Having done a lot of questioning and research on why "Short Sales" are taking soooo long, I have discovered the following that may prove helpful as you consider the opportunities available to your buyers or sellers.

 
Q: What is a short sale?

A.  With real estate prices currently at 2005 levels, many homeowners find themselves needing to sell, BUT discover they owe more than the homes current value. Reason's for selling can vary from a job transfer, to a homeowner no longer able to make mortgage payments due to job loss, recent divorce, business failure, or a Sub-prime ARM reset.

If the reason for selling can be documented and attributed to a distressed situation, a homeowner may qualify for debt forgiveness.  To do so, requires the homeowner to prove that they do not have, or will not have the money now or in the near future to pay back the difference between the homes value and the mortgage balance. 

Q: How is the process initiated?

A:  Before any conversation with the lender, the home is listed for sale.  While the home is listed for sale, the homeowner and their agent should prepare a "short sale" packet, including the seller's financials and a "hardship letter".  Upon receipt of an offer, the seller can sign off on the terms of sale, but terms are not official without the lender's approval.  The sale status now becomes "Pending: Back-Up Offers Requested", as most lenders will require listing agents to submit all offers until approved by the lender.  In the meantime, the short sale packet is place in a que and awaits review by the lender.  An initial response from the lender usually takes between one to three months, but can take longer as we have all discovered.   

Q: When does the bank become involved?

A: Lenders typically do not talk to the seller or listing agent until there is a purchase offer in hand.  The list price may be far less than the bank is willing to initially accept, which could cause confusion with the buyer.  When a purchase offer is received by the lender, a Broker's Price Opinion is ordered, and the lender assigns a negotiator to work with the lender, investor (eg. FNMA) and the buyer to help them come to terms.  Once the lender approves a price, they send an approval letter with an end date by which the transaction must close.  The timeframe for an inspection and financing contingency typically begin upon lender approval.   Because of the lengthy wait, or because of negotiations involving the lender's higher BPO, it is not unusual for the first buyer to walk away.  Many agents have found that the price the lender is willing to accept, decreases as the foreclosure date draws closer.  It is the BUYER'S agent's job to research the seller's financial situation to determine the likelihood of the bank accepting the desired price.  It is essential to explain the process to both buyers and sellers to manage expectations and eliminate last minute confusion.  It's important to know that lenders will negotiate, so start an offer below your walk away price.  Today, lenders are beginning to realize that losses are greater with a foreclosure, than with a short sale.  Because of the large number of pending foreclosures, lenders are more inclined to work with interested buyers before the process reaches foreclosure.

Q: Do most short sale require the buyer to skip an inspection?

A:  Because homes in distressed situations are often not cared for, it is highly recommended to get an inspection. The inspection can be done upon mutual acceptance with the seller, to avoid waiting the 1-4 months for lender approval.  Obviously this could put the $400-$500 at risk, should the transaction not close. Should the inspection uncover needed repairs, you may find that the seller is not in a position to make those repairs.  In this case, it may be possible to re-negotiate the price with the lender, but it is more likely that that the investment in an inspection will do little more than alert the buyer as to the condition the home and what items need to be addressed in the future.

Q:  Some say that only 10% of the short sales come to sale and the rest become bank owned.   Is this a realistic success ratio?

A:  Short Sale Buyers need to be flexible!!!  They are wise to look at other options while waiting on the lender response.   And because of this, the numbers are skewed because so many short sale buyers walk away when they find a better opportunity.  When worked properly, your success ratio will dramatically increase.