Short Sale

Short Sales are an option for homeowners facing foreclosure. I have found short sales to be the best option for sellers in distress who do not think their financial situation will improve in the near future.

What is a Short Sale?

A Short sale is when a homeowner sells their home for less than what they owe. While doing a short sale the homeowner still has legal title and or possession of the home, however- they need the bank’s permission in order to sell for less than the loan amount. For buyers that have patience, these can be great deals.

Short sales can happen at any point during the foreclosure process. If you are at the very end of the foreclosure process with a Notice of Trustee sale date set, hurry up and ask the bank for a last minute extension!

Short sales are distressed sales that result from a hardship suffered by the homeowner. In down markets where prices are declining, many short sale listings will appear. When the market is going up, the home is worth more than the loans and so sellers can do a conventional sale instead. Break-even sales can even become short sales sometimes when considering closing costs- the typical real estate sale closing costs is 7% to 8%.

Common examples of hardships that may cause a short sale are job loss, illness, death, or divorce. The hardship prevents the homeowner from being able to pay their monthly mortgage payments. Since the homeowner is unable to pay, they will eventually lose the property through foreclosure. Normally, in these circumstances a homeowner would sell the property- but when the market value of the home is less than what they paid for it (upside down)- a regular sale is not possible. The loans against the house are greater than what the home is worth.

What are the Benefits of a Short Sale?

The main reason a homeowner would want to do a short sale is piece of mind. It is very stressful to go through a foreclosure. A short sale provides a dignified and graceful exit. Sometimes the bank will pay the seller a relocation fee of $10,000 to $20,000 to help them move so there can be a small monetary compensation. Some homeowners fear the bank coming after them after a short sale and seeking a judgment. In Non-Judicial foreclosure states – the bank gives up the right. I’m my experience the homeowner gets to walk away after completing the short sale. Short sales are less damaging to credit rating (-50 points for some late payments versus -300 points) than foreclosures and it relieves the debt.

How long does a Short Sale take?

Calling a Short sale short is an oxymoron because there isn’t anything short about them. Short sales usually take anywhere from 3 to 9 months. They can take even longer. The longest short sale I ever worked on was 2 years. Every bank has its own short sale rules. The time for a short sale depends on the bank the loan is with and how many loans there are against the property. One loan is the fastest. Two or more loans (especially if one is a Heloc), can slow down short sales substantially by making things more complicated.

What is the Shortsale Process?

Step 1: Hire a Real Estate Agent

The short sale process starts for sellers by hiring a short sale agent. Real estate agents handle short sales. Make sure they have learned how to do it. The short sale agent will get an authorization letter from you for them to work on your behalf and contact the bank(s) and notify them of your intention to short sale. 

Step 2: Contact Lender

Every bank has its own process for handling short sales. You need to contact the short sale department and ask what are their requirements for doing a short sale. You will need to write a hardship letter and complete the lender’s short sale package, as well as supply any requested financial documents requested.

Step 3: List 

Now that you have made contact with the bank, you need to find a buyer. The listing agent will list the property for sale, arrange showings, and negotiate offers. It is important to disclose that the sale is a short sale.

Step 4: Accept an offer

As seller you get to pick the offer to be sent to the bank. Make sure to use a short sale purchase contract or short sale addendum so the buyer knows what to expect. 

Step 5: Submit Short Sale Package to lender

The listing agent will send the accepted offer along with the short sale package to the bank:

Short Sale Package Typically Includes:

Authorization Letter
Hardship Letter
MLS Setup Sheet
Accepted Offer (Purchase Agreement, Preapproval, Proof of funds)
Financial Documents of the Seller (Bank Statements, W2s or 1099s, Tax Return Past 2 years, HOA info, Copies of 401K or IRA)

When the bank’s short sale processor receives the short sale package it will be put on a huge stack of other short sale packages. It may be 2 or 3 months before the short sale package is reviewed by the processor. During this period it is very important for the listing agent to consistently follow up on the file each week and log any communication so they can start building a case history for the file. The agents who consistently follow up will get quicker processing times. When the bank reviews the file, they will assign a short sale negotiator to the file. The submission period can take 2 to 3 months.

Step 6: Bank Approval

The Short Sale Negotiator will hire a Broker Price Opinion or BPO to give them an estimation of the value. The broker price opinion is usually done by a real estate agent for a small fee like $100 to $150 so it is not an appraisal. Sometimes you have to argue back and forth if you think the BPO is wrong. It is very common for banks to counter offer higher after they do the BPO. This can be frustrating for buyers who have been waiting for months of nothing, just to learn when they finally hear from the bank that they want more money! A buyer can do three things in this situation: Accept, Cancel, or Counter. A lot of short sales come back on the market after the bank has responded to the offer because they countered a higher price.

When the bank approves a price this is known as the accepted offer price– so when the listing agent relists the property if it fell out, these short sales with an accepted offer price can have much shorter timelines of 30 to 60 days.

Step 7: Escrow

For short sales, escrow is the same as a standard sale except that banks will try to push some of the traditional seller side closing costs onto the buyer, such as title insurance, HOA transfer fees, no termite, no home warranty, no retrofit. Since Short sales are distressed sales, there are usually back due property taxes and HOA dues that also have to be picked up by somebody (usually the buyer). These charges will continue to grow as you wait for approval. Escrow is typically 30 days.

Step 8: Closing

After a lengthy process of several months to a year, you complete the short sale with the closing! The debt is removed, and you can move on with your life. The buyer picks up the keys and the bank files a reconveyance which releases their lien.

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