With a whirlwind of information out there, the short sale process can become very confusing and tedious to accomplish. In this article we will break down the core concepts of a short sale in an easy to understand step by step process.
Short sale refers to a real estate sale where the net proceeds of a property sale fall short of all debts that liens have secured against that property. In other words, it’s the sale of a property at a price less than what the current owner owes.
For instance, the amount owed by a homeowner can be $500,000 on a mortgage. However, the value of the home in question can be $400,000. As such, there is a negative equity of $100,000.
But, why would a lender agree to a short sale? Well, lenders are in a money making business. They are not interested in owning homes. When a lender takes a property back and forecloses it, the property is considered a non-performing loan.
Therefore, this transaction is particularly beneficial to banks or lenders because it allows them to avoid repossessing properties through foreclosures. The foreclosure process is time-consuming and expensive. On the other hand, this sale enables property sellers to avoid credit hit that foreclosure brings as well as the bankruptcy that accompanies it in some cases.
The process of a short sale can be broken down into nine steps as follows:
Step 1: Send the Sender Authorization
The first step of the short sale process entails gathering the necessary documents and sending Third Party Authorization to a foreclosing lender requesting a sale package, reinstatement figures, and payoff. The authorization form should bear the homeowner’s name, property address, lender name, social security number, loan number and a date. This should be followed by a call to the customer service with an explanation that you will be working with the defaulting client. Find out if you will need an authorization file from the lender or the loss mitigation department or even both. Also inquire about the duration you will wait for this authorization and ensure that you have the contact details of all departments.
Step 2: Follow Up and Request a Short Sale Package
You will have to resend various documents. Follow up with the bank or the lender to ensure that you resend documents immediately and avoid wasting time. Also find out more about the mortgage lender, the strict foreclosure date if it exists, and loan type. This information will determine how you approach negotiations. Once you have authorization on a file, order a package for the sale if you have not received it yet. Most lenders prefer getting their own packages instead of generic packages.
Step 3: Complete the Short Sale Package
Get all documents that the foreclosure lender requires. Be on top of the real estate agent or homeowner or the entity that originally sent over the home. This will enable you to get all necessary documents as soon as possible. Generally, it’s wise to collect all documents necessary from the property owner before you initiate the short sale process.
In most cases, the short sale process requires the following documents:
If the homeowner doesn’t have some documents, make sure that they write, date and sign a brief explanation for this.
Step 4: Submit the Short Sale Package to the Lender
If a property has two mortgages, there should be different timing for faxing the sale package. There are lenders that request a payoff from the other mortgage before making their decision. In that case, faxing the first short sale package and waiting for the Broker’s Pricing Opinion (BPO)/appraisal to be ordered first before submitting a second short sale package is the best approach. If the other lender wants to see the payoff, tell them that you got a verbal acceptance and you are waiting for a written letter.
Step 5: Follow Up on Short Sale Package Receipt
The lender requires between 48 and 72 hours to scan the information in the documents you send. Therefore, make a call to follow up after this time. If necessary, continue to make follow up calls until you are sure that the package has been received with all documents. Inquire about the duration your sale package will take to be assigned a loss mitigator. Find out more about when to follow up and if you should use the same phone number. The duration between short sale package reception and assigning can last from one to four weeks.
Step 6: Schedule a BPO or Appraisal for the Short Sale
After the lender receives your offer, request a BPO in order to validate the pricing of the offer. The BPO is the most influential element that is considered by lenders when deciding on the discount amount to accept. Some lenders have setup representatives. These order the BPO/appraisal while organizing the sale package for a mitigator.
At this stage, be ready to face objection. The setup representative or mitigator might not be ready to order a BPO. If the setup representative or short sale mitigator decides to order the BPO/appraisal, find out how long the contracted agent or appraiser will take. Also ask how long they will get the appraisal or BPO back and the duration their decision making process will take.
Step 7: Educate Your Evaluator
If you don’t get a good deal or if you get a too high BPO/appraisal, the sale can end instantly. However, you can schedule an appointment with the appraiser or BPO agent and set up a meeting at the property. Attend the meeting with real estate comps and supporting documents to justify the offer. Take time to educate them about the property. After the appraisal or BPO, wait for your offer to be evaluated against the appraisal or BPO before starting the negotiations.
Step 8: Start Negotiations with the Loss Mitigator
After reviewing the BPO/appraisal with the sale document and current offer, the mitigator can decline, accept, or counter your offer. If your short sale offer is accepted, start preparations for property closing. If the offer is declined, try to plead your case with the mitigator.
Address facts like major damages, solid comparables, decline of the market, and state of crime in the area where the property is located. Be prepared to justify your case if you are negotiating the short sale. It might even be necessary to resubmit the entire short sale package and the assisting documents. Nevertheless, you will most likely have to make numerous calls to get this type of deal closed.
Step 9: Short Sale Acceptance
Once the short sale has been accepted, start preparing for closing. This may include supplying the necessary documents to the attorneys/title company, setting a date for closing, checking the money owed for water/sewer use and property taxes as well as the amount owed for the condo fees where applicable.
The time taken to short sell a property varies depending on several factors. For instance, the lender will influence the time your property will take to sell. A short sale can be approved by a lender within two weeks. Others can take year or even more! Nevertheless, short sales are mostly completed within 3 to 6 months.
Most agents can assist in narrowing down the short sale timeline by checking the loan information. Your loan type and lender’s identity set a stage for the sale timeline. Additionally, you could be paying several loans. Your loan can also have mortgage insurance. These are some of the factors that will influence the time you will wait for your short sale to be approved while adding overlays to the sale.
This is a team or an individual that works hard to get approval for the sale on this transaction. The short sale negotiator can be a third party like a real estate broker or an attorney. They can also be a listing agent depending on how they structure their team.
During the short sale process, there are occasions where a third party or a listing agent has to work with the mortgage lender of the seller to reach acceptable terms and price for the property in question. Nevertheless, the term negotiator can have another meaning when used in relation to the navigation required to complete the sale process.
Most short sale agents are frustrated while trying to navigate the process. Negotiation or navigation of this process entails sending several follow ups with different departments, multiple faxes, getting past misinformed gatekeepers, and escalating requests to the management. This navigation can often difficult and it’s the major challenge in this transaction.
When it comes to flipping houses, this sale happens when a real estate investor simultaneously buys a property at a price less than its current mortgage balance and resells it at a higher price. Clearly, this sale is gold mine for a flipper. However, there are things that you should pay keen attention to when purchasing a short sale home or property as a flip. For instance, make sure that the sellers or lender agrees to your terms when it comes to repair costs. Also check specific sale approval guidelines in the affidavits. Even more, make sure that the lender has ratified the offer or terms of the sale.
Generally, these sales are a great buy for flippers. In most cases, they are in better condition than abandoned or bank owned properties because most sellers reside in their properties till the closing day. Nevertheless, due diligence is required just like with other real estate deals.
In addition to providing protection to the seller’s credit, this sale has numerous benefits for the buyer. Here are some of them:
This sale presents an opportunity for a buyer to get a great deal on a property that would otherwise be unaffordable to them. Essentially, lenders opt for this sale to avoid the costs of evicting owners, administration, maintenance, and repair. They sell properties under their loan value thereby presenting a chance for buyers to get great deals on amazing properties.
As mentioned previously, a short sale requires the lender to agree to the sale of a property for less than the current loan’s value. The lender must also give the buyer favorable terms in order to sell the property quickly. However, the terms of this sale are the most cost-effective for the lender. For a lender to consider this option, the property owner must be way behind schedule in terms of payments. Therefore, the lender knows that the owner has insufficient resources. Thus, they can’t meet their obligations.
Instead of continuing to receive no money from the property, the lender is eager to go for this sale in order to recoup some of the costs of the loan. Foreclosure is not a better option because it comes with eviction, repair, and administration expenses. What’s more, banks don’t have guarantees that foreclosed homes will sell. Thus, foreclosing can leave the lender with monthly maintenance expenses until they sell the property.
Homeowners can cause some real problems when it comes to foreclosure. For instance, there are cases where legal action is necessary to evict current occupants, and in these situations, an angry homeowner can also damage the property before vacating. On the other hand, buying a short sale typically means dealing with an eager seller. This spares buyers some foreclosure problems. Most sellers want to prevent the credit report damage caused by foreclosure. They also want to purchase new houses faster. This compels them to be more cooperative during this type of sale.
Any sale must be approved by the lender. That means not every house listed for sale via this method is really up for sale. So, before you buy a short sale, here are some of the things that you should look for.
Some properties listed for sale through this method have ridiculously low prices to a level where lenders do not accept them. Such listings can get multiple offers. However, to have your offer accepted, the lender must fully approve your offer. Thus, having similar comparable properties that have sold at or around your offer price will help it to be accepted.
Mortgage Amount, Number of Lenders and Loans
When buying through an agent, ask them to research on the amount owed against the property as well as the number of lenders and loans. Second or third lenders receive peanuts compared to the total amount received by the first or senior lender. What’s more, working with some lenders is not easy. Experienced agents know lenders that are difficult to work with and they will advise you on the best way to overcome such challenges.
Track Record of the Listing Agent
Due to the complexity of a short sale, a listing agents track record is a key factor to consider.. Essentially, it’s the listing agent that submits a short sale package and negotiates with the lender. A buyer agent doesn’t talk to the lender. Though a listing agent can hire an outside company, the results of such negotiations can get complex. Therefore, don’t risk having the purchase rejected by working with an inexperienced listing agent.
In addition to having a property that qualifies for a short sale, the seller should also meet some qualifications. A sale package comprises of the following minimum requirements:
A seller that doesn’t want to cooperate will delay returning these documents. Others don’t know that it’s mandatory to return the documents. Therefore, check the seller’s qualifications to ensure that your short sale purchase is not delayed by an agent or seller that doesn’t have the necessary documents.
Number of the Received Offers
When a property is priced under its current market value, it receives multiple offers. Try to make an offer that beats the competition while being below the market value to avoid wasting time.
Buying a house through this process involves the following steps:
Step 1: Identify possible short sales
This is the first step of the process. Here, you locate pre-foreclosures within your area. You can check online listings, legal ads, search courthouse listings or use a buyer’s agent.
Step 2: View the house
Gauge the condition of the house to determine its repair estimate. Normally, most home buyers do not consider houses that need work. This might be great for you.
Step 3: Conduct some research
What is the profit potential of the property? How much is the home worth? Whether you are a homeowner that wants to live in the house or an investor, you want to buy a profitable house.
Step 4: Find all mortgages and liens
Ask the agent or seller about the property liens as well as the primary or main lien holder. Confirm the information via a title search before you close the deal to avoid undisclosed liens on the house.
Step 5: Decide on financing
How do you intend to pay for the house? The existing lender can give you a loan if they consider you a worthy credit risk. That’s because the sale paperwork provides enough information about you. This can also expedite the process of applying for a loan.
Step 6: Talk to the lender
Talk to the resource recovery or loss mitigation department instead of the customer service or collection department. Essentially, you should find the decision maker. However, this is not easy and you should convince the homeowner to fill out and sign an authorization letter. This permits the lender to discuss their mortgage situation with the buyer.
Step 7: Complete a sale application
Most lenders provide sale request application. If there is no such an application, find out more about the paperwork that the lender may want you to fill out.
Step 8: Come up with a proposal
Generally, a proposal comprises of a materials package. This includes the authorization letter, application, sale and purchase contract, hardship letter, property’s value statement, liabilities and costs.
Step 9: Negotiate the sale terms
The lender can propose a counteroffer or reject the offer. But, like with any other transaction in real estate, you should decide on your limit beforehand. Don’t fear walking away in the event that the lender fails to agree to your offer.
Step 10: Seal the short sale deal
Once you, the lender, and the seller reach an agreement, get everything officially written and recorded. Ensure that the seller understands the sale deal before closing.
Most property owners resort to this sale when they fall behind in terms of mortgage payments. Unfortunately, some buyers don’t know how to find such homeowners. Here are some of the ways to find properties for sale through this method.
Short sales occur when outstanding loans or obligations against a property are more than the amount a property or home is worth. This compels the lender to accept discounted payoff thereby releasing the lien secured to that property on receiving an amount less than what is owed by the borrower or property owner hoping to mitigate or avoid an impending loss.
On the other hand, a foreclosure is simply taking possession of a property when its owner fails to pay for a mortgage. Foreclosure is a legal process that has set outcomes and timelines. In a short sale, the name of the homeowner is still on the property’s title. Thus, they are still the official owners that want to sell the home or property. On the other hand, a foreclosure means the property is owned by the lender. Thus, the property owner is not a party in its sale.
Lending institutions use the term Real Estate Owned or simply REO in relation to ownership of properties acquired through foreclosure or for investment. REO refers to a lender owned property following an unsuccessful sale via a foreclosure auction. This is followed by an attempt by the lender or bank to sell the property. The lender can remove expenses like some liens before trying to sell it via real estate agents.
There are pros and cons of this sale for everyone. Here are the pros and cons of the sale for investors or buyers:
Yes. Your credit report won’t have the “short sale” term. Basically, this term is a description of a settlement negotiation process for a mortgage debt for an amount less than what was originally owed. Therefore, your credit report will show “settled”. Whenever an account reports a debt as “settled”, the credit scores and credit history are affected negatively.
When it comes to the severity, a short sale typically has a lesser affect than a foreclosure on your credit. However, the impact of a short sale is still serious because you did not repay the debt fully. The impact amount depends on credit history and the scoring system that the lender uses. However, the sale will affect your credit negatively for several years.
This sale affects credit report negatively, but for how long? According to the Experian, information about the sale remains in credit report for up to seven years following the delinquency date of the mortgage. However, you might still be eligible for a loan even after two years. Essentially, effects of this sale on a credit report are possible to remedy a few years based on your current debt-to-income ratio and history of your past mortgage payment.
Yes. This sale involves complex negotiations and paperwork with multiple parties. It’s therefore important to ensure that your sale or purchase involves an experienced realtor. In addition to specializing in these sales, the realtor works with experienced attorneys that can be consulted when necessary and they will focus on protecting your interests.
Although not every realtor in this specialty earns this designation, majority of them become Certified Distressed Property Experts. This means they have completed the necessary educational coursework that relates to the sales as well as foreclosure and acquired vast experience in both processes.
There are many people looking for properties available through this sale. That’s because they offer high return on investment. As such, you need to know how to find them before other investors. Here are ways to find these listings to purchase.
Generally, properties for sale via this method are listed like other properties for sale. That means you can find them just way you can find other properties. The main difference is the sale price and process.
Yes. It’s possible to short sell your house and purchase another one. However, answering the “when” question is the major challenge. The answer to the “when” question will depend on how your loan payoff will be reported by your lender to credit-reporting bureaus.
For instance, if the lender reports the payoff as something less than you paid in full, your credit score will suffer. In turn, this can affect your mortgage loan qualification negatively. If you intend to buy another house immediately after the sale, ask the lender how they will report your payoff.
Yes, you definitely can wholesale or flip a short sale properties. However, always be sure to check the approval letter because some banks & lenders do not allow wholesalers to assign short sales. In some cases this is because the entity on a contract should be the same entity that purchases the property.
Always be prepared when you purchase a short sale when flipping & wholesaling houses because the banks can present a restrictive agreement requiring you not to resell the property immediately. This type of restriction is typically called a "Deed Restriction." Because of this, be ready to potentially hold onto the property if you intend to wholesale or flip it compared to traditional sale types. Also, be sure to schedule a home inspection to know the repairs you will have to do immediately after closing.
At the end of the day, your ability to wholesale & flip a property is dependent upon the contract between you & the lender. The contract is always the law of the land and should always seek the advice of a real estate attorney to make sure you are abiding by all of the laws.
A short sale will damage your credit if you are the seller but it will cause less harm than a bankruptcy or foreclosure. This type of sale can block you from a new home mortgage for around two years but a bankruptcy or foreclosure can prevent you from getting a new home mortgage for up to ten years. Nevertheless, a sale presents a chance for improving credit score via good financial habits and it can help you get a better interest rate when buying your next home.
As an investor, short sales can be phenomenal investment properties. Remember, to always abide by state and federal laws, and you will be golden!
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