A short sale is a situation when a seller who owns a property is attempting to sell a house and cannot pay off the full amount of the mortgage loan(s) that are a lien against the property based on the current market value.
Example:
- Joe Smith bought his home in 2005 for $300,000
- Joe put $0 down on the house and got a 1st Mortgage for $240,000 and a second Mortgage for $60,000
- In May of 2009, Joe decided that he needs to sell his home, but the market has declined significantly in his area and now the home is valued at $260,000
- If he can sell the home for $260,000 he will have to bring $40,000 to the closing table to pay off the loans and that figure doesn’t include selling costs (realtor commissions, closing costs)
If Joe doesn’t have the over $50k to cover the loss on the house, then he will try to get the mortgage lien holders to take the loss.
That is a short sale.
Why would a lender agree to take less than what they are owed?
Lenders will not agree to take less than what is owed unless the seller can prove the following things:
- A hardship that is forcing the seller to sell the home
- A job loss that is making it difficult or impossible to make the mortgage payments
- The seller had to quit their job to take care of a sick parent or child
- Another hardship, beyond the seller’s control, that is forcing the seller to sell
- The market has declined and the value of the house is really less than what the seller paid for it
- Foreclosure is imminent if the lender does not agree to a short sale
Getting the lender to take such a large loss is not easy and requires a lot of paperwork and information that the seller will provide to the lender, but often times it is in the best interest of the lender to agree to a short sale as opposed to letting the house go in foreclosure.
What is a foreclosed home?
A foreclosed home is a lender owned home that the lender has acquired through the foreclosure process. The lender will generally list the home for less than they are owed in order to reduce the inventory that they have of foreclosed homes.
What is the difference between a pre-approved and unapproved short sale?
A pre-approved short sale is when a lender has agreed, in principal, to take less than they are owed on the property. It means that the seller has provided all the documentation that the lender has requested and the lender is satisfied that the seller has met the conditions for a short sale. The lender might not have agreed to a specific price, but they have agreed to take less than what they are owed.
An unapproved short sale means that the lender has not agreed to take less than they are owed for the property. Either the seller has just started the process or the lender is very backed up and has not had a chance to review the documentation that the seller has provided.
Is the process for making an offer on a short sale or a foreclosure different than on a regular property?
No. The offer process is the same for short sales and foreclosures as it is for a normal listing. There may be additional addendums to fill out relating to the short sale or the foreclosure, but otherwise the process is the same as for a normal listing. The difference is in the acceptance of the offer.
How is the acceptance of a short sale and foreclosure different from a regular offer?
The acceptance of a normal listing only depends on the seller as the decision maker. Sellers will generally respond within 24 hours of your offer, accepting, countering or rejecting the offer.
The acceptance on a lender owned, foreclosed home depends on the lender making a decision about the presented offer. The lenders have an REO department that handles their inventory of foreclosed homes. Depending on the inventory of homes and the amount of offers that the REO department is receiving on that inventory, it could take anywhere from 3 to 5 business days for the bank to respond to the offer.
For short sale offer, acceptance not only depends on the seller signing off on the offer, but the lender has to sign off on the offer before the contract is considered under contract. So, the seller will sign the offer that is “subject to lender approval” and forward it onto the lender for them to review and respond to the offer.
How long will it take for the lender to review and respond to the offer?
The best answer to that is, “It Depends.” It could take anywhere from 15 days to 6 months before the lender will respond to the offer. That time frame is directly related to whether the short sale is pre-approved or unapproved. Unapproved is ALWAYS going to take longer.
Why does it take so long?
Lenders are in the business of lending money, not in selling real estate. Because of that, they do not have the infrastructure to handle to mass of shorts sales requests that have flooded them and the market in the past year.
If a lender has not pre-approved a short sale, it takes significant amount of time to process the documentation provided by the seller in order for the bank to agree to the short sale.
If a lender has approved the short sale and an offer is received, signed and accepted by the seller it will be sent on to the lender and the following has to happen:
- The title company works up a HUD-1 settlement statement. This allows the lender to get a preliminary estimate on the amount of the loss from short sale.
- The lender reviews the HUD 1 and the offer and orders a BPO (Broker Price Opinion) or Residential Appraisal in order to determine if there is any possibility of getting a higher price for the house
- When they receive and review the BPO or Appraisal they make the decision to accept, reject or counter the offer
- If the lender decides to accept the offer, they then generate a Short Pay Off authorization letter that states the amount they will accept in order to pay off the mortgage. This letter has an expiration date and any deal must close prior to that date.
This process takes numerous phone calls, messages, and emails to the lender’s REO department. The lead time on any of these items getting done is a least a week. So it all adds up in the end to making the short sale process a LONG process, anywhere from 15 days to 6 months.
Can the lender reject or counter the offer?
Just like a normal seller, the lender is free to reject or counter the offer for any reason. The seller might not have met the hardship qualifications or the market value of the house may be significantly greater than the offer and the lender may counter the offer to mitigate their losses.
Is there anything a buyer can do?
Unfortunately, the buyer is at the mercy of the lender. The best thing for the buyer to do is be patient. If the house that you put the offer in on is the house you want then just sit it out and wait. If, however, you are in a time crunch and have to move by a certain time, putting an offer on a short sale (even one that is pre-approved) is probably not the best idea.
Remember… in the short sale process, patience in the key!!!