- What is a real estate short sale?

- How does a short sale typically work?

- Who is eligible for a short sale?

- Why do lien holders co-operate with short sales?

- Who should negotiate a Short sale?

- Who needs to approve a Short sale?

- How long does it take to Approve a Short sale?

- What is involved in presenting a short sale to a lien holder?

- What needs to be disclosed to buyers?

- What happens if the bank denies the short sale?

- How much money does a short Sale cost?

- What are some of the seller benefits of a short sale?

- What are some of the risks of a Short sale?

What is a real estate short sale?
                In real estate, a short sale is when all lien-holders agree to release their liens in order for a home owner to sell their property in the instance the highest offer is not enough to pay off all the secured liens. (note: a mortgage is a lien). 

How does a short sale typically work?
                Each situation varies, but in general the property is first listed for sale with a Realtor 'as is' and at a price that will generate an offer with-in 30 days to liquidate the property quickly.  The expectations are set with the buyers upfront that it is a short sale and acceptance can/will typically take 90 days.  It is important for the seller to realize that in a short sale situation the goal is to sell the property quickly for what it is worth today 'as is' which has no relation to what is owed.  And the reason is simple, it can only be sold for what a buyer is willing to pay.
                The agent negotiating the short sale on the sellers behalf is given authorization to work with the lien holders directly in order to notify them that the property is listed for sale as a short sale and to get a balance on the total liens, late payments and additional fees incurred.  (This alone could postpone a foreclosure sale.)
                If significant buyer interest is not generated, the price may be reduced in as quickly as 14 days or as needed based on buyer feedback, foreclosure timing, and market conditions.
                Only when a buyer submits a written offer to purchase and agrees in writing that they understand the purchase is contingent upon short sale approval, should the seller, at the agents guidance, consider accepting an offer to submit.  The accepted offer is submitted to the lien holders with the required Short sale 'Financial Hardship' documentation consisting of bank statements, pay stubs, tax returns and a breakdown of monthly income and expenses showing the that the seller has no way to pay off the balance and that foreclosure is inevitable.
                Each lien holder that will be considering a loss will hire their own Appraiser or BPO/Real Estate  Agent to value the property 'As Is' and as if it was to sell in 30-days.  This is the most important stage of the process and is critical that the value come in around 85-90% of the offer price.
                If the Appraisal value is in-line with the offer price then additional or updated documentation may be requested by the lender to validate the sellers financial status.  Once the lien holder has all the information it needs, then the short sale package is submitted to the underlying investor who actually owns the loan.  (many banks act as the collection agency for loans they sold to investors who wanted to earn a higher rate of return on their money secured by real estate.)  If the investor accepts the loss then a 'short sale acceptance letter' is issued so the buyer can schedule their inspection, secure their financing and notify the attorneys of the upcoming closing.  When a short sale is not accepted then the deal could fall apart if the buyer is not willing to increase their offer to satisfy the lien holder.  The last resort is to put the property back on the market seeking a new offer that will satisfy the lien holder.

Who is eligible for a short sale?
                Any borrower with a significant financial hardship situation that will lead to an unavoidable Foreclosure may be eligible for a short sale.  In some situations the borrower does not need even be behind on mortgage payments to proceed with a short sale.

Why do lien holders co-operate with short sales?
                Lenders not only co-operate with short sales, they recommend them.  Banks are the most popular lien holder and are not in the business of owning real estate and they do not want your property, no matter how nice it is. If it comes to the point where they may need to foreclose on a home, they will be seeking methods to get the property liquidated before ever taking title. 
                Most importantly, in almost all cases a short sale will net the lien holder(s) more money than foreclosing and selling it themselves.  This is because of the high risk and costs associated with the foreclosure process.  Some of those costs to the lien holder are: missed mortgage payments, missed taxes, missed insurance payments, court costs and filing fees, attorney fees, asset management costs, maintenance costs, repair costs, real estate commissions, in-house employee costs, closing cost, and the simple fact that they typically get left with damaged property from both disgruntled homeowners and vandalism.

Who should negotiate a Short sale?
                We highly recommend that a Licensed Real Estate Professional with short sale experience lists, sells and negotiates the complete short sale package for the home owner. A good agent will never charge a distressed home owner a fee for short sale negotiation and their profit is made in the form of a real estate commission paid by the lender only if they successfully negotiate the payoff and sell the property. 
                While Attorneys are often capable of completing short sales, they typically want up-front cash from the home owner whether or not the short sale is accepted.  Attorneys who practice bankruptcy could also influence a borrower into filing for bankruptcy when it may not be completely necessary. (remember they specialize in law, not financial planning).
                Upon giving your lien holders approval to release your information your real estate agent is able to negotiate your short sale on your behalf with any bank or lien holder.  A commission-based real estate agent paid only upon the successful short sale acceptance gives your negotiator the invested interest needed to work harder for you.

Who needs to approve a Short sale?
                In all short sales, the home owner has the first right to refuse any purchase offer and/or terms provided by lien holders as to their acceptance of the short sale.  Junior liens such as 2nd mortgages and Condo fee liens also need to approve the short sale, while they are often the most stubborn and demanding.  Condo fees are always paid in full because the association depends on the money to survive and therefore their liens are legally placed before 1st mortgages and even property taxes.

How long does it take to Approve a Short sale?
                Short sale approval time can vary from as little as 30-days to as long as 3-years or longer depending on several lien holder factors including: the efficiency of their short sale processes, their organization, their employee competency and the sheer number of short sales they are working on at any given time. The typical response time for a short sale approval in 2008-10 has been approximately 2 to 4 months (60-120 days).

What is involved in presenting a short sale to a lien holder?
                Short sales have become so standardized in the banking industry that all lien holders request almost the same exact 'short sale package' consisting of solid records proving financial hardship. These documents are nearly the same documents required when originating a loan and proving its affordability and creditworthiness, but in this case it is just the opposite as to prove that the borrower in question is definitely unable to continue making mortgage payments and has no means to pay off the loan.  They understand a borrower in financial distress needs money to survive and they are not looking to take every last penny to their name, but at the same time they are expecting the borrower to pay off the lien if it is at all possible before they will consider taking a loss of tens or hundreds of thousands.               
                The typical financial hardship documents include: pay stubs, savings account balances, checking account balances, tax returns, and a financial worksheet of income and expenses.

What needs to be disclosed to buyers?
                It must be disclosed to buyers that that the property for sale is a short sale because it needs to be understood and agreed upon by all parties that the sale is subject to 3rd party approval (the lien holders) and that may take 90-days or longer for that acceptance.

What happens if the bank denies the short sale?
                If your short sale payoff is denied by any lien holder getting less than is owed to them, then the buyer has the option to increase their offer to satisfy the lien holder or the purchase offer will become void as per the short sale addendum '3rd party approval' contingency.  At this point the property can be relisted in an effort to receive a higher offer.  Now the short sale is 'pre-approved' so acceptance will usually be much faster.  Original offers, or even lower offers in a declining market, can still be submitted down the road once the lien holders appraisal becomes outdated which is typically after 3-6 months.

How much money does a short Sale cost?
                A short sale should cost a home owner absolutely nothing if it is handled by a licensed real estate agent.  Unlike most attorneys and third party 'negotiators', a real estate agent makes money only if they successfully sell their clients house (and that also means the short sale needs to first be accepted).  Since there is no equity in the property, it is ultimately up to the lien holder's  to absorb closing costs and commissions associated with the sale by also deducting those costs from the payoff.

What are some of the seller benefits of a short sale?
                With a Short sale, sellers avoid having to go through a lengthy foreclosure process and prevent the impact of a foreclosure on their credit score. While the reports on the effects of a foreclosure on credit vary, most agree that the deduction is between 200-300 points and stays on your report for around 7 years. Home loans and car loans will become nearly impossible for a long time and/or future interest rates will be sky high. Even the good rental units have strict landlords checking credit worthiness to decide if they trust renting to you and your ability to make payments on time. Bottom line is that Foreclosure can make your life very difficult for a very long time, if you don't prevent it.
                On the other hand, a Short sale on a credit score can be as little as 50 points and several 'strikes' for the months of missed payments. But once the property is sold and the debt is considered satisfied, you can immediately begin rebuilding your credit, so in as little as 2 years you can be eligible for another loan. In the mean time you may still have the credit to satisfy a landlords credit check and the ability to explain that 'Yes I missed a few payments, but there was an unexpected hardship, I cooperated with the lender and together we made the best of the situation.' It says a lot and shows responsibility.

What are some of the risks of a Short sale?
                Sellers considering a short sale must understand a few important things. First, not all lenders will offer to completely relieve the seller of the responsibility of paying off the balance of the loan in agreeing to allow the property to be sold. In some cases, particularly with 2nd mortgages, the lien holder could request the home owner accept a promissory note to pay back some or all of the difference. In this case the home owner could refuse the agreement and allow them to continue the foreclosure process which typically nets a second lien holder $0.  But realize, though rare, the lien holder could still pursue a judgment to pay off the loan difference even after a home is foreclosed and/or sold at auction.
                Secondly, there is no guarantee all the lien holders will accept the short sale. Second lien holders are toughening up and requesting higher pay-offs knowing they have control of the sale, and 1st lien holders may have strict guidelines preventing paying a 2nd mortgage more than a few thousand dollars. In these cases you may get stuck with a stale-mate.
                Third, the Short sale of a non-primary residence may be required to pay income taxes on the short sale amount forgiven as if it were a gift. When the lender decides to forgive all or a portion of a borrower's debt and accept less, the forgiven amount is considered income to the borrower and is liable to be taxed.  However, after the signing of The Mortgage Forgiveness Debt Relief Act of 2007 by President Bush, amendments have been made to remove such tax liability and allow the borrower and lender to work freely together to find a common solution that is beneficial to both parties. This protection is limited to primary residences so consultation with a tax advisor is necessary ensure that a borrower qualifies.  Ask a tax professional about your liabilities of a short sale.