Over the past year, no two words have been heating up the real estate world more than “short sales.” As RealtyTrac reports, short sales accounted for almost a third of all sales in 2012.
That’s not necessarily bad news for the housing market. With fewer foreclosures and more short sales, more lenders and borrowers are walking away from homes without paying the huge financial (and often emotional) price of a foreclosure. “A lot of short sales involve sellers who are having financial problems but they’re still willing to make something work,” says Elizabeth Weintraub, a real estate agent in Sacramento, Calif.
In a short sale, a homeowner owes more on a loan than the property is worth. The property is put up for sale, and the lender accepts the proceeds from the sale as repayment of the loan. While a short sale still negatively affects a borrower’s credit score, and it is certainly not a “short” process, both the borrower and lender avoid the fees and costs of a foreclosure.
Do Your Research
Before you set your sights on a short sale, speak with a lender who can assess your situation, says Tracy Royce, an Arizona-based short sales and foreclosure expert. “See if your lender can do a loan modification instead and then discuss whether or not a short sale is the best way to go,” she says. Typically, a short sale is not the only solution for financially struggling homeowners. “It’s just one tool in the tool box,” Royce says.
However, if it’s determined that a short sale is optimal, reach out to a local professional with extensive short sale experience. “There’s no cookie cutter process and all short sales are different, so it’s important to find an agent who knows how to do them all,” Weintraub explains.
Together with your agent, you’ll compile the hardship letter that most lenders require. The contents of a hardship letter can vary greatly – from explanations about a medical emergency or a death in the family to a change in your employment status or an impending divorce – but must always include some significant reason why your financial situation has deteriorated since you initially took out your loan.
Oftentimes, this letter includes basic documents, such as your last two years of tax returns, a profit and loss statement for your business (if you’re self-employed), the last two months of bank settlements and the last 30 days of your payroll.
Additionally, the lender will have their own short sale package to complete, though the specifics of this package vary depending on who the lender is and what financial information the bank they work with requires.
Negotiate a Deal
And so the dance between the lenders, the investor and the seller begins. The principal dancers – the lender and the type of investor – will determine how the short sale will be handled, which in turn will affect the length of sale. For instance, a Bank of America/FHA short sale can take anywhere from four months to a year or longer, Weintraub says, while other lenders can complete an FHA short sale in a month to six weeks.
Another essential factor is the homebuyer. “Remember that price negotiation doesn’t start until the bank gets an offer, because until then, there’s nothing to negotiate with,” Royce says. Once an offer is on the table, the value of the property is determined using a broker price opinion—a BPO—or an official appraisal. When deciding a value, the bank also accounts for the initial offer.
Next, the home must undergo an inspection. “This is where a lot of short sales fall off,” Royce says. “Either the inspection doesn’t go well or the buyer wants to take money off the sales price or get a concession.”
If a buyer’s offer is approved by the bank, a short sale approval letter is then issued to you, the seller. Pending that the price matches what is in your best interest – and all details in the letter are correct – the buyer and lender move forward to close on the sale.
Embarking on a short sale can be a long and arduous process, so consult with your local real estate agent, lender, attorney and other experts to ensure it is the right choice for your financial situation.