The first thing to understand about a short sale is that unlike a traditional equity sale there is an all-important 3rd party that controls the fate of the deal: And that’s the lender. In order for a short sale to occur, the lender or lenders must approve the transaction. This involves 3 items for their consideration:
- Can the current owner show sufficient financial hardship to prove that he cannot pay his mortgage?
- Is the price offered consistent with comparable sales in the area? Obviously the bank wants to re-coup as much of their investment as possible.
- Will the bank or investor agree to settle for less than the amount owed, or will they choose to foreclose?
Step #1 - Pre-Qualification
Before taking a short sale listing it is the job of the Realtor to understand the financial requirements and pre-qualify the seller. This involves having the sellers complete a financial worksheet and reviewing their income and assets. Whether buying or selling, this is a critical step and one reason why working with an agent that is experienced in short sales is important. If the sellers don’t financially qualify, there is no point going any further.
Step #2 – It’s all about the Documentation
Once it has been determined that the sellers qualify, the Realtor or qualified short sale negotiator, will contact the seller’s lender and determine the exact requirements for submission as they are all slightly different. It will also be determined at this point if the lender participates in the government HAFA (Home Affordable Foreclosure Alternatives) program as there may be incentives for both the sellers and the lender, and certain procedures may be streamlined. In any case, the Realtor will work with the sellers and collect all the necessary documentation. This will include:
- A statement of general information
- Financial worksheet
- Handwritten letter explaining their hardship Hardship letter
- 2 months pay stubs or year-to-date Profit and Loss statement if self-employed
- 2 months bank statements
- Tax returns for the last 2 years
- Most current statements for all retirement accounts or other assets
- Authorization form to allow the Realtor or negotiator to speak with the lender.
Step #3 - Selling the Property
The house is listed for sale as a short sale. Both listing and selling agents must agree to equally split whatever commission the lender decides to pay. Once an offer is received the Realtor should carefully examine it and make sure that it is an offer the lender is likely to accept; the price should be consistent with comps; the offer must not be contingent on the sale of the buyer’s home; and the buyer must understand that it is unlikely that the lender will pay for any termite work or other repairs.
Step #4 - Submission of the Short Sale Package
The listing Realtor or negotiator submits everything to the lender for approval of the short sale and the listing is noted in the MLS as “Contingent”. Again, it is important to have an experienced Realtor who makes sure that the submission is not only complete, but that it is packaged neatly and easy to read and understand.
The package goes to a special department at the lender where it is reviewed. If there is any documentation missing or unclear, they will request additional information. Unfortunately, even this initial review can sometimes take 4 weeks or longer and often paperwork disappears and duplicates must be supplied.
Once this initial review is completed and the package confirmed as complete, a negotiator representing the lender will be assigned. It is the job of this negotiator to carefully review the file and make a recommendation as to whether it should be approved, or not. If there are 2 lenders (as in a 1st and 2nd mortgage), this entire process must be completed for both lenders.
Step #5 - Negotiation
During the review and negotiation process, the lender’s negotiator may counter specific items in the offer including the purchase price and the requested commission. In the case of the second mortgage holder (who stands to lose the most), they may push for a bigger contribution from the 1st lien holder as they can no longer request that the buyers make a financial contribution. Again, this is where experience counts. The seller’s Realtor or negotiator should be in communication with the lender’s negotiator several times a week, working to move the deal along and arrive at terms that are favorable to the seller and buyer. This part of the process can drag on for weeks, or even months, although some lenders have streamlined the process. Also, keep in mind that many of the 2nd mortgage holders won’t even begin the review process until the 1st lien holder has approved the sale.
Step #6 - Approval
If the lender’s negotiator recommends approval, the file goes to upper management or the investor for final approval. Generally speaking, if the file makes it this far, it is usually approved. But again, this final leg of the process may take an additional two or more weeks.
And finally, the letter everyone has been waiting for – the approval letter. Assuming all terms are acceptable to sellers and buyers the sale will now proceed as a “normal” sale. The approval letter will stipulate a date by which the sale must close or the approval is no longer valid, usually 30 days. Hopefully the buyer has hung-in during the approval process, and at this point the clock starts ticking for buyer inspections and contingency removals.
Navigating a short sale as either a buyer or seller can be overwhelming. Making sure you’re working with an experienced Realtor is the best way to protect your interests.