"Short Sales"/ A Buyer’s Guide

A "short sale" is a situation where a property owner/seller is trying to sell a property where the sales proceeds does not pay off the existing mortgage(s). The owner/seller has no equity. The term "short sale" or "short pay" refers to a process whereby the mortgage company must agree to a reduced payoff for the sale to take place. All the costs of the sale, the escrow/title fees, transfer taxes, commissions, property tax prorations, etc. must be covered and the seller receives nothing (except debt relief.)

A mortgage company/lender may agree to a "short sale" to prevent a foreclosure. Most short sale properties are in "default". The owner may be behind on their mortgage payments and/or the property taxes and the expenses are adding up. The property is the security for the mortgage and if the lender "takes the property back" in a foreclosure, the lender will then own the property and will have to sell it as an REO (real estate owned) on the open market. The lender will incure all the foreclosure costs as well as the selling costs. If the market value of the property is less than the loan on the property, the lender may cut their losses by agreeing to a "short sale."

The problem is that mortgage company/lender does not own the property, only the mortgage; they do, however, have to agree to the "short sale" for the sale to go through. If they do not agree, and if the seller is unwilling or unable to make up the shortages to complete the sale, there is no sale! If you’re the buyer in such a transaction, you’ve just lost out and wasted valuable time. The seller can’t sell if the mortgage company disallows the "short pay" and the deal dies.

Here’s where logic disappears. Many times the department that handles the "short pay" negotiations, sometimes called the "workout" department in loan servicing, is not interested in saving the bank money. They are only interested in recovering the debt. Even if it would cost the bank more to foreclose, they’ll sometimes hold out if they think the owner has assets. Even if it means losing you as a buyer and the sale falls through.

They will want to see the owner’s financial statements. If there are any assets available (savings, 401K, IRAs) they want the owner/seller to deplete those assets before the bank agrees to a "short pay."

They usually want the real estate agents that are trying to make the deal happen, reduce their commissions.

If there are any "junior liens" or second mortgages, they’ll be wiped out.

The bank’s decision process takes time and meanwhile, if you’re trying to buy the property, you wait. And wait. And wait. The odds are not good that the sale will be allowed. Just because the seller agrees to your price does not compel the bank to agree to a "short pay."

How can you increase your chance of success? Let’s consider a strategy to maximize your odds of acquiring a "short sale" property. You’ll still have to be patient since every situation if different. Above all, understand that many "short sales" are not successful.

The first step is work with a broker/agent that understands the process. This is so very important. If the "listing agent" has little or no "short sale" experience, the odds are against you and your "buyer’s agent."

The listing agent must do their homework ahead of time, before your offer written, because the listing agent will have to build a compelling case for the lender to accept your offer.

The listing agent should have made contact with the person or at least the department that handles the "short pay" process. This person may not make the final decision but you have to start somewhere.

The listing agent should have a list of the bank’s required documents and should have collected everything in anticipation of your offer. The file will need the seller’s financial information, tax returns, retirement fund statements, bank statements. If the property needs repairs, there should be inspection reports, repair estimates and photos of the property.

The listing agent should provide the bank with a "CMA", a comparable market analysis to help substantiate your offered price. The listing agent should also provide the bank with a marketing history of the property, newspaper ads, MLS printouts, all to prove that the seller tried to sell for more and isn’t just "dumping" the property.

Here’s another wrinkle. There is a high probably that even the seller’s mortgage company may not have the final say. Most loans are insured, so the MI (mortgage insurance) company will have it’s own set of guidelines and requirements since they’ll have to reimburse the mortgage company for all or a portion of any loss. They may have the final authority to approve a "short pay."

So you see, there are barriers to your purchase that are beyond the control of the agents, the seller and even the seller’s mortgage company.

"Short Sales" can happen! Acting as a listing agent, I’ve successfully completed every "short sale" I’ve started. Why? Because I "qualify" the seller before I place the property on the market. If the seller isn’t willing to provide the detailed paperwork the lender/MI company requires, I can’t help them. I contact the lender and I do my homework. If the odds are not good, I don’t list the property.

Your offer should include an escape clause if the bank/MI company does not give a favorable response within a reasonable time period. If the sale is not approved by the bank AND the MI company within 4-6 weeks, you should be able to terminate the transaction, get your deposit back and look for another property.

Make sure any contingency time periods start AFTER the bank/MI companies give approval. Don’t spend money for appraisals and inspections before obtaining bank/MI approval.

If you’re getting a loan, get approved before making an offer. A bank/MI company considering a "short pay" will give weight to a "strong buyer."

Remember, nothing happens evenings and weekends (banks and MI companies are closed).

While you’re patiently waiting for an answer from the bank/MI company, the property usually remains on the market and the listing agent must present all offers to the seller. You could be "bumped" at any time.

So…. If you’re willing to wait 4-6 weeks, just to see if your offer is accepted, good luck!

Hopefully these tips will help you manage your "short sale" expectations.

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