Beginning the Short Sale Process
Short sales occur for several reasons, but the most common reasons are the seller has a hardship (job loss, unexpected health issues etc.), they fall behind in their mortgage payments, and they owe more on the mortgage than the home can sell for at fair market value.
The seller, when applying for a short sale approval, must compile a financial packet to submit to the bank, and they can often be quite voluminous. Every bank has their own criteria for the packet, but it’s similar from bank to bank. The seller’s short sale packet will consist of:
- Letter of authorization, which lets the listing agent speak to the bank.
- Preliminary HUD-1 (also knows as a settlement statement or RESPA statement). This gives the bank a general idea of their final net, after all fees are paid.
- Completed seller financial statement
- Hardship letter explaining WHY the seller cannot keep current on the mortgage
- 2 years of tax returns
- 2 years of W-2s
- Recent payroll stubs, or proof they do not have a job
- Last 6 months of bank statements
- Comparative market analysis or list of recent comparable sales
The Offer, Submitting it to the Bank, and the Buyers Responsibility While Waiting for Approval
Before a buyer writes an offer, the buyer should ask his or her agent for a list of comparable sales. Even in short sale situations, banks will not approve a short sale at ridiculously low prices. The bank will want to receive somewhat close to market value, and often determine their “bottom line price” based on the difference between the sales price and what is owed to the them. The bank typically orders an appraisal or a BPO (broke price opinion), and this too becomes a factor in the approval process.
The short sale list price may not even be close to market value. In fact the house may be listed below. Additionally, just because the seller accepts the offer, doesn’t always mean the BANK will.
After the seller accepts the offer, the listing agent sends the following items to the bank:
- Listing agreement
- Executed contract of sale and other pertinent paperwork
- Buyer’s pre-approval letter and copy of earnest money check
- Seller’s short sale package
If the submitted package is incomplete, the process can and will be delayed. If the bank doesn’t receive the complete package in a reasonable amount of time, the bank might even destroy the package. This is why it’s imperative to have a listing agent familiar with short sales from the beginning. An SFR certified agent is one who has been trained as a Short Sale and Foreclosure Resource and is knowledgeable about the entire process. This doesn’t always mean they can make it move faster, but it helps when they know the procedure and how to follow up in a timely and efficient manner.
Short sales are typically “AS IS” sales. Neither the seller nor the bank will make any repairs. It is up to the buyer to obtain a home inspection (if they so chose and at their own expense), and determine if the results of the inspection are acceptable. If an “as is “ sale, the inspection is only for informational purposes, and should be done sooner rather than later (7 to 10 days from signing the contract), and definitely before the short sale is approved.
If there are such major issues as a result of the inspection that the buyer does not want to address them, the buyer can rescind their offer, however they cannot be reimbursed for the cost of the inspection. Often times the seller also requires the buyer to pay for AND make repairs necessary to obtain, any certifications the locality may require. Typically they may include:
- a Certificate of Occupancy (or C of O-not required in some towns)
- fire inspection for smoke/carbon monoxide detectors and fire extinguishers
- the required clear Wood Destroying Insect Report (called the WDIR or the “termite” inspection).
Meanwhile, the process should be moving along as follows.
The Short Sale Process at the Bank
It can take a long time for a reply from the bank. It is imperative for the listing agent to regularly call or email the bank and keep records of all correspondence to keep track of the progress. Buyers sometimes get so frustrated waiting for the approval, they often threaten to cancel if they don’t get an answer soon. Unfortunately, the seller, listing agent, AND buyers agent are at the mercy of the banks at this point, and threatening to cancel the transaction does not speed up the process.
If you have no patience, or have to move into a home quickly, a short sale is not for you.
Following is a typical short sale process at the bank:
Bank acknowledges they received the short sale packet. This can take up to 1 month.
- A negotiator is assigned to review and negotiate with the “investors” of the lien. This can take 1 to 2 months.
- A BPO (Broker Price Opinion-a type of market analysis for the bank to determine the market value of the house based on comparable sold homes) or appraisal is ordered. Typically the bank will NOT reveal the results of the BPO or appraisal.
- The file is sent for review with the banks loss mitigation department. This can take up to a month. Infrequently, the bank may request still MORE financial paperwork from the seller to have current bank statements, etc.
- The bank may request that all parties sign an Arm’s Length Affidavit, stating that the buyer and seller have no “relationship” with each other.
- The bank issues a short sale approval by letter, email and/or phone call.
- The buyer rescinds the contract.
Bear in mind that the bank can, and often does, reply with a counter-offer if the BPO/appraisal values the house quite a bit higher than the offer price, and/or if the difference between what is owed and the agreed upon offer price are too far apart.
Some short sales get approval in 6 to 8 weeks, but it can sometimes take 6 months.
As if all that waiting wasn’t annoying enough, assuming the buyer doesn’t get frustrated and walk away while waiting, waiting, waiting, once the bank DOES approve the short sale, they typically give 45 days from date of approval to obtain your mortgage commitment, (if it is not a cash transaction) AND close.
So the entire transaction is wait, wait, wait, then…. hurry up!! Again, if buyers are the type with little patience, or have to move into a house quickly, perhaps a short sale is not for them.
Note: This is not all inclusive of everything that goes on in a short sale. Each transaction has it’s own unique problems that may arise which have not have been addressed in this article. This article is meant to be for informational purposes only, and is not to be construed as an actual schedule of events or what will happen in your transaction.