Wednesday, October 13, 2010

The Short Sale Process Summary

This is a compilation of the steps involved in a Short Sale and what documents would be needed for a successful short sale completion. The short sale process can be divided into 7 major steps. The duration of each step varies for each case and hence difficult to estimate in advance. The important thing to keep in mind is that all the parties to a short sale need to be happy. Mr. Seller is getting away from his debt with little harm to his credit as compared to a foreclosure. Mr. Buyer is getting a property at a ‘good deal’ i.e. below the expected market value in the near future. Mr. Lender needs to be convinced that a short sale is a better alternative than a foreclosure.

The numbers calculated need to convince the lender that the borrower is headed towards foreclosure or bankruptcy or both. The lender needs to make sure that they will recover more of their investment by approving a short sale rather than foreclosing the property.

Below is the step by step process which explains the short sale process and what is involved:

1) Initial Property evaluation
The borrower must be upside down in the loan payments and the financial numbers should show that he is heading towards bankruptcy or foreclosure. The lender needs to be ensured that the borrow can no longer support the payments and the best recourse for the lender is to approve the short sale. The foreclosure process costs on an average $50000 to the lender and that can cut into the bottom line of the lender. Also the lender will need to make the property ready for sale by doing repairs and this will further cut into the bottom line for the lender. The home should be worth less than what the borrower owes with various mortgages.

As a prospective buyer for a short sale property you need to take a look at various things like, a seller who is willing to go through the short sale so as to avoid foreclosure, true hardship on the part of the seller, market evaluation or comparison that will help you determine the price, the property has no prohibitive claims or liens against the title, etc. there are many details that one needs to keep in mind when entering a short sale transaction. It is best to have an experienced attorney and real estate professional look into the detail and advice accordingly.

2) Lender contact after borrower permission
Once the borrower has made up his mind that he wants to do a short sale of his property he needs to hire a short sale experienced attorney and real estate professional. Please make sure the person you hire is an experienced one and knows what they are doing since they are the ones who represent you in the dealings with the lender. Once the borrower has decided on who will represent him in the transaction they will be required to give a written permission authorizing the person to discuss their situation with the lender.
Next the authorized person needs to contact the lender’s loss mitigation department (a list of the contact information of most of the lenders is given below). Another alternative is to contact the person named on the letters to the homeowner, which would be a most efficient and direct contact. It is advisable to make the first call in the presence of the borrower so that the lender can ask him questions directly.

Each lender has different decision making processes and different requirements hence, make sure the representative asks for an outline of what to expect and what the lender wants so as to get everybody on the same page.

3) Writing the hardship letter
The letter of hardship explains the occurrences which testify that the borrower has no ability to pay future payments towards the home. Hardships can be as a result of events beyond the borrower’s control which might result in sudden, significant and prolonged reduction in income or a catastrophic increase in financial obligation. The letter should describe the financial situation that is leading up bankruptcy or foreclosure or both. The letter doesn’t have to be sob story of what the borrower has been through but it needs to have a factual description of the financial situation faced by them. It should also contain the efforts taken by the borrower to resolve the situation

With the letter the lenders need to be convinced that approving a short sale is a preferable option and foreclosure is the only other option. The letter of hardship needs to be supported with valid documents such as paystubs, medical bills, income tax statements, etc.

4) Collection of documents for the process
Collecting documents for the short sale package only begins with the hardship letter. All the documents included should give numbers that will indicate that the borrower is on his way to bankruptcy or foreclosure or both. The goal is to prove that the borrower is a hopeless situation and cannot afford to pay all the mortgages accumulated on the house.

Below is the list of some of the documents the borrower should attach to prove financial hardships:

- Bank statements
- Pay stubs
- Tax returns
- Credit reports
- Hospital bills, etc.

Repair estimates should be the other document that the borrower attaches for the lenders reference. This tells the lender the amount it would need to spend incase if the property was to be foreclosed. This helps the borrower’s case in getting approval for short sale and avoiding foreclosure.

5) Short sale purchase agreement
Along with the financial statements, the package should also have a purchase agreement for the property. The borrower or his real estate agent needs to list the property on the market for sale and invite offers. The seller will need to accept one offer and then send that offer to the bank along with the other documents for approval.

The buyer should also have an experienced attorney who practices real estate law, so as to protect his interests. The attorney can draft the original offer as well as evaluate the counter offers that come back from the seller or lender.

6) Lender’s processing of the short sale
The lender looks at the short sale package with the aim of determining what would be less expensive for them – short sale or foreclosure. The package and the contents need to convince the lender that short sale is a better option. The lender will verify and analyze all the information and documents mentioned in the package. They will also gather their own data and analyze that in light of the documents. In doing so the lender will determines the value of the property and compares that with the value of the amount due on the mortgage and buyer’s offer.

If the numbers support it the lender will approve the short sale since the average cost of a foreclosure is $50000 for the lender in addition to the assets that the lender has to hold as reserve against the loan. So, if there are repairs that the lender will have to undertake to make the property ready for a sale in a foreclosure, then those need to be mentioned in detail in the short sale package submitted by the borrower. This will give the lender an additional reason to approve a short sale.

7) Closing the short sale
After the lender verifies all the documents, collects their own and does their own calculations they will approve the short sale at a particular price. If the short sale is approved at the price of attached purchase offer then the buyer and the lender will open Escrow. If the lender approved short sale price is higher than the offer price then a counter will be sent to buyer with the changed terms and the buyer is given a chance to accept the counter. If the revised terms are inacceptable to the buyer then the property is put back on the market and new offers are called for. Most of the lenders set a time limit on the approval and if an offer is not closed within that time, the process will start all over again.

For Buying or Selling, You Need a Teacher that gives you straight answers. For more information on buying, selling, or renting out an income property in San Diego, please call Frank Rashid's cell phone at (858) 676-5250 or email him at More to follow within the next couple of weeks.

No comments: