In part one of this discussion, I talked about the initial steps that are involved in starting a short sale process. As with all short sales, this option is not necessarily the first line of defense a lender wants to take in releasing the lien and ultimately your financial responsibility in a property. The path of least resistance for any and all lenders is a loan restruction (some use the name loan modification). Although a loan modification sounds like a great idea, most individuals who have either lost their job or the ARM that the lender has placed them in is not the best route to take in relieving your financial responsibility to the lender of your property. A short sale is usually a great option for a home owner who just needs to get out of the loan they are in. With a sagging housing market and lenders going out of business daily, reselling this asset can be tough.
Another item of importance that was discussed in the last blog was preparing the paperwork that is necessary for a bank to approve a short sale. This paperwork includes: the last two years of tax returns, current pay stubs, bank statements, 1099 forms, and utility bill information. This collection of data is critical in that it demonstrates to the lender that you can no longer keep up with the current note on the property. This data is also important in that it shows that you are willing and able to disclose your financial history to the bank to show them that you want to work with them to sell your home so that they don’t necessarily need to take the home to foreclosure.
Once your financial history is gathered and you have put together a detailed financial spreadsheet for the lender, your next order of business is to get the home up on the market. If you have not already done so, contact your listing agent and begin pulling comparables of surrounding home sales in your neighborhood from the past six months. This, just behind the collection of your financial data, is another critical step in selling your home. Many agents who list homes concentrate on listing your home for as much as they possibly can to not only pay off your lien, but to put extra dollars in your pocket. In the short sale scenario, all liens on the property are taken out of the equation. What the bank wants to know is the current market condition of your home. The seasoned listing agent who pulls comps should concentrate on the lower end of the market. This will solve two problems in this tight market: (1) it will bring you a ton of showings and potential offers; and (2) it will show the lender that you have a viable property that can be sold without sending the home to foreclosure.
Of course with a home priced at the bottom end of the market, you will get a lot of investors and individuals who want to place low bids on the property. This is okay. Take ALL offers and submit them to the bank. Before the offer is submitted to the bank, you must accompany it with a HUD-1 settlement statement. This is a universal tool all title companies around the nation use to disclose to both parties, the buyer and seller (and in this case your lender), as to who will pay for what and what the net profits will be at the end of transaction. Contact your local title office and have a title officer prepare this settlement statement. Instruct them to treat the sale of the home as if there are no liens on the property. Once the settlement statement is prepared, submit the signed offer from both the buyer and seller, accompanied with a prequalification letter or proof of funds AND your full financial package to the lender.
An important item to relay to the buyer is that they need to understand that the short sale process is not a fast transaction, it is usually a marathon. If you haven’t already been getting the phone calls from the lenders collection department, you soon will. Keep in mind that the loss mitigation department whom you are dealing with is completely separate from the collection department. The right hand doesn’t necessarily know what the left hand is doing. When you do get a collection call, indicate to them that you are requesting a short sale from the lender and that you have been working with loss mitigation. This may slow the calls, but it certainly won’t stop them.
The next step to the process is another very important step. Now that the lender has received your full file, they will order a Brokers Price Opinion (BPO) on your property. This is done by an independent third party, usually a local agent, who will drive by the property and pull various comps in the neighborhood as a way of indicating to the bank if the offer you are getting on your property falls within what they call “fair market value”. The reason why this step of the process is so critical is that that particular agent or appraiser can float or sink your transaction. If he decides to pull from the top of the market and you have pulled from the bottom of the market, there may be too much variance in the asking price to make the deal go through. This is why I like to meet them at the property to discuss the comps that they are using. This is also why you want to hire the “squeaky wheel” agent because they are the individuals who will meet the appraiser or agent at the property to push for a price reduction based solely off of the comps they pull in the neighborhood.
After the bank has received the BPO from the agent or appraiser, the lender will now put your entire portfolio, along with the third party appraisal into a package, and submit it to the investor for review, and hopefully approval. The investor is the individual who has actually loaned the bank the money for their loan to you. They are the only individual in this case who can approve, deny, or counter the offer on your property.
In my third and final discussion in this series, I will discuss the final phase to the short sale: the closing of the transaction and the long term ramifications of the shot sale process.