background image

The Basics of a Short Sale

Banks grant short sales for 2 reasons: the seller has a hardship, and the seller owes more on the mortgage than the home is worth. A few examples of a hardship are:
  • Unemployment / reduced income
  • Divorce
  • Medical emergency
  • Job transfer out of town
  • Death in family
The seller will need to prepare a financial package for submission to the short sale bank. Each bank has its own guidelines. The seller's short sale package will most likely consist of:
  • Letter of authorization, which lets your agent speak to the bank.
  • HUD-1
  • Completed financial statement - specific per lender
  • Seller's hardship letter
  • 2 years of tax returns and W-2s
  • Recent payroll stubs and bank statements
Important Considerations for a Seller
Although a bank may forgive the balance between the mortgage balance and the final sales price, the bank might not release the seller from personal liability. This means it is possible that the bank might be able to legally garnish a seller's future wages, attach bank accounts or otherwise pursue the seller for that money. It's called a deficiency judgment. Classic Settlements will do our best to avoid a deficiency judgment for the seller.

Banks scrutinize a seller's financial statement. Banks examine a seller's bank accounts, tax returns and credit report. If the bank is taking a loss on the sale, obviously the bank would like to recoup part of that loss. That's why the bank looks at the seller's assets and disposable income.

If the seller is attempting a short sale without hardship, it is highly likely that the bank will ask for a seller contribution. Even if the seller qualifies for a short sale through a financial hardship, the bank could demand a contribution. This means the seller could be required to bring in money to close.

We believe that every short sale seller can benefit from a legal consultation prior to putting a home on the market as a short sale. These are complex transactions. While the temporary HAFA short sale program that sunsets December 2012 offers some protections for sellers, it doesn't take the place of obtaining legal advice.
  • Classic Settlements will not ask for attorney fees to be paid up front.
  • Classic Settlements may have to order a title search on case by case basis. This fee may need to be paid by the seller if the closing falls
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 giving away a home 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. After the seller accepts the offer, the listing agent or Classic Settlements will send the short sale package to the bank.

If the package is incomplete, the short sale process will be delayed. If the lender asks for additional documents, which they will, and they are not provided on a timely basis, the bank may close the file and you must start over again. They are notorious for taking their time but when they ask for something, you must respond immediately.
What Role Do Real Estate Agents Play in a Short Sale?
  • Gathers the required paperwork and submits the short sale package to the bank. Sometimes agents outsource this part of the process or they might hire a third-party to negotiate the short sale. Classic Settlements can help with this.
  • Helps the seller to price the short sale home. The price needs to be attractive enough to entice a buyer to wait for short sale approval but high enough to satisfy the bank's BPO.
  • Puts the home on the market. The agent must submit all offers received to the seller. Some offers will be lowball offers because buyers don't know any better.
  • Communicates and manages buyer and seller expectations.
  • Stays involved throughout the entire process.
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. Classic Settlements will do this on a weekly basis. 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, a short sale is not for them. The same principal applies to sellers and Real Estate Agents.

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 30 to 60 days.
  • A BPO (broker price opinion) 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 bank counters.
  • Investors approval is required and this may take another couple weeks.
  • The bank may then request that all parties sign an Arm's-Length Affidavit and addendum.
  • The bank issues a short sale approval letter.
Why Hire a Lawyer to Negotiate a Short Sale?
You need to hire an attorney as it is against the law for a real estate agent not licensed to practice law to dispense legal advice. Even if the agent knows the answer to a legal question, a real estate agent is not allowed to tell you.

Laws change all of the time. Short sale rules change even faster. Banks have hired a lot of employees over the past few years to work on their short sales. Many are inexperienced and hostile towards short sale participants. Others are very helpful and will work with you to get to a resolution. Every short sale is different but we have a lot of experience in dealing with them. We have a very high rate of closure on short sales and almost always get an approval within 60-90 days.
A Short Sale is a Privilege, Not a Right
Not every property qualifies as a potential short sale in a bank's eyes. A bank must agree to grant a short sale. Banks are under no obligation to approve a short sale. Banks will grant a short sale if the bank feels it is in the bank's best interest to approve the short sale.

Sellers should always get legal and tax advice before completing a short sale. There is no guarantee that a lender will approve a short sale. It should be expected that a seller's credit score will go down after a short sale. It is possible that the seller will be asked to bring some money to the table. It is possible that there will be tax ramifications for doing a short sale.

6 Montgomery Village Avenue, Suite 305
Gaithersburg, MD 20879
Phone: 301.921.2667
Fax: 301.921.9190
11333 Woodglen Drive, Suite 105
Rockville, MD 20852
Phone: 301.816.1717
Fax: 301.816.0992
4201 Northview Drive, Suite 204
Bowie, MD 20716
Phone: 301.352.8000
Fax: 301.352.7794