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What is a short sale?
A short sale is when the homeowner owes more to his
lender than the home can be sold for. An example: The home
owner paid $450,000, putting $45,000 down and borrowing $405,000. In today's
market a buyer will only pay $350,000, so the seller will have to ask the lender
if they will take less for the note then is owed. If the lender says yes, than
that is a short sale.
There are many different lenders and each will have different policies for the short sale process. The lenders all have their own criteria of what short sales they will accept and even though your house may fall in this category it does not mean that it will be approved for a short sale.
The next thing to understand is that a short sale does take time.
Unfortunately, it is
not as simple as sending some documents in and that is it.
There are formulas and procedures that lenders use and you will have to work
your way through them. Some lenders outsource their short sales to a company
that is proficient in the business of negotiating short sales. In these
situations the lender gives the company a bottom line that they will accept, how
much they are willing to lose to do the short sale.
Mortgage insurance adds another layer to get through for
approval. If your loan has mortgage insurance then the mortgage insurance
company will also need to approve the short sale. Since the mortgage insurance
company will pay the lender a portion of the difference in the loss, they have a
say in the short sale approval.
The lender who you are sending your house payment to every
month may own the note or they may just be a servicer for the lender. If they
are the servicer for the loan there is an additional amount of time in the short
sale process because there is yet one more entity the short sale will have to be
approved by. This happens a lot in situations where your note has been sold
several times in a short period of time or when the lender holding the note is
an investor. In this situation, the investor must approve the short sale as
well.
If you have second mortgage with a different lender, that will
complicate matters more and also puts a kink into getting the short sale
approved since the second note holder will want something (money) to accept the
short sale. Typically the first note holder offers a mere fraction of the
outstanding balance to the second note holder however you will need the approval
of both lenders in order to have clean title for the buyer. Sometimes the second
note holder will accept the sale if the seller agrees to owe a note to them and
pay for some of the loss.
Why would a lender want
to do a short sale?
A lot of times the loss they will accept on a short sale is a lot less of a loss
than if they had to foreclose on the property. Foreclosing is not a cheap
process and can be very time consuming. With our market continuing to decline it
can make sense for a lender to cut their losses with a short sale.
Who can sell their
home for less then is owed on it?
Lenders want to know
you can pass the Hardship Test.
There must be a good and provable reason why you are not able to keep your home
any longer.
The Hardship Test:
Lenders will look at each short sale request individually because each situation
is different. You must be able to prove that there is a hardship.
- Look
at your situation and ask yourself these questions to see if it will pass
the hardship test.
- Since
you bought the house, have you lost your job?
- Did
you have a bad accident or illness in which you got injured and could not
work?
- Do
have large new medical bills that you incurred after you purchased the home?
- Have
you been relocated to another city or state?
- Has
your interest rate gone up so much that it is now a hardship for you to pay
your mortgage?
- If
you have used your house as your ATM machine and took all your equity out of
your house and are now in debt, well, that is a hardship that is going to
have a tough time being accepted. I would suggest that you do what you have
to do to be able to keep your house.
- If
you bought your house on the tip of the market and now it is worth less than
what you paid for it that is not a hardship and not a reason at all to sell
your house as a short sale in
- The
Asset Test: Do you have assets that you can liquidate to bring to
closing when you sell your house short of what you owe your lender?
- Do
you have money in CD's and Savings Accounts?
- Do
you have stocks and bonds?
- Do you have equity in other properties?
If you have these types of assets your lender is not going to
take all the loss and not have you bring some money to the closing table. They
will only accept the short sale if you are contributing as well to the loss.
However, you may be able to negotiate the loss with your lender.
Short Sale Myths and
Truths about Offers
There is a vast amount of false information regarding how much you can buy a
short sale for. Like those that are watching too much late night TV about buying
real estate at 50 cents on the dollar and with no money down.
MYTH-
The lenders are so desperate they will accept any low offer that is offered on a
short sale.
TRUTH- The lenders would rather work out a workable solution with the
homeowner. There is a formula that most lenders use to determine their loss and
what the actual net proceeds are that they will accept at a short sale closing.
TRUTH- The lenders follow procedure. The procedure is that we submit the
short sale package along with the short sale offer from the buyer. The lender
then orders a BPO This usually takes 7 to 10 days. The BPO is NOT an appraisal.
It is a Broker's Price Opinion. The lender hires an agent to go out and do this
Broker's price opinion for the lender. The lender pays the agent somewhere
between $50 to $100 to do a BPO.
Once the BPO is back, they work their formula and then send a statement telling me what they will need to net, their bottom line. The BPO is what the last similar property sold for. They will usually accept about 5% to 15% below their BPO for an accepted offer.
TRUTH- No you can NOT. The lender may take a small discount off of the BPO
value
The short sale package and offer will be assigned to a
negotiator. The negotiator takes the file and checks to see if all the documents
are in the package and if the file is complete. Each negotiator may have 100 or
more files coming in per day and they must process these files as quickly as
possible. Any incomplete file is not going to be attended to in a timely fashion
so make sure it is all correct to begin with before you send it in.
Once the negotiator has checked the file and has determined it to be complete he
or she will order a BPO.
What is a BPO?
A BPO is a Broker's Price Opinion. The lender will hire a real estate agent to
do a pricing report and come back to the lender with the information as to what
that individual believes the fair market value of the property is right now. The
BPO must consider the last solds in the neighborhood that the property is in and
if they can not find any comparables in that neighborhood then they may go
outside of the neighborhood to find a property of like kind. Usually this
process takes 5 – 10 days.
Short Sale Vs Foreclosure: Benefits and Drawbacks
If you would like to talk to me about selling your home via
short sale
call me directly at 760.476.9560 or
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