The Short Sale Option

Sell your home even if it is worth less than you owe!

What is a Short Sale?

A Short Sale can be the solution when the proceeds from the sale of your home would not be enough to cover the mortgage payoff, commissions, and all other closing costs. It is a common situation in today's market, especially if the home was purchased as a new home in the past 3-4 years, and/or at least 90% of the purchase price was financed. Many people think that the only choices are foreclosure, bankruptcy, or just being stuck with their house, because they don't know about the Short Sale option.

With a Short Sale, your bank agrees to accept less than what is owed as "payment in full", in an effort to avoid a potential foreclosure. If you are approved into the lender's Short Sale program, the lender agrees to "write-off' as much of the mortgage as is necessary for the home to be sold at market value with typical closing costs.

We can help you through the entire process and paperwork. It can be a complex process and lenders can be frustrating to deal with, so it helps to have an experienced team in your corner. When it's all over, the house gets sold, you don't need to bring any money to the closing, and there is no foreclosure on your credit report. Our fee to handle the short sale is the commission that the lender pays us. There is no out-of-pocket cost to you.

What are the advantages for the homeowner in doing a Short Sale?

  • Little cost and no risk
  • The homeowner avoids a foreclosure on their record
  • The only damage to the homeowners credit is the points deducted for the missed payments
  • No income tax liability for the amount of debt forgiven by the lender (Signed into law December 21, 2007)

Why would a mortgage lender accept a Short Sale rather than foreclose?

  • Real estate law and the foreclosure process differ drastically from state to state and lenders do not want to tie up their financial and legal resources trying to keep up with all the idiosyncrasies of state-specific law.
  • The foreclosure process is too time-intensive, too costly and too state-to-state specific. Banks would rather just "cut their losses" and move on to replacing "bad loans" with "good loans". For the most part, mortgage companies do not want to be in the real estate business!
  • Most lending institutions have to hold in reserves (and cannot lend!) several times the value of the REO properties on their books. As we all know, mortgage lenders make money by lending money... if the amount they have to hold in reserves is a function of the REO properties on their books, you can see that they would want to keep these properties at a minimum.

What qualifies a homeowner for a Short Sale?

  • Behind on payments
  • Hardship situation or lack of cash required to close
  • Little to no equity

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Anatomy of a Short Sale

By Kristian Aasgaarden, RealEstateInvestmentFirm.com

March 13, 2008
Often, in today's real estate market, many homeowners who are in foreclosure or a position of needing to sell their property find out that they actually owe more to their lender(s) than what they can actually sell the home for. In this scenario, one of the more popular solutions is to conduct a short-sale. A short-sale is simply negotiating with the home owner's current lender(s) to accept an amount that is less than they are owed.
A properly structured short-sale transaction can be an attractive alternative and beneficial for all parties to the transaction. The homeowner is able to sell the property, get out from under the stress and strain of a foreclosure, and move on with their lives. The person buying the property, whether an investor or home buyer, is able to purchase the property, usually at a substantial discount, and the bank that is taking the short is able to avoid the high costs of the foreclosure and the risk of the property reverting back to them at auction, which results in additional costs to secure and upkeep the property. It is said that every foreclosure property that ends up as an REO (Real Estate Owned by the bank) costs the lender approximately $50,000.
To many, that may sound simple enough. However, negotiating a successful short-sale is a complicated and time-consuming endeavor. While all banks and lenders require typically the same documentation on every short-sale package, each lender has their own specific requirements or procedures. When negotiating with lenders, it is critical to learn those procedures and follow them to the "T". Before an investor can even contact the bank to start the process, the investor must have certain required documentation from the seller of the property. The first and most important document is the signed Letter of Authorization (LOA) from the seller authorizing their lender to discuss their loan with the investor or negotiator. Once in hand, the LOA must be faxed to the bank (sometimes several times) before the lender will discuss any aspect of their customer's loan.
In addition to a signed letter of authorization, the investor needs to compile many other documents to submit to the lender. Every bank mitigator will require the following:
  • A fully executed purchase and sale agreement contingent upon the lenders approval of the short sale. Note: Lenders want as clean an offer as possible. Therefore, do not add a lot of contingencies or other subject-to's.
  • An estimated HUD-1 settlement statement showing an accurate statement of costs and a net-payoff to the lender.
  • A hardship letter from the seller accurately describing the reasons why they are in foreclosure and why they are not able to make the mortgage payment in the future.
  • A financial declaration spreadsheet from the seller itemizing their monthly income and expenses.
  • 3-6 months of seller bank statements.
  • Two years of seller's tax returns.
  • A property condition and repair estimate. (It is best to have a licensed contractor provide this estimate)

It is important to submit all the documents at one time. Do not piecemeal the paperwork to the mitigator. First, it can easily be misplaced by the lender and never find its way into the file and secondly, you need to make the mitigator's job as easy as possible. If he or she only has a partial package, he cannot go to management with your offer and it will just sit in purgatory.

Once the lender has a complete package submitted, they will request a Broker's Price Opinion (BPO) to be completed. It is critical that the investor be the point of contact with the person conducting the BPO. The investor should be prepared to give the lender's representative comps of similar homes in the area that support the value the investor is hoping to achieve as well as point out all of the defects or repairs that need to be done and give them copies of any repair estimates that you have.
By following the above steps, you should be able to navigate the realm of short sales successfully. While no one will have a 100% Acceptance Rate, you will certainly do much better than your competition, who are going through the process blind.