Of all of the many different elements, tactics, and maneuvers in New Jersey real estate, a “short sale” is one of the most complicated, especially when it comes to the title of the property. For both the buyer and the seller in a New Jersey short sale, understanding what makes up a short sale (and the complications title insurance brings) is essential to a successful transaction.
Here, we’ll break down exactly what a short sale is, go through why these types of sales are tricky for title companies, and detail exactly what to ask your title company before you make an offer.
What is a Short Sale?
A short sale is when a seller intentionally (and voluntarily) sells their property for less than they owe on the mortgage. It’s a tactic to avoid a full foreclosure, which could significantly damage a homeowner’s credit.
One of the important things to know about a short sale? It’s a complicated process. First, the mortgage lender must approve the short sale and release the lien. Additionally, properties listed for a short sale often have second mortgages or other debts attached, which can lead to lengthy negotiations.
Why Short Sales Are Some of the Hardest Closings for a Title Company
Short sales often pose unique challenges for title companies. Here are the most common ones:
- Multiple liens or debts on the property. Many properties going up for a short sale have a variety of liens or debts, including second mortgages, court judgments, tax liens, or Homeowners Association (HOA) liens. That creates a maze of paperwork, with many different parties involved and multiple rounds of negotiations and back-and-forth needed to close the transaction. Plenty of opportunities exist for things to go sideways.
- Standard title defects. As with any other property sale, title companies have to do their standard search through the history of the property to find errors in the record, undisclosed liens, heirs who may have a claim to the property, and many other things. That same maze of paperwork that comes with properties up for a short sale can make picking through the property’s history a challenge.
- Inexperienced professionals. A short sale is complicated, and many real estate professionals on any side of the sale (from the buyer to the seller to even the title company) may not have the required knowledge or experience needed to take a short sale to a successful conclusion.
Common Liens That Complicate a Short Sale Title
Several different types of liens could complicate things when tackling a short sale, including:
- Second mortgages or Home Equity Lines of Credit (HELOCs) – Many distressed properties involved in a short sale have debt beyond the initial mortgage, either a second mortgage or a Home Equity Line of Credit (HELOC). Those specific debts will require additional negotiations before the deal is completed.
- Homeowners Association (HOA) liens – These could include unpaid dues, assessments, or other fines levied against a property, all of which require negotiation and settlement.
- Tax liens – Unpaid taxes from local or federal sources may need to be settled before closing.
- Court judgments or mechanic’s liens – Court judgments against the property or money owed to professionals for their work may also need to be settled.
How a Title Search Uncovers These Issues Before Closing
Here’s where the professionals at the title insurance company come in. In the case of a short sale (or any other real estate transaction in New Jersey, for that matter), the title insurance company will embark on an in-depth search of the property’s history. They’ll search all official records on the property, combing through liens, mortgages, encumbrances, deeds, and other details to give you a clear picture of any title issues the property faces.
For a short sale, getting an accurate look at what mortgages or debts remain on the property and how they might need to be handled is essential to clearing those problems before closing. A thorough title search before the closing table helps address issues and supports a successful outcome.
Short Sale vs. Foreclosure: Why the Title Difference Matters
Short sales and foreclosures are different real estate procedures; short sales are voluntary procedures initiated by the seller, while foreclosures involve the lender putting the property up for sale to recoup their investment.
For title insurance, the difference generally comes down to the issues title companies must address in foreclosures and short sales. In foreclosures, most title insurance issues stem from a disruption in the chain of title or paperwork errors as the property moves through the process. With a short sale, most issues involve outstanding second mortgages or other debts tied to the property. Buyers need to know what they’re walking into with a short sale or a foreclosure purchase; understanding the differences early can reduce confusion later.
How Long Does It Take to Clear a Title on a Short Sale?
The short answer is, “it depends.” Many factors can affect the timeline for clearing a title on a short sale. These include:
- The number and complexity of mortgages and other debts on the property.
- The negotiation tactics of any other parties involved in clearing the title.
- The responsiveness and cooperation of the seller and other parties involved in the sale.
- How old the property is and how many times it’s changed hands (which can require an even more extensive title search).
There is no one answer for the timeline, given the many different factors that come into play with a short sale. Check in with your title company representative at the start of the process to get an estimated timeline, and check in periodically for updates to better understand the process.
Questions to Ask Your Title Company Before Making an Offer
Thinking of making an offer on a short sale? Here are the questions you should ask your title company:
- What kind of liens and judgments are on the property? Have them explain the financial situation of the short-sale property.
- What does the time frame look like? The complexity of short sales can make the timeline look very different from the average real estate transaction. Ask your title company for an estimate of how long the process will take.
- What’s your experience with the short sale process? Make sure the title company is up for the job. Ask them about their history with short sales, and ask for concrete, specific examples of their prior success with these types of transactions.
Work With a Title Company That Understands Short Sale Complexity
Interested in a property that’s up for a short sale? Choose your title company partner wisely; an inexperienced title insurance agency could lead to an unsuccessful transaction. Cortes & Hay brings a wealth of short-sale experience and experience with other unique transactions to the table, working hand in hand with all parties involved to ensure the best possible outcome.
Ready to get started with your short sale? Contact us today.
Frequently Asked Questions
A short sale is when a homeowner sells their property for less than what they still owe on the mortgage, with the lender’s approval. It’s typically used to avoid the more damaging credit consequences of a full foreclosure.
Short sale properties often carry multiple liens or debts, like second mortgages, HOA liens, tax liens, or court judgments, that must be uncovered and resolved. Add in standard title defects and the number of parties who need to sign off, and the closing process becomes far more complex than a typical sale.
The most common are second mortgages or HELOCs, HOA liens for unpaid dues or assessments, tax liens from unpaid local or federal taxes, and court judgments or mechanic’s liens against the property.
There’s no set timeline. The timeline depends on the number and complexity of liens, how responsive the seller and other parties are, and how many times the property has changed hands. Check in regularly with your title company for updated estimates to stay informed.
Ask what liens and judgments are on the property, what the expected timeline looks like, and what experience the title company has in successfully closing short sales.