Anatomy of a Short Sale

How to Navigate the Short Sale Process

If you’re navigating a short sale you can expect the following steps:

Financial Hardship.

The seller has endured a financial hardship, and they owe more on their home than it’s worth which is called negative equity.

The seller decides they are unable to stay in their home, so they pursue the option of a short sale. It’s important to know the lender does not have to agree to it, but the process is as follows:

Obtain a Listing Agent.

The seller/borrower contacts a real estate agent to help with the listing of the home. The seller needn’t be behind in payments but to start the short sale process, they must not be able to pay their mortgage or pay it in the future.

Proof of Hardship.

The borrower must then submit a packet of financial hardship proof to the lender. This packet must be complete before any short sale is accepted.

Marketing of the Property.

While the short sale request may still be in process, the seller’s agent will market the property, as usual, trying to attract a qualified buyer. Ideally, the offer won’t be too low. A lender won’t approve just any offer. Typically, the average short sale price is only 17% below market value.

Buyer Submits Offer.

The buyer must be advised of the short sale process as closing could take 3-6 months.

Offer Is Submitted to the Bank.

In a short sale, the seller doesn’t agree to terms; the bank does.

Bank Examines the Offer.

The Bank must first make a decision on whether a short sale is in its best interest. Then it must review the offer. It can:

• Agree
• Agree with stipulations
• Ask for additional information (if seller documents are over 30 days old, the bank will likely request new ones)
• Decline
• Provide no response at all

Assuming the bank didn’t decline the request then…

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The Negotiator Is Assigned.

The negotiator can ask for many things such as additional paperwork, the seller to contribute funds, the agents to take a smaller commission or clarification at an earlier point. Timely answers are important because the clock could be ticking on foreclosure. In which case, the process would start all over again with the bank as the seller and it being listed on the title.

Aside.

It’s important to note that all lien holders have to agree to the short sale. This includes taxation departments, construction liens, and homeowners’ associations. If only one lien holder is involved, the process is generally easier.

Short Sale Closing.

Title and possession are transferred to the buyer. Sales proceeds go to the lender and other lien holders.

Post-closing Deficiency Actions.

If the other lien holders are not paid out, as is the case when the proceeds are not high enough, they can pursue the matter in court. A short sale does not absolve the seller of all debt.

If you’d like to know more about the short sale process, download our ebook “A Real Estate Agent’s Guide to Successful Short Sales.”