What to Know About Short Sales That You Don’t Already
Does Short Sale Mean What You Think it Does?
A Common Misconception About Short Sales
The term short sale used to refer to a specialized faction of the real estate industry. Since the crash of the real estate housing market in 2008, short sales have not only become a common practice among real estate professionals, but the term short sale has become common to consumers in today’s economy.
What does short sale mean? One is often lead to believe that with the name short sale, it must close more quickly than a more typical real estate transaction. Ironically, a short sale is anything but short. In fact, it is quite unusual to close a short sale in less time than a traditional real estate transaction.
So, What is a Short Sale?
By definition, a short sale is any sale of real estate that generates less than the amount owed. In other words, the owner accepts a price for the sale of real property that is short of what s/he still owes.
Why Do a Short Sale?
A short sale requires taking a loss.
Reasons to take a loss and sell short
Sellers may choose to sell their real estate short for the following reasons:
- They are ineligible to refinance or modify their mortgage
- They are facing long-term hardship
- They are behind on mortgage payments
- They owe more than the property’s value
- The property will not sell at a price that covers the remaining mortgage balance
- They can no longer afford to maintain the property
- They have an urgent matter that requires them to move quickly
Benefits of doing a short sale
A short sale may be the best-case scenario, and may have the following benefits.
- May eliminate or reduce the seller’s mortgage debt
- The sellers may avoid the negative impact of foreclosure
- The credit repair process will start sooner than foreclosure
- The seller may be eligible for a Fannie Mae mortgage is 2 years rather than 7 years
What to Expect When Selling Real Estate with a Short Sale
At the beginning, a short sale is much like any other real estate transaction. The seller works with a real estate agent to market the listing and find buyers. Before real estate can be sold at a loss, the short sale must be approved by the homeowner’s bank.
Getting bank approval
First things first, the bank needs to give approval to sell the property short. It’s the listing agent’s duty is to prepare a short sale package and submit it to the lender. Though all banks abide by their own guidelines, the basic procedure is usually similar. A short sale package will likely consist of the following.
- Letter of authorization
- HUD-1 or preliminary net sheet
- Completed financial statement
- Hardship letter from the seller
- 2 years of tax returns
- 2 years of W-2s
- 30 days of paystubs
- Bank statements for the past 2 months
- Comparative market analysis or list of recent comparable sales
Submitting an offer
In an ordinary real estate transaction, the buyer’s agent sends an offer to the seller’s agent. If the offer is acceptable to both parties, the contract is ratified and the road to closing begins then. It’s not that simple with a short sale. The sale is subject to the lender’s approval. The bank requires the following documents from the buyer’s agent.
- A copy of the listing agreement
- An executed purchase offer
- A preapproval letter from the buyer’s lender
- A Copy of the earnest money deposit with proof of funds
An incomplete package will result in a delay in the short sale process.
Waiting for short sale approval
Be patient when waiting for short sale approval. It takes a considerable amount time for the bank to approve a short sale. Your real estate agent should keep regular contact with the bank and give you updates throughout the process.
Of course every short sale is different, but you can use the following timeline as guideline.
- The bank acknowledges receipt of the file – apx. 10-30 days
- A negotiator is assigned – apx. 7-60 days
- The BPO is ordered, and the bank will probably refuse to share the results.
- A second negotiator may be assigned – apx. 30 days
- The file is sent for review or to the PSA – apx. 14-30 days
- The bank may request all parties sign an Arm’s Length Affidavit
- A short sale approval letter is issued by the bank
It is possible for a short sale to get approved in 2-8 weeks, though that is uncommon. The average short sale, however, may take an average of 90-120 days. Keep in mind, that the length of the short sale generally depends on the investor, not the bank.