A Seller’s Guide to the Short-Sale Process

Some of you may be wondering how you can go about selling your home the “short-sale” route, but aren’t sure how it works. Well, here’s what I call a “Seller’s Guide to the Short Sale Process”…

First and foremost, let’s define “short-sale” as it relates to real estate today:

A short sale is a sale of real estate in which the proceeds from the sale fall short of the balance owed on a loan secured by the property sold

If you’re not sure whether you’ll be “short” if you sell the house, hire an appraiser or ask a Realtor to do a CMA for you and deduct the balance of your mortgage(s), any line of credit(s), other lien(s) and cost of sale from the estimated market value of your property. Once you’ve done that, you’ll have a good idea of whether you’re “short” (assuming the appraisal or CMA are accurate).

Let’s assume that you’re “short” and want to move forward with a short-sale. What are the next steps.

Well, fellow Virginia Realtors and bloggers Sarah Stelmok and Jeremy Hart beat me to the punch by about 24 hours with their posts on short-sales. So, with their permission,  I’m going to cite their explanation about the process to save some time.

If you are a Seller considering a Short Sale in your property, you will need to gather the following information:

• All lien holders names and contact information
• All loan numbers
  
• A Third Party Authorization Form - this will allow the bank to discuss your short sale with your REALTOR.  It needs to be agent and loan # specific and have an indefinite end date Some banks have their own form; others will accept any form you prepare.  You need to get this to the bank as soon as you hire a REALTOR.
• Listing Agreement - this should include a CMA of the property to justify your list price
• 2008 and 2009 W-2s - or the tax forms that you filed if you do not get W-2s.
• A Profit/ Loss Worksheet for 2009
• Last 2 Month’s Bank Statements
• Proof of Disability or Unemployment or Job Transfer (if applicable)
  
• Hardship Letter - this explains why you want to short sale and why the bank should allow you to short sale

Once you have all of these items, the next steps are…

1. List the property for sale– Some banks want the property listed for the amount that is owed first, and they will be willing to drop to a more realistic price after a period of time.  The listing agent will need to back up their list price with a good CMA!  Remember, a BPO will be called out as soon as they receive a contract.

2. Receive and ratify a contract – needs to be ratified by the seller and buyer.  Some banks want one contract at a time; others want to see them as they come in.  Another reason to contact the bank ASAP.

3.  Send Contract to Bank - get confirmation from the loss mitigation offer at the bank and preferably written proof of receipt

4.  You will also need to send – all of the paperwork including the hardship letter you gathered/prepared prior to listing your property for sale (see earlier part of this post). The bank may ask for other items not listed here. They may also send you additional forms and paperwork for you and/or your agent to sign.

5.  Be persistent, but patient - Make sure you ask how long it will take for a contract to work its way through the system.  You want to hear it will take 30-45 days, but they may tell you that it will take just that long for them to even look at the file as is the case with CitiMortgage.  You also want to ask about the likelihood the loan will be sold.  They like to sell the loans right before they give you approval, and you’ll have to start the process all over if they do.

6.  Stay as current as possible - Make sure you don’t get more than 2 months behind.  Some banks will allow you to get up to 9 months behind, but they are harder to negotiate and keep off the auction block. If you don’t know what their policy is, ask.

These steps will need to be done for each bank that is involved and each bank has their own process. Some banks that are in 2nd position (2nd trust/mortgage) will only start processing their short-sale after they’ve received written short-sale approval from the 1st trust. This means that the overall short-sale approval process may take twice as long with two trusts/mortgages.

If you are considering pursuing the Short Sale route to sell your home, it is important that you consult an attorney that is familiar with the process. It is also important that you use a REALTOR who is trained in the short-sale process and has experience in Short Sales.

So I hope that this helps you out (thanks again Sarah and Jeremy). If you’re in a situation where you’re about to fall behind on your mortgage and/or are considering a Short Sale, contact me to chat about it and see what options you have.

Related Articles

Short Sale (real estate) - Wikipedia

Percentage of Short-Sales Being Approved Increasing

10 Questions To Ask Before Writing an Offer on a Short-Sale

10 Questions To Ask Before Writing an Offer on a Short-Sale

It’s like the Wild West right now when it comes to short-sales in Loudoun County (and the entire Northern VA area). Some take 60 days to settle while others take 6 months (if they settle at all). Some are handled by agents, title companies and negotiators that know what they’re doing while others are not. The list goes on…

That’s why every buyer (and buyer’s agent) should ask the listing agent/broker (or seller if FSBO) the following 10 questions before they write an offer on a short-sale…

1. Have you received any other offers that you are waiting to hear back on from the bank?
2. How many trusts are involved that will be “short”?
3. How many total banks/creditors are involved in the short-sale and which banks/creditors are they?
4. Have you requested and received the short-sale package from the bank(s) including the hardship letter?
5. Have you sent the package and confirmed receipt?
6. Has the asking price been approved by the bank(s)/creditor(s)?
7. Who is negotiating the short-sale with the bank(s)/creditor(s) - you, a negotiator, a lawyer, the title company or….?
8. Has the seller/borrower completely stopped making payments on their loan(s)?
9. Is the seller willing to hold a note with the bank for the difference? (much better for their credit score)?
10. How many short-sales have you (the listing agent) closed within the past 12 months?

If the listing agent balks at answering these questions, it’s either because the seller does not wish to disclose the information and/or the listing agent may not know what they’re doing. Either way, if you don’t have the answers to all of these questions, you can’t make a very educated decision as to whether it’s worth writing an offer on the property or not.

Why? Here are just a few of the reasons…

• Different banks have different approval percentages and varying time frames for processing the short-sale. For example, if you have to move within the next 60 to 90 days, a short-sale being negotiated with CitiMortgage may not be something you want to pursue. If the short-sale is being negotiated with IndyMac, you will be talking to folks in a call center in another part of the world (literally) that care little about your short-sale (or IndyMac for that matter because IndyMac no longer exists)
• If the agent, title company and/or negotiator has not negotiated/closed many short-sales, they may not know what they’re doing which lowers the chance of the short-sale being approved and you being able to actually buy the property.
• If there is more than one trust, the total approval process time doubles because the second trust typically does not start their approval process until they have written approval from the first trust.

The 10 questions listed above are very similar to the 10 questions that Frank Llosa recommends asking before seeing a short-sale in one of his (excellent) posts. One question that Frank has on his list that I don’t have on mine is…

• How long do you estimate that the lender will take to provide an answer to an offer?

The reason why I don’t have it as one of my questions is because I’ve found that some agents just throw a date out there that they pulled out of thin air. For example, one agent told me the other day that she could have an approval and settle on the short-sale “within 45 days at the most” despite the short-sale being through Countrywide who is running way behind on short-sale approvals due to their recent merger with Bank of America which involved physically moving many offices, computers, files and employees.

Forty-five days? Riiiiiight… And I have a great deal on some ocean-front property in Arizona. No, really!

Rather than relying on what the listing agent tells you, your Buyer’s Agent should know and be keeping up with the nuances and latest news regarding each individual bank/lender’s short-sale approval process and how long it typically takes. This includes anything and everything that could affect the length of time it could take (such as the Countrywide/BoA example above).

Important: If a Buyer’s Agent tries to get you to blindly write an offer on a short-sale without asking these questions first or the listing agent is not willing to answer them, be wary and look at your other options.

On a related note…I will be writing a post on which banks are the fastest at approving short-sales, which are the slowest and which banks are the easiest to deal with from a sellers and buyers standpoint. Keep an eye out for that later this week.

Search for short-sales in Loudoun County

Update on Short-Sales Involving CitiMortgage

CitiMortgage is currently running 45+ days behind on starting the short-sale review process. That means that once the ratified contract has been submitted to CitiMortgage, it takes them at least 45 days to even look at the file. Then it takes them another 45 to 90 days to review and process the short-sale. You’re looking at 90 to 135 days to get a response from CitiMortgage on a short-sale.

Why the delay? Three main reasons:

1. A huge increase in the number of short-sales.
2. Being short-staffed.
3. Lack of an efficient internal review process.

One title company who deals with them often said that the short-sale department of CitiMortgage is getting over 130,000 emails per day. Those emails are a combination of borrowers inquiring about the short-sale process as well as agents, sellers, title companies and short-sale negotiators submitting new short-sales or inquiring about ones already submitted. Some of the folks at CitiMortgage and other banks have literally hundreds of cases on their desks at one time and the pile is growing.

Real life example…

A short-sale I’m currently working on with buyer clients involves CitiMortgage as one of the creditors. It’s been about 75 days since the offer was ratified and submitted to CitiMortgage for approval. The case is still in the review process though we’re hoping to hear back soon. 

And we’re lucky - the only reason it’s this far along after 75 days is because the title company and negotiator knew the direct contact information of someone near the top of the food chain who pushed the process along and put this particular short-sale deal at the front of the line.

So, if you’re wondering why things are taking so long with CitiMortgage short-sales, now you know…

Percentage of Short-Sales Being Approved Increasing

Yes, there is actually good news when it comes to short-sales - more and more short-sales are being approved!

I've had 4 out of my last 6 offers on short-sale listings get approved. Is a 66% approval rate on short-sales a fluke? Perhaps. But it still is what it is and my clients and I will take it!

In speaking with other agents, they're also seeing short-sales going through at a higher percentage than before. Considering that the national average for short-sales being approved is said to be around 20%, anything more than 20% is great.

What's leading to more short-sales being approved? Here are some of the reasons…

1. Banks are finally realizing that accepting a short-sale is a way to avoid the inevitable (foreclosure)
2. Not having real estate inventory (foreclosures) on their books allows banks to lend and make more money
3. Short-sales are typically less expensive than foreclosures because they don't have to go through the foreclosure proceedings, incur carrying costs, etc
4. Short-sale properties typically have people still living in them which means that they will generally be in better condition than if they sat vacant as a foreclosure for 3, 6, 12+ months. This means that the bank will get more money for the property if sold as a short-sale than as a foreclosure
5. Public sentiment is helping push banks to "work with borrowers" as much as they can to avoid foreclosure, part of which includes negotiating and accepting short-sales
6. More sellers, real estate agents and title companies are using short-sale negotiators to help negotiate the short-sale. Many of these negotiators once worked as bank loss mitigation officers (the folks who work for the bank who approve/reject short-sales) themselves so they know exactly how the process works

Note: Though the chances of a short-sale being approved have increased, it doesn't mean that yours will or that they're any easier to maneuver through. Whether you're a seller trying to negotiate a short-sale or a buyer trying to buy a short-sale, you still have to know what you're getting yourself into and what you're doing (as does your agent).

Related Articles

"The Type of Property You Can Buy May Depend On The Time You Have"

"The Issues With Short-Sales"

"Do You Know What The Bank Addendum REALLY Says?"

Do You Know What the Bank Addendum REALLY Says?

If your offer on a bank-owned or short-sale property is "accepted", you will receive the bank's addendum to sign. Many buyers (and their agents) just skim through it, sign on the dotted line and send it back to the listing agent. But they don't truly understand what the addendum says nor how it could affect them.

Some say, "It's just an addendum. The original sales contract has been accepted and those terms are what count."

Wrong.

The bank's addendum always has language in it that says something similar to, "This addendum supersedes the terms of the contract of sale and all other addendum." or "In the event any provision of this addendum conflicts in whole or in part with the terms of the contract of sale, the provisions of this addendum shall control."

In layman's terms…the bank's addendum trumps any and all terms of your original offer which you thought the bank "accepted" and "agreed to". 

Some of the most commons things in the sales contract that are trumped by the bank's addendum are

• contingency time frames
• title/deed
• inspections (or lack thereof)
• termite inspection/remediation
• closing cost assistance/concessions
• transfer taxes/tax stamps
• HOA assessments
• real estate broker commissions

All of these could potentially have a big financial and legal impact on a buyer. Every buyer should fully understand what the terms of the bank's addendum really say and mean.

Let's look at an example…

Let's say you put "10 days" for the financing contingency, but the bank addendum says "buyer's time frame for financing contingency is 5 days". You don't notice and your agent doesn't notice. You, your agent and, more importantly, your lender doesn't notice. Your lender thinks he has 10 days to get final approval on your loan and is working on your loan accordingly.

On day 7, your lender comes back and says, "Sorry, the underwriter found some things they weren't happy with and wouldn't approve you for a loan." You immediately call your buyer's agent and say, "I couldn't get final approval so get me out of the contract using the financing contingency."

Your agent calls the listing agent to get you out of the contract only to find out that you are S.O.L. because the financing contingency is only 5 days per the bank addendum (which you signed 7 days ago). You've gone from getting out of the contract to forfeiting your earnest money deposit.

(This actually happened to a buyer who had a ratified contract on one of my friend's/fellow Realtor's listings)

Btw…If you're wondering whether you can change or counter and of the terms of the bank addendum, the answer is "no". If you want to buy the property, you have to agree to the terms as they are.

If you don't like the terms, feel free to back-out and look for another property. But all bank-owned and short-sale properties have bank addendums that all pretty much say the same thing using different fancy words.

So next time you go to buy a bank-owned or short-sale property, make sure you have a buyer's agent that knows what they're doing and that you read the bank addendum carefully and in its entirety. If you don't, you could get burned badly.

Short-Sales Are Now Taking Even Longer to Negotiate

Yesterday, I spoke with with someone who works at a company that specializes in negotiating short-sales - they told me that the time it takes to negotiate a short-sale has increased dramatically over the past 60 days.

The company she works for has about 100 full-time negotiators on staff. All of them have seen their case files go from 30 or 40 to over 100. This is in part to the rise in short-sales, but it's also due to the banks taking longer to process the short-sales on their end. This holds up the entire process and is a vicious cycle. (It's like trying to get your inbox to zero, but receiving new emails faster than you can hit "delete")

In addition, and more importantly, the loss mitigation officers at the banks are getting overwhelmed. In an effort to keep up with the rise in short-sales, many banks, such as Countrywide, are re-hiring people that they previously laid off from other divisions and putting them in loss mitigation (to negotiate short-sales). Not only are these hires new to loss mitigation, they're getting thrown into the job without any real training. That's not a good combination.

The person I spoke with also said they've been seeing this trend - increased short-sales and not enough (good) help - really picking up over the past two months They also said that it's getting worse by the day.

One could argue that this is an isolated incident - it's only this one person, this one company and only Countrywide. But I've seen short-sales taking longer as well and other agents who work with short-sales are seeing it too.

For example, an offer I submitted on behalf of my buyer was accepted by the seller (borrower) mid-February. A negotiator wasn't assigned to the case until just yesterday and the bank told the negotiator to "take a number" and that they "would get to it when they got to it". That translates to "it'll take longer than it usually does". Most likely, that means that it will take well over the 90 day average.

Yes, short-sales can be great deals and, with real estate inventory way down, they may be some of your only choices. Just remember that you must have lots of time on your hands and plenty of patience when dealing with short-sales - especially as of late.

Related Articles

"The Type of Property You Can Buy May Depend On The Time You Have"

Facing Foreclosure or Negotiating a Short-Sale? Watch this Video

If you're facing foreclosure or trying to negotiate a short-sale, this video clip is a "must-see".

(If you don't see the video below, click here)

Hat tip to zsaw.com (aka @zsaw on Twitter)

The Type of Property You Can Buy May Depend On The Time You Have

Many home buyers start seriously looking for a new home about three to six months before their preferred move date. Some give it even less time. But is two, three, even six months enough time? And does it affect what type of property you can try to buy?

Six, three, even two months may give you enough time to search for a new home, write and offer, go through the negotiation process, come to an agreement (ratify the contract) and then proceed to settlement - IF the property is a traditional resale or bank-owned (foreclosure). But it may not be enough time for a short-sale.

Though the time from which the offer is ratified to when settlement occurs is similar regardless of what type of sale it is, the negotiation process varies drastically especially when it comes to short-sales.

Here's the breakdown…

Traditional resales

A traditional resale is a sale in which the property is not bank-owned nor is the seller attempting to do a short-sale (definition of a short-sale later in this post). The owners are selling it directly to a buyer without needing final approval from a bank or other creditors.

Traditional resales typically take anywhere from a day to a week from the time you present an offer to when the negotiation process is complete.

If you've given yourself between 3 and 6 months, you'll be fine even if you don't get the first or even second or third house you've made an offer on.

Bank-owned properties (aka "foreclosures")

Bank-owned properties have been foreclosed on and are now being sold by the bank on the open market.

Bank-owned properties typically take a few days to two weeks to negotiate. The reason for them taking longer than a traditional resale is that you're dealing with the bank's asset manager - they have hundreds of files on their desks at one time and they don't work nights, weekends or holidays.

If you've given yourself between 3 and 6 months, you'll be fine even if you don't get the first or even second or third house you've made an offer on.

Short-sales

Short-sales are situations in which the seller/borrower is attempting to sell the property for less than what is owed on it (they're "short") and the seller/borrower is trying to get the bank/creditor to agree to take the loss. The bank/creditor must give final approval on the offer in order for the deal to take place. (For a more detailed explanation of what a short-sale is, click here)

The average response time from the bank on a short-sale is 3 months though I've seen responses take as long as 6 months. And here's the kicker…only about 20 percent of short-sales are approved.

If you've only given yourself 2 to 3 months before having to move, you're outta luck - short-sales are not for you. Even if you've given yourself 6 months, you may be cutting it close because it may take the full 6 months to hear a response. But…if the bank doesn't approve the short-sale, you're back to square 1 and you've lost an average of 3 months (if not more) of house-hunting time. 

If you'd like to look at short-sale properties, you should give yourself enough time to find a home PLUS another 4 to 7 months (average response time plus time to close).

The home buying process is stressful for many - especially first time home buyers. The last thing you want to do is feel rushed or, even worse, find yourself having to double-move or living out of a hotel. That's why knowing the timing involved with each type of property and planning accordingly is so important.

What Does “As Is” Mean?

Foreclosure and short-sale properties are all sold "AS IS". But what does "AS IS" really mean?

"AS IS" means that what you see is what you get. Ninety-nine percent of the time, the seller (bank) will not make any repairs to the property (the one percent is FHA financing-post on that coming soon). It also means that the extent of the seller's obligation with respect to title will be to provide insurable title to the purchaser.

Here's an excerpt from an "AS IS" clause from Freddie Mac:

"Purchaser understands that the seller obtained the property by foreclosure, deed in lieu or foreclosure, forfeiture or similar process and consequently, seller has little or no direct knowledge regarding the condition of the property. Purchaser accepts the Property in  "AS IS" condition at the date of the Contract of Sale, including, without limitation, any defects or environmental conditions affecting the Property, known or unknown.

Purchaser acknowledges that neither the seller nor its agents have made any warranties, implied or expressed, relating to the condition of the Property."

Here's an excerpt from an "AS IS" clause from IndyMac Bank:

"Buyer acknowledges and understands that the Property is being purchased and sold as-is, where-is and with all faults. Buyer further acknolwedges and understands that the Property was acquired by Seller through a foreclosure or other similar action and therefore, Seller is not an owner-occupant and Seller's information concerning the Property and its condition is extremely limited. Accordingly, Buyer acknowledges and understands that, except as otherwise disclosed in writing to Buyer, Seller is unaware of any latent defects in the Property or any appurtenant systems including, without limitation, plumbing, heating, air conditioning and electrical systems, fixtures, appliances, roof, sewers, septic, soil conditions, foundation, structural integrity, environmental condition, pool or related equipment. Seller makes no representations or warranties as to (i) the condition of the Property or any of the Property's systems or improvements, or (ii) the serviceability or fitness for a particular use of the Property or any component of the Property."

As you can see, "AS IS" clauses are also a huge C.Y.A. for the banks. As a buyer, you must understand that the property is sold "AS IS" and that you'll need cash and/or sweat equity of your own to fix it up.

For those of you that have the cash and/or sweat equity to perform the repairs, there are some great bank-owned deals out there, especially from Fannie Mae and Freddie Mac. For those who don't have the cash or sweat equity to invest in a foreclosure property, don't worry…there are great deals on foreclosures that require very little work, as well as on traditional resales.

NOTE: This is not meant as legal advice nor should it be taken as such. For guidance on any and all "AS IS" clauses and contracts in general, contact an attorney.

Countrywide Cancelling Short-Sales and Freezing Foreclosures

 

Countrywide announced that they are cancelling many short-sales already in process and freezing foreclosure sales until further notice. This will affect a number of folks including…

1. Home-owners about to try to negotiate a short-sale with Countrywide
2. Home-owners in the middle of negotiating a short-sale with Countrywide
3. Buyers waiting for approval from Countrywide on their offer on a short-sale listing
4. Buyers will have less inventory to choose from due to the freeze on foreclosures (post about this topic coming shortly)
5. Real estate agents/brokers who get some or most of their business from Countrywide in the form of foreclosure listings

In my humble opinion, this will only delay the inevitable and prolong the recovery process. Getting through this inventory is necessary in order to move on and get to better times that lie ahead. But I don't have a great tan so who am I to speak…

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