What is a Short Sale? The Short Sale Process In WA Explained

The term “short sale” is getting a lot of use these days, in Washington State and around the nation. Many people know that short sales offer the opportunity to get a good price on real estate. But what, exactly, is a “short sale”?

A short sale is the sale of a home for a price less than what the owner owes on the mortgage, AND the lender agrees to a “short” payoff in exchange for release of the bank’s lien on the property — hence the term. But that definition requires a little more explanation, because some readers might be thinking, “Release the lien? What does THAT mean?”

When you buy a house using money borrowed from a bank, you sign a deed of trust (along with about a thousand other documents! :-) ). The deed of trust pledges the home to secure the debt, so if the borrower does not repay the debt the bank has the legal right to sell the house without the owner’s consent (a foreclosure auction) and to apply the proceeds from that auction towards the debt. Thus, a deed of trust creates a “lien,” a legal right of another besides the owner to sell the property in order to repay a debt. There are lots of types of liens besides a mortgage, such as a contractor’s lien. To “release a lien” means to eliminate that right of another to sell the property.

Why is that important? When you buy a home, you take ownership of it subject to any existing liens. So if you bought a house where a contractor had put a lien on it a few weeks earlier, that contractor would have the right to sell your house to pay the debt incurred by the prior owner — a big deal!! Accordingly, before the seller actually conveys title to the buyer (the legal term meaning transfer of ownership), the seller must satisfy all liens or otherwise insure they have been released.

Back to short sales: Many people use the term to describe any sale where the sale price is less than the amount owed, but that really isn’t a short sale, at least not until the lender agrees to a short payoff. Rather, if an owner gets an offer to purchase for less than the amount owed, the owner/borrower always has the option of bringing money to the table to repay the mortgage in full, i.e. pay the difference between the sale proceeds and the amount owed. If the debt is repaid in full, the lien must be released.

But some people — well, pretty much ALL people — would strongly prefer to not pay money in order to sell their house. (Remember the good old days, when sellers would MAKE money by selling?) Accordingly, if the seller gets an offer to buy for a price less than what is owed, the owner will approach the bank and ask the bank to release the lien even though the loan will not be repaid in full. The lender has no obligation to agree to the request. Alternatively it can agree, but only if the seller continues to make payments on the balance of the loan following the sale. That said, particularly if the property is a residence, most lenders are willing to forgive the unpaid balance entirely. In either event, though, a “short sale” means that the bank has released its lien even though the debt has not been repaid in full.

So why does a “short sale” possibly present a good opportunity for buyers? The seller in a short sale has virtually no motivation at all to get the best price for the property, because 100% of the money is going to the bank. Accordingly, short sales tend to be priced lower in order to simply get an offer that can be presented to the bank. Once it gets to the bank, the bank is less likely to counteroffer or otherwise negotiate aggressively — that is not the bank’s line of business. So, short sales can present good opportunities for buyers — with lots of risks, though, that I will address in a future post.

Finally, as indicated by the title, this post addresses short sales in Washington State. Every state has different laws regarding real property, and moreover I practice (as an attorney and as a broker) exclusively here in Washington. Accordingly, my knowledge of short sales is limited to those in this state. That said, short sales – unlike other aspects of real property law, such as foreclosures – generally do not differ much from state to state as I understand it. Accordingly, the principles discussed above may also apply to your state. But remember: You should always consult an attorney in your area, and never get legal advice from a blog.

Posted by Marc

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23 Responses to “What is a Short Sale? The Short Sale Process In WA Explained”

  1. scott jantzen says:

    I’m confused. You say, “When you buy a home, you take ownership of it subject to any existing liens. So if you bought a house where a contractor had put a lien on it a few weeks earlier, that contractor would have the right to sell your house to pay the debt incurred by the prior owner — a big deal!!
    But in the following sentence you say “Accordingly, before the seller actually conveys title to the buyer (the legal term meaning transfer of ownership), the seller must satisfy all liens or otherwise insure they have been released.
    So, why wouldn’t the seller have to satisfy the lien as the house is sold BEFORE the new purchaser can buy without any encumberances?
    Thank you!

  2. Craig says:

    You’re right, the seller in my example would have a legal obligation to pay the debt to the contractor or otherwise take steps necessary to remove the lien from the property before it is conveyed to the buyer. If the seller fails to do so, the seller will be liable to the buyer. However, that may be of little consolation to the buyer. What if the seller “retired” to Costa Rica? Or is engaged in a drug and alcohol bender with the proceeds of the sale? In either case, recovery from the seller will be difficult or impossible.

    The point of the comment was merely to illustrate what a “lien” is and how it can affect a buyer. Sorry for the confusion!

  3. Larry Moyw says:

    Hello Craig,

    I just went through with a short sale process and had twp mortgages on the house and the bank accepted it, it closed this last month what do I do now to insure that they might not come after me for the balance. Sincerely Larry

  4. Craig says:

    Larry, you need to consult an attorney in person, not a blog. I am not your attorney unless and until you sign a fee agreement. This is not legal advice. Subject to that disclaimer:

    You needed to ask this question BEFORE you approved the terms of the short sale and closed. The short sale approval letters generated by each lender should indicate whether or not you are being released from the balance of the debt. If you are, then congrats; if not, then you should have negotiated that term further before closing on the short sale. The best you can do at this point, if you do remain liable, is to contact the lender to see if they will accept satisfaction for something less than the full amount due. Good luck.

  5. Pete Filipiuk says:

    Happy Monday……So, short sales can present good opportunities for buyers — with lots of risks, though, that I will address in a future post. Have you posted the risks yet and where may I find them or could you e mail them to me. Thanks, Pete

  6. Craig says:

    Pete, I’m sorry, I don’t recall whether I followed up on this post or not with the risks associated with short sales. I’ll tick off a couple here, subject to my standard disclaimer: This reply is not legal advice. For legal advice you need to consult an attorney, not a blog.

    Risks of a short sale for the buyer include all imaginable permutations of the following. Note that in a short sale the contractual rights of the buyer are much muddier than in a typical transaction, which in turn can contribute to these possible risks:
    – Lender sits on its hands, and/or listing agent or short sale negotiator fails to follow up with bank, such that the bank never even gets around to considering the short sale offer; property eventually goes through foreclosure.
    – Lender eventually makes a decision several months after you submitted the offer, and the answer is “No.” Without any sort of counteroffer.
    – Lender eventually response with a counteroffer much higher than your top number.
    – After seller gets your offer and forwards to the bank, some other buyer submits a substantially better offer. You never learn of this until long after the other offer has been approved by the lender.
    – The seller changes her mind about selling after the bank approves the short sale amount. In retrospect, it is apparent that the seller never intended to sell but instead used the short sale process as leverage in an effort to renegotiate the loan. (This specifically happened to a client of mine.)
    In a nutshell, the primary risk is, notwithstanding your extreme good faith and nearly unbelievable patience, the deal has a good chance of blowing up even at the last second, and as the buyer you have little recourse.

    Best of luck, Pete, and thanks for the comment.

  7. Wendy says:

    Grr. I have been involved in a short sale in King County since August. The PSA was accepted by the seller and submitted with all the requisite seller information. The PSA expired and I insisted on an extension. It has expired several times since then, however the listing agent has not been having the seller sign them and return then to us. There have been no back up offers and the LA changes the way the listing shows up on the mls. Yesterday she switched it back to active and today the listing has expired. Yesterday she told our agent that she needed our highest and best offer and that the sellers were now asking her to consider getting more money. Our offer was above the asking price and all comps and original BPO indicate we are at market value. This smells of questionable ethics. The sellers moved out of state and the house sits vacant and we are into our 6th month waiting and now it seems we are waiting with nothing to hang on to. Thanks

  8. Rebecca Scott says:

    What is this I hear from Wells Fargo…the Shortsale is now accomplished with Realtor uploading my financials, hardship letter, W2, etc to Equator …….why would a Real Estate Agent have access to this kind of confidential information. Would every Realtor showing the house have access to my financials, etc?
    I had rather continue to try to get the most I can for my house……pay the bank the difference if I do not profit.
    This seems sleazy…this Equator thing….this Shortsale thing…..What about Banks giving incentives to homeowners facing foreclosure…to try shortsale? Wells Fargo says they do not do that, yet we hear on CNN and read in USA today that they are…..$20-30K.

  9. Craig says:

    Rebecca — In my experience, the Equator system simplifies and expedites the short sale process. So to an extent, this is a good thing. However, I don’t recall the extent to which an agent would have access to documents uploaded to Equator by another agent. I would be surprised if other agents have the ability to access every document uploaded regarding a particular sale — but then again I don’t use Equator very often. You should talk to your listing broker about this issue.

    As for incentives to try a short sale, that differs from lender to lender. That said, the $20-30k you reference is, I believe, available to reduce principal on a loan modification. I am unaware of any systemic effort to offer this amount of incentives from any lender. But there’s a lot out there that I don’t know….

  10. Heather says:

    We recently put an offer on a home that was in bankruptcy. A trustee accepted our offer and a judge ordered the sale of the house to us, but now it just seems like a regular short sale minus the seller. Is this the case? Why would the courts make this decision that really isn’t theirs to make?

  11. Craig says:

    Heather, sorry for delay in getting back to you. Yes, it is typical and standard for the trustee to make the decision about selling when the seller is in bankruptcy. The trustee has an obligation to protect the interests of the creditors, so a sale must make sense from that perspective. If it does, then the trustee recommends sale, and the bankruptcy court is likely to defer to the trustee’s request. So this IS a decision to be made by the courts when the seller is in bankruptcy.

  12. Yolonda says:

    Hi Craig,

    Is there are certain criteria the saler has to meet in order to sale their home through the “short sale” process? Is this process different from financial institution to credit unions? Do you just have to lose your job in order to qualify or can their be other circumstances? And if so, what are they?

    Thanks.

  13. Craig says:

    Yolanda:
    Yes, the process can differ from lender to lender, and in my experience credit unions take a harder line. There is no set definition for “hardship” although job loss is certainly one common type. Others include extreme debts (typically medical bills), divorce, job relocation out of area, etc.

  14. Cheryl says:

    We are under water with our house, about $84,000. What must we do to insure a short-sale of this property so we can move on to something we can eventually have equity in? We don’t see that ever happening at this address and it’s disheartening.

  15. Craig says:

    Cheryl:

    You should consult an attorney. You will explain the details of your particular situation, and he or she will be able to explain your various options (letting it go to foreclosure, short sale, deed in lieu, modification, etc.) and the ramifications of those various options (possible liability for the deficiency, tax liability, HOA liability, impact on credit, etc.). If you’d like to discuss possibly retaining me for this service, give a call at your convenience.

    And yes, it is extremely disheartening when you are under water. The only good news is (a) you are not alone, you have a lot of great company, and (b) there are ways to solve the problem. None of those ways are easy and they all incur some hardship, but the problem is solveable.

  16. Michelle says:

    Hi Craig, We submitted an offer on a short sell property in the Tri-City area the 2nd of January. We have since learned that the sellers are in the bankruptcy process. The bankruptcy attorney has sent all the necessary paperwork into the bank but they bank says they wont sign until the bankruptcy court signs and the court wont sign until the bank signs. Is there anything we can do to help this along? There was talk of a motion being filled saying that both parties agree but signing cant happen at the same time? Have you ever heard of something like this???
    Thanks

  17. Craig says:

    Michelle, first and foremost I am not your attorney and this is not legal advice. For legal advice, you need to consult an attorney in person. Subject to that disclaimer:

    While I have not heard of something like this, it is not surprising. Short sales are complicated to begin with, and when seller is in bankruptcy that creates another layer of complexity. So its not surprising that the left and right hands aren’t working well together.

    What can you do? Yes, a motion in the bankruptcy court might break the logjam, but you need to consult an attorney with knowledge if the bankruptcy process to know for certain. I’m sorry, but I don’t have any other ideas to offer.

    Best of luck!

  18. Hi Craig says:

    We are now 8 months into a bankruptcy/short sale offer with Wells Fargo and are not getting any information on the progress. It has become extremely frustrating, as we’d really like to get this house. We are trying to be patient, but we are feeling helpless and are at the mercy of the listing agents and Wells Fargo. Can a bank foreclose on a court ordered sale? OR do they need to negotiate with us? I fear that the time it has taken is going to lead us to finding they will foreclose on it instead. I was also wondering if this bankruptcy/short sale falls into the new HAFA guidelines of requiring lenders to respond in 30 to 60 days. Is it considered unethical for me to contact the trustee? I’d love some information.Thanks!

  19. Craig says:

    Dear “Hi Craig”:

    First and foremost, this is not legal advice and I am not your attorney. For legal advice you need to consult a lawyer in person, not a blog.

    As a general rule, you are in fact at the mercy of the lienholder, in this case WF. No, they have no legal obligation — and you have no legal right — to negoitate with you or anyone else as to a short sale.

    I don’t have much experience with short sales in the context of bankruptcy, but generally speaking yes the trustee has an interest in completing the short sale and should be able have some influence. I see no harm in trying to contact him/her for information.

    Yes, the bank can foreclose even though the debtor is in bankrutpcy. The bank would need to file a motion with the bankruptcy court seeking “relief from the stay” to allow the foreclosure. These are granted routinely but not always depending on the facts of the case.

    Best of luck!

  20. Paris says:

    Craig,
    I’m currently renting a condo that is in “short sale”, according to my landlord/owner and their realtor. But they claim they’re still paying their mortgage and from what your post says if they are paying then they aren’t in short sale. Their bank (Wells fargo) has come by our place twice to talk to the owners and they gave us a # to give them because it was urgent for the bank to speak with them. I told them first time they came by and she said she would call…never heard anything about it. The second time they came by is when I started becoming worried and suspicious. The landlord said they were probably just checking the make sure the property is being kept up. I just don’t understand if they are paying the mortgage and in communication with the bank why the bank would even come by in the first place. I’m just worried the bank is going to come in a kick us out because they’re not paying the mortgage. Are there any tenants rights as far as short sales and foreclosures go? The bank can’t tell us anything and I just have a bad feeling about this whole situation. Any advice/info would be appreciated.

  21. Craig says:

    Paris, I am sorry for not replying sooner.

    Note also: This is not legal advice. For legal advice, you need to consult an attorney, not a blog. Also, the following general insight is limited to the state of Washington.

    Here in WA, a tenant has 60 days following foreclosure to vacate the property. A foreclosure would extinguish an existing lease, and the tenant would need to vacate by 60 days (although those 60 days are rent-free). Any sale of the property, including a short sale, would be subject to the term of your lease. In other words, the new owner would have to respect your right to lease the property for the remainder of the lease term.

    I agree with you, it sounds a lot like your landlord is not paying the mortgage. If the lender forecloses, various notices (like a Notice of Default, and a Notice of Trustee’s Sale) will be posted on the property, so you will know that foreclosure is impending.

    Best of luck.

  22. Almir says:

    Hi Craig and other bloggers
    My wife and I are in a search to purchase our first home and it seems like the market is very tough. I have seen a lot of short sales and other options but I am somewhat nervous making an offer on a short sale but would like an opinion whether making an offer on a short sale is really worth the head ache or put 20% down payment and go through the regular process, which could be a bit more costly.

  23. Craig says:

    Almir, there is no “right” answer. You may get a good deal on a short sale; you may end up wasting your time on a short sale. It is impossible to know in advance how things will turn out. Short sales can represent good value — if they are successful Short sales can be a waste of time — if they fail, and they often do. Best of luck.

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