Who is the Seller in a Short Sale?
Question: Who is the Seller in a Short Sale?
A reader writes: "I signed so much paperwork when I put my home on the market as a short sale that I can't remember what I promised to do or what any of the paperwork means. My agent says the bank pays all of the costs of sale, but it doesn't look that way to me. He sent me an offer to sign. The offer says "seller to pay title and escrow." Is that me or is that the bank? Who pays the property taxes? Who is the seller in a short sale?"
Answer: First, let me say that if you are wondering who the seller is in a short sale, you are not alone. Even sellers who should know the answer to that question do not. Even agents who should know the answer to that question do not. That's part of the reason why your agent is telling you the bank pays all of the costs in a short sale. But your agent is not exactly correct and might be taking the easy way out.
It also sounds to me like you might have a trust issue going on with your own agent. When an agent signs a listing agreement with you, that agent is creating a fiduciary relationship with you. That means the agent must work in your best interests. It is difficult for an agent to do that job for you if the fiduciary does not exist. You must trust your agent to have fiduciary with that agent. Without trust, you might have broken the fiduciary relationship.
My suggestion is that you ask your agent to explain fiduciary to you, and to explain to you who is the seller in a short sale.
This should not be a difficult task for your agent and, in fact, most likely will be welcomed by your agent.
Who Pays the Costs in a Short Sale
A short sale is really no different than any other kind of transaction as far as costs are concerned. Your closing statement and the fees that are charged are very similar to any other real estate transaction.
It works like this:
- Say you are selling your home for $100,000. You are the seller.
- The buyer hands you $100,000, either through a combination of a down payment and a loan, or maybe it's just all cash. It doesn't matter. In the end, you get $100,000.
- First, you pay the commission. If it is 7%, you will pay $7,000 to the listing broker. The listing broker then pays the listing agent, the buyer's broker, and the buyer's broker pays the buyer's agent. There could even be sub-agents of agents who get paid from the $7,000, but the fact is you now have $93,000 left.
- From the $93,000, you will probably have another $3,000 in expenses. These fees could cover title fees, escrow fees, recording fees, delinquent property taxes, tax prorations, transfer fees, among other charges. If all those fees total $3,000, for example, you will now have $90,000 left.
- The $90,000 is your net proceeds. You can't keep that money because you owe the bank. You probably owe the bank a lot more than $90,000, but if the bank were to sell your home as a bank-owned home, the maximum the bank could probably get would be the $100,000 you were just offered for the short sale.
Therefore, since the bank can't get any more than that because the $100,000 is market value, the bank will accept your $90,000. The only difference between a short sale and a regular transaction, as you can see, is the fact that you don't put any money into your pocket. In a regular transaction, you would pocket the net proceeds after paying off the bank because you would have what is called equity. In a short sale, you have no equity because you have lost your equity.
This means you are the seller. The bank is not the seller. The owner is the seller, and the owner pays the costs of the sale from the proceeds of sale.
Is the Bank Really the Seller of a Short Sale?
Some people argue that the bank is really the seller of a short sale because the bank is owed far more money than the home sells for, but that is not true. That's because title stays with the seller until the seller deeds the home to a buyer. The seller is the owner.
It works this way in reality, though. Say, you owe $200,000 to the bank, but your home is only worth $100,000. If the bank is going to lose $10,000 from the proceeds, because the net proceeds of sale are only $90,000, that makes the bank very interested in and vested in the costs of sale.
Although the bank does not really pay the costs of sale, every dime the bank can stop the seller from paying goes into the bank's pocket. Because the bank gets the money that is left over. That's why the bank cares how much the seller pays in closing costs.
But the seller is still the seller, and the bank is still the bank.
The question remains if the bank will not authorize a certain fee or expenditure in a short sale, who pays it? If a fee is unauthorized, it means the bank will not allow it to be deducted from the gross proceeds. But the fee still needs to be paid. In most of my short sales, I ask the buyer to pay any unauthorized fees.
Ordinarily, the payment of unauthorized fees is negotiable. However, in a HAFA short sale, the seller was not allowed to pay anything extra. HAFA short sales are no longer used. In California, SB 458 prohibits California short sale sellers from paying any fees at all from out-of-pocket, as evidenced by the California Civil Code 580e.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.