Short Sale Home » Short Sale Buyers » What is the Process of a Short Sale?

A short sale is selling a property for less than what is owed on the mortgage.  The final process agreed is what the buyer is willing to pay for the property with the mortgage or lender having the final approval on the closing costs, commissions, terms and acceptance of the discounted sale.  A short sale seller should always talk with an attorney, tax adviser or CPA to determine the legal or tax consequences of a short sale.

The process of a short sale starts with the listing agent places the home up for sale.  It’s the primarily the responsibility of the seller to request and complete a short sale package from the bank or lender.

Short Sale Sellers need to prepare the following documents and information to the bank:

• A Hardship Letter- outline exactly why you are requesting a short sale
• A financial statement and budget outlining your income and expenses
• The most recent 2 months of paycheck stubs.
• The most recent 2 months of bank statements
• The past 2 years income tax returns
• If you are self-employed, include 6 months of Profit and Loss statements.
• The listing agent may also require additional information: Current copy of mortgage statements, copies of HOA statements and an authorization form signed by the sellers to allow the listing agent to communicate and negotiate with the bank on the seller’s behalf.

The short sale process begins when an offer to purchase is received from a qualified buyer.  The offer is submitted to the bank for final approval and can take from a few weeks to months.  A successful short sale depends on several factors:

• Is the offer solid?
• The buyers can obtain financing
• The seller has completed and accepted the hardship package showing the bank that there is a true financial hardship
• The knowledge and communication skills of all the agents involved
• The BPO/Appraisal ordered by the bank
• The patience and determination of all the parties

To ensure a smooth transaction, the buyer’s agent needs to also be knowledgable about the short sale process.  Here are some key points to make sure the buyer’s are on the same page as the agent:

• What is the buyer’s time frame to buy a home?  Will they be prepared to wait several week’s to purchase the home?
• Are the buyers interest rate sensitive?  If rates go up, will it negatively impact their ability to get a loan?
• Are they aware of the number of obstacles to get an approval from 2 separate banks to be cleared prior to closing.
• Strengthen the offer by having a pre-approval letter (not a pre-qual) and show a proof of funds letter from the buyer’s lender.
• Are their multiple offers on the property?  Remember that the bank wants to yield the highest net possible.
• Make sure to include the short sale approval contingency/addendum clause and a due diligence time frame to begin after short sale approval by the bank.

The Short Sale Offer

Situation: You made an offer on a short sale property but are aware that multiple offers have been received.  Now you’re wondering what is the process and do you stand a good chance in getting the home that you’ve been waiting so very patiently for.

Short sales are very much a hurry up and wait game.  Your real estate agent is responsible to communicate with the selling agents, who in turn are responsible for staying in touch with the bank.  Unfortunately, some selling/listing agents have no experience with short sales which can hinder the process.

Ask your agent to ask the seller’s agent if the seller signed more than one offer.  The seller may accept in offer as a back up.  By law the real estate agent has to submit all the offers, regardless of price or any other factor.

After the offer is submitted to the bank, it will be assigned to a loss mitigation officer at the lender or bank.  A BPO will be ordered by the bank which will help the bank either approve or deny the short sale offer.

Holding up the 2nd Mortgage

A problem with a 2nd mortgage can hold up or ruin your short sale.  Second mortgages and their short sale resolution have different rules vs.  a short sale with only one mortgage.

Issue #1 – The “Under the Table” payment

Increasingly, a number of second lenders are holding up the transaction in attempt to flush out more money.  If the seller has no more money to give and the first lender has no more money to lose, then sometimes the brokers or the buyer can contribute to pay the 2nd lender.  Although, the problem is that the payments to the 2nd mortgage are not authorized by the first lender.  The best practice is to get the 1st lender to approve the payment.  It will take longer but a smart loss mitigator for the lender will get it approved.

Issue #2 – Failed contract

Sometimes both lenders will approve the short sale, but the buyer walks from the deal or the first lender has a problem with it, or you still need the 2nd lender to approve the short sale.  Sometimes all it takes is a call to the 2nd lender.

Issue #3 – Conflicting appraisals

If the 2nd lender has a problem with a short sale when there is an appraisal or BPO higher than the 1st lender, there can be a problem.  Do a careful examination of the BPO’s and discuss with both lenders to see the problems…are there differences with square footage, etc?

Dealing with a 2nd mortgages can take some time with 2nd mortgages.  Don’t leave the 2nd mortgagee for the end of the process with the assumption that it will fall in line and go away.

Lender’s Decision Process

Hopefully the short sale package has been submitted to the lender, with documentation of the inability of the homeowner to make their mortgage payments.  The lender should receive a clear picture on the numbers supporting the documents that the borrower is heading toward foreclosure and/or bankruptcy.

What does a lender do with the package?  The numbers are analyzed and verified.  The borrower’s ability to pay the mortgage is calculated with these new numbers.  The lender then will derive a value of the property and compare that value to the amount due on the mortgage and offer from the purchasing party.

The average cost of foreclosure runs around $50,000, so there is a bit of an incentive for the lender to consider a short sale offer if the numbers work.

If  the lender sees the possibility in recouping more of their investments from the short sale route, they may approve it.  It will be less costly, and completed sooner than a foreclosure.

Many times a lender will commission a real estate broker to do a “drive-by” BPO and won’t enter the home.  So, if there are any repairs needed, you need to make sure the lender knows about them.  Although, the lender (most of the time) will request you purchase the home as is.

Tags: bpo, loss mitigation, real estate agent, Short Sale Offer, short sale process