Short Sale Process

short sale processShort Sale Process

The short sale process is actually a pretty easy process despite what you may have heard. By easy, we mean simple and straight forward in terms of the concept.  The difficulty in the short sale process lies in all the variables when it comes to the various lenders involved and the different forms and expectations they have.

We have broken the short sale process down into 5 steps so that you can understand and follow along while your short sale is being processed.

1. Qualify the Seller and Home for a Short Sale

The first step is to speak with the loan servicer and let them know that you will be attempting to sell the home on a short sale. Some lenders may not want to work on anything until they have an offer in hand, but most lenders are now proactively allowing a review of the sellers hardship and even going as far as recommending a listing price to the agent.

This can save all kinds of time later down the road when you have an offer and an eager buyer wanting the sale to close.  The loan servicer will review the sellers financial information and verify that there is the need to sell the home now as opposed to paying it off as agreed.

It’s also important to verify what documents they will need to see when an offer comes in.  They may require certain forms and affidavits to be signed once the home is under contract.

2. List the Property For Sale

Once we are confident that the ball is rolling with the lender, or we have a recommended listing price, its time to attract buyers.  The home must be listed in the MLS (Multiple Listing System) in order to attract a fair market price. The agent will need to disclose that any offer will require 3rd party approval.  The loan servicer will have sent out an independent agent to do a BPO (Broker Price Opinion) in order to determine the fair market price.  They will want the agent to list the property for sale at that price.

3. Receive An Offer

Once an offer is received, it is important that any additional documents required by the loan servicer or investor get completed accurately and submitted with the offer. Many lenders require and Arms-Length Affidavit or other form of disclosure that states that there are no hidden contracts, the parties are not related, and everything about the transaction has been disclosed to the lender.  Discovering what forms the lender requires should be done in step 1 to avoid delays.

Paperwork errors and missing paperwork are the single biggest cause of delays in the short sale process. 

4. Submit the Offer for Review

The offer and all supporting documents will be submitted to the lender for review. A HUD-1 Settlement Statement will also be submitted which shows a break down of all costs and net proceeds to each lender. This is how they determine if the offer will meet their expected proceeds based on the Fair Market Value of the home.

A few things can happen at this point:

If they don’t like the net proceeds, they will recommend a higher purchase price.

They may also reject some of the fees being charged by various parties in the transaction. (escrow fees, HOA fees, commissions, etc).

They could submit the file to the investor for final approval, or, they may have the authority to approve it on the spot depending on how their contract with the investor is written.

5. Receive Approval and Proceed to Closing

Once everything been agreed to, the lender will issue an approval for the short sale which will spell out whatever terms and conditions that have set out.  It’s important for all the small print is reviewed carefully as the lender may agree to the short sale, but not forgive the loss they are taking and expect to be repaid.  In most cases, they do waive this deficiency balance, but not always. If the seller agrees to the approval letter then the buyer can proceed with their part of the closing.

The process here looks very much like a regular real estate transaction. Home Inspection, Financing, Earnest Money, etc.

A few days before closing, the Escrow company will need to supply one last HUD-1 with the final numbers calculated to the exact day of closing.  The lender will need to approve this Final HUD and then closing and recording can proceed.

5 simple steps right?

Not exactly.

As mentioned above, there are a lot of variables that can complicate things and cause delays.  What if there is Mortgage Insurance?  What if there is more than one loan? What if there are judgements, back due taxes or other items clouding the title? What if the lender wants the seller to contribute to the loss at closing?

These are just a few of the issues we deal with on short sale transactions and why it is recommended that a short sale is processed by an agent or company that has the experience and training to deal with these issues. This is the best way to insure that you avoid delays and pitfalls in the short sale process.

For more information about different terms related to short sales, visit our Short Sales 101 page.