Short Sale FAQ

• Definition
• Does a Seller Qualify For Short Sale?
• Six Things to Know Before Buying a Short Sale
• How Long Does a Short Sale Take?
• Is Buying A Short Sale Home Right For Me?
• 10 Reasons Why You Should Not Buy A Short Sale

A short sale means the seller's lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it.

Be aware that the seller need not be in default -- to have stopped making mortgage payments -- before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may have over-encumbered, owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.

When you spot a short sale house that interests you, take your hand off the mouse and step away from the computer. Before you get all excited over the prospect of buying that short sale house, pick up the phone and call your real estate agent. Your agent needs to research that short sale listing first.

In some real estate markets, less than one in 10 short sales closes. Just because that home is listed as a short sale doesn't mean it's really for sale (because it's subject to lender approval), nor does it mean it will sell at the advertised price.

The last thing you want to do is to get involved in listed short sale and then have the seller not qualify to sell his home as a short sale. Remember anyone can list their home as a short sale that does not mean that it qualifies for one.

Qualifications for a Short Sale:


1. The Home's Market Value Has Dropped.
   
   
   • Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.


2. The Mortgage is in or Near Default Status.
   
   
   • It used to be that lenders would not consider a short sale if the payments were current, but that is no longer the case. Realizing that other factors contribute to a potential default, many lenders are eager to head off future problems at the pass.


3. The Seller Has Fallen on Hard Times.
   
   
   • The seller must submit a letter of hardship that explains why the seller cannot pay the difference due upon sale, including why the seller has or will stop making the monthly payments.


4. The Seller Has No Assets
   
   
   • The lender will probably want to see a copy of the seller's tax returns and / or a financial statement. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall.

1. What are the comparable prices of sales and actives within a 1 mile radius?
   
   
   • The lenders will know these prices and will based acceptance on the market
   • Actives and pending are important because a Short Sale can take 3 – 6 months or longer
   • Unlike what people think you will be need to be close to market value to get an accepted offer.


2. Mortgage Amounts, Number of Loans and Lenders
   
   
   • Some lenders are easier to deal with than others
   • Some are more amicable on negotiations
   • It is import to know what the lender is on the hook for and the market value so an offer will be made that has a realistic chance of being accepted


3. Short Sale Listing Agent's Track Record
   
   
   • You need to be sure the listing agent has handled short sales before and his track record
   • These agents must submit very specific packages to the bank in a specific manner
   • An agent that has not handled these transactions can lead you down a path that could take 6 months and not result in you getting the house


4. Short Sale Seller Qualifications
   
   
   • Has the listing agent received the sellers hardship package
   • Usually consists of:
     • Sellers' hardship letter
     • Tax returns
     • W-2s
     • Payroll stubs
     • Financial statement
     • Bank statement
   • You want to make sure the listing agents has these filled out and sent to the bank before you make an offer


5. Number of Short Sale Offers Received
   
   
   • You want to make an offer that will beat the competition yet still be below market, or don't waste your time.


6. The Listing Agent's Short Sale Procedures
   
   
   • Make sure the listing agent is reputable and dealing by REALTOR Code of Ethics

Not all short sales are made the same. Banks have extra incentives these days to approve short sales, so what used to be a 5-10 month process has now been shortened to 2-5 months. Here is a stage by stage picture of Short Sales, where to stay away and where to try and jump in.

• 1st Stage: 0 – 30 days LOOK AWAY
  
  • The property has just been listed on the market for not too long.
  • The agent probably has not submitted any paperwork to the bank yet and is in the process of doing so.
  • Depending on the efficiency of the agent, this stage can take up to a month. These properties should be set aside because this is the most volatile time. It is uncertain whether or not it will be approved, or if the owners will even go through with the short sale.


• 2nd Stage: 1- 4 months WAIT
  
  • The property has been listed for a little while (1-4 months, depending.)
  • The property is awaiting approval, depending again on the efficiency of the agent; we can’t tell how long exactly this will take. It is best to leave properties in this stage alone until it gets approved, since we cannot measure the time.


• 3rd Stage : 2- 5 months TIME TO HIT IT
  
  • The property has been approved or just weeks from being approved.
  • Yummy! Just right for the picking! If you find these listings, it means that you can buy NOW! No more waiting, it’s like finding an REO home and getting the bargains of a short sale.


• 4th Stage: 1 year and longer LOOK AWAY FOR GOOD
  
  • The property has been out on the market for over a year.
  • It has either not been approved yet or the price is way above market value. The agent may not have had the skills sets to get it approved efficiently, or the lender is not working well with the borrower. Either way, these properties are dead-ends and should not be dealt with.

As with everything, there are great deals and rotten ones. Short sales normally take an extremely long period of time before it is successful. There are too many out there that are not properly handled; some agents let a short sale grow stale for months, maybe even years. By the time the short sale is approved by the lender, the approved price is way over market price.

• You can’t be in a hurry.
  
  Negotiating a short sale might only take a month but in most cases it can go 90 days or longer. So don’t hire a mover, end your lease or lock your rate until you have confirmation that your offer is approved by the bank. If the seller accepts your offer that isn’t an approved short sale; any offer the seller accepts still requires approval from their lender.


• You are buying the house “as is.”
  
  In rare cases, such as in an environmental problem, the lender will pay for repairs but most if the time you are getting the house as is, as found. The seller is in hardship, so they won’t be able to help either. So make sure you do your inspections and know what you are getting into before going forward.


• You can’t “flip” the house.
  
  Short sales are very good deals in most cases but not so very low that you’ll be able to turn a short term profit. They usually are retail value, less repairs and maintenance, and perhaps less a bit for speed.


• Status updates take longer.
  
  Unlike regular transactions where updates are a phone call away, all parties are forced to wait on the lender, who is not, shall we say, committed to keeping everyone happy. This doesn’t mean that the purchase is lost in the ether; but it does mean that more patience is required than normal.


• If the listing agent is not a short sale specialist, it may turn into a nightmare.
  
  You do not want a newbie or someone who has worked on only a few short sales. Short sales are hard for experienced experts; an agent who is doing their first or 2nd short sale is in for a long ordeal. The best way to handle that transaction is to not enter into it. If the house looks right for you and a short sale is disclosed, ask how many short sales the listing agent has successfully closed. If the agent hasn’t done many, the best thing to do might be to pass the house by. Otherwise, you might be in for 6 months of frustration.


• Subordinate financing takes longer.
  
  If the seller has a second mortgage, then two lenders have to render their approval, and coordinating the two complicates matters. Some specialists won’t even list those homes (I do.). Ask if there is another lender, and even if they are the same institution, it will add a measure of difficulty (the same lender but two different loans means two different divisions or departments). Do a lien search on the home before going forward. If there is a 2nd lien the listing agent hasn’t disclosed you might consider walking- they may not be in command of how to close this workout.


• Ironically, you have to be ready to close rather quickly.
  
  This is the “hurry up and wait” irony of the short sale process. The lender will make you wait far longer than a normal purchase for a decision, but when that decision is issued there will typically be a 15 or 30-day deadline to close or the sale approval has to go back to review. By this point you should have done your inspections and other due diligence completed. Once the lender approves the sale it is then time to lock the rate, call the mover and give notice on your apartment.



This is a broad overview, but it boils down to knowing when to hold and when to fold. No two short sale transactions are the same, even with the same lender.

1. Sellers Paid Too Much.
   
   If a home sold for $500,000 a few years ago and is now for sale at $400,000, that doesn't mean the buyer is picking up $100,000 of equity for free. It means the seller paid too much in a rising market and now the market has fallen. It means the seller has no equity.


2. Sellers Borrowed Too Much.
   
   Banks that were eager to lend money in appreciating markets sometimes allowed borrowers to over-mortgage the home, meaning the borrower's loan balance exceeded the value of the property. Appraisals are subjective, and not all appraisers will place the same value on a home. Although against the law, some appraisers are pressured by banks to appraise at the amount the home owner wants to borrow.


3. Stringent Qualifications.
   
   Inexperienced or unethical real estate agents might push a seller into considering a short sale when the seller does not qualify for a short sale. Sellers must prove a hardship and submit evidence of the hardship to the lender for approval. Some agents list homes as short sales without ever talking to the lenders or pre-qualifying the sellers.


4. Home Sells at Market Value.
   
   Lenders aren't naive or unaware of the value of a home. Lenders will insist on a comparative market analysis, known as a CMA, or broker price opinion, known as a BPO. If a lender believes a better price can be obtained by taking the property back in foreclosure over a short-sale offer, the lender may hold out for a higher price. That price will be close to market value. Lenders accept short sales when the home is worth the short-sale price, which means market value.


5. Homes sold really “As Is”.
   
   If a mortgage company agrees to a short sale, it is most likely also paying the closing costs in the transaction. Lenders ask buyers to purchase the home in its present condition.
   
   Lenders typically will refuse to pay for:
   
   • Suggested repairs disclosed on a home inspection.
   • Pest inspections or work necessary to issue a clear pest report.
   • Roof certifications or roof repairs.
   • Home protection plans for the buyer.
   • Deferred maintenance.


6. Length of Time To Close
   
   Depending on when the Notice of Default was filed, the lender's back-log of foreclosures and how much paperwork the seller has already submitted, it could take anywhere from two weeks to two months to get a response on a purchase offer from a lender. In addition, if two lenders are involved because there are two loans secured to the property, it could take longer to satisfy the demands of the second lender. These are just response time not the time it takes from start to finish. (2 – 6 Months)


7. Lenders Can Change Conditions
   
   Some lenders reserve the right to renegotiate the terms of the short sale at the last minute. If the market changes, new laws pass or new information crosses the lender's desk, the lender can attempt to change the terms of the contract. Lenders generally have lawyers at their disposal, and ordinary buyers do not.


8. Higher Buyer C losing Costs
   
   Because lenders rarely will pay for any extras, like a seller would be willing to do, if you want any of those extras, you will pay for them yourself. Sometimes lenders will refuse to pay for standard seller closing costs such as transfer taxes, too. If you want specific inspections, you will probably pay for them out-of-pocket.


9. Lose Control of Transaction
   
   If you need to close escrow by a specific date, lots of luck with that. A short sale home closing process takes an indefinite amount of time. The seller's lender calls the shots, not the buyer nor the buyer's lender. If you are trying to close escrow concurrently with the sale of your home, it might not happen.


10. Little Seller Motivation
    
    When the seller discovers that the short sale effect on credit is close to that of a foreclosure, there is little incentive for a seller to cooperate with a short sale. Although sellers may qualify to buy another home in 2 years after a short sale versus 5 (with restrictions) on a foreclosure, some have no intention of ever buying another home again.

Contact Me So if I have not put the fear of g-d into you, perhaps you are ready to talk about short sales as one of your options. Call me at 310.505.5571 or email at bob_schmalz@wlaregroup.com . Let’s start looking at what is out there!. One last thing check with your lender or mortgage broker on their requirements and if they will make loans based on a short sale

Bob Schmalz