In general, the following is the process of a short sale. There are many variables due to specific lenders, particulars of the parties involved and the heavy influence of third party negotiators and/or the involved real estate agents.
* Regardless of the path taken to get to this point, the sellers eventually decide that attempting to negotiate a short sale with their lender(s) is their best option. Lenders will not approve a short sale until there is a contract in hand.
* The homeowner contacts a real estate agent. Not sure how to screen an agent for this process, the homeowners generally pick the first person who says they can help. Sometimes this works out fine; other times it does not - but we'll cover that in a later post.
* Because there is often a race against a clock to prevent foreclosure, the agent should see this as a firesale and market the property agressively, at a price they hope will quickly attract buyers; but the agent should be careful not to market the property too low, as the goal is to procure an offer that the lender will approve.
* An offer, or multiple offers, are received. The agent should assist the sellers with reviewing and negotiating the contract, and should be sure to include a contingency addendum that provides for "third party approval", namely approval of the lenders.
* An offer should be ratified.
* Contract now in hand, the listing agent and sellers put together the required information for the seller's lender, and forward the package to the bank. This package includes seller's financial information, bank statements, paystubs, tax returns, a "hardship letter" explaining how the seller got into this mess, and why they need help getting out of it, the ratified contract to purchase the home, a Comparable Market Analysis of the property estimating fair market value, and other things that may help to persuade the bank to approve this short sale.
* The bank receives the package, distributes it to the right department, and the file is assigned to a negotiator at the servicing bank.
* The negotiator reviews the package, and may return it in its entirety to the seller because it is incomplete or the seller does not meet the requirements to qualify. Or, the negotiator will move it to the next phase.
* A BPO (Brokers Price Opinion), appraisal, or both, are ordered for the property.
* Once received, the bank has a third party's impression of the fair market value of the property. The negotiator can "counter" the offer on the table (if they feel the ratified contract is too low), can reject it, or can recommend it for approval.
* Once the negotiator can recommend the package for approval, it is submitted for another layer of review, where it goes through a similar process. If it is not approved, then it will be sent back to the negotiator with instructions to counter or reject the offer on the table.
* This negotiating process may include negotiating the sales terms (usually price) and/or negotiating for additional payments from the seller, either at the table or over an extended period of time, post sale.
* There may be multiple layers of approval, especially if losses are significant for the bank. Also, many times the servicing bank is not the investor. So, once the servicing bank makes a recommendation for approval, the investor(s) will also need to make the same recommendation. They may or may not request additional BPOs or appraisals.
Each additional layer of review increases the time the process takes. Each item that must be negotiated also increases time frames. Once the bank agrees to the short sale, a letter is sent to the seller outlining the terms of the sale that have been agreed to. Then, and only then, can settlement take place.
For buyers, this process is a big "hurry up and wait" experience, and then more rush to get to the closing table. Generally, banks require closing must happen inside of 30 days from the date of their approval.
Because of the time involved, many buyers fall out. They become disenchanted with the process and move on to another home. For this reason, many short sale listing agents prefer to have a few back up offers in place. The trick here is getting the back up offers to have the same price and terms as the original. Also, if primary buyers drop out because of lack of interest, you can be certain that secondary buyers are even less attached to the home.
In my next posts, I will break down concerns buyers and sellers face and how to minimize risks and make the most of these types of sales. Stay tuned.
