The definition of a short sale is the sale of real estate in which the amount yielded from the sale is short of the balance owed on a loan secured by the property which will be sold. That means that a property has more owed against it than it is worth in current market conditions.
In a short sale, the lender agrees to discount a loan balance because of a seller’s financial hardship. The negotiation for short sales is done with communication through the loss and mitigation department of the lender.
Additionally, a property may have more than one loan against it, and they may be from multiple lenders. And the primary lien holder or other parties may file a Notice of Default or NOD on the property. An NOD is the beginning of the foreclosure process, and there may be a trustee sale date associated with it. That is another consideration with respect to negotiating the short sale, requesting to have the trustee sale date postponed.
The lender(s) have the right to approve the short sale on the property. However, it is a process that needs cooperation and patience from all parties. One of my favorite phrases is, “hurry up and wait!”
Also, if the home is located in an area where there is a home owner’s association, the HOA needs to be taken into consideration as well. The HOA will need to be included in the negotiations to determine if they will discount their fees. Typically there are attorney fees and interest over and above the monthly HOA dues which need to be considered. This balance typically changes daily.
As a Realtor representing the seller in a short sale, the process is long and arduous, and as I stated before, requires patience.
The Realtor typically prepares the short sale packets which are submitted to the respective lenders. Each lender has specific criteria on what documents they want in their packet. This information about what the lender requires may be obtained from the specific lender. Some lenders respond via facsimmile, email, or letter.
One of the most crucial pieces of information is an authorization letter. No one will discuss the matter with you if there is not an authorization letter on file. That needs to go in advance of the short sale packet. After a packet has been submitted to the loss and mitigation department, the short sale packet is reviewed to ensure they have all documents they have requested. A typical short sale packet may include the following documentation:
- Authorization letter (typically they are valid for 90 days – if you want more time that must be specified on the authorization letter).
- Listing agreement.
- Listing history.
- Hardship letter from seller.
- Recent sold and active comparables for the property.
- Purchase agreement and associated documents from buyer, including pre-approval letter, copy of deposit check.
- Tax returns from Sellers.
- Copies of bank statements, paycheck stubs and other financial documents as required by the lender from seller.
- HUD 1 Statement.
There may be other documents as well, and depending upon the length of time, the lender can require that these documents be updated with more current time frames. To give you an idea of how many pages are in a short sale packet (and they all vary), I have submitted them with 160 pages in the packet. I chose to be as thorough and organized as possible to prevent any possible delays with the lender requesting additional information. Even then, the lender may still request documents that have already been submitted.
What determines whether or not a lender will consider discounting a loan balance are the circumstances which are related to the current real estate market and the borrower’s financial situation and hardship. We have seen that in 2009. Buyers bought homes two and three years ago when the market was at it’s peak, and the loan’s associated with those properties were reflective of market conditions. Then as the market declined, the loan balance remained the same, but the property’s value declined.
A short sale is executed to prevent foreclosure, and often times lenders will consider a short sale as opposed to foreclosure because they believe there will be a smaller financial loss by selling the property short as opposed to foreclosing on the property.
Once a packet is submitted, it is not automatically assigned to a negotiator. There is a time frame where they review the file, and determine whether or not it will be assigned to a negotiator. And the time frame is unknown, each lender is different. The negotiator for the first trust deed on the property may approve the amount, but then it is up to the Realtor to obtain the approval from the other lien holders as well.
The lenders and banks are considering and approving more short sales. Short sales require consent from all lenders or lien holders, HOA, and sellers.
My advice to buyers considering purchasing a short sale, is to be patient. It is a process that takes time, review and must be approved by the lender(s) and HOA. It is important to realize that the lender’s may be taking a considerable loss on the loan.
My advice to sellers is the same. Be patient, and be cooperative with your agent. Send them everything they need in a timely manner to ensure a smooth process.
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