Guide to Short Sales
The short sale process is still a mystery to many people, even after all these years. Lots of buyer’s agents are confused; puzzled buyers are looking for direction, and not every short sale listing agent knows how to do a short sale.
The Basics of a Short Sale
Banks grant short sales for 2 reasons: the seller has a hardship, and the seller owes more on the mortgage than the home is worth.
A few examples of a hardship are:
Unemployment / reduced income
Job transfer out of town
The seller will need to prepare a financial package for submission to the short sale bank. Each bank has its own guidelines but — with the exception of Wachovia, which is the best short sale bank in the world — the basic procedure is similar from bank to bank. The seller’s short sale package will most likely consist of:
Letter of authorization, which lets your agent speak to the bank.
HUD-1 or preliminary net sheet
Completed financial statement
Seller’s hardship letter
2 years of tax returns
2 years of W-2s
Recent payroll stubs
Last 2 months of bank statements
Comparative market analysis or list of recent comparable sales
Writing the Short Sale Offer and Submitting to the Bank
Before a buyer writes a short sale offer, a buyer should ask his or her agent for a list of comparable sales. Banks are not in the business of giving away a home at rock-bottom pricing. The bank will want to receive somewhat close to market value. The short sale price may have little bearing on market value and may, in fact, be priced below the comparable sales to encourage multiple offers.
After the seller accepts the offer, the listing agent will send the following items to the bank:
Executed purchase offer
Buyer’s preapproval letter and copy of earnest money check
Seller’s short sale package
If the package is incomplete, the short sale process will be delayed. In this event, the bank might even shred the package.
The Short Sale Process at the Bank
Buyers may wait a very long time to get a response from the bank. It is imperative for the listing agent to regularly call the bank and keep careful notes of the short sale process. Buyers may get so tired of waiting for short sale approval that they may feel the need to threaten to cancel if they don’t get an answer within a specified time period.
That type of attitude is self-defeating and will not speed up the short sale process. If buyers are the type with little patience, perhaps a short sale is not for them.
Following is a typical short sale process at the bank:
Bank acknowledges receipt of the file. This can take 10 days to a month.
A negotiator is assigned. This can take 30 to 60 days.
A BPO is ordered. The bank probably will refuse to share the results of the BPO.
A second negotiator may be assigned. This can take another 30 days.
The file is sent for review or to the PSA. This can take 2 weeks to 30 days.
The bank may then request that all parties sign an Arm’s-Length Affidavit.
The bank issues a short sale approval letter.
What is a short sale?
Although, the "arrangement" can take many different forms, there is no other definition of a short sale. I say this because many realtors and some investors simply throw the term around as if it meant "a sale under market value." No. A bank owned (foreclosed) house is not a short sale. A seller deciding to lower their price and take less profit is not a short sale. An old lady that owns her home free and clear, selling a $150k home for $75k, IS NOT A SHORT SALE. For it to be a Short Sale, someone must be getting "shorted." Either the seller, or the bank. I will explain how both of those happen in more detail presently.
Another important definition of a short sale is how it differs from foreclosure. In foreclosure, the homeowner falls way behind on their payments and the bank repossesses the house and sells it. In almost all cases, THE BANK PURSUES THE HOMEOWNER FOR THE DEFICIENCY!!! No one seems to know or believe this, but just ask someone who has gone through foreclosure, they will tell you the only way out of this was to file bankruptcy.
How did we get to this place in the first point?
A short sale can come about for many different reasons. In my wife’s case, she was the owner of the house and had been making payments. We bought an investment property and put it solely in her name to protect our family in the event that the market took a turn for the worse. It did. We owed 590k, but the best offer we had after 6 months was 550k.
Despite popular belief, YOU DO NOT HAVE TO BE BEHIND ON YOUR MORTGAGE TO REQUEST A SHORT SALE. You just have to demonstrate that your house can’t be sold for what you owe.
In other cases, short sales happen when a seller can’t afford to make their payments and is nearing foreclosure or bankruptcy. It makes life much more complicated if you are living in the house in question. The bank’s ability to scare you is much greater in that case. In this case, a short sale is only slightly better than the alternatives. You will still lose your house, and your credit is still destroyed just because you’ve made 4-5 late payments on your mortgage.
A final note on how the short sale can come about… Most banks will not agree to a short sale in writing until you have a formal offer. You can simply call your bank and ask them if you could do a short sale at a certain price and they might say "sure, no problem, we’d be happy to facilitate that offer." BEWARE. That doesn’t mean a thing. Before your short sale is APPROVED, you’ll have to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender.
Once this huge packet of information is submitted to the lender, you will most likely hear back in 1-4 weeks on the TERMS of their "approval." Be warned their approval will most likely be thinly disguised attempt to collect their debt and will almost never be the "write off" you were hoping for.
Why is the number of short sales rising?
A short sale can also be the best option for a homeowners who are upside down on mortgages because a short sale may not hurt their credit history as much as a foreclosure. As a result, homeowners may qualify for another mortgage sooner once they get back on their feet financially.
What challenges have short sales presented for REALTOR?
Many REALTORS are new to the short sales process; a difficulty which is compounded by many lenders’ lack of sufficient and experienced staff to process short sales. Even if the REALTORS are experienced, most servicers are under-staffed and still not adequately trained, making negotiating a short sale particularly difficult.
Absence of a uniform process and application
Until HAFA guidelines were established, both short-sales documents and processes were lender-specific, making it very difficult and time-consuming for REALTORS to become knowledgeable and efficient in facilitating these transactions.
When more than one lender is involved, the negotiations are much more difficult. Second lien holders often hold up the transaction to exert the largest possible payment, in exchange for releasing their lien, even though in foreclosure they will get nothing.
As a result of these challenges our members have reported difficulties with: unresponsive lenders;
lost documents that require multiple submissions, inaccurate or unrealistic home value assessments, and long processing delays, which cause buyers to walk away.
3 Reasons Why a Short Sale Is Better Than Foreclosure
What not many Realtors or advisors are willing to admit from the very beginning is that when a homeowner is in debt, both the foreclosure and a short sale can have a devastating impact on the credit history. However, choosing the lesser of the two evils is important. Its natural for sellers to be concerned about the impact of a short sale on their credit score. Who wouldnt?
As a homeowner who is facing a foreclosure, don’t expect that a short sale will not leave any marks on your credit record. But keep in mind that a short sale will affect your credit score for a shorter period and that you have better chances to buy a home again soon. Here are three issues that affect you the most.
Every state has different regulations on credit ratings but most often realtors talk about 80 to 100 point decrease in credit score due to a short sale. The score may be a little higher or lower depending upon other variables affecting the credit score as well. In case of a foreclosure, the credit drops by over 250 points! Even if you start off with an excellent 800 points credit, once you get a foreclosure on your report you will end up with 550 points, which is poor and hopeless.
What I find to be the biggest difference between foreclosure and short sale is that a short sale allows the purchase of a new property in case the owner does not miss any mortgage payments, has not signed a promissory note or a deficiency judgment has not passed. In case of any one of the occurrences, a homeowner has the freedom to buy a house within two years. On the other hand, if the homeowner signs a foreclosure, about 5 to 7 years are needed to apply for a new mortgage. And as if that wouldnt be enough the borrowing terms for the new mortgage may become tighter as well.
A big minus that foreclosure carries is the deficiency judgment and that makes a short sale to be a better option. The chances of deficiency judgment with a short sale are lower compared to a foreclosure as the lender agrees on solving the problem together. This implies that the bank is not acquiring the property in a short sale and the homeowner is selling it to a buyer which he would do otherwise. And thats very important when thinking of your future financial security!
The decision is up to you in the end. But before making it think of what now affects you the most and most importantly, what will affect you in the future: your credit score, the period in which you wont be able to buy another home and the deficiency judgment.