Short sales

With the current condition of the market, you’ve probably been hearing the term “short sale” frequently. The term brings about a lot of anxiety and nervousness on both sellers and buyers. It even makes experienced agents nervous. Until recently short sales were few and far between. It is my hope that this page helps explain the pros and cons of a short sale and how people can benefit from them.

Although the term short sale might make you think that the sale will happen in a short period of time, it does not. More often than not, it takes longer than the typical 30 days from offer to close. A short sale occurs when the mortgage company agrees to take less than what is owed on the house. Mortgage companies will accept an offer of less than what is owed on the house instead of foreclosing on a home if they feel it is in their financial best interest. It is also important to realize that the seller will not receive any funds from the sale of the house.

Why would a seller want to sell the house for less than what they owe?

• They are behind in the mortgage payments and do not see a way to catch-up. A mortgage company will only consider a short sale if they are behind in payments and a foreclosure is imminent.

• The seller wants to avoid further damage to their credit. While they do have late payments listed, a foreclosure does more damage and lasts longer then late payments.

Why would a buyer want to participate in a short sale?

• Pre-foreclosures are quite often the best deals out there. You can typically buy a home well under market value. Once a foreclosure occurs, the mortgage company has added expenses that they want to recoup. Occasionally you can get a better deal after a foreclosure but you have to be ready to move fast. Even in a slow market those rare great deals go quick.

Why would the mortgage company accept a short sale?

• There are a lot of reasons for mortgage companies to accept a short sale. The biggest reason is that it makes financial sense. The mortgage company will evaluate each offer, have the house appraised and then come up with a price that they are willing to accept. If the mortgage is higher than the appraisal or any repairs needed to be done in order to sell the house are too expensive they will cut their losses and sell the house.

How does a short sale occur?

Typically the agent listing the property will market the house for sale as a short sale possibility. At the very least, they need to let prospective agents and buyers know that it is a short sale when they call to schedule a viewing of the house. Most mortgage companies will not approve a short sale until they have an actual offer so it is hard to determine what offer they are willing to accept. Once a prospective buyer decides to put in an offer on the house it goes to the seller for review and acceptance. The agent representing the seller needs to make sure any special stipulations needed to protect the seller are added to the contract. Once that is done the seller’s agent needs to forward the offer along with other required paperwork to the mortgage company. This is commonly referred to as “the package” and typically includes the following:

1. Purchase and sale agreement accepted by both buyer and seller.
2. Copy of earnest money check from buyer
3. Copy of pre-approval letter from buyer’s mortgage company.
4. Copies of seller's bank statements, pay stubs and tax returns.
5. Letter from seller explaining what caused them to fall behind and why they cannot keep the mortgage current.
6. Different lenders may ask for additional information as well.

It is important that all items in the package be sent to the mortgage company at the same time. If items are sent in at different times, most mortgage companies will not consider the offer.

Once the mortgage company has all of the information, they will review it, order an appraisal and make a decision. This is where both the buyer and seller need to be patient. While a few mortgage companies will respond quickly, most will take at least 30 days to make a decision.

Most mortgage companies will either submit a verbal counter offer or simply tell the seller’s agent that the buyer needs to submit a higher offer because the first one is too low. The good news about this is that the hard work has been done and decisions should be made quickly beyond this point. Once a purchase price has been agreed upon by all parties, a new contract is drafted to keep the paperwork clean and ensure that all parties agree to the terms.

How long does the whole process take?

If the buyer needs to close quickly for any reason, the offer needs to be enough to payoff the balance of the original mortgage. If this is the case, many mortgage companies will fast track the offer and close in around 30 days. If the buyer is looking for a significant reduction from the original mortgage, it can take 60 days or more.

I hope this information helps you better understand the process of a short sale. In my opinion, short sales are a win-win situation for everybody involved. The seller is allowed to avoid foreclosure and able to move on. The buyer can get a great deal on a home they love and the mortgage company can avoid the added expense of foreclosing on a house and the risk of loosing more money at auction or after the house is listed as a foreclosure.