As a listing agent, getting listings on short sales can be challenging. With so many variables and every lender acting differently, it can be daunting to stay on top of all the issues. While there are so many steps to insure that a short sale transaction moves smoothly, I could never cover them all here. Yet, one issue looms large and if not done properly, could cause you considerable grief and aggravation possibly resulting in a failed transaction.
The issue is obtaining the HUD-1 that the lender will require when considering a short sale transaction. Most often, the process starts with you going to a title company and asking for a short sale HUD-1. With that request, most title companies will simply ask you and/or the seller about the current liens. Since the seller owns the home, they should be the one to answer those questions. So, let’s assume the seller tells the title company that they have one lien; that being the lender who is considering the short sale.
Thus, the title company prepares the short sale HUD-1, most often without doing a title search, and shows the liens that the seller tells them about. That’s the problem. By not doing a title search, and by not grilling the seller with questions which might uncover additional liens, the HUD-1 is prepared with incomplete information which is a recipe for doom.
If done that way, the lender approves the short sale and everything moves forward. The buyer deposits their money, pays for an inspection, appraisal, and loan application and incurs various other costs, while assuming they are buying the house. Low and behold, much later in the process, the 2nd lien pops up, typically a Home Equity Line of Credit (HELOC) or some other lien, which the seller either forgot about or did not realize was part of the transaction. Closing is delayed as the 2nd lien holder is contacted and typically offered pennies on the dollar. Many of them say no, and the deal fails.
Is there a lesson to be learned? Yes. When ordering that HUD-1, either insist that the title search is done in conjunction with the preparation, or very soon thereafter, so that if another lien shows up, everyone will know about it long before the 1st lender approves the short sale and the buyer spends any money. If the title company refuses to accommodate that request, find another title company, as some do this as a matter of course, but many do not.
