I worked with various Real Estate Investors before I decided to become a Realtor. Thus, I learnt all about short-sales; the processes, the negotiations; the marketing and sales; from the ‘real experts’. I have seen short-sales evolve from a taboo to an accepted norm. I have heard people say ‘Everyone is short-selling their houses. So we should too’
What is a short-sale?
Markets slumped in 2008. Property values took a dip. In many instances, the depressed house value was lower than the mortgage on the property. People had to sell their homes for various reasons. But they could not get a price to cover their mortgage. They had to convince their lenders to accept less than the amount owed.
Outstanding mortgage balance: $ 250,000
Depressed Property Value: $ 200,000
If Homeowner were to sell, he would only get $ 200,000, which is not enough to pay the outstanding mortgage of $ 250,000. Thus, he would have to convince the Lender to accept less than the outstanding obligation.
Thus, a real estate short sale is any sale of real estate that generates proceeds that are less than the amount owed on the property.
Who can short-sale:
There are 2 basic attributes to do a short-sale.
- No/Less Equity
- Seller Hardship
- Sometimes, rich homeowners short-sale too. If the Lender determines there is no proof of sufficient hardship, they may still proceed with short-sale; BUT he seller may be asked to financially contribute to the deal, bring cash to closing or sign a promissory note to repay part of the shortfall after the closing. The bank may agree to cancel most of the shortfall but not all of it.
But mind you, every Bank… and even negotiator/underwriter within a Bank…. has their own opinions. Something that worked one time may not work with another and vice versa.
This is the best case scenario process
– Seller lists the house with a Listing Agent.
– Seller readies the short-sale package for the Bank. This includes Seller financials, pay stubs, bank statements, hardship letter, 3rd party authorization and other forms as requested by Bank.
– Once an offer is received, Listing Agent or attorney or an outsourced short-sale processing company (Let’s call the short-sale negotiator as the 3rd party for simplification) sends the Listing agreement, Executed purchase offer, Buyers preapproval and earnest money copies, Sellers short-sale package.
– Bank acknowledges receipt of file.
– A home support specialist maybe assigned who is initially the intermediate between 3rd party and Bank negotiator. Support specialist checks for correctness of documents. In other cases, a Negotiator is assigned directly.
– BPO is ordered (Broker Price Opinion). Under this, Bank contacts BPO providers who send their sales agent to determine the potential selling price or estimated value of a real estate property.
– A 2nd negotiator maybe assigned.
– File is sent for review to investors (who own the mortgage)
– The Bank issues a short-sale approval letter.
Above is a fairy-tale process. Many obstacles like files getting lost, couple of BPO’s and even formal appraisals, 3rd-4th-5th or more negotiators, high BPO’s and renegotiations, more than 1 lien-holder and further negotiations, buyers cancelling and restarting processes from scratch and much more into that mix.
How long does it take to get short-sale approval?
This is the million dollar question. Unfortunately, there is no guarantee of a short-sale approval. Most REO listings (foreclosed listings) have a history of being listed as a short-sale previously. Naturally, the short-sales didn’t go through; and hence the foreclosure.
However, for the sake of an answer, it can take anytime between 30 days to forever. ( Especially FHA mortgages take longer). I had one FHA short-sale that closed after 5 years! But the good part is: we did have a successful short-sale and a happy ending!
A lot of times, the compensation is not as much as the efforts involved in navigating the short-sale. This may lead to uninterested 3rd parties who do NOT do as much follow-up; thus delaying the process.
Is it simple?
Yes and No.
If you can prove hardship/no equity, it’s a conventional loan, offer price is around the market value AND you have a competent short-sale negotiator working for you; than answer is YES
Everything opposite to above; than answer is NO. Sometimes there are more than 1 mortgages involved (HELOC, other liens) which make the process more complicated.
Should you do a short-sale?
I get that often.
But as a Realtor, it does not fall under my prerogative and I advise anyone thinking such to take professional legal and tax advise on the matter.
Just some benefits of short-sale are:
- You save yourself from the ‘F’ word stigma; foreclosure
- Judgements can often be negotiated between seller and short-sale lender
- Loan applications typically do not require you to include information about short-sales. However you are required to answer ‘Have you ever had a property foreclosed upon’?
- Up until December 2016, the Mortgage Forgiveness Debt Relief Act was into play; which exempts homeowners from having to pay taxes on forgiven mortgage debt. As of today, the Act has expired and we do not know if it will be renewed in future.
Conclusion and Tips:
I have to stress here that it is imperative to have a good short-sale negotiator (Whether it’s the Listing Agent, Attorney or the Outsourced servicer). Someone who knows how to operate the process and who will not give-up on the file even when its future looks blurry. A good short sale agent can help to speed up the short sale process by staying on top of the file and holding the bank accountable. Checking in with the bank at least once a week is imperative. Recognizing the behavior of incompetent negotiators and requesting a replacement is often necessary as well. Choose someone who is Never afraid to escalate.
Though the article is long, it is lacking the depth and width of what a short-sale may entail. If you know anyone who might need advice on short-sales, feel free to direct them to me. I may be able to help!