What is a Short Sale?


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Short Sale, Yes or No.  

A simple overview.

 What is a Short Sale?

This situation occurs when the homeowner wishes to sell their home and market conditions indicate that the current market value or price point (today) is less than the money owed on the property. 

 Example:  In 2006, 0000 Main Street was purchased for $350,000 and carries a mortgaged debt of $300,000.  A market comparative shows the current property value of $150,000 based upon recent sales of similar properties.

Is This A Short Sale?  No, not yet, at this point it is potentially a short sale  After some thought the homeowner decides to list the property.  A listing agreement is signed disclosing a short sale property and the information is entered into MLS and other websites.  When a buyer submits an offer and both buyer and seller sign the purchase agreement for the sale of the property, then the Short Sale process begins. 

 Short Sales are complicated transactions.  Selecting the right agent is critical.  This is a financial transaction, it is not a typical “real estate sale” but rather it is the process of getting out of a mortgage.  Troubleshooting and problem solving are essential. Plus, an experienced agent. 

 With both buyer and seller signing the purchase agreement what happens next? 

Now armed with the executed contract, the Seller may officially submit their request for a Short Sale regarding 0000 Main Street to their lender(s) 

 On the Seller’s side paperwork is gathered just like applying for a mortgage which includes; an authorization letter for third party access, bank statements, pay stubs, completion of a hardship form and  a 4509T.  There may be additional materials requested by the lender(s). Each lender has their own packet of information to be completed and submitted on their specific forms.  If there are two lenders then two separate packages must be completed and submitted. 

 On the Buyer’s side  in addition to the purchase agreement, the Buyer must submit proof of funds to close, be it a bank statement, lender’s pre approval letter or both.

 The authorization letter allows follow up regarding the short sale process by the Seller’s agent, the attorney and/or short sale negotiator.  The Buyer or their agent typically do not have third party access to follow the file.  Thus, communication to the buyer circles from the Listing Agent to the Buyer’s agent and then the Buyer.hardship affidavit

 The Federal government has implemented numerous programs to help prevent, reduce and possibly eliminate properties that are upside down with debt to current market value. 

These  federal programs open and close throughout the year.  If the Seller had considered selling their property in January 2010, and reconciled their decision in November 2010, more than likely the January program no longer exists and has been replaced with a different one consisting of different guidelines. 

 How long does a Short Sale take? 

Once all of the paperwork has been received by the lender, they follow strict Federal guidelines that include reporting deadlines.  It would be best to anticipate up to 6 months to close a transaction.  Given this long time line communication with all parties becomes essential.  Perhaps you have heard of Buyers walking away.  This has and does happen particularly when they lose interest. 

 Why does a Short Sale take so long? 

There are many agencies that have to review the file, the initial lender, the PMI company, perhaps a secondary investor, Fannie or Freddie Mac.  Each agency is allowed time for intake, review, assessment and approval or a counter offer. 

 A counteroffer?

Yes, although the property was listed based upon market value (let’s say) $150000 and the Buyer offered $140000 which the Seller accepted.  The lender may re negotiate the offer with a counteroffer.  Let’s say $145000.  The Buyer now has the opportunity to accept the Lender’s counter or reject it.  The Seller at this point also has the opportunity to accept or reject the Lender’s counteroffer.  Again, a Short Sale is a very complicated transaction and to keep the information in this article simple we will continue that the Buyer decides to accept the Lender’s counteroffer of $145000. 

 The Lender issues a letter of agreement including their closing date.  This letter clearly states if the transaction does not close by this date their offer for a Short Sale is null and void.  Up until this point the Buyer was sitting on the sidelines.  Typically, once the Seller’s Lender issues their approval letter then the Buyer starts with their property inspections and finalization of their mortgage to purchase.  There is a delicate juggling act that begins at this point between all parties to arrive a the closing table for a successfully closed deal.  There are many more details and accounts that we might include as each transaction and situation are completely different however we are trying to keep the described  situation simple .

 It would be best to note that a Short Sale is typically sold “As-Is”.  This means that the Seller and Lender make no warranties or repairs to the property.   The Buyer has the opportunity to inspect and decide based upon these findings whether or not to proceed.  Florida is a deficiency judgment state, it is up to the Seller to decide whether or not to accept and proceed with a Short Sale. 

 Given the terms of the Short Sale, the Seller might be forgiven the balance due or receive a deficiency judgment which could be settled or include in bankruptcy.   We have seen a broad variety of situations occur. 

If you are considering a Short Sale we recommend seeking Legal counsel.

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~ by Lynn Brock on January 18, 2011.

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