The Ins and Outs of the Short Sale Process

I have to admit – the content of this post is a little dry and wordy, but there is a lot of great information in here for people wanting to know how short sales work. So, grab a cup of coffee and read on!

What is a short sale?

A short sale is a process that allows homeowners to sell their home for less than what they owe on it through a negotiated settlement. The settlement requires the lender(s) to agree to accept a short payoff for the secured mortgage(s). In order to qualify, the homeowner usually needs to demonstrate a hardship where they can no longer afford the mortgage payment.

What are the steps to the short sale process?

1.    Contact your lender – as I’ve mentioned in other posts, this is always the first place you want to start. Call your lender(s) as soon as you see signs that you are in financial trouble or experiencing a hardship. (Don’t know if you’re in trouble? Take my quick self assessment quiz now!) Make sure to stay in constant contact with your lender and provide accurate information. You never want to misrepresent your situation to your lender(s).
2.    Gather your hardship package – this is the group of documents that the lender will ask for to review your situation so they can offer potential solutions. See my post, The Critical Elements of the Hardship Package for more information on assembling the necessary documents.
3.    Identify the benefits of a short sale – Why go through the short sale process, which can sometimes take up to 120 days to complete? Depending on your specific situation, there several benefits of short sale vs. foreclosure. For more on this topic, click here.
4.    Find the right Realtor® – make sure to find a Realtor® who has a successful track record with short sale negotiations, someone who presents a comprehensive marketing plan for your property, and someone who has a negotiating strategy in place tailored to your situation. Make sure to check the license, certifications and designations that the Realtor® carries (you can usually do this through your state’s Department of Real Estate). And lastly, make sure you hire someone who you are comfortable with. You’re going to be sharing some details about your life with them, you might as well feel comfortable doing it! If you need help finding the right Realtor® for you, please send me a message through my Contact page and I can find one for you through my extensive national referral network.
5.    Let your Realtor go to work for you – meet with your Realtor® to sign the listing agreement, go over the marketing plan for your home, and give them your hardship package. As soon as you receive an offer on your property, your Realtor® will present the offer to you to review all the terms of the sale. They will also handle negotiating with the buyer through a counter offer(s). Once the terms of the sale are agreeable, your Realtor® will have the title company provide an estimated HUD and will send the entire hardship package (including the offer/counter offers) to the lender. They’ll handle dealing with your lender(s) on a regular basis through the negotiation process until an approval is reached.
6.    Maintain the property – while you are waiting for an approval on the sale of your home, stay in the property and maintain it as much as possible. Remember that you are asking the lender to take a significant loss on the property and you should do your best to maintain it to sell quickly. If the property is located in an HOA (Home Owner’s Association), try to stay current on the HOA fees as most lenders will not agree to pay off any liens (just the mortgages) in order to sell the property. Also, maintain the utilities on the property so that they remain on when the property goes into escrow and the potential buyer needs to do their inspections.
7.    Seek professional counsel – there are potential tax and legal consequences for both short sale and foreclosure. Before deciding whether or not a short sale is for you and certainly before you enter into any kind of agreement, make sure you contact the appropriate professional to address any concerns you may have. Also, be careful with whom you share your situation with – not every situation is the same. What works for your friend with their lender may not work for you. Seek information and advice from industry professionals with proven track records, don’t rely not the advice of friends and family – even though they mean well. When an approval is reached with the lender(s), be sure to read the approval conditions very carefully. It is also a good idea to have an attorney review the approval prior to moving into contract with a buyer or agreeing to any terms set forth in the approval.
8.    Be Patient – the short sale process takes time, be prepared to wait on the lender for a response. Keep in mind that due to market conditions, lenders are dealing with a huge influx of work out packages (requests for loan modifications, short sales, and even foreclosures). Every time new legislation is passed which offers more help to homeowners, the loss mitigation departments at the banks get even busier. It may take longer when the 1st and 2nd mortgages are held by two different lenders. Each lender must agree to the sale and one may try to hold out for a better payout. In the end, patience and cooperation from all parties involved is needed for a successful transaction.
9.    Plan for the future – this includes finding a new place to live after the sale goes through. Although many homeowners prematurely vacate their property prior to a short sale approval, this is not necessary. Lenders prefer you stay in the property to maintain it since the goal is to avoid foreclosure. Most homeowners that move out early do it out of fear of not being to qualify for a rental. As soon as you start to experience financial difficulty, start putting together a rental application packet. In this packet include a copy of your credit report, pictures of your home (to show you are a trustworthy tenant who is able to maintain a property), complete rental application with personal references, and a cover letter stating why you would be a good tenant to consider. Share your situation and the steps you took to remedy the situation (i.e. short sale) to show that you are not a victim, but a responsible homeowner trying to work out a debt in good faith. Locate property managers in the area where you’d like to move to and share with them your situation and rental application packet. That way, they can keep you in mind as they receive vacancies on properties for rent.
10.    Keep accurate records – like the settlement of any debt, you’ll want to keep copies of the approval letters and/or agreements to show that your debt was once and for all settled. A good practice is to monitor all three of your credit reports for false information. If the debt reports incorrectly, you’ll have the documentation at hand to dispute the credit lines and have them corrected.

Finally, when you’ve received the approval on the short sale from the lender be prepare to move out and leave the property clean and in the same condition in which it was when the buyer first made their offer and when they did their inspections of the property. You’re ready to move on with the next phase of your life knowing that it was worth the wait to have this debt settled and that you have the documentation to prove it. Plus, by doing a short sale instead of walking away from the property, you have protected your credit and put yourself in a much better position to purchase another home within 2-3 years. If you have questions on this topic, please Contact me. Since we also like sharing on this blog, please be sure to share your thoughts, experiences, and tips here on the Comment section below!