Q: What is a Short Sale?
A: A short sale in real estate refers to a transaction in which the sale price is insufficient to cover all encumbrances and closing costs and the seller is unable or unwilling to pay for the difference. A lender will agree to forgive the difference if the lender is convinced that the net sale proceeds from a short sale will be the same or more than what the lender will otherwise get from foreclosing and reselling the property. In a short sale, a lender pays for the customary seller’s closing costs including broker commission. A lender usually wants the borrower to establish financial hardship before ageing to a short sale. Some lenders will also ask the borrower to tribute money to make up a part of the short fall either in the form of cash or an installment note.
Q: What are the requirements for a Short Sale?
A: The basic requirement for a short sale are a listing agreement with a realtor and a sales contract from a buyer which are submitted to the lender along with a Hardship Letter from the Seller explaining why they cannot continue to pay the mortgage and supporting document such as tax returns, bank statements, information and photos of the home and the comps, or comparative home prices supporting the offer. If the package is complete, the Lender will order a BPO, or Broker’s Price Opinion, from an independent Realtor. The BPO is the key to the whole process. If it is too high, the Lender will not accept a low offer. Most Lenders will accept an offer lower that the BPO, but usually not much more than 10% lower, though that will vary depending on the company. The sales contract should specifically state that the offer is contingent on the lender accepting the purchase price in full and forgiving the seller the deficiency on the mortgage.
Q: What are the procedures of a Short Sale?
A: There are four major steps:
First, sign a listing agreement with the Seller and obtain written on a potential short sale. Make sure to include the following additional terms in the listing agreement: authorization from Seller to discuss with the lender
· Seller agrees to receive Zero dollars from the sale proceeds.
· Purchase price and broker commission are subject to lender’s approval.
· Seller agrees to provide broker with all necessary financial information as may be required by lender in order to consider a short sale.
· A lender may ask the seller to contribute to the shortfall in payoff.
Second, collect all necessary financial information from the Seller including but not limited to tax returns, bank statements, W2s. Have VRG evaluate and qualify the property and seller. Third, market the property as you normally would except disclosing that the sale price and broker commission are subject to lender’s approval of a short sale. If the property is in foreclosure, disclose the estimated trustee’s sale before a short sale is approved.
Forth, upon receiving an acceptable offer, prepare a complete short sale package and submit it to lender along withal supporting documents. Fallow up with the lender and obtain approval letter.
Q: How long does it take for a lender to approve a Short Sale?
A: Although response time varies from lender to lender, it could take two weeks to 90 days to receive an approval of a short sale from a lender. That’s why it’s critical that buyers and their representative understand and accept that time frame before they make an offer. An Addendum to the Florida Association of REALTORS purchase contract includes a provision allowing either party to cancel a short sale contract within a set period if the seller hasn’t gotten the deal approved. Properties with securitized loans (which are the majority these days) may require a longer time to get an approval of a short sale because of the possible need for approval from the entity holding the pool of securities.
Q: What affects a Lender’s decision to accept or reject a Short Sale?
A: Before approving a short sale, a lender will make several key decisions:
First, can the owner afford to continue making the payments on the property or contribute to the short fall? If they can, there is no reason for the bank to unilaterally take the loss. Banks will not look favorably upon a borrower who they believe has lied to get the loan. Second, will the short sale leave the bank in relatively the same position as they are likely to be in by going though the foreclosure process and then selling the property? If the bank can do significantly better by foreclosing, they are most likely to do so. In a short sale, the net amount the lender will receive from the sale after closing costs. Third, will the seller receive any sale proceeds for themselves?
Seller must receive zero sale proceeds in a short sale. Forth, if there is a junior lien-holder, will the junior lien holders receive any sale proceeds? A senior lender is usually reluctant for junior lien holders to receive any sale proceeds if the senior lender intends to accept a short payoff.
Q: How to improve the odds of success in a Short Sale?
A: The success of a short sale is contingent upon three major factors:
First, A properly priced property, a cooperative and qualified seller, a through and well organized document package. When you have good control over these factors, your chances of success improve significantly. When a property is priced right, low enough to attract bargain hunters but high enough to pass lender’s scrutiny, you have a better chance of getting it sold within the limited time you have.
Second, A seller has to be motivated enough to provide the information and documentation as required by the lender, and even make up for a part of the losses the lender takes.
Third, submit only complete and well organized packages to the lender. Don’t send the required documentation in piece meals and hope the lender will contact you for additional information. Don’t make any claims if they can be substantiated with documented evidence. Don’t present any information that contradicts what the lender has on file. Don’t present multiple offers to the Lender. Pick the buyer who offers reasonable price (not necessary the highest), well qualified financially and is willing to sit around waiting for an answer from the Lender. Don’t call the lender three times a day. Be persistent, yet always be courteous and professional.
Q: How can Lender’s Foreclosure Service help in a Short Sale?
A: In short, we help Realtors to screen short sales, expedite the lender’s approval process and improve the acceptance rate of short sales. First, we qualify the property and the Seller to decide whether a case can be made for short sale. We evaluate information on the property, the loan, and the Seller’s financial situation to make a preliminary recommendation. Second, we collect, research, reconcile, and analyze Seller’s financial information to establish a bona fide financial hardship. Based on our analysis, we prepare the Seller’s hardship letter, financial statement, and all other supporting documents as required by the lender. Third, we present the complete short sale package and then follow up with the case manager on a regular basis to monitor
The status, negotiate for the best terms and conditions. This is a pretty straight forward process, however, knowing whom to talk to, what to say and how to say it makes a big difference.
Q: Does VRG guarantee the success of a Short Sale?
A: Yes and No. We can get any short sales approved under certain terms and conditions. But we can’t guaranty that we will get you’re the particular terms and conditions Seller and Buyer are looking for. Therefore, we will evaluate and qualify the property and Seller beforehand so Buyer and Seller can decide whether they want to proceed with the proposed Short Sale or not.
Q: What happens if I don’t do a short sale or my short sale is unsuccessful?
A: The result is the same: A Foreclosure. Our goal is for you to avoid foreclosure, which will affect your credit more than a short sale. Generally a foreclosure is one of the most damaging occurrences in a credit history. Most likely you will miss mortgage payments through the course of a short sale and this will show on your credit history. But at the end of the day, when your short sale is completed, your credit report will show that your mortgage has been completely “satisfied” and typically your credit score should almost immediately rise by 65 points.
Q: What is a Hardship?
A: Reduced Income or Unemployment
· Inability to work due to health reasons.
· Separation or divorce
· Medical bills.
· Business failure
· Death of a spouse
· Adjustment in mortgage payment or unforeseen increase in your monthly expenses.
· Any other circumstance that cripples your ability to repay your mortgage.