Short Sale Secrets…Revealed!

Short Sale Definition and Explanation

A SHORT SALE is a real estate sales transaction in which the seller's mortgage lender permits a seller to sell their property at or close to the present market value and the mortgage lender agrees accept a mortgage loan payoff from the seller, which is LESS than the present balance due on the mortgage loan.  The term “short” is a reflection of the mortgage lender allowing for a “short” or “reduced” pay-off of the mortgage loan.

Seller’s Getting Started
Be proactive and call your mortgage lender!  A seller may need to make several telephone calls before they find the person responsible at their mortgage lender for handling Short Sales.  Sometimes it may seem like the mortgage lender is KEEPING IT A SECRET!  Usually, you will NOT get to speak to the Short Sale or “Work Out" Department at your mortgage lender as they will insist that you contact them in writing since they have so many inquiries from borrowers (sellers).  Try your best to get a supervisor's name and contact information.  Ultimately, you want to deal with the person authorized to make a Short Sale decision on behalf of the mortgage lender.  This will take real dedication on your part to identify the proper party.

Short Sales Simplified
Banks, mortgage companies and lenders generally grant short sales to sellers for a combination of two (2) basic reasons:

  1. A seller has a financial hardship.
  2. A seller owes more money on their present mortgage balance than what the property is actually worth in the current marketplace.

Financial Hardship
For sellers, a financial hardship may include any one or more of a combination of the following:

  1. Unemployment
  2. Reduced income or a pay-cut
  3. Divorce (division of marital assets)
  4. Medical emergency (significant medical bills)
  5. Job transfer (unreasonable or impossible commute)
  6. Bankruptcy
  7. Foreclosure
  8. Death
  9. Severely Depressed Property Value
  10. Etc.

Demonstration of Financial Hardship
To prove one is suffering from a financial hardship, a seller must prepare a detailed financial package for their current mortgage lender (bank), which they must submit to the mortgage lender through a designated channel or process detailed by the mortgage lender.  Each mortgage lender has their own unique process and course of action for a seller to follow.  The submission process is generally quite similar from mortgage lender to mortgage lender; however, it is extremely important for a seller to be sure they are submitting the proper information for their package to be considered.

Most Common Financial Hardship Package Contents
In most cases, a seller’s short sale package, to demonstrate their financial hardship, will likely consist of the following documentation:

    1. Letter of Authorization (If a seller has an attorney and/or a Real Estate Broker representing them through the process, this is an extremely important document)

Mortgage lenders are unwilling to disclose any of a borrower’s (seller’s) personal information without written authorization directly from the borrower.  Some mortgage lenders may even require the authorization to be NOTARIZED.  If a borrower is relying on the assistance of a 3rd party professional, they will receive better cooperation if they write a Letter of Authorization to their mortgage lender giving the mortgage lender permission to communicate with the 3rd party professional(s) about their mortgage loan. The Letter of Authorization should include the following:

    1. Borrower’s (seller’s) name
    2. Property address
    3. Mortgage loan account number
    4. Today’s Date
    5. The contact information for all of the 3rd party professionals assisting the borrower
    6. Specific instructions of what permission you are granting to the mortgage lender [i.e.: I hereby authorize XXXXXX mortgage lender to communicate with my representative, XXXXXXXX (Attorney, Real Estate Broker, etc.) with regard to any and all matters concerning my mortgage loan.]
    2. Proposed HUD-1 Settlement Statement or Seller’s Net Sheet (it is best from a mortgage lender-approved Title Company if possible), which will show all of the anticipated expenses and costs associated with the sale of the property

This document should show the fair market value sales price you expect to receive for the sale of the property and ALL of the costs involved in the sale.  It should also have accurate information concerning all unpaid loan balances, outstanding payments due and late fees to the mortgage lender, necessary real estate commissions, if any. The title company or a seller’s attorney should be able to help prepare this.  Ultimately, if the document is produced and the bottom line shows cash (proceeds) due to the seller, the seller will likely NOT need or qualify for a Short Sale.  To justify a Short Sale, the bottom line must show that the seller is upside-down (there are more total expenses and loans to pay-off if the property is sold than what the property is worth) when selling the property.

    3. Complete and detailed financial statement (most sellers would have their CPA or another qualified professional assist them with this)

Honesty is always the best policy!  Sellers should be truthful about their financial situation and disclose all of their assets.  Mortgage lenders will be curious to know if a seller has savings accounts, money market accounts, stocks, bonds, jewelry, business ownership equity, negotiable instruments, cash, other real estate or anything of tangible value.  Mortgage lenders do not want to leave any stone unturned and they do not like making a habit of forgiving a borrower’s debt.  They want a seller’s real financial picture to show if they have any possible way of paying back all of the debt that is properly due under the terms of a seller’s mortgage.  Hiding assets or not disclosing the truth about all assets can pose a severe ethical and even legal problem for a seller.

    4. Financial hardship letter (from the seller to explain their specific circumstances and why they are requesting the short sale)

This letter has to be from the heart and emotional.  Quite frankly, THE SADDER THE BETTER!  Everything a seller includes should be completely honest and accurate.  Sellers should be sure to detail how they ended up in the terrible financial situation that they are in.  The more heart-wrenching that it is, the better off a borrower (seller) will be.  Remember, it is a plea to the mortgage lender to accept less than full payment of all the monies that may be due.  Most mortgage lenders are reasonable and they can usually understand if a seller lost their job, were hospitalized or they suffered through a divorce; however, mortgage lenders have no compassion with regard to matters involving dishonesty or criminal activity.

    5. Two (2) years of complete IRS 1040 Income Tax Returns including all Schedules and applicable W-2s, 1099s or K-1s, etc.

A seller should submit signed photocopies of the actual Tax Returns submitted to the IRS.

    6. Two (2) months of the seller’s most recent payroll stubs (if the seller is employed)

If payroll stubs exist, they should be accurate and recent and reflect a seller applicant’s ACTUAL income.

    7. Two (2) months of the seller’s most recent bank account statements

Bank statements should reflect regular activity and nothing that is out of the ordinary.  If a seller’s bank statements show unaccountable deposits, significant cash withdrawals or a strange number of checks, it is definitely recommended that the seller explain each of those banking activities to the mortgage lender with a cover letter.  Some mortgage lenders may require a seller to explain each deposit and credit to determine whether such deposits will likely continue in the future.

    8. Comparative Market Analysis (CMA) OR a list of recent comparable sales, preferably from an independent, licensed Real Estate Broker, to help justify and explain the reduced value of the property .

Real estate market values are constantly change and sometimes these movements are significant and rapid and occasionally these changes in price are extremely slow. If severely depressed property values in a seller’s market place is one of the reason that a seller cannot successfully sell their property at a high enough price to properly pay off the full amount currently due on the seller’s outstanding mortgage balance, this must be documented and substantiated.  A CMA is the best way to do this and a Real Estate Broker is the person a seller needs to help them do this properly.  A solid and complete CMA will show details concerning the following types of properties, in relationship to the property being sold under the terms of the Short Sale:

    1. Similar properties that are active and presently on the market for sale (Active Sales)
    2. Similar properties that are no longer on the market because they have pending sales contracts and are waiting to Close (Pending Sales)
    3. Similar properties that were sold during the past six months (Closed Sales)

The Seller’s Reliance on their Mortgage Lender
The KEY to a short sale transaction being successful with the seller being able to sell their property and the buyer being able to purchase the property is the COOPERATION of the seller’s Mortgage Lender.  If the Mortgage Lender does NOT agree to permit the seller to sell their property and pay-off a reduced mortgage balance, then the rest of the transaction is irrelevant as it cannot proceed.  A smart seller will work diligently with their mortgage lender to submit all of the necessary documentation to help convince their mortgage lender to approve the Short Sale as quickly as possible.

The seller may wish to sell their property, but without their mortgage lender’s cooperation and approval, there will be no sale and the seller may be put in a treacherous financial position, which could possibly result in the ultimate foreclosure of the property or other financial complications.

How a Buyer Makes & Submits a Purchase Offer to the Seller and the Seller’s Mortgage Lender
An informed and educated buyer is a powerful buyer!  Before a buyer writes a Short Sale offer, a buyer should consult with their Real Estate Broker for a list of accurate comparable sales from the Multiple Listing Service (MLS).  Mortgage lenders do not like to leave any money on the table in a real estate sale, so like any seller; they will want the highest possible price that they think they can achieve for the sale of the property. The mortgage lender will want to receive fair market value for the home or at least a price that is very close to fair market value.

Frequently, buyers will be attracted to Short Sale listings, because of the artificially low asking or listing price, which is advertised for the property.  The advertised price in many instances has never been approved by the seller’s mortgage lender and is used simply to generate interest and create attraction to the property.  Once a buyer or many buyers are interested in the property, the seller and/or their mortgage lender will use the significant interest to try and drive-up the sale price to create somewhat of a “bidding war” between the buyers, assuming there are multiple interested parties.  Many people argue that this is the MOST FRUSTRATING part of dealing with a Short Sale property.  It is common for buyers NOT to be able to purchase a Short Sale property they see advertised, even if they offer FULL or MORE THAN FULL price.  Buyers need to be educated about this unpleasant marketing tactic so that they are not disappointed when they begin the Short Sale negotiation process.

Generally speaking, the seller frequently has little or no concern about what the terms of the buyer’s purchase offer are since the seller, to qualify for a Short Sale, has to accept the fact that they will receive absolutely no proceeds (no money) from the sale of the property and in some cases, the seller may even have to come up with money and bring money to closing to pay-off various Closing expenses or a portion of the original mortgage loan on the property.  Assuming a buyer makes an offer to purchase a Short Sale listing with terms that are acceptable to the seller and in most cases, any terms are acceptable to the seller, the seller must submit the offer to their mortgage lender for consideration.  One of the MOST CRUCIAL documents that is to be included with the buyer’s offer is the SHORT SALE ADDENDUM.  In a nut shell, the Short Sale Addendum says that the entire transaction or sale of the property hinges on the seller’s mortgage lender’s approval or denial.  Regardless of what terms the buyer and seller may agree to, without the seller’s mortgage lender’s full cooperation and agreement, there will be absolutely no Short Sale of the property.

What Happens Once the Seller Accepts the Buyer’s Offer
The seller, with the assistance of their attorney and/or Real Estate Broker, will submit the following items to their mortgage lender:

  1. Real Estate Listing Agreement between seller and Listing Real Estate Broker (it is important to note that the commission terms agreed-to between seller and Real Estate Broker may not be acceptable to the mortgage lender and in many instances will be REDUCED by the mortgage lender to keep all costs down associated with the sale of the property to help increase the mortgage lender’s proceeds)
  2. The fully-executed purchase offer between buyer and seller, including the Short Sale Addendum as outlined above
  3. If the buyer is looking to obtain their own mortgage financing, the buyer's mortgage preapproval letter
  4. If the purchase offer indicates a Good Faith Earnest Money Deposit paid by the buyer, then a photocopy of the buyer’s check or an Escrow Letter
  5. The seller's COMPLETE Financial Hardship Short Sale package as outlined above

The Mortgage Lender’s Short Sale Procedures
Patience is a virtue!  It is common for buyers to wait an exceedingly long period of time to receive a response from the seller’s mortgage lender as to whether or not the Short Sale has been approved or denied. It is critically important for the Real Estate Broker to frequently stay in close contact with the seller’s mortgage lender to monitor the progress of the Short Sale evaluation and consideration.  Many times the person or persons that work at the seller’s mortgage lender who are responsible for the application file will CHANGE so it is important to keep good records as to who the point-of-contact is at all times and what status updates they provide to everyone involved.  Unfortunately, many buyers get so frustrated while waiting 60-90-120-150 days or more for a proper response from the seller’s mortgage lender.  Some buyers may need to proceed with cancelling their purchase offer if they do not receive a decision from the seller’s mortgage lender within a specified time period.  Don’t bother with empty threats to cancel a purchase offer, because threatening a bureaucratic, multi-billion dollar bank is self-defeating and will not help or expedite the Short Sale process.  YOU MUST HAVE LOTS OF PATIENCE TO PURCHASE A SHORT SALE PROPERTY!

Here is What is Happening at the Seller’s Mortgage Lender, While the Buyer is Waiting
Assuming that one is dealing with a cooperative, well-organized and efficient mortgage lender, here is the general process that is occurring once a Short Sale Submission Package has been received by the seller’s mortgage lender:

    1. The mortgage lender acknowledges receipt of the package. This can easily take up to a month due to the tremendous number of Short Sale packages that mortgage lenders are typically receiving during these challenging economic times.
    2. A mortgage lender staff person, referred to as a “Short Sale Negotiator” is assigned to the file. This can take another month or two (2).
    3. The mortgage lender will order a third party Broker Price Opinion (BPO) or Appraisal to try and confirm an independent value opinion for the fair market value of the property. The results will most likely not be shared with the other interested parties involved in the transaction.
    4. It is possible that a second Short Sale Negotiator may be assigned to the file, which can take another month.
    5. The file will be forwarded to a mortgage lender supervisor (decision maker) to verify that the Short Sale request is acceptable under the terms of the Pooling and Servicer Agreement (PSA), which can take up to another month.
    6. If all goes well as the transaction nears completion and acceptance by the seller’s mortgage lender, it is extremely common for the mortgage lender to require that all interested parties involved in the transaction sign an Arm's-Length Affidavit.  The purpose of this is to ensure that nobody involved in the transaction is conspiring with anyone else involved to “cheat” the mortgage lender out of monies that may otherwise be due and payable.  This likely will only take a few days to complete.
    7. If all goes well according to the steps above, the seller’s mortgage lender will hopefully issue a Short Sale approval letter so that the transaction may close.

Typical Time Frame
Barring any rare and extenuating circumstances and generally speaking, the fastest someone can hope to close a Short Sale Transaction is 6 to 8 weeks (ultra aggressive and quite uncommon); however, it is extremely common for a Short Sale Transaction to last 3 to 5 months.  Some unique Short Sale transactions have carried on for a year or more!

Being that the Short Sale process can be so lengthy and requires so much patience on behalf of everyone involved, especially the buyer, many times the buyer may decide midstream to “cancel” or “quit” the transaction, which they are usually allowed to do without difficulty, assuming one is using the proper SHORT SALE ADDENDUM.  It is not uncommon for a seller to have to “sell” the property to 2-3-4 or more buyers to get just one of those buyers to have the patience and persistence to wait out the entire Short Sale process.  When a buyer sees through the entire transaction to completion, the reward can be truly wonderful!  The buyer can purchase a great property at a fantastic price!

Short Sales…The Bottom Line
A Short Sale transaction may not always be a pleasant transaction, but certainly is BETTER for a seller than letting a property go into foreclosure!  A Short Sale is less damaging to a seller’s credit report; however, it still does have significant negative impact to one’s credit history. Short Sales have become extraordinarily common in recent years and sellers usually feel much better about negotiating a settlement with a bank (a Short Sale), when they can no longer afford their mortgage payments, as opposed to just losing one’s home through foreclosure, which for many people can be quite embarrassing and uncomfortable.  If a homeowner (seller) is struggling financially, then a Short Sale may be a great solution, particularly if the sellers acts quickly and sensible and receives the guidance of an experienced professional like an attorney or Real Estate Broker.

Some experts have analyzed that at least HALF of all real estate sales over the past few years have been Short Sale transactions.  It is hard to avoid a Short Sale property if you are looking at real estate for sale in today’s marketplace.  Ultimately, it is up to the buyer if they want to get involved with a Short Sale transaction rather than a traditional transaction.

Short Sales…The Fine Print
Not all mortgage lenders will cooperate with or permit a Short Sale request, most particularly when it would make more financial sense for the mortgage lender to foreclose on a delinquent borrower.  Furthermore, Short Sale qualifications for a seller are extremely rigid and not all sellers nor all properties qualify for a Short Sale.

All parties involved in a Short Sale transaction, especially all buyers and sellers should consult with their own legal counsel and tax specialist (CPA) to grasp a full understanding of the legal implications and tax ramifications of participating in a Short Sale transaction.  Signature International Real Estate, LLC and are NOT attorneys or tax specialists and we do not advise on any such implications or consequences.

The USA Mortgage Debt Relief Act of 2007 can be read by CLICKING THIS LINK.  The US Internal Revenue Service (IRS) may consider the debt forgiveness (from a mortgage lender) to a seller in a Short Sale transaction as INCOME.  Income may be taxable and could cause an additional challenge for a seller.  Receiving expert advice from a CPA is extremely helpful in this instance.  There is no guarantee that a mortgage lender who cooperates with a seller and permits a Short Sale will not legally pursue the seller for the difference between the amount currently owed on the outstanding mortgage loan and the amount paid to the mortgage lender at the time of Closing.

The DIFFERENCE between what is owed on the outstanding mortgage loan and the amount actually paid to the mortgage lender at the time of Closing in a Short Sale is referred to as DEFICIENCY.  With the assistance of qualified legal counsel, one can determine whether a seller’s mortgage loan qualifies for a deficiency judgment or claim against a seller from their mortgage lender.  Consulting with an attorney is an excellent idea!


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Signature International Real Estate, LLC
Ben G. Schachter, Licensed Real Estate Broker