Taking the Mystery out of Short Sales

What exactly is a short sale?  You hear that term a lot on the news, but what exactly does it mean, and how does it work?

There are two reasons why banks are willing to grant a short sale.  The first is hardship (unemployment, divorce, medial emergency, death, bankruptcy).  The second is when the seller is upside down, or owes more than the home is worth.

Getting a short sale approved by the bank involves putting together a financial package.  This package would include all the pertinent information, such as; Letter of Authorization (allows your agent to speak to the bank), HUD-1 or preliminary net sheet, letter of explanation of hardship, a completed financial statement, tax returns, W-2s, payroll stubs, bank statements, and a comparative market analysis for the property.  It is very important that all the information the bank requested is returned accurately and completely.

Your short sale has been approved, now what?

Now your home is placed on the market just like any other listing.  The process is the same as a normal transaction, except the bank must also approve any offer you agree to.  Once an offer has been negotiated, the listing agent must provide to the bank the listing agreement, the executed contract, the buyer’s pre-approval letter, a copy of the earnest money check, and the seller’s short sale package.  Banks have been known to take weeks to respond, and inaccurate paperwork only slows down the process.

The Waiting Game

It is typical for buyers to get antsy and start issuing deadlines once the wait has become too long for them.  However, this will not change what is happening at the bank.  For buyers and sellers alike, waiting on the bank requires a lot of patience.  It is a good idea for the listing agent to call the bank weekly and take notes of how the file is progressing.  The following is an example of the typical short sale offer process once an offer is submitted.

• Bank issues an acknowledgement of the file (1 week – 1 month)
• A bank representative is assigned to the file (1-2 months)
• A BPO (Broker Price Opinion) is ordered
• The file is sent for review (2 weeks – 1 month)

Bank requires that all parties sign an ‘Arm’s Length Affidavit’ (document that states no person in the transaction is a family/friend/business associate of the sellers, and  there are no secret agreements being made to benefit the sellers)

The bank issues a short sale approval letter

If after all this the buyer is still hanging on, you probably have a deal.  Unfortunately, many choose to ‘cut bait’ prior to the bank finishing their processes.  A lot of times, the listing agent will be able to get an idea of when the file will be ready to close at the point that they bank sends it for final approval.  This is generally when the buyer gets their loan finalized and ready to close.

If you are a borrower and have experienced a hardship that is affecting your ability to pay your mortgage, the best thing to do is call your lender.  Many times, they are able to put together a loan modification program for you.  But if not, you would much rather have a short sale on your credit than a foreclosure.

According to the National Association of REALTORS®, in less than 30% of foreclosures were the banks ever called to look into loan modification, short sale, etc.  Hopefully none of this will happen to you, but if it does, at least now you will have some idea of what to expect.  Remember your mom telling you that patience is a virtue?  In this instance, it is a virtue that will serve you well.

About the author: Kimberley Kelly has been helping sellers in the Palm Springs valley avoid foreclosure for the last 5 years. You can learn more about Kim by visiting her Palm Springs real estate website and reading some of her La Quinta real estate blogs such as “Getting Your Home Ready To Sale“.