One of the hottest topics today remains "Short Sales". As market values continue to decline more and more sellers are finding themselves upside down with loan to value ratios. Unfortunately many sellers do not fully understand the concept of short sales and labor under false impressions. Below are the top five myths that Realtors should dispell.

TRUTH: This is typically one of the worst approaches a seller can pursue. Conveying title to the bank does not release the debt. To the contrary, it takes away any bargaining power and opens the door to the bank obtaining an appraisal at the time of conveyance and suing the borrower for a deficiency judgment representing the difference between the appraised value and the balance of the note and mortgage.

MYTH #2: Sellers need to contact the bank first for approval prior to listing their property below the mortgage balance.

TRUTH: A seller is free to list the property at any price at any time by disclosing the fact the listing is a short sale and subject to the lender's approval. A bank will not respond to speculative questions without an actual sales contract. Contacting the bank, in advance, is putting the cart before the horse.

MYTH #3: Making payments on an upside down loan will foster better working relations with the lender to obtain their cooperation.

TRUTH: A bank will typically never entertain a short sale if the borrower is faithful with payments. To the contrary, a bank is motivated to work out non-performing loans. In fact, many lenders will not consider a short sale unless the borrower is a minimum of 90 days late. Continuing payments paradoxically will hurt rather than help a seller's chances of being successful with a short sale.

MYTH #4: Stopping payments will tarnish your credit.

TRUTH: Perhaps, however, one of the tools of successfully negotiating a short sale is seeking to work out a deal with the bank that will restore your credit. A borrower may agree to pay a small portion of the indebtedness in exchange for the bank reversing the credit reporting blemishes. To the contrary, the alternative to a short sale is a foreclosure which will have much greater long term consequences on a borrower's credit history.

MYTH #5: Short Sales are a solution for everyone who made a bad investment.

TRUTH: Unfortunately, if a borrower has numerous assets and/or liquidity the bank may release the mortgage, but will not forgive the indebtedness. Ironically, applying for relief from a short sale is 180 degrees from applying for a mortgage. My extensive experience with short sales has taught me that there is a direct correlation between a bank's willingness to accept a lesser percentage of the amount due based upon the borrower's recent payment history and the buyers ability to repay.

The above discussion is not intended as specific legal and/or credit advice, but rather based on observations from being personally involved in dozens of successful short sales. Each situation has its own unique set of circumstances. Unfortunately short sales are not a clear cut science, but rather hinge on the art of presentation to the lender through the lender's Loss Mitigation Department.

*If you would like to receive a comprehensive discussion for yourself or your customers on short sale strategies please reply and I will be glad to send information in a separate PDF attachment to you.

Ronald Webster, Attorney at Law