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Short Sales
First, let me explain what a short sale is. For Owners wishing to consider this option please be sure to read the Owners section below. For Buyer’s wishing to take advantage of this opportunity, be sure to read the Buyer’s section below.
What is a short sale?
A short sale is where a property will sell for less than the total loan amount due and the owner is unable to pay the remaining amount due at the closing table including all costs associated with the transaction (commissions, taxes, etc). Example:
Contract Price: $200,000
Loan Amount Due: $225,000
Commissions: $ 12,000
Taxes $ 1500
Other fees $ 1500
Total Due by Seller $240,000
Buyer Pays $200,000
Short Amount $ 40,000
The Bank must decide to “release the debt/lien” from the title before the sale can close. No Buyer would want to take ownership with that $40,000 debt on the title. Additionally, if the Buyer is getting a loan, his/her Bank will not approve any loan without a clear title. The Bank can decide to remove the lien and still pursue the Seller for the amount owed. In most cases (where successfully negotiated), the Bank will forgive that debt. The Seller will not be able to get any cash at closing. But the Seller can pay traditional costs such as commissions, taxes and fees through the proceeds of the sale, leaving the Short Sale Bank with a “net amount received” towards the loan balance. In this example, the Bank is only receiving $185,000 on its $225,000 loan, hence the term “Short Sale”.
A Short Sale is often a “Pre-foreclosure” as the Buyer has most likely missed a payment or many payments and is on the path to foreclosure. This Short Sale can help the owner avoid foreclosure.
Why would a bank allow the owner to sell it for less than the amount due?
Banks realize, especially in the current market, that it is more costly for them to foreclose now, and sell later, as opposed to working with a buyer making an offer now.
Banks are sitting on LOTS of unlisted foreclosed inventory. By allowing a short sale it is more cost effective for the bank than a foreclosure. It’s a win, win for the bank and the future buyer.
The bank is willing to forgive the debt in most cases because they realize it’s not going to be collectable due to the bankruptcy laws which are designed to protect the consumer. By allowing the short sale, and forgiving the remaining debt the bank will save the costs of pursuing the debt through courts. Additionally, they realize the risks of rejecting an offer and having to sell months later when the market value of the home may have considerably dropped.
How does the Bank decide to approve a short sale?
The Bank will be looking at two key factors.
* One is the property market value.
* The other is the owner’s ability to continue making payments, and or current assets available to offset the debt owed.
The first step is getting the property under contract. A professional Realtor can do a comparative market analysis, and help the owner get it listed at a price that will attract buyers. Once under contract, then it’s time to get the bank involved. Once the contract is presented to the bank they will then ask the seller for a complete financial history, and do an assessment of the properties market value.
Complete Financial History For The Seller:
* W-2 from the last two years (tax returns)
* Current paystubs from the last two months
* Bank accounts statements from the last two months
* A detailed monthly budget including all expenses personal and other
* Utilities
* Dry Cleaning, ect. ect.
* Hardship letter
Assessing the property value;
* The bank will have an appraisal conducted to obtain fair market value, and ….
* The bank also realizes an appraisal may not reflect the exact price it will take to sell the property right now, therefore they get the opinion of one or more Realtors in the local area (not associated with the transaction) to assess what price the property will most likely sell at.
* Based on the appraisal and Realtors opinions the bank will have a high and low value range of the properties fair market value. This process is known as the BPO.
Once the bank has received the financial history of the seller and the data on the property’s value they will make a corporate decision as to whether they will approve a short sale, or not and at what sales price. If there is a second loan, this process is done the same way for the 1st and 2nd loan, and separately negotiated. If the loan had PMI (Personal Mortgage Insurance) on it then the PMI company/entity will also need to approve the short sale, or transaction.
These corporate approval processes can take on average between 30 and 90 day’s and in some cases can take much longer than that. The speed at which these companies have been approving the short sales has been improving every day.
Buyers and Seller’s will benefit greatly from understanding that process and the timeline involved.
Owners
Owners- Is a short sale right for my situation?
There are key factors for you to consider in making this decision.
1) Is it possible to sell my property and pay off the loan with closing costs or not?
a. What is the market value of my property right now?
b. What is it likely to sell for?
c. What is the condition of the property and how will that effect the sales price?
d. Does my neighborhood have a lot of homes on the market, foreclosed, or rented? All of these effect
the potential market value.
2) This will damage my credit, but not as badly as a foreclosure.
a. Banks require at least one payment to be missed before considering a short sale thus effecting credit
scores.
b. The Banks are also varying on the reporting of final loan status after the short sale has closed. Many are
not indicating “paid as agreed” thus negatively effecting credit.
3) Am I unable to make the payments even if I rented the property?
a. Many Banks may offer or even require you try to qualify for loan medication thus reducing your payment
and making it possible for you to keep the home.
b. Often a short sale and/or foreclosure can be avoided by renting the property.
c. Click here for more information on renting solutions.
4) Have I missed any loan payments and/or how soon will the property foreclose?
a. If you are on a path to foreclosure, the short sale can be a very good solution for you and the Bank.
b. If you are close to foreclosure, time is running out and it is critical to act fast.
i. Call your Bank- discuss options including a loan modification and/or policies they have for short sales.
ii. Contact a Realtor who understands and has experience with Short Sales for getting your property marketed and on the path to avoid foreclosure. A qualified Realtor here is key as over 50% of short sales get rejected due to the Bank having incomplete or erroneous data. A good Realtor will help you get it Sold and Approved!
Once you have considered all the factors, and if you feel confident you will qualify with the Bank for a short sale, the next step is to inquire with Realtors who specialize in handling short sales. Many do not, and an experienced Short Sale Realtor can lead you to an unsatisfactory outcome or worse!
Your Short Sale Realtor will:
1) Guide you through the documentation you will need to get prepared for the Bank and likely submit it directly.
2) Some Realtors will use a Third Party Negotiator for the handling the owner’s documentation and negotiation of the transaction with the Bank (not a Buyer). Please see more below on Third Party Negotiators
3) Create a CMA (Comparative Market Analysis) to help you understand current market value and determine a list price and marketing strategy for getting the property sold quickly!
4) Get the property listed and contract negotiated with a Buyer with the appropriate terms for a Short Sale.
5) Submit the contract and all necessary documentation to the Bank and get the Bank approval process launched.
6) Negotiate with the Bank on gaining approval for the short sale at the contracted price, or get the bank to counter offer the Buyer’s price. An experienced Realtor will work hard (and know what to do) in preventing a Bank rejection of the sale. Keep in mind over 50% of Short Sales are rejected due to inexperience and poor negotiation with the Bank.
7) Drive the transaction to closing once the Bank has approved the short sale.
My team is experienced with Short Sales and we deliver Results that will please you, your Bank, and the future Buyer. Please feel free to contact us at Admin@JamesMarotta.com with any questions you have on this process. It will be our pleasure to help you.
Buyers
Why should I consider buying a home that’s a short sale instead of a foreclosure?
The simple answer is consider short sales and foreclosures the same, just with different processes. The same buying power is there for you as the buyer. If, your needing to move right away a short sale may take too long, and a foreclosure is a better opportunity. However if your, not needing to move right away then both can be equally good deals.
Buyers have you found a Short Sale property but unsure how it works?
For buyers who found a home that is a short sale it is important to have a Realtor that understands all the key elements of a short sale. A good Realtor will not only ensure that you get the best price, but will also negotiate the best terms and protections for you. A short sale can present pit falls such as the bank declining the sale after you have spent money on an inspection.
Buyers submitting an offer on a short sale will likely encounter one of two scenarios.
The First Scenario is where the offer is accepted by the owner. The buyer is under contract preventing other buyers from coming into the deal at a later date. This contract is submitted to the bank, and the bank will begin its process of evaluating the property’s market value, and the Seller’s ability to pay. The Bank’s process to approve a short sale will likely take 30 to 90 days, but can take longer.
***Keep in mind, if the Bank approves it in 30 days, it will likely mean you, The Buyer, are closing 60 days after the contract date. Unlike a traditional sale, or even a foreclosure, this process does not allow for a fast close unless the Bank has already approved a sales price. This most often happens when a previous contract fell through. ****
The Second Scenario is where the Seller does not sign a formal contract. Instead the Seller sends offers to the Bank as they come in. The Bank begins the same approval process once the first offer is received. Since the Buyer and Seller are not under contract, a buyer that made first, only, or highest best offer at the beginning of the process could be pushed out by a higher offer as the bank completes its approval process. It is important the Buyer understand the implications of this method. Until there is a contract, no deal is safe!
Both methods are common, and the decision on which method is used is entirely the sellers.
Clearly the first method is more advantageous to a buyer at the beginning of the process. A good Realtor will help you navigate both scenarios.
In either scenario these are the key stages from offer to closing;
Ø Submitting an Offer
Ø Seller submits one or more offers or a signed contract to the bank
Ø Bank requests financial information from seller
Ø Bank orders an appraisal and conducts a BPO (Buyer Pricing Opinion)
Ø Bank evaluates sellers ability to pay loan, and the market value of the home
Ø Bank will make a decision to accept, reject, or counter the buyers offer
Ø If PMI (Personal Mortgage Insurance) entity is involved the bank will submit all data for approval by the PMI entity.
Ø Once buyer, seller, and bank have agreed on all terms, then a short sale approval letter, along with the contract will be sent to the designated closing attorney
Ø Depending on the terms in the contract the buyer may begin the inspection as part of a due diligence period, and initiate the loan approval process (for any transaction involving a new loan). It is important that the buyer, and the Realtor understand the contract detail and timelines as each transaction will present unique requirements. In some cases for example the due diligence period and inspection may be at the beginning of the process rather than waiting for final bank approval of the short sale.
Ø Closing
As you may see, purchasing a home that is a short sale involves a number of steps that must be carefully navigated. However with successful negotiations and transaction management, you may get a deal on a home that is as good, or better than a foreclosure. This can be a great opportunity for you, the buyer, as well as a win for the bank, and the seller.
My team is experienced with Short Sales and we deliver Results that will please you, your Bank, and the future Buyer. Please feel free to contact us at Admin@JamesMarotta.com with any questions you have on this process. It will be our pleasure to help you.
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