Many buyers are not familiar with short sales and often wonder just how does a short sale work. A short sale is a property that has not been foreclosed by the borrower’s lender, but may be heading to foreclosure if the borrower is in default on their mortgage or about to default. The borrower is typically facing a financial hardship that results in the default situation. Because the borrower is upside down on their mortgage, meaning the property is worth less than what the borrower owes their lender, the borrower is unable to sell the property and pay off the mortgage.
Basically, the borrower is short the difference between the sale proceeds and the mortgage balance. Therefore, the one thing that every short sale has in common is that the borrower’s lender must approve the sale and write off the difference between the sale proceeds and what the borrower owes on their mortgage.
How Does a Short Sale Work Successfully?
The art of negotiating and successfully closing a short sale depends on how skilled the buyer and seller are at negotiating a deal that the lender will accept. This is where a real estate professional such as a real estate attorney, Realtor or short sale negotiator can be helpful. Many sellers list their home with a local short sale Realtor to market the home and help with the negotiations between the buyer and the seller. An attorney or short sale negotiator typically negotiates the short sale with the lender once the buyer and seller agree to the purchase contract terms. Be sure to negotiate a contingency with the buyer that the sale is contingent upon the lender’s approval of the short sale.
Lenders can be difficult to deal with if you are not familiar with how the short sale process works. Hiring a real estate professional will actually make it easier for you because they are experienced with the short sale process and will make sure that the proper paperwork is sent to the lender. It is important whether or not you use a real estate professional to assist you with the negotiations to make sure to send the lender all the financial information that they request. Typically, the following financial information will need to be provided to the lender:
- Hardship letter explaining the borrower’s financial hardship
- Recent financial statement
- Recent bank statements
- Copies of last two paycheck stubs
- Copies of last two year’s income tax returns
- Copies of W-2’s or 1099’s
- Copy of the purchase and sale contract
- Copy of any real estate brokerage commission agreement (the lender pays the broker’s commissions)
Following up with the lender after you send the documents is also important because many times the paperwork gets lost, and you have to send it a couple times. The entire process could take anywhere from 90 days to 6 months or longer so you have to be patient and persistent.
Once the lender assigns a negotiator to your file, you know the process is moving along. The negotiator will either accept the short sale or counter with other terms. If you and the buyer both agree to the terns, then you have a deal. It is always a good idea to negotiate that the short sale proceeds satisfy the loan balance so the lender cannot come back later and get a deficiency judgment against you.
Having a clear understanding of how does a short sale work is important so that you can list your home at the right price, market it to the right qualified buyer that is committed to buying the short sale and can close the transaction and that the contract terms are favorable to getting the lender to approve the transaction. While there is never any guarantee that the lender will accept the terms, there is a higher chance that they will if the home is priced right and the buyer is willing to wait for the lender to give their approval. Also, having the proper legal and/or real estate professional team behind you lets the lender know that you are serious about selling your home and getting the short sale closed.