Negotiating Short Sales
How Board Members Should Negotiate Short Sales
As foreclosure rates remain unstable across Florida, a beacon of light has begun to shine across Downtown Miami:
• Yearly sales have increased, with 2012 having a 24 percent spike above 2011’s rates.
• The average price per square foot also jumped 7 percent from last year’s price.
• Several local new condo projects have been proposed or are already in construction.
How did this happen? So many condominiums in distress are selling and Associations are slowly moving forward toward a better financial position. Enter the expression, “cash is king,” or more importantly, enter the era of the “short sale.” A real estate short sale is when your mortgage bank agrees to take less than what is currently owed on the unpaid balance. A short sale can provide mutual benefits for both the homeowner and the bank because it helps both parties avoid foreclosure. What about the Association?
While every short sale offer should be negotiated on a ”case by case” approach, the first question a Board should ask is, “At what stage is the unit in the lender foreclosure process?” The Board should consider the amount the Association will receive if the short sale is approved versus the amount they are owed. If the Board chooses not to accept the offer, the next question is how much longer would the Association have to wait to receive any funds, which could be limited by the Florida Safe Harbor provision as outlined in the Florida Statute 718.116(1)(b). If the unit is in the beginning stages, the short sale offer can be better negotiated. Otherwise, there are other factors to consider. The main factor is whether accepting the short sale offer will result in the Association taking less than full payment owed. In most cases, the answer is yes. This is where the creative process kicks into gear, and the Board of Directors should consider these other approaches:
• If any brokers/agents are involved and are taking full commission, then suggest that the broker/agent reduce his/her commission and redirect that percentage to the Association.
• Usually in short sale scenarios, the buyer’s offer has been approved by the lender, which is usually under the current real estate value. Ask the buyer to contribute to the debt.
• It also never hurts no go back to the lender and “counter” their offer for a better deal.
While the Association is under no obligation to participate in short sales, it is good policy to review: (1) a copy of the preliminary HUD1 Settlement Statement (which shows the distribution of all funds in the transaction); and (2) a copy of the short sale payoff. It is also a good idea to have a real estate attorney review all short sale offers to evaluate a HUD1 Settlement Statement and see if anyone is making more money than they should be.
At the final conclusion of all possible negotiations, when the short sale offer is accepted by the Board, the end result is usually that there will be bad debt to write off (loss to the Association). However, there will then be a new owner, which will hopefully result in positive cash flow for the Association moving forward.