In these difficult economic times, many people who are having trouble making their monthly mortgage payments as well as those who are already in default are asking questions about possible alternatives to foreclosure when it appears that a mortgage modification or other workout plan is not possible or desirable. A “short sale” is sometimes used to resolve the default situation. It is a negotiated transaction between a seller of a property, its mortgage lender, and a buyer and it, like a foreclosure, results in the loss of the property… however without a public auction.
Most mortgages in New Hampshire contain a “statutory power of sale.” The “statutory power of sale” is language contained in the mortgage instrument which authorizes the holder of the mortgage to foreclose on or sell the mortgaged property without judicial intervention. In spite of the self-help nature of such right, the foreclosure statute also contains various requirements relating to notice, publication, timing, and the conduct of the foreclosure sale which add costs and delays to the foreclosure process. A “short sale” is sometimes used to in order to avoid these costs and delays.
In these times of reduced or deflated property values, many properties are “under water” or “upside down,” meaning the amount of money owed is more than their current market value. A “short sale” is one in which the agreed upon sale price of a property is less than the amount of money owed on the property. The seller must be able to deliver to the buyer “good title” to the property, meaning it is free and clear of any mortgages or liens affecting the property. Therefore, the seller must first obtain the agreement of the mortgage lender or holder as well as any other lien holder to accept less than they are owed under the mortgage loan or lien. In connection with any such agreement by the mortgage holder or lien holder is their additional agreement to discharge or release the mortgage or lien, thereby enabling the seller to transfer good title to the buyer.
For example, an owner has found a buyer willing to pay $300,000 for the house but the owner owes the mortgage lender $325,000 and a credit card company $5,000 and the credit card company has recorded a judgment lien on the house after suing the homeowner. The seller and/or buyer must obtain the agreement of the mortgage lender and credit card company to take less than they are owed at the closing in exchange for a discharge and release of the mortgage and the lien. The seller should also attempt to obtain the agreement of both creditors to accept the reduced payments in full satisfaction of seller’s obligations to them, although neither creditor is legally obligated to do so.
When sellers find themselves in this situation, they should always advise any prospective buyer that any signed purchase and agreement between them requires the approval of the sellers’ lender and/or lien holder. If a recent appraisal has been conducted (for example, by the buyer or its lender), it is very useful to provide the mortgage lender and the credit card company with a copy of the appraisal. This substantiates the fact the purchase price reflects the current market value of the property and that it makes economic sense to “accept” the short sale and avoid the added costs and delays associated with a foreclosure sale. Moreover, since there is never a guaranty at a foreclosure sale that the property will fetch any bidders or a high enough bid, a “short sale” offers creditors a certain predictability often lacking in the foreclosure situation.
Beth H. Davis is a director at Hamblett & Kerrigan, P.A. Her present practice focuses on real estate and business transactions. You can reach Attorney Davis by e-mail at [email protected].