A short sale occurs when the proceeds from a real estate sale fall short of the loan balance owed on the property. It is also referred to as negotiated settlement, short pay, or pre-foreclosure. Most short sales take place when a borrower can no longer meet their mortgage obligations, and the lender decides that selling the property at a loss is better than foreclosing on the home. Both you and the lender consent to the short sale process, which prevents hefty losses for the bank and avoids a foreclosure on your credit history.
How Long Will It Take?
The short sale negotiation can be a lengthy process. Many lenders will have several layers of bureaucracy, insurers, and investors to maneuver through in order to get a short sale approved. It will take several months for an approval, and everything depends on how well a deal sticks together. The more contracts that end up falling apart, the longer a short sale will take to close.
Why Do Short Sales Fail?
The leading reason lenders delay and/or deny short sale approvals is a seller’s failure to deliver necessary documents in a timely manner. Due to the extremely high workload, lenders do not tolerate sellers who won’t cooperate. Providing all documents and authorizations in a timely manner will make a short sale successful and limit the risk of foreclosure.
What Do You Think This Homeowner Will Do, Short Sale or Foreclose?
Short Sale Documentation
All short sales require the seller to complete a financial package. The lender will use this information to determine the financial hardship and what caused it to occur. This includes: two months of bank statements, two months of paycheck stubs, two years of tax returns, a complete financial worksheet, and hardship letter. Please start collecting as much of this information as possible and be sure to collect updated information on a monthly basis. You should evaluate this information to determine if your financial situation dictates a short sale or just strict budgeting. Contact The Hightower Team for a hard copy of the financial worksheet and hardship letter.
Initial Meeting
If you decide to do a short sale, you will need to schedule an initial appointment with The Hightower Team Realtor. At the initial appointment, we will determine your home’s value by reviewing eight comparable properties within your neighborhood. The comparables consist of four homes currently for sale or under contract and four homes that recently sold. After the value is determined, the listing agreement and supporting short sale documentation are reviewed and signed. During this appointment, we will tell you what required documents you need to obtain. At the end of the initial appointment, you will schedule a follow-up appointment in your home for sign placement, lockbox, and a full set of interior photos.
Follow-Up Appointment—Photos
During the follow-up appointment, a full set of interior photos are taken for marketing purposes (i.e., to upload onto the Multiple Listing Service). Get your home ready for photos by making each room tidy and clean. A virtual tour will be created with the photos taken during the follow-up appointment, so staging the home is highly recommended.
Marketing Your Home
Your home will be shown to both investors and individual buyers. During the showing process, your home could be shown several times a day. The goal is to get the highest and best offer in the shortest possible time. Those viewing your home have been instructed not to bother you with questions regarding the short sale, so feel free to decline to answer any questions asked to you. Be aware, your home will be shown even after an accepted offer has been submitted to the bank for approval. This will ensure you find more than one interested buyer for your home, further helping to avoid foreclosure.
The Offer
Once an offer is received on your property, The Hightower Team will schedule an appointment to review the terms and sign the purchase agreement. The offer and all supporting documentation from you (called the short sale package) will be submitted to the lender or lenders for review and approval—hopefully. Escrow will be opened and the terms of the purchase agreement will be followed. Your property will remain on the MLS and we will continue to market the home for a backup contract.
The Approval Process
Once the offer(s) has been sent to the lender(s), the short sale process can take anywhere from several weeks to several months. This timeline varies with each lender, but the averages are sixty days for approval and thirty days to close. However, this sixty- to ninety-day timeframe assumes the first contract on your home closes and that there are no cancellations or other delays. Due to the lender’s high volume of calls from prospects, clients, agents, escrow offices, and other lenders, please understand that response time can be delayed. As the mortgage crisis continues to grind on, approval timelines have become streamlined. It is much easier today vs. 2010 as mentioned in this video:
My Foreclosure Date Is Scheduled, Will I Have Enough Time?
Possibly. A lender may be persuaded to delay the foreclosure to allow an attempt to negotiate the short sale. As long as there is an offer and a complete short sale package submitted to the lender, they will often allow the sale date to be rescheduled multiple times. Accepting a buyer’s offer will NOT automatically stop the foreclosure process, and sometimes guidelines set by the mortgage holder cause a home to foreclose. There are no guarantees, but many sellers have been successful.
Prior to Short Sale Approval
After reviewing the short sale package and ordering updated information and other documents, a broker price opinion (BPO) will be ordered by the lender. In some cases, an appraisal will be ordered by the lender. Either of these valuations will provide your lender with market activity and price comparables to help them negotiate the short sale. During this process, the lender will compute their net proceeds and the expense allowed on the estimated HUD-1 settlement statement. If there are subordinate loans such as a second or a home equity line of credit (HELOC) negotiations with each lender must be successful for a full short sale approval.
The Short Sale Approval
Once the short sale package has been approved by the lender, you will be notified and given the opportunity to review the lender’s terms and the overall short sale approval. The buyer and their real estate agent will have the same opportunity. Any new terms required by the lender will be added to the purchase agreement with an addendum signed by both parties. If either the buyer or seller rejects the lender’s terms, then the transaction will cancel and the property will be available for the next buyer. If all parties agree to the short sale approval, the transaction will proceed to close, following the terms outlined in the lender’s short sale approval and the buyer’s purchase agreement.
No Margin for Error
After months of waiting, the lender may demand to close escrow anywhere from 10-30 days from the date of the approval. It is imperative that all parties understand the terms and conditions of the short sale approval and be prepared to complete the obligations. All parties must understand that the approval cannot be changed without risking massive delays or even foreclosure. If the escrow does not close on time, the lender may decide to proceed with foreclosure, eliminating the opportunity for all parties to complete a successful transaction.
The Short Sale Closing
As the finish line approaches, you will make an appointment to sign seller documents at the title company handling the closing. Prior to closing, make sure the home is ready for the new owner. This is their new home experience and we want it to be fun and exciting. On the day of the closing, bring government issued identification such as a driver’s license, passport, or military ID to the title company handling the closing. Also bring all keys to the property, garage door openers, and any other applicable property items for the buyer.
It’s finally over!
After waiting for months, the closing finally occurs and the short sale is complete! You will feel so relieved after meeting all of the lender’s demands for months. Many of our clients can’t believe they finally closed and can move on with their lives. The short sale experience is unique to each person who narrowly avoids foreclosure. The Hightower Team has shared many hugs with clients and has seen homeowners smile, laugh, and cry once a closing is complete.
How Do I Know This Will Work?
There are no guarantees and missed payment means the lender has the option to foreclose. We present alternatives to the lender that highlight the benefits of a short sale vs. foreclosure, but ultimately our success depends on you. Distressed property sales are tough, and all Buyers looking at short sales want a good deal. As a Seller you must make the choice to avoid foreclosure, and do whatever it takes to do so like Suze Orman says in this video! It’s not going to be easy, but it’s all worth it when it’s over.
What Happens If This Doesn’t Work?
Your house will likely go to foreclosure if the short sale doesn’t work. A short sale is the most viable option after you have exhausted all alternatives while attempting to remain in the home. We advise all homeowners to be prepared for the worst case scenario. Please take time to review the Homeowner Rescue, which outlines what to expect if the bank forecloses.
