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There are multiple steps involved in a short sale. If you’re a buyer or seller today, it’s helpful to understand the entire process from the inside out. Here are 10 things you should know about short sales.
What exactly is a short sale?
A short sale isn’t a foreclosure, and the property may not be anywhere near the process of being foreclosed upon. In a short sale, the seller needs to sell their home for a variety of reasons — job transfer, divorce, lost job, inability to make payments, and so on. The current market value of their property is less than what they owe the bank because its value has declined; the seller took out additional loans against the property; or both.
To complete the sale, the seller needs to go to their mortgage lender and ask permission for the bank to take less than they are owed — to get “shorted,” in other words.
In my experience, most banks actually want to work with the seller and approve the sale, as opposed to having to foreclose on the property. If the seller falls behind on their payments and the property heads for foreclosure, the bank ends up owning the property. This forces the bank to be in the business of owning real estate, which isn’t what it’s set up to do, and that costs them time and money.
The bank’s perspective
Imagine if you were owed money by someone and they came to you and asked to pay you back less. You wouldn’t be too happy about it and would only go along with it kicking and screaming, right? Well, the same is true with lenders when a customer needs to sell their property in a short sale. They don’t want to lose money, and they’re going to make sure that a short sale is the best of the worst-case scenarios they’re facing. In doing so, the banks have processes and procedures in place, some more bureaucratic than others. They’ll want a review of the seller’s finances, to be certain they truly can’t afford the payments and that their reason for selling is legitimate.
What does the bank want to see?
In order to decide whether you want to take this financial hit, the bank will require the seller to complete a short sale package, much like a loan pre-approval package when you purchase a home. The package includes (but isn’t limited to): a financial worksheet completed by the seller; the past few months bank statements; last two years tax returns; the last few pay stubs; copies of equity/brokerage accounts; and a hardship letter laying out the seller’s case for the short sale.
Additionally, the bank will want to see a purchase agreement, proof of buyer financing, authorization to speak to a third party (namely the listing agent) as well as a HUD-1 — a closing/settlement statement that lays out the finances of the sale. Finally, the bank wants to have the property appraised to confirm that they are receiving the most money for the home.
Short sale review process
Nearly every bank has a team of “negotiators” who are assigned to review each short sale application and make a decision.
It’s rare that they will accept the short sale package as is. More likely, they’ll ask for a number of things including a counter offer to the purchase price and a reduction in fees/closing costs. If they lower the listing agent’s commission, it’s almost always reduced below 6 percent (but rarely below 5 percent).
Often, the bank will ask the seller to make a financial contribution in order for them to approve the sale. This is generally OK with the seller, and often the seller can agree to a payment plan. Everything is a negotiation here, and the listing agent is generally the one negotiating with the bank on behalf of the seller.
The seller is often required to miss a payment
Many banks will require the seller to miss a payment in order to process the short sale. In essence, the bank is rejecting the short sale and telling the seller to come back and reapply after they’ve gotten behind in their payments.
This happens all the time. If you’re a seller with perfect credit but circumstances require you to sell the property as a short sale, the bank wants you to pay for it by negatively affecting your credit with a 30-, 60-, or 90-day late payment.
This is the most troubling, misunderstood, and backwards part of a short sale and part of the reason why they take so long. This will likely set the seller and the potential buyer back by at least 30 days, and the buyer often walks away, sometimes after waiting 60 days.
If you want to avoid this roadblock, start missing your payments as soon as you know a short sale is inevitable. Yes, you heard me right: I’ve literally advised sellers to stop making their mortgage payments.
Facing up against a foreclosure
This is where things get messy and timing is everything.
If you miss your payments for 90 days, a notice of default is filed and the foreclosure process begins. The foreclosure department is likely a completely different arm of the bank and does not always have any knowledge of the short sale offer.
Sometimes, they’ll work hand-in-hand to delay the foreclosure if a short sale application is in. But, many times, especially if they are so disconnected, the foreclosure department simply forges ahead. I have heard horror stories about a full price short sale offer on the table, yet the bank forecloses.
Have your ducks in a row before going on the market
Prior to listing the property in a short sale, request a copy of the short sale package from the lender. Start with the customer service telephone number; they can usually get you in touch with the loss mitigation department. Find out what’s required to complete a short sale and get everything that the bank needs up front.
A good real estate agent will have every single piece of information available and ready to send to the bank before they list the property. Once an offer is received, they can add the purchase agreement and the closing statement to the package. Short sales take a long time when the seller or real estate agent have an offer but don’t have any of the paperwork ready to send to the bank.
If you’re a potential short sale buyer, ask the listing agent if they’ve made contact with the bank. Have they received the short sale package? If so, are the seller’s documents ready to be submitted? If the answers to these questions are no, or are received with a blank stare, chances are you’re going down a long and rocky road.
Additional places the short sale gets hung up
The banks require a lot of paperwork in order to present the short sale to the negotiator. If they don’t have an absolutely complete package, they won’t send it on. This means that if you’re missing one document or one bank statement has the wrong date, there will be a hold up.
Also, even though it’s 2011, many banks require the packages to be faxed into their system. This means lost pages or missing documents. And the bank, as busy as it is, isn’t likely to call you and tell you what you’re missing. So the listing agent or the seller needs to stay on top of the bank.
Once the package (sometimes 185 pages) is faxed in, a call should be made confirming the fax was received. Within a few days, another call should be made to ensure the package has been assigned to a processor. The processor’s job is to provide the negotiator with everything needed for review. Check with the processor, to see if they’re missing anything and if not, how long it will take to be assigned to a negotiator. Most banks will tell you five, 10, or 21 days. Staying on top of the bank will help speed up the process. As the saying goes, the squeaky wheel gets the grease.
Final step is getting the approval
The waiting game begins once the file is complete and is on the desk of the negotiator. At this point, there is nothing you can do but wait for their decision/negotiation. Once the approval and all the negotiating has been completed, the regular sale/escrow process begins. Be aware that the bank prefers these to be “as-is,” so there won’t be room to add fees, request credits or adjustments. Having said that, I once went back to a short sale lender and requested (and received) a $20K reduction in purchase price due to some serious termite issues that were uncovered during the property inspection.
Advice to buyers, sellers and agents
Whatever role you’re playing in the short sale drama, be patient but persistent. I’ve seen short sales approved in less than 30 days, others in nine months. It all depends on the bank, the seller and the listing agent.
And if you’re the potential buyer, try not to get too attached to a short-sale property. If you don’t get a sense that the listing agent is familiar with the process, or if you realize the agent and seller don’t have their ducks in a row, you may need to walk away — no matter how good of a deal the short sale is
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