The 5 Steps to a Successful Short Sale
Published on Wednesday, April 8, 2009, 5:52 PM by Loren Keim
Regardless of whether you are a home owner attempting to get out from under
a crushing mortgage payment, or a Realtor attempting to assist that home
owner, you’ll need to understand all the steps necessary to get a short sale
accomplished.
The short sale process can be long and complicated. The following steps are
the most common steps required by most lenders to facilitate a short sale.
The length of time to obtain an approval on a short sale request has risen
significantly over the past twelve months. Some lenders are actively
telling us that they need ninety days to review a short sale request.
One of the challenges of putting a short sale together, whether you are a
property owner or a Realtor, is that many buyers are unwilling to wait sixty
or ninety days to find out whether or not they’ve been able to purchase a
home. There are many properties on the market for sale for a buyer to choose
from without having to wait, so we have to entice a buyer to hang in on the
transaction.
An additional complication occurs when the home owner has more than one
mortgage against the property. There may be a second mortgage that the home
owner took out at the time of purchase, or there may be a home equity loan
or line of credit the owner used to make some improvement, or any other lien
against the property.
Requesting a short sale, in a nut shell, is finding a buyer, negotiating an
offer on the home, contacting the lender, obtaining all the documents the
lender requires for approval, and then staying in contact with the lender
until they approve, deny or counter your proposal.
As I stress in every article I write about short sales, have an expert
assist you with this process. Seek the advice of an attorney, Realtor,
accountant and any other professional you might require to insure the
process is done correctly, and to insure you’re making the appropriate
decision for your situation.
Step 1: Contact Your Lender for
Information
Most lenders will not approve a short sale until there is an actual offer to
negotiate. Banks and mortgage services are typically understaffed and very
busy trying to work out situations with other clients who already have
offers on their properties. They don’t have the time and resources to
analyze every possibility.
However, since short sale approvals are taking considerable periods of time,
it makes sense to find out who you need to speak with and what the lender
requires the owner or Realtor to supply. In most cases, the lender has a
“short sale” package that includes a list of all the forms the lender
requires.
Step 2: Market Your Property and Find a Buyer
Marketing a property that requires a short sale may also be a challenge for
several reasons. First, you must notify any potential buyers that any offer
must be approved by your lender. This will scare some buyers away from your
home because they don’t want to wait for someone else to approve the sale.
This will attract some investors who believe they can “steal” the home,
because they’ve seen on late night television that banks will accept almost
any offer. This is simply not true. Although they may get a very good
price, they are not likely to “steal” the home in the current environment.
The components of marketing any property successfully include pricing,
staging and marketing. Staging is simply presenting your property in the
best possible light in order to attract buyers to offer on your property
rather than competing properties. Pricing entails carefully selecting the
correct asking price in order to attract potential buyers. There are
methods to selecting correct price positions based on recent sales and
competing properties for sale.
Step 3: Negotiating an Agreement
The typical home requiring a short sale sells for a bit less than other
properties. The primary reason for this anomaly is that the buyer must have
a reason to go through the pain of purchasing a home through a short sale.
Historically, short sale properties sold to investors because they were the
few with the fortitude to wait weeks to months to find out whether or not
the sale would actually go through.
Imagine the stress of moving to a new home and perhaps a new school
district. Consider the stress on your family. Now add to that stress the
idea that unlike most real estate transactions, where a buyer knows within a
day or two whether or not the owner will accept the offer, the buyer may
have to wait several months for an answer. Worse, if the lender accepts the
buyers offer, the buyer needs to be prepared to settle and move quickly.
Most buyers who are selling another home need to plan their move very
carefully. They can’t rely on the hope that this transaction will settle.
They need to be out of their home by a certain date and need a place to
move. If they have a sixty day window to move from their home and they
won’t find out a response about the short sale from the lender for
forty-five days, that gives them little or no time to find another home
should this transaction fall through.
Because short sale transactions are typically limited to investors and those
who do not “have” to move by a certain date, the pool of potential buyers is
smaller than for that of other homes. Enticing buyers to purchase a short
sale home over one that doesn’t have the same challenges often requires some
consideration in price.
If you’re an owner is this situation, you may be offended at selling your
property slightly below market, but please consider that the lender won’t
allow you to receive any proceeds anyway, so you’re not taking that direct
loss.
An added complication is that many of the owners of homes requiring a short
sale are in default on their mortgage or at risk of default. That means
that the owner may have to get the home sold more quickly than the typical
home in the area. If the Sheriff is locking the doors and auctioning the
home in ninety days and the typical market time in a slow market in your
area is six months, you need to be priced below the market in order to
attract buyers to your property first.
Step 4: Put Together a Short Sale Package for Your Lender
Hopefully, by the time you receive an offer on your property, you’ll already
have the full short sale package and you’ll have started filling it out. It
is imperative to get this package to the lender as quickly as possible and
then to follow up with the lender to make sure they received it and that
they are processing it.
Whether you are the home owner, negotiating with the lender directly, or a
Realtor or attorney attempting to work on behalf of the home owner, there is
a lot of information that needs to be provided to the lender. Some of the
information will have to be filled out by the home owner, because it
directly involves the home owner’s financial situation. Some of the forms
are better prepared by a Realtor, title insurance agent or attorney.
Although every lender is slightly different, the typical documents required
in a short sale package include:
1. A Cover Letter
2.
An
authorization for the Realtor or attorney to speak with the lender
3.
Seller’s
Hardship Letter
4.
Hardship
Documentation - Copies of documentation related to owner’s hardship
5.
Seller’s
Financial Statement or Income, Expense and Asset Worksheet
6.
W-2 forms
for past two years
7.
Two
months pay stubs
8.
Two to
three months bank statements
9.
Repair
estimate for any necessary repairs to property
10.
Agreement
of
11.
Realtor’s
competitive market analysis
12.
Photos of
the home (interior and exterior)
13.
Seller
Net Sheet
14.
Payoff
statements from any other lenders or liens against the property
15. Preliminary HUD 1 settlement sheet
Other forms that the lender may ask for include:
1. Title search of the property
2. Special forms
Step 5:
Start Calling the Lender!
Remember that there are many people in the same situation across the
nation. Lenders are swamped with phone calls and packages. When you
complete the package, call and email the lender to determine the best method
to get the package to the lender. My suggestion is to send it to them in
two forms.
If the lender tells you
they’d like the physical package by mail, then I would express the package
in order to insure the package gets to the lender quickly and in order to
insure it is delivered and can be tracked by who signed for it. I would
additionally scan the entire package and email it to the same person to whom
you expressed the package.
My goal is to insure they
have the package and can begin working on it. If the lender asks the
information to be faxed, which some are now doing, I would again both fax it
and email it.
Expect a Counter Proposal
Hopefully
the lender will simply accept the short sale proposal as written and allow
the sale to be consummated. Don’t be surprised if the lender refuses the
initial offer and makes a counter proposal. Should this happen, you may have
to go back to the buyer and ask for more money in order to settle the
transaction.
If you are a Realtor, you should be preparing your buyers to understand that
this is a negotiation. The lender may accept the deal, or may counter.
Getting to Settlement
As with any transaction, title insurance must be ordered and settlement must
be scheduled. In instances where an owner may be behind on their mortgage
or may be considering a short sale, a wise move for either the Realtor or
home owner would be to contact an attorney, title agent or escrow company to
run a preliminary title search of the property. Make sure there are no
other liens against the property.
Once a lender agrees to accept a short payoff, the owner needs to be ready
to move quickly to complete the transaction.
Loren Keim is the author of several books including “Short Sales: Step
by Step” and “How to Sell Your Home in ANY Market.”