Short Sale Information
Short Sale Pre-Qualification Worksheet
Points to remember when briefing a seller on short sales
Try to explain the idea of a short sale as simply as possible as the idea seems crazy to some people.
They don’t “get it” because many people never heard of it and have trouble believing that their lender would take less than what is owed on their mortgage. Let’s face it, lenders don’t exactly advertise this.
As previously mentioned, stress to the seller that you are not proposing a quick fix or a guaranteed sale.
They need to know that if the lender is not flexible then you probably are not going to be able to close on the property for them. Remind them that you are not going to live in the property, therefore, you cannot purchase it at full market value. (as is true for any deal, not just short sales except maybe for owner financing).
And of course — here’s the biggie – they must not, in any circumstance, contact the loss mitigation department, or at least not without asking you first. You need to maintain total control over the deal.
How long does the short sale process take?
It is extremely important to let the seller know from the start that short sales often take quite a bit of time.
The time frame for a decision on a short sale offer varies per lender. If there is more than one mortgage, each lender needs to be dealt with separately.
Some lenders will have an answer within one week (unfortunately, this is the rare exception rather than the rule) and others take 2 to 3 weeks and still others take 45 to 60 days or even up to 90 days or more.
I do everything in my power to move the process along as quickly as possible but sometimes lenders have many, many short sales going on and loss mitigation reps are hard to get a hold of and do not return phone calls in a timely manner, therefore, decisions are delayed.
In a market slump, the number of short sales lenders work on skyrockets, but the number of employees in their loss mitigation departments often remains the same or even decreases due to the lenders need to cut costs.
These lenders are so backed up that often their response times are delayed several weeks just to get the short sale packages into the system. I call loss mitigators whose voicemail boxes are full, who never answer phone calls… The only hope is that the loss mitigators want to get as many files off their desk as quickly as possible.
It is important that the seller does their part of providing all the requested documentation on the checklist so that you as the short sale negotiator can do your job and in turn the loss mitigator can do theirs.
More often than not, the seller’s procrastination in providing the requested documents is the part which delays the process the most.
Dealing with a Seller in a Short Sale
Some sellers are going to already know (or think they know) about short sales. Others will never have heard of it in their lives. It is your job to clearly explain it to them. Short sales can be really confusing. It is a complicated process.
There are a few main points that I make them understand right off the bat:
1. Short sales are not a quick fix – they take time. Often many months. Patience is needed.
2. They must cooperate and provide all the necessary information, if not they are digging their own grave.
3. You will make sure that at the end of the day, they will not have to pay any closing costs or owe any more money
Now this is a tricky one. Often you will have sellers who don’t want any cash out of the deal and just want to walk away. Technically when doing a short sale, because the lender (whose money it is rightfully for the debt) agrees to take a loss, they will not allow a seller to receive any funds from the transaction (understandably so).
However, there are sellers who really need some cash, not really to make a profit, but to clear their debts. You have to make it very clear to them that under no circumstances that they can disclose to anyone the funds they receive as if the lender gets wind of it, they can reverse the sale. So they basically really have to trust you to pay them at the end of the day as they have no legal discourse without exposing themselves and effectively having the bank take back the property and reverse the short sale.
Another way to approach this is to have another contract drawn up for the owner providing you with a service or selling you something – such as a bill of sale for the furnishings in the house or for them cleaning out the property for you before the closing – this way, they are not technically receiving proceeds from the sale, rather they are being paid separately for goods or services.
As always, consult your attorney for guidance on how to handle this issue so that you are compliant with the law and the agreement with the bank.
Why should the homeowner do this? Why is this in their best interest?
When a homeowner is faced with the reality that they don’t have enough equity to sell, that their property is overleveraged and they especially cannot afford to pay a realtor’s commission, then they will consider doing a short sale through an investor.
Very often a short sale is the only option for an owner to avoid losing their home through a foreclosure auction. Especially if the lender is not willing to offer another solution such as loan modification or deed in lieu of foreclosure. The recent influx of properties in foreclosure perfectly demonstrates this point.
If a property purchased in a seller’s market depreciates even 5%, and then the owner for some reason can no longer afford their payments, that’s it, the owner can be stuck with the property with no buyers in sight. The property is often listed with an agent and stays listed without anyone even making an offer close to an amount needed to pay off the mortgage because the market conditions changed.
Without short sales, there would be a whole lot more properties at foreclosure auctions and REO properties on the market as short sales are an important option for owners to avoid the dreaded sheriff’s sale.
Chances of success/acceptance
Short sales are not guaranteed to go through. Sometimes lenders will just not budge on the price even after being shown many valid reasons why they should.
Knowing your exit strategy in advance can make all the difference in the world whether or not your deal will ultimately be successful.
For example, if you are a wholesaler, the discount negotiated needs to be greater than if you plan on buying and holding or selling to a retail buyer. In other words, what may be an acceptable discount for one investor may not be for another if their exit strategy is different. The definition of success varies per investor.
Sometimes, for numerous reasons, a lender simply won’t budge on a price and prefers to take the property to auction rather than accept your offer. We’ll discuss how to handle this later, but in certain cases, there is just not much you can do.
How it Helps/Hurts the Homeowner
How it affects the seller’s credit rating
Delinquent mortgage payments adversely affect credit. A short sale does not negate this fact, however, having a short sale on a credit report is better than having a full foreclosure on record.
Of course, there are many factors which determine credit rating and I always recommend that that my clients keep as many other accounts current as possible even if their mortgage is delinquent. This helps to demonstrate that the delinquent mortgage was an isolated incident as far as the creditor’s financial responsibility is concerned.
A short sale shows that the seller took action and did something about their situation. When the loan is finally paid off, it will be shown as a short sale on the credit report but also as the loan debt being satisfied as this is effectively what a lender agrees to by accepting a short sale.
Every consumer is allowed to add a brief explanation to their credit report in order to explain any delinquencies. I encourage all sellers to do so and keep detailed paperwork to support their claims in case it is necessary at a later date to obtain another loan.
For example, if it is a case where the seller was defrauded, paperwork in good order can help prove the case at a later date that they are indeed credit worthy despite the delinquent mortgage on their report.
Credit can be repaired. The best way to do this is with time and consistent payments of all debts. Also, there are many different companies that can help speed up this process which charge a fee for their services.