Insider’s Guide to Success with Short SalesDate:October 28, 2011 Author:Brendon DeSimoneMany real estate agents steer their clients away from a short sale because they think they take toolong, that their commissions will be lowered, or simply because they don’t know a lot about theprocess and what it takes to get a short sale completed successfully.There are multiple steps involved in a short sale. If you’re a buyer or seller today, it’s helpful tounderstand the entire process from the inside out. Here are 10 things you should know aboutshort sales.What exactly is a short sale?A short sale isn’t a foreclosure, and the property may not be anywhere near the process of beingforeclosed upon. In a short sale, the seller needs to sell their home for a variety of reasons — jobtransfer, divorce, lost job, inability to make payments, and so on. The current market value oftheir property is less than what they owe the bank because its value has declined; the seller tookout additional loans against the property; or both.To complete the sale, the seller needs to go to their mortgage lender and ask permission for thebank to take less than they are owed — to get “shorted,” in other words.In my experience, most banks actually want to work with the seller and approve the sale, asopposed to having to foreclose on the property. If the seller falls behind on their payments andthe property heads for foreclosure, the bank ends up owning the property. This forces the bank tobe in the business of owning real estate, which isn’t what it’s set up to do, and that costs themtime and money.The bank’s perspectiveImagine if you were owed money by someone and they came to you and asked to pay you backless. You wouldn’t be too happy about it and would only go along with it kicking and screaming,right? Well, the same is true with lenders when a customer needs to sell their property in a shortsale. They don’t want to lose money, and they’re going to make sure that a short sale is the bestof the worst-case scenarios they’re facing. In doing so, the banks have processes and proceduresin place, some more bureaucratic than others. They’ll want a review of the seller’s finances, to becertain they truly can’t afford the payments and that their reason for selling is legitimate.What does the bank want to see?In order to decide whether you want to take this financial hit, the bank will require the seller tocomplete a short sale package, much like a loan pre-approval package when you purchase ahome. The package includes (but isn’t limited to): a financial worksheet completed by the seller;
the past few months bank statements; last two years tax returns; the last few pay stubs; copies ofequity/brokerage accounts; and a hardship letter laying out the seller’s case for the short sale.Additionally, the bank will want to see a purchase agreement, proof of buyer financing,authorization to speak to a third party (namely the listing agent) as well as a HUD-1 — aclosing/settlement statement that lays out the finances of the sale. Finally, the bank wants to havethe property appraised to confirm that they are receiving the most money for the home.Short sale review processNearly every bank has a team of “negotiators” who are assigned to review each short saleapplication and make a decision. It’s rare that they will accept the short sale package as is. Morelikely, they’ll ask for a number of things including a counter offer to the purchase price and areduction in fees/closing costs. If they lower the listing agent’s commission, it’s almost alwaysreduced below 6 percent (but rarely below 5 percent). Often, the bank will ask the seller to makea financial contribution in order for them to approve the sale. This is generally OK with theseller, and often the seller can agree to a payment plan. Everything is a negotiation here, and thelisting agent is generally the one negotiating with the bank on behalf of the seller.The seller is often required to miss a paymentMany banks will require the seller to miss a payment in order to process the short sale. Inessence, the bank is rejecting the short sale and telling the seller to come back and reapply afterthey’ve gotten behind in their payments. This happens all the time. If you’re a seller with perfectcredit but circumstances require you to sell the property as a short sale, the bank wants you topay for it by negatively affecting your credit with a 30-, 60-, or 90-day late payment.This is the most troubling, misunderstood, and backwards part of a short sale and part of thereason why they take so long. This will likely set the seller and the potential buyer back by atleast 30 days, and the buyer often walks away, sometimes after waiting 60 days.If you want to avoid this roadblock, start missing your payments as soon as you know a shortsale is inevitable. Yes, you heard me right: I’ve literally advised sellers to stop making theirmortgage payments.Facing up against a foreclosureThis is where things get messy and timing is everything.If you miss your payments for 90 days, a notice of default is filed and the foreclosure processbegins. The foreclosure department is likely a completely different arm of the bank and does notalways have any knowledge of the short sale offer. Sometimes, they’ll work hand-in-hand todelay the foreclosure if a short sale application is in. But, many times, especially if they are sodisconnected, the foreclosure department simply forges ahead. I have heard horror stories about afull price short sale offer on the table, yet the bank forecloses.
Have your ducks in a row before going on the marketPrior to listing the property in a short sale, request a copy of the short sale package from thelender. Start with the customer service telephone number; they can usually get you in touch withthe loss mitigation department. Find out what’s required to complete a short sale and geteverything that the bank needs up front.A good real estate agent will have every single piece of information available and ready to sendto the bank before they list the property. Once an offer is received, they can add the purchaseagreement and the closing statement to the package. Short sales take a long time when the selleror real estate agent have an offer but don’t have any of the paperwork ready to send to the bank.If you’re a potential short sale buyer, ask the listing agent if they’ve made contact with the bank.Have they received the short sale package? If so, are the seller’s documents ready to besubmitted? If the answers to these questions are no, or are received with a blank stare, chancesare you’re going down a long and rocky road.Additional places the short sale gets hung upThe banks require a lot of paperwork in order to present the short sale to the negotiator. If theydon’t have an absolutely complete package, they won’t send it on. This means that if you’remissing one document or one bank statement has the wrong date, there will be a hold up.Also, even though it’s 2011, many banks require the packages to be faxed into their system. Thismeans lost pages or missing documents. And the bank, as busy as it is, isn’t likely to call you andtell you what you’re missing. So the listing agent or the seller needs to stay on top of the bank.Once the package (sometimes 185 pages) is faxed in, a call should be made confirming the faxwas received. Within a few days, another call should be made to ensure the package has beenassigned to a processor. The processor’s job is to provide the negotiator with everything neededfor review. Check with the processor, to see if they’re missing anything and if not, how long itwill take to be assigned to a negotiator. Most banks will tell you five, 10, or 21 days. Staying ontop of the bank will help speed up the process. As the saying goes, the squeaky wheel gets thegrease.Final step is getting the approvalThe waiting game begins once the file is complete and is on the desk of the negotiator. At thispoint, there is nothing you can do but wait for their decision/negotiation. Once the approval andall the negotiating has been completed, the regular sale/escrow process begins. Be aware that thebank prefers these to be “as-is,” so there won’t be room to add fees, request credits oradjustments. Having said that, I once went back to a short sale lender and requested (andreceived) a $20K reduction in purchase price due to some serious termite issues that wereuncovered during the property inspection.Advice to buyers, sellers and agents
Whatever role you’re playing in the short sale drama, be patient but persistent. I’ve seen shortsales approved in less than 30 days, others in nine months. It all depends on the bank, the sellerand the listing agent.And if you’re the potential buyer, try not to get too attached to a short-sale property. If you don’tget a sense that the listing agent is familiar with the process, or if you realize the agent and sellerdon’t have their ducks in a row, you may need to walk away — no matter how good of a deal theshort sale is.Brendon DeSimone is a Realtor and real estate expert based in San Francisco and New York. Heis a contributor to Zillow Blog, has collaborated on multiple real estate books and is oftenquoted by major media outlets. Follow Brendon on Twitter.Note: The views and opinions expressed in this article are those of the author and do notnecessarily reflect the opinion or position of Zillow.