The Complete Short Sale Process From Beginning to End
The short sale process is still a mystery to many people even after all these years. Puzzled buyers are looking for direction but even buyer's agents are sometimes confused. On top of that, not every short sale listing agent knows how to do a short sale.
What Is a Short Sale?
When a lender approves a short sale, it's agreeing to sell the property for less than the outstanding mortgage balance against it.
There's something in this for the lender when foreclosure seems inevitable. It doesn't have to take the property back and go through the expense and hassle of maintaining it until it can be sold again—and there's no guarantee how much it will eventually sell for.
The dollar amount of a short sale offer is right there on the table and it's often more than the lender is likely to get for the property in a foreclosure auction. That said, banks aren't in business to release mortgage obligations at rock-bottom prices, either.
The Basics for the Seller
Banks grant short sales for two basic reasons. The seller is experiencing a hardship and there isn't enough equity in the home to pay off the mortgage after paying the costs of sale.
Some examples of hardship include unemployment or reduced income, divorce, a medical emergency, a job transfer out of town, bankruptcy, or a death.
The seller must prepare a financial package for submission to the short sale bank. Each bank has its own guidelines but the basic procedure is similar from bank to bank.
A seller's short sale package will most likely consist of:
- A letter of authorization which lets your agent speak with the bank
- A preliminary closing statement
- A completed financial statement or RMA
- A hardship letter from the seller
- Two years tax returns
- Two years W-2s
- 30 days payroll stubs
- Two months of bank statements
- A comparative market analysis or list of recent comparable sales in the area
Writing an Offer and Submitting It to the Bank
As a buyer, ask your agent for a list of comparable sales before you write a short sale offer. The bank will want to receive something at least close to market value.
Keep in mind that the short sale listing price might not reflect market value. In fact, the property might be priced below comparable sales in an effort to encourage multiple offers. Some short sales can begin prior to an offer but banks will most often start the procedure upon receipt of an accepted purchase offer.
After the seller accepts the offer, the listing agent will send the listing agreement, the executed purchase offer, the buyer's preapproval letter, a copy of the earnest money check, and proof of funds to the bank. She'll also submit the seller's short sale package.
The short sale process will be delayed if the package is incomplete. The bank might even shred the package.
Buyers can wait a very long time to get a short sale response from a bank. It's important that the listing agent call the bank regularly and keep careful notes of the progress.
Buyers can get so tired of waiting for short sale approval that they might threaten to cancel if they don't get an answer within a specified time period, but that's self-defeating. It won't speed up the short sale process. A short sale might not be the best option for buyers with little patience.
A buyer's agent isn't allowed to speak with the lender without authorization so don't ask your agent to call the bank. It won't work.
The Typical Process
This is the typical short sale process from the bank's end of things:
- It acknowledges receipt of the file. This can take from 10 days to as long as a month.
- A negotiator is assigned. This can take two to three days, or it can take 30 days.
- A broker price option is ordered. The bank probably will refuse to share the results of the BPO.
- A second negotiator might be assigned. This can take another 30 days.
- The file is sent for review based on the pooling and services agreement. This can take from two weeks to 30 days.
- The bank might then request that all parties sign an "arm's-length" affidavit.
- The bank will issue a short sale approval letter.
Sometimes buyers cancel after all this. They become angry and annoyed because the short sale process is so lengthy and they think they can drop the whole thing without telling anyone, even their agents.
Some short sales get approval in two to eight weeks. Others can take 90 to 120 days on average. A top short sale agent can help to speed up the process a little by staying on top of the file and holding the bank accountable.
Checking in with the bank at least once or twice a week is imperative. Recognizing the behavior of incompetent negotiators and requesting a replacement is often necessary as well. Never be afraid to escalate. Cross your fingers that the negotiator wants to wrap up the file as much as you do.
Submitting complete packages in advance can often help to speed up the process, too.
A Final Tip
A listing agent will often have some idea of when approval will eventually come after the file is sent for final review. At that point, buyers might want to start the loan process so they've got a head start in case the bank allows only two weeks to close. This sometimes happens.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.