I figured I’d put this short article together to help people understand exactly what a short sale is, and some of the very basic information about them.
This is basically “Short Sales 101” information that some of you may already know, but others may need to know. Either way don’t do a Short Sale without having a basic understanding of the short sale process…
The term “short sale” in the Real Estate world basically means selling a home for less than the balance of the loan amount owed to the lender. There is nothing mystic about term really. Just owing more on a home than you are able to sell it for on the open market, and needing the bank’s approval for them to take a loss for the difference should the home need to be sold.
For example: If Joe owns a home that he bought for $300,000 last June and now with market conditions is only worth $250,000, and needs to sell, he will have to get the lender’s approval to sell for that amount ($250K) minus any Realtor commissions, closing costs etc. The sale will be “subject to” lender approval, which means the lender has the final say on whether the home will sell at that price.
Keep in mind that just because Joe “needs” to sell, doesn’t necessarily means he will qualify to sell the home short. The lender is going to “qualify” the sale/owner/situation based on the “hardship” the owner is facing. Joe may be a candidate for a short sale, then again he may not. A borrower simply owing more on a home than it’s current value won’t qualify as a hardship. Hardships usually fall into the range of events like divorce, job loss, ARM payment adjusting, relocation, etc.
Even with a legitimate “hardship” the lender is going to make sure that the Seller/Borrower has no other funds or assets that could be used to pay the amount that will be short. They may also send a 1099 to the borrower for the forgiven amount of the short sale and the borrower may then be taxed on the forgiven amount as earned income (there are many exceptions to this though, see the link at the end of this article).
There must always be a legitimate hardship before requesting a short sale. The lender will require proof of the financial standing of the borrower (w-2’s, tax returns, bank statements, pay stubs, etc.) to verify the that a short sale is necessary, and withholding information is not advised.
The other thing to remember is that some banks will not even discuss their willingness to accept a short sale until you have a contract with a buyer. You can to try and ask the lender about the short sale process when you first identify the need for one, but you may not get a straight answer. At this point you want to request a short sale package that may give you somewhat of a checklist of documents the lender will need with the short sale contract from the buyer. Better to start the paperwork process sooner than later since you may not want to wait around a few weeks until you get a short sale package together, and a buyer’s offer submitted, as this is just another avoidable delay.
Benefits to the Homeowner in Trouble:
If you are a homeowner with a legitimate hardship, and are wondering if a short sale may be your best option, seek the help of a Realtor who does short sales. There is a lot of legwork to do, and most traditional Realtors won’t even know where to start. The good news about utilizing the services of a Realtor is that the headaches, phone calls, and negotiations will pretty much be handled by them, AND you won’t be paying the commission, the lender will as part of the loss!! There isn’t much you can lose in this situation, and for the price you can’t beat it! Plus don’t forget you will need to have a Buyer for the home before you will get the approval for the short sale, so hiring a Realtor is definitely the way to go.
The Short Sale Process:
The Short Sale Process can vary depending on whether or not the short sale is a “traditional” short sale or some other type such as a HAFA Short Sale (Learn more about HAFA Here). So you’ll be familiar with a traditional short sale process, here’s the basic flow and approx timeline for each part of the process working with us:
- Initial Consultation – Typically by Phone or at the property (approx 30 min to 1 hour)- Here we are assessing your situation and gathering necessary information about your particular situation. We will inform you of the pros/cons of a short sale, possible obstacles if any, and lender specific information that you should know.
- Document Collection– Typically via email, fax, or mail (2 Days-1 Week) – After the initial consultation we will assess whether we are willing to work with you to short sale the home (we don’t work with every client) and send you via email a checklist of necessary documents that your lender will require for the short sale. This process can be as fast or slow as it takes to have documentation ready to provide to us.
- Listing the Property– At the Property (1-3 Days) After the Documentation Process is 100% complete and we have everything we need for your lender we will move toward listing the home for sale. This will be the time that we will see the property in person if we haven’t already, draft the Listing Agreement, take photos, customize a marketing plan, place a lock box, sign, etc. on the home.
- Begin Marketing the Home for a Buyer– Typically 1-8 Weeks depending on average marketing time for the area – We work our Marketing Plan to attract buyers for the home (yes, you need a plan!) so we can get a contract on the home to submit to your lender.
- Begin Offer Submission and Short Sale review with the Lender(s)– (Typically 4-10 Weeks) Once there is a contract on the home, the short sale package is created to send to them along with the offer and the estimated HUD1 closing statement. The lender will then order an appraisal and assign a negotiator to the file.
The review process will begin once the appraisal is done and the lender has any other requested documentation. Once they have everything they need the file is submitted to managers and/or the loan investor, or Mortgage Insurance company (if any) for approval. This is the longest part of the process and we follow up with the lenders at least every week to make sure they stay on task as much as possible.
Should there be any issue such as the offer being too low compared to the banks appraisal, buyer walks away, other liens attach/are found on the property, etc. This can add time to this timeline.
- Short Sale Approval– Once the short sale is approved, after any counter offers the bank may have had, or any issues in the previous steps, then you will receive a short sale approval letter that spells out the terms of the short sale. Many are relatively easy to understand, but (we always recommend proper legal and tax advice from professionals in those fields) we always forward a copy to clients for review. If the terms are good then we proceed to begin the contingency and closing process.
- Contingency and Closing Process– (Typically 14-40 days)- This is where (depending on the terms of the contract) a buyer’s inspection period would begin, loan approval process would start, buyer’s appraisal would be ordered, etc. much like any other non-short sale transaction. Typically most contracts in our area start the timeline for the buyer’s contingencies to be the date the short sale is approved although that is not always the case.
Once all contingencies are cleared the closing can be scheduled and the property is sold once and for all. This is the Happy Ending after all the hard work is completed. Homeowners move on with their lives, buyers get their new home, Realtors get paid (our favorite part 🙂 ) and all is well.
I hope that this Short Sale overview has proved helpful and educational. It’s hard to understand the process with so much misinformation floating around. What I’ve found is that a well educated client is a happy client, and my favorite kind of client. If there are any additional questions you might have about short sales, or if you are ready to short sale a home today, then Call Us Today!
We’d be glad to work with you if it looks like we will be a good match. Like I mentioned, we do not take on every client, however it’s certainly nothing personal. Give us a Call Today at (754) 227-2258