What is a short sale?
Simply put, a short sale is selling a property for a less than what is owed to the underlying mortgage holder(s). The final sales price is essentially what the buyer is willing to pay for the property with the mortgage company/bank having the final approval of the associated closing costs, commissions, terms and acceptance of a discounted payoff(s). The seller should always consult with an attorney, CPA or tax advisor to determine any legal or tax consequences of a short sale. We have seen the gamut of scenarios from mortgage companies accepting the discounted payoff and releasing all remaining debt to deficiency judgments and negotiating a settlement or new payment plan with the homeowner.
The pre-short sale process begins at the time of listing the property for sale. An experienced short sale real estate agent will counsel the seller about the entire process and assist the seller in establishing a competitive listing price based on the current market conditions. The primary responsibility of the seller is to request and complete a short sale package from their bank or mortgage company.
Sellers should be prepared to provide the following documents and information for the short sale packet:
• Hardship letter – clearly outlining their financial hardship and substantiating the reasons for requesting the short sale
• A financial statement/budget – delineating all income and expenses
• Most recent 2-months paycheck stubs
• Most recent 2-months bank statements
• Past 2 years income tax returns
• If self-employed, 6 months of Profit & Loss statements
• The listing agent may request additional information:
o Current copy of mortgage statements or any notices from the bank/mortgage company
o Copies of HOA statement showing current or past due amount (if applicable)
o An authorization form signed by the sellers that will allow the listing agent to communicate and negotiate with the bank on the seller’s behalf
The short sale process begins in earnest when an offer to purchase is received from a qualified buyer. The actual process from submission to the bank to final approval can take weeks to months. A successful short sale can depend on several factors, among them –
• how solid and complete the offer is
• the buyers ability to successfully obtain their financing
• the bank’s particular process and workload
• the seller’s completed and acceptable hardship package showing the bank(s) that there is a true financial hardship
• the knowledge and communication skills of the agents
• the resulting BPO/Appraisal ordered by the bank
• the patience and determination of all parties involved
To ensure as smooth a transaction as possible, buyer’s agents must also be knowledgeable about the entire short sale process and take the necessary time to brief the buyer and set realistic expectations. Some key points to include in your buyer’s interview and qualification meeting:
- What is your buyer’s time frame? Are they prepared to wait for possibly weeks to several months for the transaction to close?
- Are they interest-rate sensitive? If interest rates go up will it negatively impact their ability to get a loan?
- Prepare your buyers for the reality of limited information about the status of the approval and the need for patience if deciding to go the short sale route.
- Be aware of numerous roadblocks along the way to closing. Everything from getting approvals from 2 separate banks to liens and clouds on title to be cleared prior to closing is possible.
- Do your homework when showing properties and be cognizant of the below-market list prices. Some listing agents will list the property well below the comps to entice activity and offers. What seems too good to be true to you and your buyer is usually proved correct when the bank counters the sales price to actual market conditions. Don’t fall into this trap!
- Strengthen your offer by having a pre-approval (not pre-qual) letter and proof of funds letter from the buyer’s lender.
- Remember the bank wants the highest net possible after acceptable closing costs. Are there multiple offers on the property? Encourage your buyer to write his/her best possible offer first.
Make sure to include the appropriate short sale approval contingency clause and due diligence timeframe to begin after short sale approval by the bank. Las Vegas agents should use the GLVAR Short Sale Addendum in the best interests of their clients:
More resources and related posts:
Short Sale Protocol - 15 sSteps to Success by Sue Saunders, General Counsel to NVAR
Short Sale Posts from Darren Welsh:
For Las Vegas Realtors: Our MLS issued this memo in April 2008..."Stop, Before You Enter a Short Sale, Foreclosure or REO Listing... Read This." Download and read the first 4 pages of the 10 page document for MLS rules and specifics. Download glvar_reo_short_sale_stop_read_this.pdf