SBA Loans:
Short Sale Approval
Carol M. Baron
It is becoming more and
more common for requests to be submitted to U.S. Small Business Administration
lenders for approval of short sales of real estate that secures SBA-insured
loans. A “short sale” is generally used to describe a sale of real property that
will result in net proceeds that are less than the total debt secured by liens
on the property. Most typically, SBA lenders receive requests for approval of a
short sale of a loan guarantor’s residence that is encumbered by a second or
third lien deed of trust or the lender’s recorded judgment.
Following are some of the documents that should be reviewed in connection with
the approval process of a short sale of SBA loan collateral:
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The signed purchase contract and all amendments, to confirm the amount of the
purchase price and parties, to verify that the contract is an “arms-length”
transaction, and to review other relevant terms.
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A post-default appraisal of the property to determine the reasonableness of
the sales price.
-
A current title report that discloses all liens of record and their relative
lien priority.
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A copy of the payoff statements from senior lienholders to prove that they
are accepting less than what is owed.
-
The draft settlement statement (and eventually the final statement) that
discloses the allocation of all sale proceeds.
-
The real estate listing agreement.
According to SBA Standard Operating Procedures, the test of whether a short sale
price is acceptable is “whether the dollar amount offered as consideration in
exchange for release of the lien is approximately equal to or greater than the
Recoverable Value of the property.” SBA SOP 50 51 3, Chapter 13, section C.6
(b). “Recoverable Value” is defined as “the net dollar amount that a secured
creditor complying with prudent lending standards could reasonable expect to
recover from collateral.” See SOP 50 51 3, Chapter 2, section B.51 (a), (b) and (c) for more detailed
information.
It is important that the written approval of a short sale be very specific in
stating that it does not include forgiveness of the remaining SBA loan debt not
paid from the proceeds of the short sale; that the property owners and all other
obligors remain responsible for the debt; and that all other collateral remains
in place as continued security for the loan, as applicable.
Depending on the property and circumstances, the lender may need to review
additional documentation.
This article does not purport to cover all of the considerations and
requirements for short sale approval or whether approval by the SBA is
necessary. For additional information concerning sales of property securing SBA
loans, contact your legal counsel or review “SOP 50 51 3 Loan Liquidation” at
www.sba.gov.
Carol Baron is a former U.S.
Small Business Administration attorney.
This article is
made available with the understanding that it is informational only, and it has
not been prepared to provide specific legal advice that may be relied on by a
reader. The author is under no obligation to update the information in the event
of a change in the law. |
