Understanding A Short Sale
What is a Short Sale?
A short sale of real estate is a sale in which the sale proceeds are less than the balance owed on the property’s loan. The borrower asks the lender to accept a sale price that is less than is loan and the lender decides that selling the property at a loss it is better than pressing the borrower. The borrower and the lender both consent to the sale and it allows the property owner to avoid foreclosure. The short sale does not always release the borrower from the obligation to pay the remainder of the balance of the loan, known as the deficiency.
Process
If the homeowner owes more than the property is worth, as described as upside down on the loan and is willing to work with a realtor and their agents a short sale may be the best solution to relieving the debt. Both the lender and the borrower need to agree to the short sale, as well as having an experienced, knowledgeable agent working to facilitate the short sale. The borrower or homeowner has to be actively involved in the short sale process and willing to cooperate with the selling agent and or negotiator.
Once the borrower decided to short sale their property and find a knowledgeable real estate agent they will determine what the property will sell for. The property owner is required to prepare a “short sale package”. A complete and updated package is critical is getting a short sale approved quickly. The package includes the following documents:
Short Sale Package
1. Realtor Submission Check list
2. Listing Agreement
3. Contract on Property
4. Borrower/Seller Short Sale Information and Document Checklist
5. Authorization to Obtain Information from lender
6. Hardship Letter
7. Personal Financial Statement
8. Last two months of pay stubs
9. Last two years of W-2’s/1099
10. Last two years of tax returns
11. Last two months of bank statements
12. Supporting documents as evidence of hardship (medical bills, judgments, etc.)
13. Divorce documents, if applicable
Every lender has their own specific requirements and many have their own forms that must be used. You should keep these documents together and provide updated financial information throughout the process.
The short sale process requires the borrower to be fully cooperative in the process and provide the documentation in a timely manner. The lenders have very strict timelines that require borrower’s to submit required documentation in order to have a successful short sale.
Additional Parties
Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders – such as second mortgages, HELOC lenders, and HOA (special assessment liens) – may need to approve the short sale. Frequent objectors to short sales include tax lien holders (income, estate or corporate franchise tax – as opposed to real property taxes, which have priority even when unrecorded) and mechanic’s lien holders. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender’s loss in the short sale. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction
Timeframe for short sale approvals
Short sale success rates vary from state to state and from bank to bank. Bank of America short sales, as of 2009 are still the longest to be approved and have the highest failure rate. Whereas, Citi and banks like Wells Fargo tend to move faster. Smaller “local” banks tend to have their own rules, but will typically approve the short sale in days, not months.
Consent
Short sales are different from foreclosures in that a foreclosure is forced by a lender, whereas both lender and borrower consent to a short sale. However, this consent may change at any time, and negotiations may be ongoing between the lender and borrower even while the short sale is on the market. The borrower may decide to remain and refinance their house, or become obstinate and force foreclosure. The bank may renege as well if they decide to stick with the current borrower, or if they disapprove of the sale price. Any short sale contract includes a contingency where the bank must approve the sale. Changing consent can present a perilous situation for potential buyers. It can waste considerable time and money for a prospective buyer who anticipated a sale. Typically, deposits with the bank will be refunded but money for paid inspections or other services cannot be refunded.
Bank Approved Short Sale
“Bank Approved Short Sales” are advertised by real estate advertisements, indicating that a real estate broker has had a previous price approval for the property. This still does not guarantee acceptance, and it often does not take junior lien-holders into account, but it is better than situations where the bank holding the mortgage has only been lightly involved in the borrower’s decision.
Buying Short Sale Property
A buyer of a property that is a short sale you have to wait for a third party approval (the lender’s approval) of the selling price before the contract is actually an executed contract, even though the seller agreed to a price the bank the bank must also agree. Unfortunately, a bank will typically respond with a price they are willing to accept along with a date within which the closing must take place. This is usually within 30 day or less. They buyers of short sales typically do not have any negotiation power on the condition of the property, price or closing dates. A bank will look at a cash buyer far more favorably than a buyer financing the property. The property will be sold “AS IS” and frequently have other debts on the property such as tax liens, HOA fees, construction liens. It is common for buyers to be required to bring additional funds for 2nd lien holder’s debts. The short sale process can be a lengthy process however, the banks have been responding more quickly now that the short sale is more common.
A short sale can be an opportunity for a buyer to purchase a property that is a valued price property. It is an opportunity for a seller to be released from a debt.