Legal Line: Short Sale Transactions: "Should I Worry?"

June 02, 2011

What is a Short Sale?

In tough economic times, there are numerous ways to lose a home. A short sale can be an alternative for lenders and owners of real estate; however, it may not be a pleasant transaction. For many homeowners who can no longer keep their mortgage payments current, a short sale is an alternative to foreclosure proceedings or bankruptcy. Short sale transactions are now more prevalent than ever before and are highly scrutinized. This type of transaction can be highly successful for all parties involved.


Closing short sale transactions presents many unique challenges to title closing agents, realtors, sellers, lenders and purchasers. A short sale means that a lender agrees to accept a lesser amount than the total amount due under the terms of the note and mortgage. Not all lenders are willing to participate in a short sale transaction, especially if it would make more financial sense for the lender to foreclose. In addition, not all sellers or all properties qualify for the short sale transaction. If you are considering participating in a short sale transaction, the following are important items to keep in mind, whether you are the seller, closer, or buyer:


  • Obtain legal advice from a competent real estate lawyer since a lender may subsequently pursue a deficiency judgment or claim.
  • Call an accountant to discuss short sale tax consequences, if any. The IRS may consider debt forgiveness as income.
  • Enlist the assistance of a real estate agent that specializes in short sale transactions.
  • Call your lender to open the doors of communication. Be sure to find the real estate short sale or work out department.
  • Submit your written letter of authorization giving the lender permission to negotiate with the real estate agent, purchaser, closing agent or lawyer and to disclose personal information about your loan.
  • Compose and send a hardship letter that explains your financial bind and will act as a plea to the lender to accept less than full payment. Your present situation may be the result of illness, job loss, disability or uncontrollable circumstances.
  • Proof of your income and assets must be submitted to your lender.
  • A comparative market analysis from your realtor can substantiate the loss of market value that created your need for a short sale.
  • Supply your lender with a purchase agreement or listing agreement when available. Be ready to negotiate repairs, etc.
  • Wait for the lender to approve the short sale transaction.


Title or Closing Agent

Closing short sale transactions present many challenges. Title must be updated to determine the existence of current foreclosure proceedings, bankruptcy, additional lien holders or judgment creditors which will need to be part of the title clearance issues. The title or closing agent must obtain a comfort level in regards to the following:


  • Do not negotiate the terms and conditions of the short sale. You must remain an independent facilitator only.
  • Short sale estoppel (a bar to denial of previously stated truths) letters must be obtained from all existing lien holders of record setting forth the strict guidelines upon which the existing lender and all other lien holders have approved the short sale. These letters are to be strictly construed and followed without any variance from the guidelines.
  • Unconditional approval of the short sale must be obtained. Confirm that the estoppel letter and approval cannot be revoked after closing due to any condition including but not limited to review of closing documents or discovery of additional information about the parties, transaction or property values, by the lender or lien holders.
  • Review estoppel and approval letters completely. Some may place resale restrictions.
  • Lien releases must be addressed in the estoppel letter. Make sure that all lien holders agree to accept a reduced payoff and agree to release the mortgage or judgment or to dismiss any pending foreclosure proceeding. Once the lender or lien holders receive the agreed amount they must file the appropriate form of release.
  • Pay specific attention to the terms of the approval as to price, closing costs, real estate agent commission, and amounts payable to junior lien holders. These terms must be followed precisely.



  • Seek the advice of a competent real estate lawyer to review all the seller’s documentation from the lender or lien holders.
  • Seek the advice of an experienced real estate agent specializing in short sale transactions.
  • Purchase an Owner’s Title Insurance Policy and review the Title Commitment prior to closing to insure the validity of the short sale transaction and that the property will be sold free and clear of prior liens.
  • Look for resale restrictions in the documentation which may prohibit a subsequent conveyance or “flip” within a defined time period.
  • The sale must be an arm’s length transaction. You must advise all parties of material fact change regarding the resale, ownership or property valuation.
  • The short sale buyer must not in any way be related to the short sale seller nor be party to a repurchase or reacquisition of the property in any form.


The above items represent some helpful hints when a short sale transaction is contemplated. Most importantly, seek professional advice, be patient and be thorough with information and documentation required by the respective parties to the transaction. Remember, the existing lender, lien holders, seller, the closing agent, the real estate agent, the buyer and the buyer’s lender all must be included in the loop for a short sale transaction to work smoothly and efficiently. 


This article was written by Dan L. Oliver, of counsel, with Rudolph, Fine, Porter & Johnson, LLP in Evansville, Indiana and an attorney for Lockyear Title, LLC. For additional information, you may contact Dan L. Oliver at (812) 422.9444, (812) 421.8405 or His practice areas include real estate and title insurance.


This article is intended solely as an information source and its contents should not be construed as legal advice. Readers should not act upon the information presented without professional counsel. Information contained in this article was provided in part by the Underwriting Department of First American Title Insurance Company Alert No. 2010-11 and other sources.