What To Expect During A Short Sale
So you’ve decided that a short sale is the best option for you? If you’re unsure or haven’t considered the ramifications, please read Should I Sell my Home as a Short Sale? Once you have made the decision, there are a few steps you should take.
#1 Hire A Real Estate Agent
Short Sales are more complicated than your typical real estate transaction, and the bank will not allow you to go it alone on this type of deal. The bank will pay your agent’s commission and wrap it into the amount that the sale is “short”. When you interview agents, be sure to ask about short sales. The agent should have an intimate knowledge of the process and should be experienced at doing them. You will have a much smoother experience with an agent who knows all the little tricks of the trade regarding working with the banks.
#2 Complete Your Paperwork
The first step is to complete an authorization letter for your bank which allows them to speak to your Real Estate Agent about the details of your loan. It is illegal for the bank to share information without this. The letter should include the name(s) of the borrower(s), social security number(s), loan number(s), property address, and your agent’s name, address and contact information. Once they have accepted that authorization (usually 2-3 days), your agent will be ready to facilitate the transaction. The bank will often allow you to begin the process of short sale approval even before you have an offer. Your agent should submit as much paperwork as your bank will allow ahead of time to minimize the time spent on negotiations after a buyer is involved. The bank will likely have a financial questionnaire for you to complete and will require certain financial documents from you. This is called a Work-Out Package. It is a good idea to complete it as soon as possible so that if you are missing any documentation you can produce it before you have an offer.
If you have a 1st and 2nd mortgage with different banks, you will be doing this twice. In addition, the deal will be more complicated because both banks have to agree and many times, there is squabbling between them as to how the money will be split. Both banks must agree before you can sell the house as a short sale. Because the 2nd mortgage is in the second lien position, they run the risk of getting nothing if the deal falls too short. Keep in mind that there could be other liens on the property, such as tax liens or judgments that have been recorded against you. Your agent should have a title search done early on to identify other potential lien holders so they can be addressed during the short sale negotiations.
#3 List The Home
Your agent will list and market your home as normal, although here in Tucson we are required to indicate that it is a short sale in the Tucson MLS. It is advisable no matter where you live to have your agent indicate that your property is being sold as a short sale because a short sale requires more waiting on the buyers’ part and not all buyers are willing or able to do that. Your agent will likely recommend a list price that is right at or just below what other homes are selling because you need to sell quickly to avoid foreclosure (the bank will only wait so long). Additionally, if you aren’t selling at that price, expect your agent to advise you to lower the price incrementally until you get to the price where people are actively viewing your home and are ready to make an offer.
#4 Accept An Offer
Once you receive an offer, you will review it and decide whether to accept it or not. A good offer on a short sale will fall within a price range that will net the bank enough money to gain short sale approval. Your agent should be able to guide you as to what range is necessary for your home. Each offer will have its pros and cons and your strategy will change depending on how close to a possible foreclosure you are. Consult with your Agent about the best course of action regarding each offer that you receive.
Here in Tucson, we also have the option to decide how we will continue to market the property on the Tucson MLS. We can market it Active Contingent and you can accept other offers only as backups or we can market it Active Capa and other offers can be presented to the bank. This has to be written into the contract and your decision will be based upon the strength of the offer that you receive and the circumstances surrounding it. Again, it is vital that you are working with an experienced agent as he or she will know how to handle all aspects of the short sale transaction.
#5 Submit The Offer To The Bank: Start Waiting
Once you have the offer, sign to accept it and then your agent will submit it to the bank along with the rest of the documents required from the Work-Out Package (if not previously submitted). Different banks have different waiting times which can range from 3 weeks to 90 days or more. Regardless of the bank’s time process, it is important for an agent to frequently contact them (once a week or so) to make sure that the file is still progressing normally. A good agent will call them frequently enough to advocate expediency on the client’s behalf without calling so much that the agent becomes a pain to the negotiator thus preventing friendly communications.
The bank’s valuation is important because it is the piece of information from which the approval amount is derived. Once the bank receives the documentation from your agent, they will order an appraisal or get a Brokers Price Opinion (BPO) to help determine the current market of the home.
It is common during the negotiation/waiting phase to have the bank request updated financial documentation, sometimes repeatedly. This is because they must have current information in their files (per investor guidelines) and as their internal process drags on the documents become aged, thus requiring more current documents to be presented.
#6 Negotiate any Unfavorable Terms with the Bank
Once the bank has gone through their approval process, you will get a response either verbally or in writing from them. Sometimes they accept the offer and sometimes they counter with a higher purchase price that they are willing to accept. In addition, they may request a cash payment from you at closing or a promissory note wherein you promise to pay back a portion of the amount the bank is forgiving.
The negotiation on price is between the bank and the buyer, so at this point, you must be patient and wait. If the bank requests a contribution from you, the decision will be yours as to whether you agree to contribute, refuse to contribute, or negotiate a different contribution amount. This portion of the short sale process is usually the most tense because everyone has waited so long and yet the bank may be requesting terms that are unpleasant for buyers or sellers. It can seem like the deal will fall apart at this stage, but if everyone can remain a little flexible, most of the time the parties are able to reach an agreement and proceed to closing.
This is the stage where it is most helpful to have the feedback of a good real estate attorney. A real estate Agent can review the terms of the approval letter and point out possible red flags. However, real estate agents are not trained in law and are not familiar with how the nuances of the wording in those letters may affect you long term, particularly as the laws change. Your real estate Agent is a good source to give general feedback on the letter, but is unable to give legal advice. For this reason, you should NEVER rely on your real estate Agent for legal advice regarding the advisability of accepting the bank’s offer or any other matter pertaining to the law.
#7 Close The Deal
Once all the price terms in the bank’s Agreement Letter have been hashed out and all parties are in agreement, you can proceed to closing. Depending on the buyer, this could take another week or another month. It should be written in your contract what the closing date will be or it can be X days after Bank Acceptance. However, the bank’s approval or acceptance letter will give you a deadline by which you must close. There will be inspections like with any other sale and the buyer may ask for repairs. You have the choice of whether or not to perform the repairs requested, if any. Consult with your agent about the best course of action regarding repairs or any other issues that come up on the way to closing the transaction.