How do Short Sales Work
What is a Short Sale?
A short sale occurs when a lender agrees to accept less than the full balance of the amount owed in order to release their lien on real property. Short sales have become a popular solution for homeowners who wish to sell their property but owe their lender(s) more than their home is worth.
- You may want to seek legal and/or tax advice before initiating a short sale.
- If you are interested in pursuing a short sale, you must document your financial hardship. You must be able to prove to your lender that a situation exists making you unable to afford your current mortgage payment, your current income does not allow you to afford your monthly payment, or you are financially distressed.
- Possible outcomes of an approved short sale include, but are not limited to:
- Your Lender will issue an IRS Form 1099-C reporting the amount of debt that was "forgiven", which may be taxable.
- Your Lender may accept an amount to release the lien but keep the account "open" to charge off or send to collections; meaning you remain personally liable for the unpaid balance.
- Your Lender may seek a deficiency judgment against you for the unpaid balance.
- Your Lender may require that you bring some funds to closing; and/or require that you enter into an unsecured loan.
- There may be credit implications- these usually pertain to late payments. Your account will be shown as settled which is not as severe as credit implications arising from a foreclosure of your property.
- Lenders will want to see financial records (i.e. bank statements, paystubs, tax returns etc.)
- Lenders will perform an appraisal to determine fair market value and will reject "low ball" offers. Therefore, the property should be listed at market value.
- Contact your lender(s) to:
- Get a fax number for their short sale and/or loss mitigation department.
- Obtain/submit Third Party Authorization form allowing your Agent and/or TSG to help monitor the status of your loan and communicate with the lender(s) throughout the process.
- Monitor loan status until closing.
- Contact TSG as early in the process as possible. We will:
- Order loan payoff(s)
- Get HOA Dues and County Property Tax status
- Order prelimary title examination to verify any liens filed since your acquisition of the property.
- Prepare a preliminary Settlement Statement for your lender’s review/approval.
- Additional pertinent information
- Have you received foreclosure notices?
- Are you currently in bankruptcy?
- Are you U.S. Citizen or resident alien?
Buyers and Sellers
COMMON TERMS OF A SHORT SALE CONTRACT
- Advisable not to allow pre-occupancy or rentbacks
- The property should be sold in its "AS IS" physical condition as of the contract date. Be sure to use the appropriate contract addendum.
- Home Inspections at Buyer’s expense and should be for informational purposes only
- Termite Inspection/Treatment and repairs at Buyer’s expense
- Well and Septic Inspections and repairs at Buyer’s expense
- Home Warranty paid by Buyer
- Final Walk-Thru permitted for convenience but not for additional negotiations
- Must show Third Party Approval required- Use the appropriate contract addendum.
- A contract is ratified once it is signed by the seller and buyer. Third party approval is only a contingency as the lender(s) do not sign the contract; they provide their own separate approval of the terms of the transaction.
- Avoid use of electronic signatures. "Wet-ink" signatures/initials are required by most lenders.
Patience and Persistence…
- It is recommended that the Agent and/or TSG follow up with the lender(s) every 2-3 days to see how things are moving along, even if they tell you not to call that often.
- Update Selling Agent and Buyer at least once a week. Communication is imperative.
- Lender(s) will assign their files to a negotiator approximately 2-4 weeks after the package is received. This person will handle the file through the approval process.
- Lender will order their own BPO (Broker Pricing Opinion/Appraisal). They may counter the contract offer based on the value of the BPO.
- Approval/denial usually comes within 2-6 weeks of BPO approval.
- The average turnaround time for approval or denial is 45-60 days. However some have taken significantly longer.
- Carefully review all terms contained in the approval letter from each lender before settlement.
Additional Information for Buyers
- Ask your Agent to interview the Listing Agent to make sure they know what they are doing. Important questions to ask:
- Have you handled many or any other short sales?
- Is there a 1st and 2nd lien on this property? Are they with the same lender?
- Has a preliminary title search been done?
- Have you checked the seller for bankruptcy?
- Has a foreclosure date been set?
- Is this the first contract on the property?
- IF YES: Do you have all of the required documents from the seller to submit to the lender(s)
- IF NO: Has the lender(s) done their appraisal?
- Do you have an estimated timeframe that you expect to get approval; or were you on the verge of approval when the last contract fell through?
- Expect the lender(s) to counter your offer
- Patience is a must on short sale - it can be a slow process. If you are in a "have to move" situation, then a short sale is probably not right for you.
- Suggested Terms in the Contract
- Buyer reserves the right to cancel contract at any time prior to 3rd party approval
- Consider delaying other contingencies (appraisal, financing, etc) until 3rd party approval is received
- Indicate earnest money deposit will be given and deposited upon 3rd party approval