Tips for Navigating the Short Sale Process

The brief version is that it is a loss mitigation workout program where the lender accepts less than the full payoff amount due from the borrower.

The longer version is that a short sale is the sale of a property, with the authorization of the creditors, for less than what is owed on it. Short sales are when a seller is behind in payments and instead of going through with a foreclosure, the lender accepts a lesser amount for the home. This allows the seller to avoid a completed foreclosure, the bank to cut their losses quickly, and the investor to buy a property for less than retail. Simple stated, it is the forgiveness of debt owed by a homeowner and means that the lender is willing to settle for less than what they originally anticipated.

Short sales are done all the time and have increased in frequency with the increase in foreclosures.

With homeowners defaulting on their mortgages at a record pace, many people are practically begging their lenders for some form of relief or assistance in order to prevent themselves from ending up on the street. While it is certainly disconcerting to receive collection letters and threats of impending foreclosure from a lender, those who are falling deeper into debt and enduring difficulty making their monthly mortgage payments need not despair. The “short sale” is one alternative worth considering as a viable means for resolving your debt with the lender and dealing with a home that is no longer affordable. Here are some basics you need to know before starting the short sale process.
What is a Short Sale?

A “short sale” occurs when the net proceeds from the sale of property is not sufficient to satisfy the outstanding mortgages on the property, and the seller does not have the financial ability to make up the difference. The lender is asked to take less than the full amount owed in order for the sale to be completed

What Causes A Short Sale?

Sometimes a short sale is brought about because the homeowner borrowed more than he/she could afford to pay back and miscalculated his/her financial status. Often, the short sale arises because of an unforeseen change in the homeowner’s life, such as a long-term illness, disability, divorce or loss of employment, which has dramatically affected the person’s income such that the mortgage payments are no longer affordable.
Why is the short sale a viable option for the seller?

A foreclosure can have a devastating impact on someone’s credit report (but not as bad as what a foreclosure or bankruptcy would do to it) that has a lasting effect for years to come. A short sale is typically reported on a credit report as a debt that is “settled for an amount less than what is due”. While this will cause a dip in credit score, it will be nowhere near as harsh as the reporting of a foreclosure.

Why would a lender agree to a short sale?

The answer is very simple: Lenders do not want to own houses. Lenders are in the business of loaning money, not in the business of stockpiling real estate. There have been numerous reports that banks can face fees of up to $50,000.00-$60,000.00 in actually foreclosing on a property. From a business standpoint, the lender will make out better if the property is put on the market and given an opportunity to attract a buyer through private sale.

It’s all part of business as all lenders know that they will not win all the time and have 100% performing loans. Risk and loss of capital are anticipated in the lending industry and are a cost of doing business. Changing economic conditions, financial hardship and medical reasons are some of the many causes of unforeseen situations that turn good lending contracts into bad.

How does the short sale process work?

Most lenders have a short sale package containing documents that the seller must submit in order to have the short sale approved. Such documents include: hardship letter from seller/borrower explaining why the short sale is necessary, seller’s financial statement, two most recent pay stubs, two most recent bank statements, two most recent tax returns, copy of an Agreement of Sale with buyer, copy of proposed settlement statement (HUD-1) demonstrating net monies to the lender. Once the package is submitted to the lender, a negotiator is assigned to the file who handles the short sale on behalf of the lender through closing.

Miscellaneous Points to keep in mind

If you find a buyer, don’t expect closing to take place quickly. It may take 60 days, 90 days or even longer, depending on the lender, to get approval from the negotiator for the short sale to go forward.

Lenders are not properly staffed to handle the number of short sale requests. In order to make sure that your file doesn’t linger on someone’s desk, you need to be persistent—your agent or attorney should make frequent calls to the negotiator in order to insure that your short sale moves forward.

You must negotiate for the release of both the property and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt.

It is wise to consult with an attorney and real estate agent who has been through this process before and has significant experience working with lenders. Also, attorney’s fees come out of the lender’s net proceeds. Therefore, you will not have to pay out of your own pocket for an attorney to assist you in the transaction.

If you are behind on payments and need to sell your home fast you can contact me and I will guide you through the short sale process. 

Why Should I use a Real Estate Agent?

There are many reasons why you should use a licensed professional to sell your house, especially if you are in a preforeclosure or foreclosure situation.  There are a lot of so called "foreclosure rescuers" out there that prey on homeowners.  Real estate agents are governed by a strict code of ethics and state laws so you can rest assured you will be treated fairly and honestly.

1. Finding Qualified Buyers - REALTORS® qualify prospective buyers to determine in advance their financial ability to purchase. Pre-Qualification also helps a buyer understand what they can afford and what they can realistically look at buying. This saves both buyers and sellers a lot of time and aggravation and ensures that the process is as smooth as possible.
2. Sale Negotiations - REALTORS® are trained professionals who will negotiate with buyers and lenders on your behalf.
3. Personal Service - REALTORS® work cooperatively with the affiliate members of the MLS to provide information on title and conveyance documents, termite inspections, home warranty programs, etc. REALTORS® also make suggestions to sellers on how to make a home more saleable.
4. Protection for Buyers & Sellers - REALTORS® subscribe to a strict Code of Ethics and accept the responsibility of promoting the interests of buyers and sellers by protecting them from fraud and misrepresentation.

Mark Schwartz is a licensed Realtor for RE/MAX Realty Professionals in Bellevue WA.

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