How does the short sale process work?

Step 1:  The homeowner misses their mortgage payment (or payments). When that happens, they're quickly in the pre-foreclosure process and at a crossroads. They can either try a foreclosure alternative like paying their past payments and fees, interest, etc. in full (which rarely happens); continue missing payments and just let the bank proceed to foreclosure; or, decide to engage in a short sale.  

Step 2:  The homeowner will want to communicate with their lender early in the process, alerting them that they are interested in pursuing a short sale. The bank may give you some information/resources and even specific forms that will help later on.  

Step 3:  Once the homeowner decides they want to go the short sale route, they should enlist the help of a few professionals. We recommend you talk to your CPA or tax planner, and possibly a real estate attorney. You also will need to find a good real estate agent to help you with the “sale” part of “short sale.” We highly recommend you utilize a Realtor who is proficient and experienced in short sales.  Remember that using this Realtor won’t cost you a dime out of pocket – so don’t try to go-it alone. 

Step 4:  The Realtor will come by the house and survey its condition, take photos, and take a look at a detailed market analysis to determine fair market value. You, the homeowner, will also sign a listing agreement authorizing the Realtor to market and sell your home (and for them to earn a commission when that happens).  The Realtor will officially publish the home for sale on the local MLS, put their sign in the front yard, and start entertaining offers from buyers.  Those aspects are all just like with a traditional sale.  

Step 5:  Next, the Realtor or short sale negotiator submits the purchase offer to your mortgage bank, along with other documentation like a market analysis, your documents displaying that you have a valid financial hardship, and more.  The lender will review the offer and your case and either approve it, deny it, or counteroffer in some cases.  That sounds like a simple step, but waiting for the bank to approve a short sale can take months and months and is often an arduous process. Remember that the buyer who submitted the offer is not "locked in" to the deal, and they are most likely out looking at other homes and submitting other offers. So, in many cases, the bank finally approves a short sale after six months, but by that time, the buyer is no longer interested.  The whole process has to start over again!  

Step 6:  Once we get all parties aligned and the seller, buyer, and bank are ready to go forward, the home sale officially starts the normal selling process, with inspections, disclosures, and the buyers obtaining their home loan.  

Step 7:  Once all of those steps are satisfied, the buyers close on their loan and the home sale can officially close and record. Your mortgage lender will receive any proceeds of the sale (not you) and will release you, the homeowner, from the mortgage loan. 

 When a lender WON'T allow a short sale:  

Remember that there are no guarantees with short sales. Just because a homeowner wants to short sale their property, it doesn’t mean the bank will allow it. And just because you put your home on the market and found a willing buyer who submitted an offer, it doesn’t mean the bank will sign off on it.  In fact, a good number of short sales never get approved by the bank and end up in foreclosure. Additionally, even when a short sale is approved, the buyer may have moved on to making another offer with another home, which is often the case since buyers don’t want to wait endless months for the bank’s process to unfold.  In that case, the Realtor scrambles to put the short sale on the market again and looks to engage another buyer. At that point, they have to start the short sale approval process again.  However, it’s not all pessimism, as some banks and lenders have streamlined their internal processes to handle and approve short sales with improved efficiency. With a good Realtor, a good negotiator, and a good bank, a short sale has a reasonable chance of being approved and closing successfully.  But there still are some instances where the bank cannot and will not approve a short sale in any case. These are:

•  The loan is current, and the homeowner hasn't missed any payments. Of course, the lender won't consider a short sale or any loss mitigation options if the mortgage borrower is paid-up and current. (Why would they?!)

•  If the homeowner declares bankruptcy, a short sale is not allowed to proceed. Short sale negotiations are considered an extension of debt collection activities, which is not allowed to proceed during bankruptcy proceedings.

•  If the homeowner owes less than the home is worth on the current housing market, the lender won’t consider or approve a short sale. In that case, a traditional sale will be the homeowner’s option because they can still sell with enough equity to end up with proceeds, or at least break even.

•  If the buyer of your short sale is a family member or even close friend, the lender typically won’t approve the short sale for fear of fraud or any impropriety. 

Remember to talk to your CPA or tax planner and possibly a real estate attorney about a short sale. There are some huge implications to selling a house as a short sale, including possible tax ramifications and even deficiency judgments or recourse debt in some states and situations. So, it behooves you to set an appointment with your tax and legal professional, so you understand the implications or your liability.  

Tips for Short Sale Buyers in Florida:

•  Make sure you understand the short sale process and timelines and know what to expect. It’s hard enough to complete and close a short sale, so you don’t want to have any unfortunate surprises based on gaps in knowledge along the way. 

• That being said, you should also make sure to use a Realtor who really understands the short sale process and has some experience. They should have clear expectations that this transaction may take a lot longer than your normal 30-day escrow, and they’ll have to do additional work by communicating with the homeowner’s Realtor. The relationship between the buyer and seller’s Realtors goes a long way to successfully completing the short sale transaction! 

• Understand that the seller’s lender will ultimately approve or disapprove the short sale. The decision doesn’t lie with the seller. 

• For some buyers who are not knowledgeable about short sales, they think they’ll be able to swoop in and make a low-ball offer and end up with a steal. Let me dispel that myth right now: it’s not going to happen. The seller’s mortgage bank will carefully scrutinize any offer and will only approve fair offers at current market value. We all get a little opportunistic when home buying and want to pick up a home for a fraction of what it’s worth, but if you’re going to submit unreasonable offers or not be serious about buying a home for fair worth, don’t bother. 

• As a buyer, you should always do a home inspection, whether it's a traditional sale or a short sale. The same is true of a pest inspection (which the buyer's lender will probably mandate, anyway). 

• A short sale doesn’t mean you have to purchase the home As-Is every time. While the seller’s bank will prefer not to do repairs or spend money on contractors during the escrow process, they may agree to repair major issues you find in the home inspection, especially if they impact the health, safety, or livability of the structure. They may also negotiate a price discount for those fixes or set aside funds to go to a contractor out of escrow. 

• Be patient and get ready for a longer process, since timelines for review and approval are up to the seller’s bank, as we mentioned. 

• If you’re an investor or a home buyer who is serious about purchasing a short sale, consider putting offers down on properties who plan on using a professional short sale negotiator. Many Realtors try to negotiate these themselves, which may work fine in some cases (and with some Realtors) but has a much better chance of being successful if a professional short sale negotiator is handling that aspect of the deal.

 ***  Short sales aren’t a perfect process, but they hold some prominent benefits for home sellers, who may buy time, avoid foreclosure, possibly remove further debt collection, and gain the satisfaction of turning their keys over to an excited home buyer.  While these transactions take a higher level of understanding and professionalism, they can yield great results if you’re looking to buy and are willing to exercise patience, as you can end up with a great home at a great price.  Please contact us if you have any questions about short sales or would like to consider your foreclosure alternatives!