Q: What is a Short Sale?
A: A short sale in real estate refers to a transaction in which the sale price is insufficient to cover all encumbrances and closing costs and the Seller is unable or unwilling to pay for the difference. A lender will agree to forgive the difference if the lender is convinced that the net sale proceeds from a short sale will be the same or more than what the lender will otherwise get from foreclosing and reselling the property. In a short sale, a lender pays for the customary seller’s closing costs including broker commission. A lender usually wants the borrower to establish financial hardship before agreeing to a short sale. Some lenders will also ask the borrower to contribute money to make up a part of the short fall either in the form of cash or an installment note. Q: What are the requirements for a Short Sale? A: The basic requirements for a Short Sale are a Listing Agreement with a Realtor and a Sales Contract from a Buyer which are submitted to the Lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting documents such as tax returns, bank statements, information and photos of the home and the Comps, or comparative home prices supporting the offer. If the package is complete, the Lender will order a BPO, or Broker's Price Opinion, from an independent Realtor. The BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Most Lenders will accept an offer lower than the BPO, but usually not much more than 10% lower, though that will vary depending on the company. The sales contract should specifically state that the offer is contingent on the Lender accepting the purchase price in full and forgiving the Seller the deficiency on the mortgage. Q: What are the procedures of a Short Sale? A: There are four major steps:
First, sign a listing agreement with the Seller and obtain written authorization from Seller to discuss with the lender on a potential short sale. Make sure to include the following additional terms in the listing agreement:
• Seller agrees to receive zero from the sale proceeds
• Purchase price and broker commission are subject to lender’s approval
• Seller agrees to provide broker with all necessary financial information as may be required by lender in order to consider a short sale.
• A lender may ask the Seller to contribute to the shortfall in payoff. Second, collect all necessary financial information from the Seller including but not limited to tax returns, bank statements, W2s. Have LFS evaluate and qualify the property and seller. Third, market the property as you normally would except disclosing that the sale price and broker commission are subject to lender’s approval of a short sale. If the property is in foreclosure, disclose the estimated trustee’s sale date and advise prospect buyers of the possibility that the property might be sold at the trustee’s sale before a short sale is approved. Fourth, upon receiving an acceptable offer, prepare a complete short sale package and submit it to lender along with all supporting documents. Follow up with the lender and obtain approval letter. Q: How long does it take for a lender to approve a Short Sale? A: Although response time varies from lender to lender, it could take two weeks to 60 days to receive an approval of a short sale from a lender. That’s why it’s critical that buyers and their representative understand and accept that time frame before they make an offer. An addendum to the California Association of REALTORS® purchase contract includes a provision allowing either party to cancel a short-sale contract within a set period if the seller hasn’t gotten the deal approved. Properties with securitized loans (which are the majority these days) may require a longer time to get an approval of a short sale because of the possible need for approval from the entity holding the pool of securities. Q: What affects a Lender’s decision to accept or reject a Short Sale? A: Before approving a short sale, a lender will make several key decisions: First, can the owner afford to continue making the payments on the property or contribute to the short fall? If they can, there is no reason for the bank to unilaterally take the loss. Banks will not look favorably upon a borrower who they believe has lied to get the loan. Second, will the short sale leave the bank in relatively the same position as they are likely to be in by going though the foreclosure process and then selling the property? If the bank can do significantly better by foreclosing, they are most likely to do so. In a short sale, the net amount the lender will receive from the sale after closing costs. Third, will the seller receive any sale proceeds for themselves? Seller must receive zero sale proceeds in a short sale. Fourth, if there is a junior lien-holder, will the junior lien holders receive any sale proceeds? A senior lender is usually reluctant for junior lien holders to receive any sale proceeds if the senior lender intends to accept a short payoff. |