I am frequently asked for how I successfully handle a short-sale transaction. Here are the highlights of how the process usually works:
Review Options. A homeowner in a distressed situation has five alternatives that they need to evaluate with their tax and legal advisors. These options are loan modification, deed-in-lieu of foreclosure, bankruptcy, short-sale or foreclosure. I make sure that the homeowner has fully reviewed and understands these options prior to entering into a listing agreement.
Determine Eligibility. A homeowner who wishes to sell a property when it is underwater (they owe more than the property is worth) will need to qualify for a short-sale by demonstrating a hardship that is leading to their need to sell the property. Examples of hardships include:
- Unemployment or Underemployment
- Medical Emergencies or Sudden Illnesses
Other situations which typically do NOT qualify for a hardship that a lender will approve include neighborhood changes, poor budgeting, purchasing a different home (unless relocation related), pregnancy or property abandonment.
Complete Short Sale Documentation. Lenders will typically need about as much information for a seller to get out of their mortgage as it took to get the mortgage in the first place. Documents that I will require include:
- Hardship Letter - which we will draft together - documenting the hardship
- Bank Statements - minimum of two months
- Paystubs or Income Documentation - again, minimum of two months or documentation of no income
- Tax Returns - two years, only the main form and immediate schedules, if any
List the Property. The property will need to be listed and a full listing agreement with California Association of REALTORS paperwork completed. The listing price will be targeted to generate appropriate offers from interested buyers (not too high and not too low) within a very short-period of time.
Negotiate. If all goes well we will fairly quickly receive several offers. These offers will be reviewed and one offer will be accepted by the seller to be forwarded to the short-sale banks. There may be important terms that will be in the sellers best interest so it will not be uncommon to have counter offers between the seller and the proposed buyer to get the best contract possible. Once a contract is signed, the property will be placed in either backup status or pending status depending upon the terms of the accepted contract.
Submittal & Follow-up. Once we have a fully signed contract, we'll be ready to submit the short-sale package to the bank(s) for review and ultimately approval. In most cases, the entire package will be faxed as a single document to the loss mitigation department at each bank. One important step that I do is to prepare a simple directory at the front of the package referencing the page number where a document can be found. In addition to numbering each page with a paste-on number I also paste in the lower right corner the sellers name and the bank's mortgage number. This helps the bank keep all pages in order and not confused with a package from a different borrowew.
Some banks are now starting to use either Equator.com or Res.net for submittal of short-sale documents. I am certified on both platforms so no matter what process is used, the submittal will go smoothly.
BPO is Ordered. Once the bank has completed basic validation of the short-sale package, they will order a 'BPO' which is basically an opinion of value for the property to be completed by either an appraiser or a real estate broker. The BPO appointment is one of the most important steps in getting the short-sale approved and I always meet the person at the property for the review. If the person preparing the BPO does not fully understand the property and the comparables they may not determine the true value of the property so I make sure that I come prepared with comps and my analysis.
Follow-Up. Once the BPO is ordered and received back by the bank it is usually just a matter of time until we hear something back on the short-sale approval. It is very important that the short-sale is followed up so that we do received an answer in a timely fashion. Regular communication with the buyer is also required as it is important to understand if we need to designate a backup buyer in the event the buyer does not wait for the entire process.
Approval Received. At some point we hopefully receive an approval on the short-sale. Once this is received it is very important to have the escrow proceeding with the buyer and for the seller to start making preparations to move. In most situations the initial approval is only for a 30 day window but it is not unusual to see even shorter approval timeframes. Extensions of the approval are fairly routinely granted but should not be counted on as bank policies can change at any time and they reserve the right to not extend.
Managing Multiple Liens. If the property is significantly underwater it is possible that more than one loan will need to be 'short'. In these cases there is a delicate balance of getting all parties to agree as to what to accept on the sale. It's also possible that an approval will be issued by one lienholder that can't be reconciled with what another lender will agree to do. Timing and strategy is very tricky in these situations but often a deal can be reached.
Closing of Escrow. Hopefully on or before the 30th day after short-sale approval is received, we will have completed the sale of the property to the new buyer.