short sale process

Short Sale Process | The Ultimate Guide

In Brokers, Realtors by SteveInvests

Short Sale Process | The Ultimate Guide

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 list and sell short sales, keep reading and be sure to check out our Short Sale Mastery Course.  

Let’s dive into the short sale process!  

Introduction To Short Sales

Look…  Markets change all the time.  But also, peoples scenarios also change all the time.

If you get on your local clerk of court website you will likely find Lis Pendens filed even in a strong real estate market.  

Why?  Because even in a strong market, people’s circumstances change due to job loss, reduction in pay, relocation, death, divorce and other personal factors.    

Think about it.  In many markets when you sold a property to someone say a year ago and they asked you to list it for sale, will they monetarily be in a better position upon a sale after all closing costs?

Maybe.  Maybe not.  And many will not have money and funds to come to the table to close the deal.  So there really is an opportunity to help people by going through the short sale process in any market if they are upside down.  

Now…  Armed with this information and the right training, when a recession occurs, you will become a short sale superstar with the right guidance.  

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:  

  1.  You are abiding by all state laws regarding the short sale process. 
  2. 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.  

Why Would A Bank Agree To A Short Sale?

There are two main reasons why a bank would agree to a short sale.

Financial:

It saves the bank by around 15% of value to do the short sale.  

  • More in attorney costs
  • The cost to evict
  • Bank employee costs
  • Contractor costs
  • Property costs like utilities, insurance, taxes.
  • Trash out / Clean out
  • Safety in boarding up windows, doors, pools
  • Additional renovations 

Liability:

The short sale lenders are not in the business to be landlords.  When they take a property back through the foreclosure process, they assume liability such as the following.  

  • Dealing with an upset / erratic borrower
  • Squatters
  • Tenants
  • Trespassers
  • Property issues / oversight.  

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.   

  1.  Get Current – They might be facing a temporary scenario where they may be able to get all payments current.  
  2. 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.  
  3. 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.  
  4. 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.  
  5. 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.  
  6. 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.

  1. Seller must have a financial hardship.  Job loss, reduction in pay, relocation, death, divorce and other personal factors.
  2. 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.
  3. Seller are facing imminent default while in a “Must Sell” situation
  4. Seller has no equity in their home
  5. 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 Strategic Default

This is when a borrower purposely stops making payments on their loan.

Usually those pursuing the short sale strategic default process have the financial capability to pay the loans.

This many times is used by real estate investors who  got over leveraged by not knowing what they were doing.  Or certain partnerships broke apart and even divorse scenarios.   

Many investors will run the long term numbers to figure if the ROI (Return On Investment) is worth keeping the asset (or bad asset) in their portfolio.  

They maybe so underwater or the market may have dipped so low that it may make more financial sense to do a strategic default.

More Difficult – In our experience dealing in the short sale process, strategic defaults are much more difficult as the lenders still want to review financials and hardship.  

Many times their personal financial statement looks ok and there is no real hardship.  

However, and more importantly they have to 100% be honest and disclose all accurate reportings regarding tax returns, profit and loss, bank statements, etc.   

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:

  1. Approve the short sale offer, issue a letter outlining its terms for the deal and process the short sale to closing.  
  2. Reject the short sale offer outright.  We only had this a couple times.  
  3. 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.  
  4. 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. 

How Does A Short Sale Impact Credit

processing short saleThe short sale has a much lesser effect than a foreclosure on credit.  A foreclosure can drop your credit as much as 300 points and remain on your report for 10 years showing future lenders that this was indeed a foreclosure.  

Late payments are what really hurts in the short sale process where your score can drop by 135 points for over 90 days late.  

Short Sale Reporting On Credit

Most times when a short sale has been processed and completed it will state the following on your report as “settled for less than owed” “paid as negotiated” or “paid in full.”

The short sale can allow a buyer / borrower to purchase a home again in many cases in less than 24 months.  This will all depend on:

  • What other negative effects on credit
  • Employment / Income
  • Debt to income, etc
  • And more importantly, Amount down (More the better) 20% conventional may expedite

Short Sales On Employment

Many times employers will pull a prospective employee’s credit with their job position approval to find out how fiscally responsible they are.  

If a borrower where to get foreclosed on, how bad will that look in the employers eyes?  Especially if their job revolves around money, supply management, etc.  

On the other hand if it shows paid in full or even settled for less than owed, it may not indicate to them that they went through a short sale process. 

If an employer questioned the reporting, then the explanation of doing a short sale and negotiating with their lender should show merit.  

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
  • Divorce
  • Death of a spouse
  • Balloon payment and can’t refinance due to market drop
  • Interest rate increase (payment increase)

Creating The Short Sale Hardship Letter

short sale check listPart of processing the short sale includes the creation of the hardship letter.  Below are some tips associated with this. 

  • Along with the hardship letter and all others in the short sale package, be sure it has the loan number and address on every page.  
  • Be sure the defaulted borrower signs and dates the letter.
  • Get to the point on exactly why can’t they pay the mortgage.  The short sale negotiators are processing a ton of short sales through their pipeline.  Get to the point.  
  • Never put blame on their lender.
  • Ask for it – “We really appreciate you taking the time to review our circumstances and know that a short sale seems to be our only option.”

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

A short sale traditionally doesn’t cost anything to a borrower.  This of course depends if they need to hire an attorney to represent them to delay the foreclosure or to help to expedite this process.

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.  

What Do I Do When I Have A Short Sale Prospect?

Get a face to face meeting with the prospective short sale seller to discuss the details of the short sale process.  

Ensure all decision makers are present for the meeting and go through the following. 

  • What circumstances are preventing them from paying their mortgage
  • Who is on the mortgage.  
  • Go through all the default options described above to ensure the short sale is the best route.
  • Provide them the Short Sale Guide which goes into the entire process.
  • Provide them the Short Sale Package and go through its contents.  Use this one just as a guide and get with your real estate broker and attorney to create your own.  
  • Are all parties on the same page to proceed with a short sale?  Don’t take listing if not on same page and 100% committed. Especially true with Divorces and other partnerships.    
  • Talk about the short sale process, impact, timelines, etc.
  • Answer all the questions they have about the short sale process.  

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)

This short sale package is attached for you as a guide.  Again, you will want to meet with your real estate broker and attorney to create your own for your state and brokerage.  

Short Sale Offer

Short Sale Seller:

You are going to want to ensure your short sale seller is protected throughout this process.  Meaning that if for some reason their lender has unreasonable requests that your seller will not be bound to the short sale sales contract.  

We have a Florida addendum for this making it contingent upon short sale approval, waiver of deficiency judgment and contingent upon overall acceptable terms for the seller.  

Essentially a kick out clause to provide an out for your short sale seller for any reason.  And who knows… During the short sale process, they may have some unforeseen circumstances that allowed them to get current on their mortgage and keep the house.  

Short Sale Buyer:

We really have to screen the buyers / their agents regarding their intent.  

  • Need to ensure the buyer is prepared to wait and be patient throughout the short sale process.  
  • Need to ensure the buyers are not looking at any other property
  • Need to find out exactly how long the short sale buyer is willing to wait.

This is imperative as the short sale approval is based on THAT BUYER and the terms of that SPECIFIC CONTRACT.  

Keep in mind, if the short sale buyer walks, many times the banks may make you start all over.  

Short Sale Process & Procedures  

  1. Go through all the appropriate short sale paperwork to ensure you have a 100% complete package.  
  2. Explain the short sale package must be completed in its entirety.  Additional and sometimes redundant material may be needed throughout the short sale process.
  3. The package includes the listing agreement which allows the broker to list the property for sale, subject to the lender’s approval.  
  4. The property will be listed and marketed on the open market to draw in an acceptable offer.  
  5. 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.  
  6. 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” 
  7. 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. 
  8. 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.  
  9. The lender will review the package and / or ask for additional information at this time.  
  10. 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. 
  11. 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.  
  12. 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.
  13. This is also where we will know if the lender will waive any deficiency judgments for the borrower.  
  14. 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.  
  15. 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.

Who Pays Your Commission

The short sale lender.  They pay your commissions.  Just be sure when you submit the full short sale package to include the HUS / Closing Disclosure showing all costs that the short sale lender will absorb including but not limited to:

  • Total Gross Commissions
  • Title Fees
  • Doc Stamps / Taxes
  • Stipend for second lien holder if any
  • Any other cost
  • And even possible move out costs for the short sale seller

Create Your Short Sale Team

You will want a strong short sale team to back you up.  

  • Attorneys with short sale experience
  • Accountants with short sale experience
  • Bankruptcy attorney
  • Attorney / Closing Agency who will close out the short sale transaction.  Now many times you can leverage these companies to make the necessary follow up calls if they want the business (IE – title insurance / fees for the closing).   
  • Follow Up Personell in-house to ensure your short sale files are processing, any updated paperwork needed and any updates.  
  • Marketing For New Short Sale Prospects

Marketing For Short Sale Listing

  • Cold Call PreForeclosures:
    • Use systems like REDX to find preforeclosures and cold call them with the script below.  **Because of our relationship with them, they will waive the $149 set up fee if you use their services with the link provided.  
    • “Hi.  My name is _____ with ______ Realty.  Are you the owner of 123 Maple St? (Yes) The reason for my call is, I wanted to find out a good time to stop over and drop off a book on short sales for your review.  Is tomorrow at 4 good or would 5:30 be better?
    • They might not know what a short sale is.  I would state the following.
    • “I am showing in my system that the property at 123 Maple St has a bank lien on it and is in default and we help borrowers avoid foreclosure.  This is your property right?”  

real estate resources

  • Mail Lis Pendens
    • Sample Letter – Included with our Short Sale Mastery Course
    • Short Sale Guide – FREE HERE.   
    • Show Up At Door – Introduce yourself.  “I mailed a package on short sales last week and want to stop by to see if you received it and where able to review it.”
  • Blog / Website / Video
    • Create blog content using local SEO techniques to drive traffic pertaining to short sale advice in your local market.  
    • Create a youtube channel like THIS ONE!!
  • Short Sale Signs: 
    • In time of recession / crash – Use Bandit Signs
    • Mobile Billboard Signs
    • And anywhere in your local market you can promote short sales via signage.  

Short Sale Buyers & Investors

By listing distressed (short sale) properties you have a huge opportunity to build up a pool of real estate investors who you can develop and work with long term.

These investors are constantly looking for short sales, REO’s, probate and other distressed properties.

You can assist them in not only finding deals but growing their portfolios.  

Short Sale Referrals

I can tell you when you help someone avoid foreclosure by using the short sale process, you become very significant in their lives.

If you are planning on crushing it with short sale, then be sure to have consistent follow up with past short sale clients.

They will be a wealth of warm referrals to your business.  

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.

Follow me on the YouTube link below for weekly videos regarding growing your real estate business with a path toward financial freedom!

How To Be An Investment Real Estate Agent

 

Want More Short Sale Guidance?

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short sale process