Short Sale Process
The Short Sale Process encumbers a variety of things including having a knowledgeable right real estate agent, the right team, knowing all borrowers options, understanding the actual short sale process, timelines, bank position, credit, paperwork as well as all consequences / benefits.
Below we go into specific detail of the Short Sale Process and how real estate agents can list and sell these properties all while saving others from foreclosure.
If you are a borrower in default and came across this page, download your FREE Short Sale Process Guide.
If you are a Realtor looking to make BIG $$ listing and selling short sales, keep reading and be sure to check out our Short Sale Mastery Course.
Not only will you make a lot of money but you have the ability like we have saving several hundred people and families from Foreclosure!
Let’s dive into the short sale process!
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Talk To Your Real Estate Broker & Attorney About The Short Sale Process / Paperwork
Before you decide to make this your primary concentration, you must have a conversation with your real estate broker and attorney.
We performed the short sale process in Florida hundreds of times and your state may have different laws regarding short sales, deficiencies and so forth.
Have a meeting with them to ensure the following:
- You are abiding by all state laws regarding the short sale process.
- Create your own short sale package acceptable to your broker, attorney and state.
We Are Not Attorneys Or Accountants (Neither Are You)
You must be extremely careful about the information you are conveying when dealing with a short sale and its process.
You must not give legal advice or accounting advice. And I highly suggest that any prospective short sale seller you have to encourage them to speak with the appropriate professional.
We also are redundant stating this information on several pages of our short sale package.
Word Of Caution: We have been sidestepped a handful of times. We had prospects who consulted with their attorneys.
They proceeded to move forward with the short sale process and ended up being talked into using another real estate agent by their attorney. So it may make sense to introduce yourself to their attorney.
What Is A Lis Pendens?
A Lis Pendens is a pending legal action and or formal notice. This is usually the first step in the foreclosure process. Meaning the bank is initiating the foreclosure.
If the borrower is in default and hasn’t been served this by the courts, they likely will. And you will want to know this / how long they have been in default.
Time is of the essence in order to effectively process a short sale.
What Is A Short Sale
Simply put. A short sale is when a lender(s) agrees to accept less than what is owed so that a seller can sell their home at fair market value.
Short Sale vs. Foreclosure
It is imperative to know the borrower’s personal situation and to never convince them to proceed with the short sale process if it doesn’t make sense. They must decide what is best for them, their family and the future.
It isn’t just about Short Sale vs Foreclosure. The Borrower in default has more options that just these two.
Below are six alternatives to the short sale process when a borrower is in default.
- Get Current – They might be facing a temporary scenario where they may be able to get all payments current.
- Bankruptcy – This will depend on the state and type of bankruptcy. Some bankruptcies may not include the real estate. It may be ideal for them to speak with a bankruptcy attorney. Ideal for borrowers who have other types of delinquent debt like credit cards, car payments, etc.
- Repayment Plan / Forbearance – Designed so borrowers can pay back delinquent mortgage payments over a specified time period. Usually ideal for a borrower who has had temporary hardship, on their way to recovery and has a desire to stay in their home.
- Loan Modifications – It is when the borrower and lender work together to come up with a compromise and modification of their loan so the borrower can continue paying the mortgage and in good standing. This could include an extension of an amortization schedule say from 30 years to 40 years. Or extension of a balloon payment. Or change in the interest rate in order to lower the monthly payments. And… In an ideal scenario for the borrower, all of these. I’ve also heard in rare conditions, principal reduction.
- Deed In Lieu Of Foreclosure – This is when the borrower voluntarily deeds the property back to the bank. This option the bank could still go after a deficiency judgement. So if a borrower decides to go this route, then want to be sure they get it in writing so they will not pursue a deficiency judgement.
- Foreclosure – This is when the bank takes the property back. The bank can still pursue their rights in many states to a deficiency judgment. Meaning come after the borrower on the difference in the amount owed after the lender sold off the property. This could include closing costs, attorney fees and back interest. This is the worst possible scenario where going through the short sale process will be MUCH more advantageous.
Qualifications For A Short Sale
The common short sale qualifications are as follows.
- Seller must have a financial hardship. Job loss, reduction in pay, relocation, death, divorce and other personal factors.
- Seller’s loan typically must be in default status (but not always). Actually was able to negotiate a non delinquent borrower a short sale in which she actually bought it fully disclosed. Cash.
- Seller are facing imminent default while in a “Must Sell” situation
- Seller has no equity in their home
- Seller typically has no available assets
These are common qualifications but sometimes this is not always the case with short sale strategic default process which we will go into detail next.
Short Sale Bank Negotiations
I can tell you in many cases, the banks are not easy to work with. You will just have to deal with it as it is all part of the short sale process.
Ultimately, one of four things will happen after the loss mitigation short sale review:
The lender COULD:
- Approve the short sale offer, issue a letter outlining its terms for the deal and process the short sale to closing.
- Reject the short sale offer outright. We only had this a couple times.
- Reject the short sale offer contingent upon certain circumstances that can be remedied. They will indicate a short sale approval contingent on certain changes such as a revised closing date.
- Do nothing at all. But it’s you (your short sale team’s responsibility) to pound the phones to get some type of definitive response.
Showing Hardship With A Short Sale
As mentioned a borrower should never lie to the bank in regards to their hardship. Some acceptable Short Sale Hardship scenarios are as follows:
- Loss of employment
- Reduction of income as self employed, job transfer, demotion, etc
- Job transfer
- Major issues with the property with no capital to fix / repair
- Increased bills like medical
- Death of a spouse
- Balloon payment and can’t refinance due to market drop
- Interest rate increase (payment increase)
Stopping A Foreclosure During The Short Sale Process
The defaulted borrower can hire an attorney who may be able to delay the foreclosure while proceeding with the short sale.
The foreclosure department and the short sale department are competing and have a job to do. They do not communicate with each other in most cases.
The Short Sale Doesn’t Stop The Foreclosure Process
Time is ticking. Everyone is at the mercy of the lender. Check out this really good read on Foreclosure Defense.
What Are The Costs Of The Short Sale
This also can depend on state laws as some states require an attorney to handle the short sale process and procedures.
Deficiency Judgement For The Balance Of The Short Sale
There is always that possibility of getting a deficiency judgment due to a short sale.
However, this depends on their state law as well as what is drafted in the short sale approval letter.
In tens of thousands of cases, the banks have waived their rights to a deficiency judgement due to short sales.
However, keep in mind we have deal with banks on a local level like certain Credit Unions who wouldn’t waive their rights to a deficiency judgement.
They still accepted the short sales but were firm on their rights to pursue.
Short Sale Taxes
The borrower will need to speak to their accountant regarding this question. Sometimes short sale sellers who showed insolvency maybe relieved of any taxation.
But again, their accountant is going to know best. And tax laws pertaining to short sales change. So keep up to date on this.
If they do not have an accountant, it is best to hire one (fairly inexpensive) to review their past returns, current employment / payroll, etc. And to find out about all tax liability in doing a short sale.
Two Loans. Can A Short Sale Be Processed
Yes. Over the years, many properties were purchased with two loans. In order for the second short sale lender to play ball, they want something out of the deal.
Usually we have the first short sale lien holder pay the second short sale lien holder a small stipend at closing for them to proceed with the short sale.
[IE – First lien holder pays the second lien holder $5k at closing]
Most cases, the second lien holder will do so. Because if the property goes into foreclosure, the second lien holder usually with not get anything.
But this will also depend on the value and debt amounts.
The Short Sale Documents
- Release Form – Allows you to talk and negotiate on behalf of the short sale seller.
- Intake Form – All pertinent contact info of the short sale seller as well as all bank info.
- HOA Disclosure – Disclosure on associations (if any). Associations can kill your short sale deal.
- Broker Hold Harmless – Short Sale liability form.
- Hardship Letter – Mentioned above
- Financial Statement – Shows all income / expenses. Assets and liabilities.
- Short Sale Listing Agreement w/ Additional Terms (Per your state)
- Short Sale Listing Addendum (Per your state)
- Seller’s Disclosure (Per your state)
Short Sale Process & Procedures
- Go through all the appropriate short sale paperwork to ensure you have a 100% complete package.
- Explain the short sale package must be completed in its entirety. Additional and sometimes redundant material may be needed throughout the short sale process.
- The package includes the listing agreement which allows the broker to list the property for sale, subject to the lender’s approval.
- The property will be listed and marketed on the open market to draw in an acceptable offer.
- The release form will be sent to the lender to show who is working on behalf of the seller and allows the agent (their team) to communicate directly with the lender as well.
- The offer will be executed but “subject to the short sale lender’s approval as well as the seller’s review and approval of the short sale lender’s approval letter and terms”
- The entire short sale package with the sales contract will be sent to the lender with a HUD / Closing Disclosure to show all estimated costs the short sale lender will absorb.
- Your team will follow up weekly in order to expedite this process that usually takes 2-4 months (more or less). Everyone must be patient during this time.
- The lender will review the package and / or ask for additional information at this time.
- The lender will higher a third party to provide a valuation in the form of an appraisal or BPO (Brokers Price Opinion) which you will need to allow access.
- The short sale lender will counter offer the buyer’s offer or if the value is close to the BPO, they may accept it as is. They may try to negotiate other terms like closing date, etc.
- Once agreed and accepted by all parties, the lender will issue a short sale approval letter which will break down the closing date, purchase price, buyer’s names and any additional terms.
- This is also where we will know if the lender will waive any deficiency judgments for the borrower.
- Assuming the letter comes back suitable, you proceed forward to the short sale closing with the title company. Buyers and sellers will have paperwork drafted for signatures and the closing will take place like a traditional real estate closing.
- Seller will have to prepare for move out, etc. Again, just like a traditional sale.
Short Sale Issues
There are a handful of things that can kill your deal and be a big issue for processing the short sale.
#1 – HOA Fees
Not paying your HOA Fees is the #1 Deal Killer of Short Sales
In the state of Florida, the HOA can foreclose on a Seller, and evict a Seller after they foreclose. Typically they will rent the property out and deny Sellers access through the gate.
If a Seller is planning on doing a short sale then they should keep up with HOA payments.
If the HOA fees get too high, including collection and attorneys fee, a seller’s short sale lender is not going to approve those to be paid by them in many cases.
#2 – FIRPTA (Foreign Investment In Real Property Tax Act)
The government has to get their money! Even in a short sale.
Assuming if the Seller is not entitled to an exception, Foreign investors maybe in trouble.
The estimated 15% withholding either leaves the lender short, or requires that the Seller come up with money at a short sale closing. If Lender is short, the sale won’t be approved. And if Seller can afford to pay the 15% the short sale sale won’t be approved.
#3 – LOW SHORT SALE OFFERS
Unless the property is in extremely poor condition and no one could obtain a mortgage for the purchase of the subject property, short sale lenders generally are looking for an offer at or near the current market value. Usually within 10-12% in my experience.
Submitting a lowball offer to the short sale lender will result in significant time delays and can even result in a declined short sale transaction.
#4 – Private Mortgage Insurance (PMI)
Private Mortgage Insurance – The insurance company collects a monthly premium from the borrower (based on risk analysis) and agrees to pay the lender a certain amount of money if the loan defaults (usually 20% of the loan amount).
As a result Lenders seek the insurance companies approval of the short sale to make sure they get paid for their loss.
In some cases, PMI companies have been known to request Sellers sign notes for their repayment of a loss, or to interfere with short sale approvals in an attempt to recoup some of their losses.
My Background In Short Sales
Opening our real estate brokerage in 2006 wasn’t necessarily the best time to start a new real estate company…
Things were going great until they were not… The market came crashing down and we had to respond quickly or go out of business.
Long story short, traditional sales and our investor sales were depleting. So we knew we had to list REO properties or Short Sales. We did both, but I can tell you listing Short Sales was the most rewarding!
At that time, there wasn’t really any information pertaining to listing short sales as well as the actual processing of the short sale with banks. So, I did the best research I could do and already had a handful of clients who were our first short sale candidates.
It was a mess! The banks were so unorganized at that time and they just didn’t have their stuff together to process the amount of short sales that was to come.
I knew we needed to do things different in order for our short sales to get processed and approved. We hired an hourly girl to stay on two phone lines at the same time.
Sometimes on hold for hours on end to. This was to ensure our files were at the top of the list and were being processed over all others.
It worked. We performed and I am proud to say we have saved hundreds of people from foreclosure and we were the top short sale listing brokerage in the county at the time.
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