients fail to adhere to the terms—even unintentionally—not only will you be putting the sale into jeopardy but you could also face civil or criminal actions. In fact, you could even be liable if you know that your client is skirting the rules but you don’t do anything about it. Here’s a look at the four lender conditions that tend to be the most problematic for real estate practitioners and their clients.
Limit on earned commission.
Most banks feel that real estate agents should be paid a fair amount for their work, but they also believe that agents should agree to do what the bank is being asked to do—accept less money than normal in order to make the transaction work.
As such, the lender may set a cap on your commission rate. If you do agree to the terms, receiving additional compensation without the lender’s approval would violate the contract.
There are instances in which lenders are restricted, most notably for Fannie Mae and Freddie Mac loans. The two secondary mortgage market companies, which are involved in about 50 percent of loans, prohibit lenders from cutting commissions, as long as the commissions are no more than 6 percent.
The buyer must be an owner-occupant.
The acceptance of a short payoff is sometimes conditioned upon the buyer living in the home. In lenders’ eyes, this rule is based upon the theory that an investor would be interested in buying the home only if there were some undisclosed equity in the property—and that equity should be going toward the payoff. Even if buyers come into the transaction with the legitimate intent to become owner-occupants but then end up renting out or reselling the property soon after closing, they could be in breach of the lender’s terms.
The purchase price must be best and highest.
In certain instances, practitioners might be aware at the time of the short sale that the buyer is under contract to sell the property to another party for a profit. While this may make business sense for the buyer, it would violate a condition in which the parties certify the purchase price to be the highest and best price obtainable.
In transactions that are part of the Home Affordable Foreclosure Alternatives program, the federal government prohibits a sale by the buyer for 90 days after purchase.
Proceeds received by seller.
To help the seller net more money than permitted by the lender, the buyer might make a side agreement to move in early and pay rent or to purchase personal property such as furnishings. But if the lender’s terms include a condition that the seller net no more than a stated amount, then the seller can’t use these side agreements to circumvent that restriction.
Payments to the seller for rent or personal property should be disclosed to the lender on the HUD-1 settlement statement, and any amount over what’s stated on the HUD-1 would violate the lender’s terms.
Even if the lender has already issued an estoppel letter or short-sale agreement, it could legally refuse acceptance of the negotiated payoff if its conditions aren’t met. And considering how much work goes into a short-sale deal, that’s an outcome that no one would like. But the disappointment of losing a sale pales in comparison to being charged with mortgage fraud or being sued by the bank, which is a possibility for agents and their clients if they violate lenders’ terms.
The bottom line: Once the lender has made clear what it’s willing to take to accept a short payoff, anything you or your client does to get around those terms can spell big trouble.