The Short Sale Process Simplified

You hear a lot about short sales these days. If you are a buyer, chances are you have come across several short sale properties that are listed on the market in your area. In fact in some condo buildings or subdivisions, there are many properties that are short sales, especially if they were purchased during 2004 through 2006 when the market was at its height.

Definition of Short Sale

A short sales occurs when the seller owes more on their mortgage than their home is worth in today's market. The seller's lender must approve the sale to the new buyer before the transaction can take place. The seller's lender will write off the unpaid balance of the loan deducting the sale price from the mortgage balance. The seller then owes nothing and can walk away from the home.

Short Sale Process

First step in a short sale process contacting the lender to see if the property qualifies for a short sale. If the owner/borrower has other assets which would enable them to pay off their mortgage, then the lender will not approve the short sale and could get a deficiency judgment against the homeowner for the difference of the amount owed on the loan and the sale price of the home. Working with a short-sale savvy investor is key in getting your short sale approved with no deficiency judgment.

If the property does qualify, then the owner will generally contact an investment company to work with directly or list it with a Realtor and have the Realtor market the property for sale to potential buyers. Once an offer is negotiated between the seller and the buyer/investor, the offer will be presented to the seller's lender for approval. There may be more than one offer presented to the lender, and the lender can choose the highest and best offer.

Who Qualifies for a Short Sale?

A seller that can prove a financial hardship and substantiate why they cannot make their current mortgage payments as a result of a job loss, wage reduction, an illness or divorce generally will qualify for a short sale providing they do not have other assets that would enable them to pay off their mortgage. A decline in home values is another reason why the seller would not be able to sell the home other than in a short sale because they would not be able to get enough money from the proceeds of the sale to pay the mortgage balance off.

Information to Provide the Lender

The lender will require a hardship letter and proof of the financial hardship such as copies of the last two paycheck stubs of the homeowner, two months bank statements, last two year's tax returns and copies of W-2's or 1099's. They will also need a copy of the brokerage listing agreement and the purchase and sale agreement, and both will require the lender's approval before the sale can be completed. If the attorney or other third party is going to negotiate the short sale, then the seller will need to sign an authorization letter allowing the lender to negotiate with the third party on their behalf and submit that with the other documentation referenced above.

Time Frame

A short sale approval can take on average anywhere from 60 days to 90 days or longer. The lender may counter the buyer's offer and want more money so the buyer should be prepared that even though the seller accepted the buyer's offer it is contingent on the lender's approval. The buyer will need to be patient. Many short sales fall apart before the lenders have even assigned a negotiator to the property because the process take so long the buyers find other properties or just get tired of waiting.

Advantages

The advantage of a short sale is that the owner can save their home from foreclosure and their credit. The seller simply walks away at the closing not owing any money on their mortgage. Of course, they have lost their equity in the property by that time. A foreclosure costs the lender on an average $50,000 so it is smarter for the lender to approve the short sale and save the time and money of going through a foreclosure proceeding. The buyer/investor generally gets to purchase a property at or below market value. It's a win win situation for all parties.

Disadvantages

The biggest disadvantage of a short sale is the time involved. If the seller is too far behind in their mortgage payments, there is a possibility that the home will go to foreclosure anyway even if the lender says the property qualifies, if there is no offer from a buyer to purchase the property within the time frame needed to stop the foreclosure. There is no guarantee that the lender is going to approve the buyer's offer anyway, and the home may still go to foreclosure.

Many Realtors do not like to show short sale properties because there is such a long waiting period for the transaction to be approved and for the Realtor to get their commission. It may take longer for the seller to find a buyer for their property if buyers and Realtors are hesitant to look at short sale properties. Generally investors are good candidates for short sale properties because they have the time and patience to wait for the lender's decision. Even so about half of the short sales under contract don't close because either the buyer walks away or the bank and the buyer/investor cannot agree upon a purchase price acceptable to both parties.

However, a short sale is a much better alternative for the seller than simply waiting for the lender to foreclose on the property.