The Complete Short Sale Process From Beginning to End

How a Short Sale is Handled from Start to Finish

complete short sale process
the complete short sale process. © Big Stock Photo

The short sale process is still a mystery to many people, even after all of these years, so there is no cause for alarm if you don't know exactly how the short sale process works. A lot of buyer's agents are confused; puzzled buyers are looking for direction, and not every short sale listing agent knows how to do a short sale. You would hope that people who are in the real estate business would have learned a thing or two about the short sale process, but sadly, short sales are not everybody's cup of tea.

The Basics of a Short Sale

Banks grant short sales for 2 basic reasons: the seller has a hardship, and there is not enough equity in the home to pay off the mortgage after paying costs of sale.

A few examples of a hardship are:

  • Unemployment / reduced income
  • Divorce
  • Medical emergency
  • Job transfer out of town
  • Bankruptcy
  • Death

The seller will need to prepare a financial package for submission to the short sale bank. Each bank has its own guidelines but -- with the exception of Wachovia, which is the best short sale in the world -- the basic procedure is similar from bank to bank. The seller's short sale package will most likely consist of:

  • Letter of authorization, which lets your agent speak to the bank.
  • Preliminary closing statement
  • Completed financial statement or RMA
  • Seller's hardship letter
  • 2 years of tax returns
  • 2 years of W-2s
  • 30 days of payroll stubs
  • Last 2 months of bank statements
  • Comparative market analysis or list of recent comparable sales

    Writing the Short Sale Offer and Submitting to the Bank

    Before a buyer writes a short sale offer, a buyer should ask his or her agent for a list of comparable sales. Banks are not in the business of releasing mortgage obligations at rock-bottom pricing. The bank will want to receive somewhat close to market value.

    The short sale price may have little bearing on market value and may, in fact, be priced below the comparable sales to encourage multiple offers.

    Some short sales can commence prior to an offer, but most often the bank will start the procedure upon receipt of an accepted purchase offer. After the seller accepts the offer, the listing agent will send the following items to the bank:

    If the package is incomplete, the short sale process will be delayed. In this event, the bank might even shred the package. Some bank employees display little patience for margins of error.

    The Short Sale Process at the Bank

    Buyers may wait a very long time to get a response from the bank. It is imperative for the listing agent to regularly call the bank and keep careful notes of the short sale process. Buyers may get so tired of waiting for short sale approval that they may feel the need to threaten to cancel if they don't get an answer within a specified time period.

    That type of attitude is self-defeating and will not speed up the short sale process. If buyers are the type with little patience, perhaps a short sale is not the best option for them.

    Further, a buyer's agent is not allowed to speak with the lender without authorization so don't ask your agent to call the bank. It won't work.

    Following is a typical short sale process at the bank:

    • Bank acknowledges receipt of the file. This can take 10 days to a month.
    • A negotiator is assigned. This can take 2 or 3 to 30 days.
    • A BPO is ordered. The bank probably will refuse to share the results of the BPO.
    • A second negotiator may be assigned. This can take another 30 days.
    • The file is sent for review based upon the PSA. This can take 2 weeks to 30 days.
    • The bank may then request that all parties sign an Arm's-Length Affidavit.
    • The bank issues a short sale approval letter.
    • The buyer cancels.

    I threw in that last line because sometimes I have had to sell my Sacramento short sales 3 or 4 times before a buyer sticks with the transaction.

    Buyers get angry and annoyed because the short sale process can be so lengthy that they sometimes cancel without telling anyone, much less their agent. Some short sales get approval in 2 to 8 weeks. Others can take 90 to 120 days, on average. The length of the short sale generally depends on the investor, not the bank.

    A top short sale agent can help to speed up the short sale process 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 the negotiator wants the file to be over as much as you. Often submitting complete packages in advance can help to speed up the process, too.

    Tip: Much of the time, the listing agent will have some idea of when approval will come after the file is sent for final review. At that point, buyers may want to start the loan process so they've got a head start in case the bank allows only 2 weeks to close.

    At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.