There is a huge misconception out there that Short Sale properties are a great way to buy properties for cheap. Truth be told,that isn't necessarily always the case. As an experienced Realtor, and having listed and sold Short Sale homes, that is the furthest thing from the truth.
The first thing I like to ask my client is: "Do you know what a short sale is?" About half of my clients can answer that question correctly, while the other half may not necessarily grasp the concept entirely. In simple terms, I like to explain the definition of a short sale to my clients a little something like this: a short sale is the sale of a property, for less than what the seller (borrower) owes on the property, in simplest terms. Meaning, the current owner bought their house when the market was high, and the market has now decreased, depreciating the value of the home. Therefore, the seller is "shorting" the bank the difference from what is owed, to what the current market value is. As a seller of a short sale property, you will be considered eligible for a short sale after the NOD, Notice Of Default, has been filed. This holds true for a lot of the properties that have mortgages with banks such as: Bank of America, Wells Fargo, Chase, Aurora, Cenlar, etc. However, the processes involved in submitting the short sale for initiation can vary from lender to lender. An experienced Realtor that has done short sales, knows how to put a complete short sale package together and send it to the lending institution for review. Even then, there will almost always be requests made by a representative or negotiator from the lender, to provide more documentation. For the initiation of a short sale the following items will be requested, and note, some lenders/banks have their own forms (which you can acquire from their websites) that need to be completed correctly and sent in along with:
- Third Party Authorization - this is a document giving permission to the bank to disclose loan information with the agent doing the Short Sale. This can be a document drafted by the agent and signed by the borrower(s) of the property, or in some cases the bank will have its own version that must be submitted.
- Hardship Letter - is a letter that has been written by the borrower(s) stating why they are not able to make their mortgage and what kind of hardships they are facing that limit them to proceeding with their loan obligation.
- Financial Worksheet - again, this document can be acquired by going to the banks website and searching their library of forms, OR you can always Google "[Lending Institution Name] Financial Worksheet" and I assure you there will be a few PDF documents that you can download and print.
- Paycheck Stubs/Last 2 months bank statements/Last 2 years taxes - all these documents will be requested for the borrower(s) to provide, and the bank statements and paycheck stubs need to be updated every 30 days (sometimes sooner depending on your lender).
- Listing Agreement and Purchase Agreement
- HUD with all of the charges reflecting what is on the Purchase agreement
- Any other miscellaneous documentation that the lender requests as part of their short sale submission package. This information can be acquired by calling either the lender short sale department or going to the website.
Unfortunately, no one said this process is going to be easy and in most cases, it isn't. For the most part, it is a very rigorous and an extremely tedious process. As a person that is contemplating on short selling their home, it is imperative that you make sure you talk to a Realtor that has experience doing short sales. Consulting with your CPA about the consequences if you did a short sale and how it would affect you tax-wise is also highly recommended. If you think that you would like to get the legal ramifications of a short sale, consult with an attorney as well. Keep one thing in mind if you happen to be going through this process. Your Realtor should NEVER give you tax or legal advise!
One problem I see a lot of when representing a buyer, is when the agent representing the seller, lists the short sale property below fair market value to entice buyers to make an offer. Agents do this as an attempt to get an offer in hand as quick as possible so it puts a hold on the trustee's sale; there is a time limit to completing a short sales, and we agents rush and do what we can to ensure a successful closing. However, in many cases, this puts false hope in the buyers. They believe that they are getting a "steal of a deal" on the property. This in turn causes an issue after the bank has a BPO (Broker's Price Opinion - is an unofficial appraisal, that the bank has done to determine the fair market price of the subject property is). When the BPO results get back to the bank (and they will almost never be disclosed to borrowers or agents), the bank will review and determine if the purchase amount satisfies the lenders/investors requirement, and either make a demand for an increase in the purchase, or proceed with the offer that is in hand. If the listing agent has listed the property far below what market value is, that gap between the offered amount and what the bank says the new purchase amount must be, will be much greater. The greater the gap, the more apt a buyer is to turn away and go look elsewhere. So, the listing agent should price accordingly, to avoid wasting his or her time, and more importantly the seller's and potential buyer's time.
As a buyer of a short sale, just know that that process does take time and you may need to be patient. Despite the name, Short Sale, there is actually nothing short about the time it takes to get your approval letter. A buyer's lender cannot move forward with disclosing the loan, ordering an appraisal and getting the loan process started without that approval letter from the seller's lender. Make absolutely certain that you DO NOT do any inspections on the property until that approval letter is in your agents hands. In the instance that you pay for inspections, and your offer is then declined, the money you spent on those inspections is essentially gone. Your agent should also ask the listing agent how much progress he has made with the seller's lender and also how much experience they have doing short sales. If the listing agent has very little experience, the process could tend to take longer. A good buyer's agent will be able to sit you down before an offer is made and educate you on how the short sale process works, and let you, the buyer, make the choice if you are willing to be patient during the process.
If you are an FHA buyer interested in a Short Sale home, there are a few things to be aware of. The first and most important of which, is that sellers seldom do any repairs in the short sale process, and the banks NEVER do. So if you are looking at purchasing, or have an accepted offer on a short sale property, understand that if anything is brought up in the home inspection, pest inspection, and/or the appraisal, chances are you may have to pay for those repairs out of pocket, yourself. And if they are required repairs to be made by the appraiser, they will HAVE to be completed before your loan is funded. This will also require the appraiser to go out and do a follow up to ensure the items called, were in fact remedied. Be prepared, because that second visit by the appraiser to clear those conditions, will cost you another $100-$200 fee (depending on the appraisal company). If there are safety concerns or things that you want to have fixed almost immediately when you move in, and if the seller is not willing to do any of those repairs, then another option to seeking equitable solution, would be to ask for a price reduction. These can be items that were called in the appraisal, the termite inspection, or the home inspection. Your agent can put together the request for the price reduction along with the reports to justify the claim. I have found that having an estimate by a licensed contractor can also help in most cases in getting some kind of reduction. Be prepared, because you are going to get 1 of 3 responses to your request; 1.) Yes, we will allow a reduction for the amount (provided the cost that will be incurred by the buyer is justifiable and the request is within a reasonable amount off the purchase price); 2.) No, there will be no reduction in price; or, 3.) We will allow "X" amount off from the requested reduction amount. That being said, be aware of the condition of the house when you are previewing it with your agent. Have your agent ask the listing agent if there are any issues that will cause the FHA purchase to hit any road blocks.
Note - if the asking price of the home is already below market value because the seller has taken into consideration the repairs that are needed, then the price reduction request will most likely be declined by the bank.
Almost every neighborhood has had or currently has a short sale listing in it. As agents, we see short sales in all price ranges, and in all types of market locations. As buyer's, don't be scared or apprehensive about making an offer on a property if you feel that it is the right one for you. Sometimes you have to wait to get the house you want, and turn it into a home.
Have you or someone you know gone through a short sale process? If so, please share in the comments sections below. I would love to hear your story. Did your agent explain everything to you and prepare you for the process?