Can you do a short sale in a redemption period?

Question

I had always thought you had until the end of the redemption period in redemption states if no one buys at the auction.  I had a short sale pending with Shellpoint and they wouldn't postpone the auction, it was held and no one bid.  They say it is now REO property and tossed my short sale documents.  They said they never consider short sales after the auction date and I now have to wait 6 months for the REO realtor to list the property to make an offer?  Is this the case with most companies?  Any strategies available to keep my short sale going with Shellpoint?  It is a conventional mortgage if that is relevant.

Ron S. · Answer

Let me throw one more thing out there IF this property is in Michigan as it appears that you are. A short sale by definition is an "Alternative to foreclosure" (CFPB definition) or a "Loss Mitigation" option in lieu of foreclosure. By Michigan statute, a borrower can only request a loss mitigation option until the day of the sheriff sale. Once the sheriff sale is held, there is no loan to loss mitigate (yeah, bad grammar choice but you get my point), the borrower has at most 12 months for redemption and as little as the amount of time it takes for an eviction in that city. The six and 12 months are not absolute. The borrower has some duties they must perform to have a redemption period. If they fail to fulfill their duty, that exemption period can expire.

Ron S. · Answer

at the risk of saying never...I would in this scenario. Yeah, I know, there are a million reasons why it could happen but for all practical matters and scenarios it couldn't. The foreclosure already occurred. The sale is already done and the redemption is purely one last ditch effort/opportunity to take the property back from the foreclosing entity/buyer for the amount that it was foreclosed on and nothing less. There is a recorded sale amount called a "credit bid" from the lender (This assumes no third party bid as you stated). That bid amount is usually total debt or a percentage of the total debt the lender/servicer calculated and unless you pay that amount, that debit in the bank's G/L as a loan simply flips to a credit in the bank's G/L as an REO upon expiration.

The loan ceases to exist for all intents and purposes once the proverbial gavel dropped at the foreclosure sale. While I'm sure anything is possible, in my experiences of over 25 years of doing just this, I've never seen a short sale after a foreclosure sale, during the redemption period. It just doesn't make any sense for the lender to do a short sale especially considering technically there is no longer a loan TO short sale.

I could see a conversation about waiving redemption rights between borrower and bank, and then bank selling property to a buyer at a price lower than total debt (there are a LOT of assumptions with this scenario...it's legal, it's enforceable, etc..). That wouldn't be a short sale though. It would be the sale of Bank REO. Just a regular REO transaction. And again, while possible, not probable unless that sale occurred on the open market, at arm's length, exposed to the biggest potential buying pool possible. The Bank COULD do whatever they wanted in that scenario but if I were the department head of that bank, I sure wouldn't sell it to you without first putting it on the MLS to see who else could buy it.

In conclusion...yeah, your scenario COULD happen but it's not probable.

Jim Bowser · Answer

Thank you for your answer. Is your answer that it could never happen or that it is just improbable. Doesn’t the bank still hold the loan if there are no bids at the auction and the owner still holds the deed at that point?   The problem I’m having accepting either answer is that I have people who have told me that they have conducted short sales during the redemption.  They were probably started before the auction date.   But in one case I tried, Shellpoint said they would never.

Ron S. · Answer

The short answer is no. To "Redeem" you have to pay the total debt foreclosed on. There is no longer a loan in existence to shortsell. Pay the amount owed in total otherwise the redemption period expires and the property reverts back to the beneficiary.