As many loan modification terms are beginning to adjust people are starting to talk about the expected increase of short sale transactions. A short sale is when a Seller decides to sell their property for an amount that will leave them with less than the full payoff amount on their mortgage(s). Lenders have a history of accepting this lower amount upon a showing of a significant hardship that leaves the seller unable to maintain their current mortgage payments. Keep in mind a lender is not required to consider a short sale or to agree to terms of a short sale transaction.
The short sale process begins when a property is listed for sale. The listing agent needs to make sure that the property is listed at an appropriate market value for the property in question. Short sale lenders will typically not accept or even consider offers that are submitted with a listing that was well below market value for the subject property. Once the property goes under contract is when the short sale negotiations are initiated with the short sale lender. It is at this time that the Seller (or their representative) will submit a short sale application to their lender together with a copy of the listing agreement, fully signed contract (with applicable short sale addendum), draft settlement statement with ALL fees/costs for seller’s side of the closing, financial questionnaire and supporting financial documents. The short sale lender will then begin the review process which can take anywhere from 45 days (on the very short end) up to 6 months (or more!). In most instances the short sale lender will agree to pay the standard closing costs on seller’s behalf and accept their payoff less these costs as long as the seller nets zero money through the transaction. In certain circumstances the short sale lender will agree to a relocation incentive amount payable to the seller.
As part of the short sale process, the short sale lender will request a broker pricing opinion (BPO) from one of their local brokers. Should this BPO come in above the purchase price listed in the contract, the short sale lender may decline the short sale or make a counter-offer. This is when the negotiation process begins as the Buyer must decide whether to increase their offer or not. If there are property related conditions that justify a lower purchase price than what might be typical in the particular market area, those conditions should be brought to the short sale lender at this point (if not sooner). Examples would be if the home needs a new roof or there is significant damage to the interior of the home (i.e. termite damage, water damage, etc…).
Once a short sale lender approves the short sale transaction, the clock starts to run for most items in the contract. The transaction will proceed as a relatively normal closing from this point forward. The short sale lender’s approval letter will spell out the proper terms of the closing including the date on which the closing must occur. If the closing cannot occur by this date, the short sale lender must grant an extension and issue a new approval letter. Most short sale lenders will allow for one extension although the process of obtaining same can take a week or more so this is something that needs to be done with plenty of notice. If not working with a title company, one should be immediately contacted upon receipt of the short sale approval letter so they can begin the title work process and move the transaction along towards closing.
As with almost everything that we discuss here, communication is key with short sales. The seller must agree to be communicative with the short sale lender or their representative or the process will be delayed. The parties must communicate with each other regarding progress of the short sale negotiations with the short sale lender. Lastly, everyone must communicate with the title company once the short sale has been approved. Certain title companies will offer a short sale processing service, which can alleviate must of the stress of an agent having to jump through the short sale process so be sure to contact your agency to see if they are equipped to assist you!