By James
Sobiesczyk,
Appraisal
Institute
communications
specialist
A FEW YEARS AGO, the reaction from
struggling homeowners, buyers and real estate
professionals to the term “short sale” was typically
one of confusion. While still a generally misun-
derstood concept, short sales have been gaining
traction as more and more deals are being com-
pleted. However, the way in which they are conducted is becoming
increasingly important to appraisers.
According to The Dictionary of Real Estate Appraisal, 5th ed., a
short sale is “a sale of real property in which the proceeds from the
sale fall short of the balance owed on a loan secured by the property.
Lenders may agree to a short sale to avoid lengthy and costly fore-
closure proceedings, and borrowers who cannot meet their mortgage
obligations may agree to a short sale to satisfy their debt.”
A short sale is a voluntary process on the part of the lenders and
is something the property owner must negotiate. In some cases, the
difference is forgiven by the lender, and in others, the homeowner
must make arrangements to settle the remainder of the debt.
For years, real estate agents have bemoaned the difficulty of
conducting a short sale, which typically involves multiple parties.
Securing all required approvals for such a transaction can take
several months, so it was not uncommon for deals to fall apart as
frustrated potential buyers walked away. However, lenders are
becoming more receptive to short sales not only because they allow
them to skip the expenses and time typically associated with fore-
closures, but also because of new federal incentives spurred by the
collapse of the housing market.
EMERGING FRAUD
While selling a home through a short sale is legal, all payments to all
parties involved in the transaction must be disclosed on the Department
of Housing and Urban Development’s HUD- 1 settlement statement.
Yet, because second lien holders frequently receive a fraction of the total
amount owed to them from a short-sale transaction, some are beginning
to demand a payment from the seller, buyer or agent in an attempt to
recoup losses in exchange for releasing their claim.
Second lien holders are acutely aware that they will not receive
any compensation if a property goes into foreclosure. However, they
know that short-sale sellers are in financial duress and are attempting to salvage their credit, which places them in a vulnerable position.
Real estate agents have reported that several major lenders, including Citi Mortgage, JP Morgan Chase, Bank of America and other large
SECOND A new form of short sale fraud is emerging: second lien holders demanding kickbacks
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