Even after all these years, the short sale process remains a mystery to many people. Distressed sellers are puzzled and desperate for some guidance from a short-sale agent. Even more confusing… most real estate agents in Orlando don’t know how to do a short sale.
What’s a Short Sale?
A short sale is a situation that occurs when a mortgage lender agrees to accept a lesser amount than what’s owed on the outstanding mortgage balance. This situation benefits both the lender as well as the seller [homeowner] when foreclosure seems unavoidable.
By agreeing to a short sale, the lender can avoid a long drawn out and costly foreclosure process. Because even if the bank forecloses, there’s no guarantee that it will sell at the auction in which case the lender would end up back with the property as an REO [real estate owned] property. If the lender keeps the property, they will ultimately have to put it up for sale again, and there’s no telling how much they will get or how long it will take.
The dollar amount offered on a short sale is often more than a lender would receive at the auction or as an REO listing. However, you should know that banks are never thrilled about releasing mortgage obligations at huge discounts either.
There are 2 main reasons why lenders grant short sales. First, the homeowner is going through a financial hardship and cannot continue paying the mortgage. Secondly, there isn’t enough equity in the property to pay off the mortgage and closing costs, taxes, etc. Both of these conditions must exist for a bank to approve a short sale.
A few examples of financial hardship may include loss of employment, reduction in income, divorce, medical condition, job transfer, bankruptcy, or even death.
Sellers must prepare a financial package so they can submit it to their lender. Every bank has a different short sale package but the basics are the same among all lenders.
The Short Sale Package
Following are the main components of a typical short sale package:
- Authorization Letter: This is a document which allows your short sale agent to speak with your lender on your behalf.
- Hardship Letter: A detailed letter describing the hardship the seller is going through explaining why they can no longer afford the mortgage.
- Preliminary Closing Statement: Discloses the contract amount, realtor commissions, closing costs, taxes and any other fees involved with the transaction.
- Financial Statement: A statement which discloses your income versus your expenses.
- Two years of your tax returns
- Two years W-2s
- Last two bank statements
- Two months of pay stubs
- CMA: This is a report prepared by your short sale agent which lists recent sales of comparable homes in your area.
Submitting an offer to the Bank
Before submitting a short sale offer to the lender, buyers should ask their real estate agent for a list of comparable properties. The lender will look to get an offer that’s close to market value.
It’s important to keep in mind that the listing price on a short sale may not reflect the market value. The property will most likely be lower than market value to entice more buyers to make an offer. Most short sales begin when there’s a signed and accepted purchase offer by the seller and buyer.
Keep in mind that the short sale listing price might not reflect market value. The property might be priced below comparable sales to encourage multiple offers. Some short sales can begin before an offer but banks will most often start the procedure upon receipt of an accepted purchase offer.
Once the seller accepts the offer, the listing agent will then send the listing agreement, signed purchase offer, and proof of funds to the bank together with the completed short sale package.
If the package is incomplete, the lender won’t even process it. This is why it’s so important to have an experienced short-sale agent representing the seller.
The Short Sale Lender
Short sales are anything but short… buyers can end up waiting several months to get a response from a lender. The short sale listing agent must follow up with the bank regularly and keep detailed notes of each contact. Being a short sale agent in Orlando since 2004, I can tell you that following up regularly with the lender is crucial to the success of a short sale transaction.
I can’t tell you the number of times a buyer has decided to cancel their offer because of the bank taking too long to respond. This is especially true when the buyer needs to buy a house ASAP. For buyers wanting to close quickly, a short sale may not be the best option for them.
The Usual Process
Once the lender receives the completed Short Sale package, this is usually what takes place on the bank’s end:
- The loss mitigation dept acknowledges receiving the completed package. This alone can take between 1 – 3 weeks.
- A short sale processor is assigned to the file, this can also take up to a week or two.
- A BPO aka [Broker’s Price Opinion] is ordered. The lender will contract a local realtor to give their opinion on what the property is worth. They do this by looking at the comparable properties in the area and are supposed consider any repairs the home may need.
- Another short sale processor maybe assigned to the file. This can add another week or 2.
- A second short sale processor might be assigned. This can take another 30 days.
- The offer is either denied or accepted. If the offer is denied, the bank will counter with the amount they are willing to accept. At this point the buyer may wish to counter the bank’s offer together with a contractor’s estimate and a CMA.
- Once the bank has accepted the offer, the lender will require all parties in the transaction to sign an arm’s length affidavit. This document states that parties are unrelated and acting their own best interest.
- The lender will send out a short sale approval letter approving the contract amount.
While all this is going on, sometimes buyers will give up hope and cancel. They become tired of waiting because the short sale process is taking much longer than they expected. I’ve had situations with clients where buyers just walk on the deal without even telling their real estate agent.
I’ve had some Orlando short sales get approved in two weeks and others take more up to 6 months on average. A top short-sale realtor can help speed up this process, but at the end of the day, it’s all up to the lender. Some lenders are easier to work with than others.
It’s crucial that the short sale agent check-in with the short sale bank at least once or twice a week. Unfortunately, there are many incompetent short sale processors and the short sale agent may have to go over the processor’s head or request an “escalation”.
A good short sale listing agent will often have a good idea about when approval will come after the file has been sent for the bank’s final review. If so, the buyer would be wise to start the loan process if they haven’t already. Occasionally, banks will only give buyers 2 weeks to close so it’s important to be ready.