A lot has changed in the world of real estate over the last decade.As difficult as it may be to believe, the mortgage collapse was over ten years ago. One of the defining terms shortly after the collapse was “short sale”. There is a good chance that even if you were in real estate you probably never heard of it before 2008. In the years following, short sales were the driving force behind a majority of all total real estate transactions. While the overall number has greatly declined in recent years, there are still a good number of short sale transactions happening every day. It is important to understand the process, both as a homeowner and an investor. Here are the five basic steps associated with almost every short sale transaction.
- Homeowner decision
One of the common themes when talking to homeowners in default is the speed in which it happens. Sure, it takes several months to get into foreclosure, but it isn’t an overnight decision. There is typically a financial hardship, medical emergency or sudden reduction in income that starts the process. A few weeks late on the mortgage turns into a month and in the blink of an eye foreclosure papers are served. With the glut of foreclosures lenders were forced to come up with alternatives and many of those are still available. Between loan modification or principal reduction most lenders would much rather you stay in your home than go into foreclosure. The most common foreclosure alternative is a short sale. This is essentially the lender agreeing to accept less than the principal amount owed. For a homeowner the stain of a short sale is less than a foreclosure or bankruptcy. For a lender they can salvage something from a depreciating asset without having to add the property to their portfolio. Before anything can happen, the homeowner must accept their situation and decide to take some kind of action.
- Reverse application.
From a lenders perspective the short sale process is very much the reverse of a traditional loan application. As much as a homeowner may want to short sale, the lender must approve it first. Once a homeowner decides on a short sale they need to show the lender that they legitimately can no longer make the regular payments. The lender will ask for several items to justify a hardship include paystubs, tax returns, bank statements and a hardship letter. The lender is not going to just let a homeowner walk away from their property because they want to. You don’t necessarily need to be three or four months late on the mortgage to get short sale approved, but you do need to show that there is, or will be, a financial hardship. Once all items are submitted to the lender they will either accept the short sale application or reject it. If accepted they will move on to the property valuation part of the process.
- BPO/Appraisal.
As is the case with any real estate transaction the seller wants to walk away with as much money as possible. In a short sale the lender is willing to sell the property at a discount, but they will not just give the
property away. To determine fair market value, they will either employ a local real estate agent for a BPO (brokers price opinion) or order an appraisal. Nothing will ever truly show a property’s value except listing it, but these methods will give the lender a good snapshot of what is going on. If the property is not currently listed the lender will recommend a price and if there is an offer already in place they will use this information to respond. As with any other listing, the more work needed and the weaker the market the less leverage the seller has.
- Negotiation
Appraisals and BPO’s are largely subjective. While these estimations of value are not exact, they do play a part in the lenders’ perception of the property’s value and ultimately the price the lender is willing to sell the property at. Once the lender receives the report they calculate the bottom line at which they’re willing to sell the property and the negotiation begins. As a seller pursuing a short sale you can put yourself in a good negotiating position by partnering with a cash buyer and short sale negotiator who has experience negotiating distressed transactions. They can take lead on your behalf and leverage their strategies, tips, and tricks to put yourself in the best position possible. As far as timeline, short sale negotiation times have been greatly reduced but can still take several months under the right circumstance. If you pursue a short sale you need to accept, and embrace, negotiation.
- Closing. Once the terms of the purchase are accepted the closing is very much like any other transaction. What makes things a bit trickier is the fact that you may need to get the homeowner out of the property. However, there may be monetary incentives from the lender or binding terms of a contract that favor the buyer. At the closing table the process is the same for, just a little more paperwork for the attorney. The bulk of the work is done once the lender accepts the asking price.
There are state specific rules for foreclosure and short sale that should be reviewed prior to moving forward. Regardless of what side of the transaction you are on, a short sale can be a viable alternative in the right situation.