The Short Sale Process
One way to look at a short sale is to imagine being a teenager again. You need to ask your parents for permission for things. “Dad, if I promise to clean my room, will you give me money for the concert?” After a lot of questions about where all the money he gave you last week went and some questions about which of your friends are going, Dad says he’ll pay half. You plead your case and he finally agrees to pay for it all, provided you clean your room and the garage.
A short sale is a lot like having a parent involved. Because the bank is agreeing to pay off any amount that you are short, the bank gets a say. You still get to control most of the aspects of selling your house but the final decision is up to the bank. After all, it’s their money.
There is no such thing as a “standard” short sale. Each bank or workout trustee is different. The owners they represent are different. Everyone seems to use different forms and ask for different information. Even if you get to use the same bank – you never seem to get the same people. However, they all have some common motives – cost control and controlling second-guessing.
Banks are subject to regulation and subject to oversight. They need to be able to provide proof to auditors, bank regulators, mortgage owners and other yet unnamed snoops – that they did a good job. Like any bureaucracy, self-protection is ingrained; therefore, the bank will ask for all sorts of information for their files. Even if the person you’re dealing with is convinced that you should be offered the opportunity to do a short sale, he still needs to cover himself and ask questions, ask for documents and fill up the file. It's just the way it is.
Typical steps in a short sale
Once you fall behind on your payments, the servicer of your loan will start contacting you to ask for payment. Start keeping a file of all your contacts. Make a file and start a log.
If you are going to look into refinancing or renegotiating the terms of your loan – now is the time to start. Ask the servicing representative to give you a contact and call that person. As we’ve discussed, this may not work if your credit has been damaged.
Once you’ve determined that you can’t sell your house for enough money to pay off the debt, you need to start working on negotiating a short sale. Contact your servicer and tell them that you need to sell your house because you can’t afford the payments. Also tell them that it looks like the proceeds will not cover the debt and you will be short.
They may moan, they may groan and they may threaten. Be calm and ask if they have a short sale program. They all do, eventually. Some are listed right on their web sites. For example, AGEIS (who is no longer making loans) has a nice section on their web site dealing with short sales and a financial worksheet for you to complete.
Some banks choose to get involved in the process early. They will ask you to submit a “short sale package”. This will include everything they need except for the final offer. Although they can only make a final decision after receiving an offer, they can review your information and let you know if you have any qualification problems. This discussion assumes that the bank will accept the background information early.
Other banks choose not to become involved early. They will tell you to try and sell the property but they will proceed with the foreclosure. If you get an offer before they foreclose they will consider a short sale. They only accept a “short sale package” if it contains an offer. If that is the case, you will submit all the information at once. The bank will then review your information and evaluate the offer. This can result in significant delays. Start to assemble the “short sale package” information as soon as possible. You want to be able to send the package and the offer the same day you receive the offer.
The loan servicer may not be the organization responsible for working with short sales. They may refer you to the actual owner of the loan, or someone authorized to work on their behalf. We’ll continue to call this organization “the bank”
You may be asked to write a “hardship letter” before they send you any information. Remember, the bank is building a file and wants to prove that you asked for help. Be direct, brief and truthful. You don’t need to go into detail about your financial situation – just that you can’t pay. The bank will get all the financial details later. Provide your loan number. If you have other conditions such as a job loss or medical conditions, mention them but don’t go on and on. The bank has heard every story. ASK FOR HELP – BE SPECIFIC. If your goal is to be allowed to participate in a short sale with the bank funding the shortage and forgiving the debt – ask for that specifically. Give them an idea of what the funding may be – “The realtor said the house will bring around $250,000 and my debt is $225,000, so the shortfall maybe over $25,000”.
If you’re current on your loan but know you can’t make payments in the future, you may be told that the bank only offers short sale options to delinquent customers. Don’t believe them. Ask to speak to someone else. Explain, that although it will be easy to stop making payments, (that’s why you called in the first place) any delay in getting started will cost them money.
They will ask for financial and other details at some point. Typically, they will ask for:
You will be asked how you plan to sell the property. For most folks this means identifying the Realtor you want to sell your property. The Realtor may be asked by the bank for a Comparative Market Analysis to support the sales price. The Realtor may also be asked to submit the real estate listing agreement for review. Typically, the listing agreement will discuss the need for bank approval prior to any sale. In addition, because the bank will be paying the real estate sales commission, the bank may want to negotiate that fee directly with the Realtor.
The bank may ask that the property be appraised before agreeing to an asking price. That’s fine. Make sure that the bank is the one paying for the appraisal. The bank may use a BPO (broker’s price opinion) instead of a full appraisal.
Good news! The bank thinks you are a candidate for the short sale. You’ve convinced them that it is better for them to fund the short sale loss than foreclose.
You’ll most likely be assigned a “real person” to deal with – your contact.
From here, until you receive an offer, it’s just another real estate sale. The Realtor advertises and shows your property.
If you need to lower the price, you may need to call your contact at the bank to get approval.
The bank is aware that “time is money”. If your house doesn’t sell, they will want to know why. They can’t allow you to stay in the house for too long. If they continue with a short sale for six months and then start another six-month foreclosure/eviction process, the bank may lose more money than it had planned. For that reason, the short sale period is usually limited in time. Usually three or four months. The next step may be to ask you to leave and give them a Deed in Lieu of Foreclosure.
Once you get an offer on your house, you need to get the bank to sign off. Your Realtor will fax a copy of the offer to your contract to the bank for approval. Approvals take time. Plan to add several extra days for the approval if they have accepted your “short sale package” information early. If they only wanted the package after you received an offer, it could take weeks to get approval.
If it’s been awhile since you submitted your financial information, you may be asked to do it again. At the least you’ll be asked to verify that nothing has changed (you haven’t won the lottery for example).
Once approved, the sale is given to the Title Company to process the sale. Make sure the Title Company knows that it is a short sale and that any remaining debt will be forgiven.
The exact method of documenting the forgiveness can vary from a simple release or satisfaction to a complex agreement. Just be certain that your attorney looks over the documents and agrees that your deficiency will be forgiven. You do not want to have a deficiency judgment.
At that point, the closing date is set and documents transferring the title to house are prepared as well as those documents releasing you from indebtedness. You most likely will not have to attend the actual closing. You’re not getting a check, so you can sign a day or so ahead.
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A short sale is the only place that Realtors get a chance to make money in a Foreclosure scenario. We are only paid if the property is sold. Banks usually only allow a short period of time for a short sale to work out. If it doesn't work out the bank is going to move on to either a Deed in Lieu of Foreclosure or a straight foreclosure.
So, the Realtor is faced with a short listing period to sell the house. In a tight market the risks are high. The Realtor may have to lay out large amounts of dollars in advertising and large amounts of time hoping to negotiate a deal that many never happen. For this reason, many Realtors don't like to sell troubled property. The risk is too high.
We have found that short sales can make sense, and we enjoy the challenge. However, we know it's important to be realistic and honest about your chances. We'll let you know if we don't think a short sale is for you.
If you are in the position where it looks like you may be faced with foreclosure and would like to investigate if a short sale is for you, give us a call or send us an e-mail.
Thanks
Russ & Betty Meyers
Distinguished Realty
904-294-0283 - Russ
904-294-1437 - Betty
rmeyers@distinguishedrealtyco.com
bmeyers@distinguishedrealtyco.com
Why Short Sales Work
Banks don't like foreclosure; it's a long and expensive process. From the date of your first missed payment until the foreclosure sale can be six months or longer. The amount of unpaid interest, late charges and other fees build-up. It takes time and effort.
In many cases the bank will have to transfer the foreclosure efforts to another bank (trustee) who specializes in loan work-outs.
Even after the foreclosure, the new owner may be forced to evict you, another frustrating and expensive process.
Also, banks don't like the exposure to loss from damage. Although many people in foreclosure keep the houses neat and clean, some don't. Either through anger, depression, frustration or just lack of funds, they can ruin the house during the foreclosure period. The bank then needs to either make expensive repairs or sell at a distressed value.
If your short sale offers a quicker, safer and cheaper alternative to foreclosure, the bank is interested.
The benefits to the seller are a little more subtle. You are going to lose your home in any case but you can walk away without any debt, with your credit rating bruised rather than shattered and without a public foreclosure record.
While a foreclosure followed by a bankruptcy also allows you to walk away without debt, the public records of foreclosure and bankruptcy will affect you for a long time.
