Mortgages & Creative Financing

Short Sales With No Cost to Sellers – Is it Possible?

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no cost short sale transactions

When checking out newspapers and magazines and even the Internet, I see many agents who advertise that a short sale transaction can be closed at no cost to the seller. When I see those ads, I always look for the fine print (and I do not always see any).

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When you take a short sale listing, the seller frequently inquires as to what s/he can be expected to pay<  (i.e., how much does short sale processing cost). It’s true that frequently the short sale can be concluded with no cost to the seller. But, then there are those other times when the seller will have to come up with some money.

I’m not going to review all of the times when the seller may have to come up with cash in this article. But, I will review one occasion when cash will be needed to close: in the case of the Homeowner’s Association (HOA).

First and foremost, even if a seller has stopped making payments on his or her mortgage and is participating in a short sale, s/he should continue to pay the HOA (if they reside in a community with an HOA and if the can afford to do so).

Lenders (at least those lenders in the state of California) frequently do not allow any of the proceeds from the sale to be paid to the HOA. Remember that when a lender approves a short sale, the lender approves the terms and conditions of the sale. The lender approves how much will be paid for various items including but not limited to title insurance, escrow fees, recording fees, and real estate commission.

In the state of California, short sale lenders generally are not approving payment to the HOA. However, the HOA balance needs to be paid in order to complete the short sale. Since associations throughout California (and throughout much of the nation) are having trouble making ends meet, we often see associations placing liens on properties for unpaid dues. These liens include exorbitant charges for legal fees and interest. If a home in a short sale has an HOA lien and the bank will not authorize money from the proceeds to be paid to the HOA, someone else (generally the seller or maybe even the listing agent) will need to satisfy that debt prior to closing.

One other thing with regard to associations is that association documents often need to be ordered (and paid for) prior to closing. If there is an upfront fee to order documents, then it is likely that the seller (or the listing agent) will need to pay that document fee charge to the HOA. Even if the bank has approved money for HOA documents and transfer fees, any money is required upfront cannot be allocated out of the money that has been approved on the short sale approval letter for the HOA. This money can only be used at closing.

So, if a short sale seller is being told that a short sale is absolutely free, don’t forget to look for the fine print. There are definitely some short sale situations where sellers will not have to come up with a dime, and then there are others where there may be some costs associated with the sale.

Now, can the buyer come up with the money for some of those unexpected costs? Absolutely.

Photo: flickr creative commons by RTP