There are a lot of long descriptions about the details of a short sale. However, the simple answer is that a short sale is a favor from the bank. The bank allows the sale of the property for less than the underlying loan on the property.

Basically, the property value is worth less than the full loan payoff with the bank. Normally, the “value” is determined by the buyer, however the bank will do an appraisal, which is often called a BPO (brokers price opinion), to determine the bank’s perceived value. Depending on the loan type, the lender will accept a percentage discount on the bank’s perceived value. 

There can often be confusion on when you can do a short sale. Actually, there does need to be a reason or hardship for the request of a short sale. The reasons for a short sale can be creative or just plain facts. Some examples, the seller lost their job, the house values have declined, the builder is dropping their current prices below what it cost when you built your house, the property has major repairs or issues, the adjustable rate mortgage (ARM) has adjusted up, the property has been actively marketed for a long period of time with showings and no offers, the seller has had medical problems or medical bills, etc.

Many people think that you need to be late on your mortgage or you have to have a major hardship. Although a pending foreclosure date is going to put your file at the top of the stack for consideration, the seller does not have to be late. The seller needs to be late or have the chance of being late if nothing changes regarding their situation and house. The agent or person helping the seller with a short sale should explain everything in an explanation letter to the bank. Also, the seller will have an opportunity to explain the facts of what is going on in a hardship letter that is prepared and sent to the bank in the short sale package.

A short sale does not fit every situation. A short sale is a tool to help get your property sold and avoid foreclosure. However, a short sale is not guaranteed. The lender is the final say on if they will do a short sale. Lending guidelines change all of the time. For example, lenders may temporarily not allow short sales.

Also, short sales give the homeowner an opportunity to sell their property, potentially eliminate the debt of the loan, and start over. In the best case scenario, the seller will be able to sell their house, eliminate the loan, potentially not owe the balance between the full payoff and the lender approved discount, and do minimal damage to their credit.

Short sales are a better option than foreclosure. Foreclosure is devastating to your credit and future purchasing power. Short sales do set your credit back, but are easier to rebound from and viewed more favorably than a foreclosure for future purchases. Also, a short sale can often reduce the risk of the lender attempting to collect the balance from the full payoff to the agreed short sale amount. With foreclosure, the lender can potentially seek a deficiency judgment through the courts to collect the remaining balance owed between the final net sales price and the true full payoff. The balance owed after foreclosure may include the attorney fees, cost to sell the property, and any other associated fees.

Normally, real estate agents will help the homeowner complete a short sale. However, short sales are a niche in real estate. So, not all real estate agents know the process or how to complete a short sale through closing. Also, short sales can be completed by people that specialize in the short sale transaction. And, homeowners can also complete a short sale on their own.

The success of a short sale is related to many factors. A big reason for the success of a short sale is doing the short package correctly, timely follow up, knowing what the lender requires, and strong negotiation skills. However, there are many things beyond anyone’s control, such as the person representing the bank during the short sale process, the appraisal (BPO), or the current guidelines from the lender.

If you are thinking about a short sale, we would recommend asking the person who is assisting you about their experience with short sales. Some good sample questions:

“Have you ever closed a short sale? How many short sales have you completed? Have you ever worked with my lender? Do you have an assistant to follow up on the short sale? Are you a real estate agent? How many homes do you sell a month? Year?”

There are a few steps that are consistent with all short sales and every lender. First, the lender will want to have a short sale package sent to them. This will always include a sales contract or offer and estimated net to the lender. Most lenders will also require bank statements, recent pay stubs, proof of income, tax returns, and a hardship letter from the seller explaining the seller’s situation and reason for not being able to stay current. In addition, the lenders normally want any supporting documentation, such as listing history, recent sold properties, repair photos, repair estimates, second lender payoffs, etc.

The lender will process the package. Then, they will complete a value assessment of the property. This normally will be an interior appraisal (BPO), however they may do a drive-by appraisal, use a past appraisal, or complete a computer analysis of the area. Once the value from the assessment comes back, then the lender will accept, reject, or make a counter offer to the buyer.

Once the lender approves the short sale, then they will issue a short payoff letter to the agent and title company. The letter will state the accepted payoff, where to send the money, any terms of the payoff, the date when the property must close, who the buyer and seller are, whether the lender requires the seller to pay any deficiency off in the future, and who to contact with any questions.

Finally, the seller and the buyer must sign the final documents at closing. This will normally happen at the title company, which I strongly recommend. The closing is identical to a traditional transaction. So, don’t forget your driver’s license or photo ID!

Once the money exchanges hands with the title company and the lender gets there final documents with agreed payment, then the deal is closed and funded. The lender will release the lien on the property. Congratulations. The short sale has been completed!

Well, the process can be easy. However, I would recommend talking with a professional that is well versed in short sales to address a specific situation. After all, they do not call them short sales because of the paperwork, follow up, or time from start to finish. A short sale in Missouri can include over 50 pages of paperwork, 10 plus hours of work and follow up, and can range from 30 to 90 days. Make sure you use a professional!