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Modern homebuyers will inevitably come across one or more
properties currently classified as a short sale. A short sale is an attempt by the current owner to sell a home in lieu of the bank taking it back through foreclosure proceedings, thus partially salvaging their credit rating and lifting the burden of a heavy mortgage debt. The entire short sale process hinges on the hope the bank will take a loss now, approve the sale and eliminate the costly process of foreclosing clearing and reselling a home. Obviously this is a BIG Hope on behalf of prospective homebuyers as well and they need to understand some things in order to lessen the chance for disappointment of unapproved short sales.
This is what you should know!!!!!!!!!!!!!!!!!!!!!!
1) Price is usually set by the agent & seller, not bank - The agent & seller often create a very low asking price in order to attract buyers. The bank is normally unaware of the asking price; however, the bank has the final say in what an acceptable offer will be. Since the bank has the power to ultimately accept or deny offers, their lack of price awareness often leads to the process taking longer than anticipated. The bottom line is that the buyer needs to remain positive and patient throughout the entire process, sometimes even for months.
2) Loans owned by 1 bank usually better than 2 - If the seller has loans owned by two different banks it is a lot more difficult to approve the short sale. This is something the agent or the buyer cannot control; it simply depends on the willingness of the bank or banks involved. While the reasons are beyond the scope of this guide, buyers should know that when the seller only has loan(s) with one bank the short sale often becomes more buyer-friendly. A savvy Realtor can let you know this type of information.
3) Lowball offers get slow or no response - Remember that the bank is typically unaware of the pricing during a short sale. When lowball offers stream into the bank they are often scoffed at and rejected, giving the prospected buyers little or no feedback. Surprisingly, it may also take painstakingly long to hear back even on good offers due to the high volume of transactions lenders are inundated with these days.
4) Agent must check comparables before submitting offer - The agent must be sure to check recent home sales in the area to give buyers a better idea of the properties that are selling. This will give the agent and the seller appropriate grounds for an asking price that will be more likely to be approved by the bank. Checking comparables will also give the buyer a better knowledge of what price homes in the neighborhood are selling for and ultimately make them a more informed homebuyer.
5) Don't hang your hat on the property - Short sales aren't necessarily "short." It can sometimes be a very long process. Don't get your hopes up for just one property, keep your options open and continue to actively look at multiple properties. Buyers must remain optimistic, the right property will come along. In most areas it is completely legal and risk-free to have multiple offers out at any given time with the proper contingencies.
6) Sellers with other properties or too strong of financials may not qualify for short sale and/or may be asked to pay the difference - Sellers that own more than a handful of properties or have an extremely large net worth will probably not be eligible for short sale. In some cases the seller will be asked to pay the difference of the sale. The seller might even need to sign a promissory note stating that they will pay back all or most of the debt. This has virtually no effect on the buyer as long as the seller cooperates.
7) "Approved" prices are quickest - It is important to remember that short sales are not always timely; however, making an offer on an "approved short sale" can be a quicker process. An "approved short sale" has a price that has already been given the green light by the bank. This could be due to the fact that another interested buyer made an offer that was approved, but didn't end up buying the property. These types of short sales are some of the most highly desirable.
8) Some banks look want strongest buyers, some want strongest offers - The bank has all the power in approving short sales. The bank can pick the most appealing buyer, which may mean different things to different banks. Some banks may prefer the buyers with large down payments while others just want the highest price regardless of down payment. Many buyers want to know if they will get a deeper discount for an all cash offer. This is very hard to predict and one will never really know until they make an offer. As long as the buyer is surrounded by a good team we would advise them to do just that.
9) Repairs are seldom done, credit is more frequent - If there are improvements that need to be made on a home, even if they are necessary to get a loan, it is often unlikely that they will be done. Typically there is some sort of credit issued and the buyer must take the responsibility of fixing anything that is broken.
10) When you get approval, must close on time - During a short sale there is no leniency with the closing escrow date as there often is in a traditional sale. During a short sale, exceptions are rarely made and the buyer must close on time. Because of this, it is important to take care of all loan paperwork immediately after opening escrow. We'd advise buyers to be extra prepared and try to have the loan finalized a few days in advance of the closing date. If there is going to be an issue that will prevent closing on time, a request for an extension will need to be made immediately. If the request is made early enough, many banks will grant an extension but don't just assume it will happen.
Conclusion
Short sales can be a great opportunity to find your new home at a competitive price. A Short sale could also be a major headache that lasts for months. It is important to have a good understanding of the factors that lead to a successful short sale to make it an enjoyable and profitable experience. We hope that these tips will help you to remain positive and optimistic throughout the process.
The 5 Steps to a Successful Short Sale
Published on Wednesday, April 8, 2009, 5:52 PM Last Update: 2 day(s) ago by Loren Keim
Tags: short saleshort saleshome sale
Regardless of whether you are a home owner attempting to get out from under a crushing mortgage payment, or a Realtor attempting to assist that home owner, you’ll need to understand all the steps necessary to get a short sale accomplished.
The short sale process can be long and complicated. The following steps are the most common steps required by most lenders to facilitate a short sale. The length of time to obtain an approval on a short sale request has risen significantly over the past twelve months. Some lenders are actively telling us that they need ninety days to review a short sale request.
One of the challenges of putting a short sale together, whether you are a property owner or a Realtor, is that many buyers are unwilling to wait sixty or ninety days to find out whether or not they’ve been able to purchase a home. There are many properties on the market for sale for a buyer to choose from without having to wait, so we have to entice a buyer to hang in on the transaction.
An additional complication occurs when the home owner has more than one mortgage against the property. There may be a second mortgage that the home owner took out at the time of purchase, or there may be a home equity loan or line of credit the owner used to make some improvement, or any other lien against the property.
Requesting a short sale, in a nut shell, is finding a buyer, negotiating an offer on the home, contacting the lender, obtaining all the documents the lender requires for approval, and then staying in contact with the lender until they approve, deny or counter your proposal.
As I stress in every article I write about short sales, have an expert assist you with this process. Seek the advice of an attorney, Realtor, accountant and any other professional you might require to insure the process is done correctly, and to insure you’re making the appropriate decision for your situation.
Step 1: Contact Your Lender for Information
Most lenders will not approve a short sale until there is an actual offer to negotiate. Banks and mortgage services are typically understaffed and very busy trying to work out situations with other clients who already have offers on their properties. They don’t have the time and resources to analyze every possibility.
However, since short sale approvals are taking considerable periods of time, it makes sense to find out who you need to speak with and what the lender requires the owner or Realtor to supply. In most cases, the lender has a “short sale” package that includes a list of all the forms the lender requires.
Step 2: Market Your Property and Find a Buyer
Marketing a property that requires a short sale may also be a challenge for several reasons. First, you must notify any potential buyers that any offer must be approved by your lender. This will scare some buyers away from your home because they don’t want to wait for someone else to approve the sale. This will attract some investors who believe they can “steal” the home, because they’ve seen on late night television that banks will accept almost any offer. This is simply not true. Although they may get a very good price, they are not likely to “steal” the home in the current environment.
The components of marketing any property successfully include pricing, staging and marketing. Staging is simply presenting your property in the best possible light in order to attract buyers to offer on your property rather than competing properties. Pricing entails carefully selecting the correct asking price in order to attract potential buyers. There are methods to selecting correct price positions based on recent sales and competing properties for sale.
Step 3: Negotiating an Agreement
The typical home requiring a short sale sells for a bit less than other properties. The primary reason for this anomaly is that the buyer must have a reason to go through the pain of purchasing a home through a short sale. Historically, short sale properties sold to investors because they were the few with the fortitude to wait weeks to months to find out whether or not the sale would actually go through.
Imagine the stress of moving to a new home and perhaps a new school district. Consider the stress on your family. Now add to that stress the idea that unlike most real estate transactions, where a buyer knows within a day or two whether or not the owner will accept the offer, the buyer may have to wait several months for an answer. Worse, if the lender accepts the buyers offer, the buyer needs to be prepared to settle and move quickly.
Most buyers who are selling another home need to plan their move very carefully. They can’t rely on the hope that this transaction will settle. They need to be out of their home by a certain date and need a place to move. If they have a sixty day window to move from their home and they won’t find out a response about the short sale from the lender for forty-five days, that gives them little or no time to find another home should this transaction fall through.
Because short sale transactions are typically limited to investors and those who do not “have” to move by a certain date, the pool of potential buyers is smaller than for that of other homes. Enticing buyers to purchase a short sale home over one that doesn’t have the same challenges often requires some consideration in price.
If you’re an owner is this situation, you may be offended at selling your property slightly below market, but please consider that the lender won’t allow you to receive any proceeds anyway, so you’re not taking that direct loss.
An added complication is that many of the owners of homes requiring a short sale are in default on their mortgage or at risk of default. That means that the owner may have to get the home sold more quickly than the typical home in the area. If the Sheriff is locking the doors and auctioning the home in ninety days and the typical market time in a slow market in your area is six months, you need to be priced below the market in order to attract buyers to your property first.
Step 4: Put Together a Short Sale Package for Your Lender
Hopefully, by the time you receive an offer on your property, you’ll already have the full short sale package and you’ll have started filling it out. It is imperative to get this package to the lender as quickly as possible and then to follow up with the lender to make sure they received it and that they are processing it.
Whether you are the home owner, negotiating with the lender directly, or a Realtor or attorney attempting to work on behalf of the home owner, there is a lot of information that needs to be provided to the lender. Some of the information will have to be filled out by the home owner, because it directly involves the home owner’s financial situation. Some of the forms are better prepared by a Realtor, title insurance agent or attorney.
Although every lender is slightly different, the typical documents required in a short sale package include:
1. A Cover Letter
2. An authorization for the Realtor or attorney to speak with the lender
3. Seller’s Hardship Letter
4. Hardship Documentation - Copies of documentation related to owner’s hardship
5. Seller’s Financial Statement or Income, Expense and Asset Worksheet
6. W-2 forms for past two years
7. Two months pay stubs
8. Two to three months bank statements
9. Repair estimate for any necessary repairs to property
10. Agreement of Sale or Contract to purchase the property
11. Realtor’s competitive market analysis
12. Photos of the home (interior and exterior)
13. Seller Net Sheet
14. Payoff statements from any other lenders or liens against the property
15. Preliminary HUD 1 settlement sheet
Other forms that the lender may ask for include:
1. Title search of the property
2. Special forms
Step 5: Start Calling the Lender!
Remember that there are many people in the same situation across the nation. Lenders are swamped with phone calls and packages. When you complete the package, call and email the lender to determine the best method to get the package to the lender. My suggestion is to send it to them in two forms.
If the lender tells you they’d like the physical package by mail, then I would express the package in order to insure the package gets to the lender quickly and in order to insure it is delivered and can be tracked by who signed for it. I would additionally scan the entire package and email it to the same person to whom you expressed the package.
My goal is to insure they have the package and can begin working on it. If the lender asks the information to be faxed, which some are now doing, I would again both fax it and email it.
Expect a Counter Proposal
Hopefully the lender will simply accept the short sale proposal as written and allow the sale to be consummated. Don’t be surprised if the lender refuses the initial offer and makes a counter proposal. Should this happen, you may have to go back to the buyer and ask for more money in order to settle the transaction.
If you are a Realtor, you should be preparing your buyers to understand that this is a negotiation. The lender may accept the deal, or may counter.
Getting to Settlement
As with any transaction, title insurance must be ordered and settlement must be scheduled. In instances where an owner may be behind on their mortgage or may be considering a short sale, a wise move for either the Realtor or home owner would be to contact an attorney, title agent or escrow company to run a preliminary title search of the property. Make sure there are no other liens against the property.
Once a lender agrees to accept a short payoff, the owner needs to be ready to move quickly to complete the transaction.
Loren Keim is the author of several books including “Short Sales: Step by Step” and “How to Sell Your Home in ANY Market”.
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