Short Sale

A "Short Sale" takes place during the pre-foreclosure stage when the owner still has title to the property. The foreclosure action may have started, if a "lis pendens" has been filed, which means "suit pending". This legal notice is filed in the Count Clerk's office and thus puts the world on notice that a foreclosure is eminent and in process.

The owner probably is at least three to four months or more behind in their mortgage payments. They probably haven't been able to work out a repayment schedule with the lender or some sort of "work-out" to get the mortgage current. Their only options are to sell it or lose it in a foreclosure.

It generally is better for an owner to sell the property or transfer the property to the lender using a "deed in-lieu of foreclosure", than to let it go to foreclosure. Banks are reluctant to accept a deed in-lieu of foreclosure, unless there is sufficient equity in the home so the bank can recoup its costs when they sell it. And often, when considering a sale of the property, the problem is there isn't any equity in the home. In fact the balance owed on the mortgage may exceed the net sale value of the home by tens of thousands of dollars.

So someone might come along and be willing to pay market value for the home but at closing there wouldn't be enough money to pay the seller's closing costs and pay off the mortgage. The seller would be "short" the money needed to close. Hence, the term, "short sale". In order for the sale to take place the bank has to agree to take less than what is owed at closing.

Why would a bank agree to do this? Probably, because foreclosures are very expensive and time consuming. In the meantime, the bank has to carry the loan on their books as being non-performing. This greatly curtails the banks lending ability. They have to set up reserves for the potential losses as well.

So the bank is open to discussing taking less today to have the non-performing debt removed from their balance sheet rather than wait nine to eighteen months or more to take title to the property and then go through the steps of selling it.

A dollar today is worth more than a dollar two years from today.

So what is the process? There are several steps to buying a property in a short sale.

• First, finding a potential property. Properties are often listed in the MLS, the Realtor Multiple Listing System, with a notation that it is subject to bank approval of a short sale. Ask your agent to look for such listings for you if you wish to specifically pursue such a property.

  Get a list of as many as possible in your price range and that meet your other criteria. Drive by those that look appealing to you. Set up viewings of those you like from the outside. Narrow your search down to one to three homes.

  Then have your agent provide you with a CMA, Comparable Market Analysis, for each of these. Have your agent find out approximately what is owed on each. Ask if any other offers have been submitted. Then, with the help of your agent, determine which property you would like to pursue.

  Make sure that whichever property you decide to make an offer on, that you have an extremely cooperative seller. Although you may be helping them avoid a foreclosure on their record, some sellers will resent the bank because their wouldn't work out a payment plan with them so they could stay in their home. They just plain may not care at this point. If the seller isn't available to take part in the process and if they aren't going to be cooperative, don't waste your time. There is a lot of paperwork and information that the seller has to provide to the bank. Without that the bank won't consider anything.

  Another issue to watch out for and ask about is, "Are there other liens on the property?" There could be an equity line of credit, a judgment against the owner, unpaid real estate taxes, federal tax lien. These greatly complicate the process. Now, instead of negotiating with one lender, the negotiations are with two or more parties. They all have to agree to take less or there is no deal.

  
  

• Second, prepare an offer. No one at this point will be able to tell you what the bank might consider to give up, unless they have already gone through the process with someone else previously and already know approximately what their bottom line is. Understand that a bank isn't going to give a property away and that your offer, and the loss the bank will end up taking, are reasonable.

  When writing your offer and determining the price to offer, take into consideration the condition of the property, any repairs that are needed, and the comparable sales in the area for a similar home. You obviously want to get the home at the best price you can, but you also need to be realistic with your offer in order to interest the bank into considering a short sale.

  Your offer should be subject to home inspections and your getting a mortgage. Make sure that the property is in good enough shape that a lender will give you a mortgage. Also, understand that the bank is not going to make repairs or give you a repair credit. You are buying the home "as is".

  Your offer is with the current owner but is subject to the bank approving a short sale, that is, agreeing to a loss at the time of closing. It also would need to be subject to approval of any other lien holders as well.

  
  

• Third, put together and submit the short sale package. The short sale package will consist of:
  • The Purchase Offer signed by both the seller and you, the buyer.

  • A Fax Cover Sheet identifying the items in the package and contact information of all parties.

  • An Authorization To Release Information form signed by the seller to allow you, your agen, or your attorney to discuss the seller's account with the bank.

  • A Cover Letter summarizing that you are asking for a short sale.

  • HUD 1 - A summary of the estimated closing costs and net cash to be received by the seller, that is, available for the bank.

  • Listing Agreement and listing history. The bank will want to see how long the property was marketed and at what price.

  • Seller's Financial Statement. The bank may require the Freddie Mac - Form 1126 - "Borrower Financial Information" form or something equivalent filled out completely and signed by the seller.

  • A Hardship Letter from the seller telling their story as to why they can't pay their mortgage.

  • Copies of The Seller's Last Two Pay Stubs.

  • Copies of The Seller's Last Two Bank Statements.

  • Copies of The Seller's Last Two Years Income Tax Returns.

  • Your Mortgage Pre-approval Letter.

  
  

• Forth, wait for the lender to respond. The package will be reviewed for completeness. As long as you have everything there that they need the file will be assigned to and forwarded to a Loss Mitigator at the bank. Expect this step to take two to four months or longer to complete.

  One of the complaints about short sales is that they take too long. From start to finish, a short sale can take four to six months or longer, and with no guarantees that it will be successful. Hence, most owner occupant home buyers don't attempt a short sale. These usually are done by investors who don't have time constraints. If you need to be in a home within two to three months, don't even consider a short sale. You will become very frustrated and disappointed with the time it takes.

  
  
• Fifth, lender orders the BPO (Broker Price Opinion). After the Loss Mitigator reviews the file and is comfortable that everything is in order, they will order a BPO. If something is missing or incomplete, they will ask that it be resubmitted.

  A BPO, Broker Price Opinion, is a simplified appraisal of the property. It is less expensive for the bank and gives the bank a good idea of what the property is worth. A Real Estate Broker is hired to find comparable sales and active listings to the subject property. From there the Broker estimates the property's resale value taking into consideration the condition of the property and a short time period to get it sold. The BPO sometimes is done by means of an exterior only, or drive-by appraisal. Other times, an interior inspection is required of the BPO Broker.

  
  

• Sixth, your offer is accepted, rejected or countered. After the BPO is delivered back to the bank and the Loss Mitigator assigned to the file, it is reviewed along with the rest of the information and documentation in the short sale package. The Loss Mitigator either decides that your offer is sufficient and then issues a short sale acceptance, or they counter-offer and tell you what price they need to make the deal work for them. They also could outright reject your offer if they feel it is low-balling and too far off the mark.

  
  

• Seventh, receive short sale approval from lender. Once you have the bank's approval of a short sale you can continue with the contract, having your home inspections, applying for your mortgage, etc.

  
  

• Eighth, get your mortgage. Once you get your mortgage commitment your attorney, or the closing agent, can arrange for settlement and closing.

  
  

• Ninth, close the sale. You now close and take title to the property. The previous mortgage and other liens are discharged and the only lien on the property should be the new mortgage you got.

Buying a home using a short sale can be quite frustrating and definitely time consuming. However, it may be worth the effort. Make sure you use an agent who is familiar with short sales and the short sale process and that they have the patience and persistence to get the deal together.

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