As a settlement agent with a profound level of experience working out short sale transactions, I spend the majority of my days on the job advising realtors/real estate agents on how to go about the short sale process. For those of you who are new to the industry, a short sale is essentially a petition to a lien-holder (a bank that holds a mortgage on the property) to release the corresponding lien attached to the property for less than the money owed on the loan obligation. Say for example I take out a loan for 500,000.00 to purchase a home, and five years later the house is worth only 350,000.00; thus, a sale of the property will not be sufficient to pay off the lien in full. By the bank agreeing to accept whatever sales proceeds are available after settlement related costs (sales commissions, real estate taxes, etc.) are deducted, the bank is agreeing to a short sale.
To efficiently go about a short sale, here are some key pointers for realtors, in particular listing agents:
1. List the property like you would in a regular sale – One of the most common questions I receive from realtors on a sale transaction is what to list the property for. Once a realtor finds out that the transaction is going to be a short sale, they seem to treat the process differently. They in fact should not. I always advise realtors to list the property like you would in a regular sale. In other words resort to the mechanisms that you utilize with any other listing. List the property for whatever price you truly believe the property is worth. Just because it is a short sale doesn’t necessarily mean the property is devalued (unless of course it is in fact damaged, etc.; hence devalued). A short sale is not a clearance sale at a department store for example. Instead it is a normal sale with a bit of unusual circumstances. Treat it as such. The bank will of course have its own appraisal done to assess what they believe the property is worth; but keep in mind that as a realtor, you are the expert. The bank’s assessment isn’t always right. If there happens to be a huge price discrepancy, a comparable market analysis may be helpful; but for starters, list the property at what you truly believe it is worth.
2. Verify that there is a financial hardship – There are two major components to a short sale: a justifiable hardship making the seller(s) unable to make the mortgage payments in the foreseeable future, and a sufficient purchase offer that meets the investor’s guidelines. At times, agents lose sight of the fact that without the first component, the lien-holder will not proceed to the second. Without a legitimate hardship (death, divorce, unemployment, distance commute to work, long-term sickness, etc.), the bank is unlikely to approve the short sale. Unless the bank is able to verify that due to certain financially crippling circumstances a borrower is unable to honor the note obligation, they will not accept a loss. Thus, it would behoove you as a listing agent to verify that there is in fact a legitimate hardship, before going through with the listing process. Otherwise, you may put in all the hard work just to eventually uncover that the bank is not going to entertain a short sale, as there is no hardship. Remember, a short sale is mechanism for the lien-holder to mitigate their losses, not a means for the borrower to back away from a bad investment.
3. Be Proactive – A short sale, contrary to the moniker, is a very lengthy process. They could take several months for a bank to render a decision on the short sale request. For that reason, you as a realtor must take any steps necessary to try to proactively expedite the process. Once you make the determination that it will be a short sale (by verifying the current payoff amount with the projected sales proceeds), advise your client to either begin putting together their short sale package (consisting of the application, hardship letter, proof of income, bank statements, tax returns, etc.), or if already gathered to go ahead and submit the financial package to the bank. Ultimately, this will speed up the process once a contract is ratified. Ideally, the bank would’ve made a determination on the seller’s eligibility to move forward with a short sale (by reviewing their finances) by the time a contract is received by the title company, or whomever is working the short sale. This would then enable the facilitator to focus strictly on the numbers (net sales proceeds), as opposed to the underwriting process to determine eligibility.
4. Set realistic expectations – While this may serve as a bit of a deterrent factor to the parties involved, especially the purchaser, it is important to establish that a short sale isn’t exactly an overnight process. While this is pretty common knowledge in the industry, you would be better served by doing your due diligence of letting the parties know that a) there is no guarantee of a short sale approval, and b) the duration of the process is out of your hands (or anybody’s for that matter), and can be quite lengthy. By establishing this from the get-go, you are setting realistic expectations for the parties involved. That way if a buyer is running against a quick timeline, it would probably be in their best interest to not pursue such a property. This is of course more of the responsibility of a buyer’s agent; however it would be beneficial for you as a listing agent to remind the buyer’s agent. This will ultimately eliminate the pressure that may be placed on you from the buyer’s side, wanting to close immediately.
5. Use an experienced facilitator – While the decision to be made on a short sale falls entirely in the hands of the bank, using experienced role players can be critical as well. First, the seller should use a real estate agent who has some exposure doing short sales, or at the very least is seasoned in conducting real estate transactions as a whole. Even further, using an experienced facilitator is key. I am a huge believer in the theory of exposure being the greatest teacher. Adequate exposure in the form of education, or experience, makes one an expert in the field exposed to. The same applies to short sales. Using an experienced settlement agent or third party liaison to work out your short sale can make the experience much more efficient. First, an experienced facilitator can provide you with an accurate overview of how the process may turn out per lienholder. While short sales are standard for the most part, each lienholder has certain nuisances that make their process difference. An experienced facilitator would be able to point out the differences in the beginning of the process, to make things move quicker. Secondly, and most importantly, an experienced facilitator is key whenever the parties run into issues. Troubleshooting is key in short sales. For example, what happens when the bank counters the offer? What happens when title work reveals more liens/judgements than what was previously disclosed? What if there is an IRS lien? An experienced facilitator would be able to provide guidance on how to address these issues.
In sum, while short sales may seem to be pretty complex transactions, they are very manageable when approached properly. While each short sale varies on a case by case basis, these steps provided above, if followed, can put a realtor on the right path to obtain a short sale approval and close on a short sale transaction efficiently.