Short Sales – the bank is willing to let the defaulting borrower sell the house for less money than what is owed on the loan and will still release the lien against the property.  

Banks are much more willing to allow a defaulting borrower to try a Short Sale to help mitigate the bank’s loss than they used to be.  Most banks now have departments dedicated to the short sale process.  The larger banks separate owner occupied short sales and investment short sales.  However, the short sale has to make financial sense for the bank.  Just because you ask to do a short sale doesn’t mean the bank will allow one. 

There are two scenarios to determining economic sense for a bank. Number One: It costs an average of $60,000 for a bank to Foreclose on a house.  If the bank stands to lose less than $60,000 they may allow a defaulting borrower to Short Sell.  The $60,000 loss does vary by price range.  The bank may be more willing to lose a bit more on a higher end property. Number Two: Housing prices could have fallen below what a borrower owes on their loan.  If the borrower can prove a need to sell the home, the bank can choose to allow the sale.  However, the bank will insure that they are getting a fair market value for the home.  The bank will have a Broker’s Price Opinion performed on the property.  The contract price needs to be very close to the BPO price or the bank will either decline the short sale or negotiate a more favorable price. 

It is important for both the Seller and potential Buyer to realize that the bank isn’t just going to give the house away.  The Short Sale has to be advantageous for the bank. Remember, the bank does not want to have a bunch of houses in their Foreclosure Inventory.  The federal government does not allow banks to be real estate holding companies and, therefore, they limit the number of houses a bank can hold.  Well, at least they used to.  Stimulus Legislation passed in the last 2 years has allowed banks to hold more REO (real estate owned) properties in inventory than previously allowed. As banks get closer to their limit they are becoming more willing to work with Short Sale Sellers.  Banks are also being encouraged by the Federal Government to restructure loans or consider short sales over foreclosure.  If a bank has accepted stimulus money they should be exploring short sale options with their mortgagees.  If the bank is difficult to deal with and appears to be giving the mortgagee the run-around, you may want to consider contacting your local Congressman for help.  (Yes, this actually works, but should be a last resort).  

The federal government has issued guidelines for banks on how to handle loan modifications and short sales (HAMP, HAFA).  These are only guidelines.  It is optional for the banks to adhere to the guidelines and the banks can pick and choose which of its borrowers it wants to apply the guidelines to.  To be honest, there are only a handful of success stories when it comes to the federal guidelines. 

Keys to Remember: 

• The Seller should have permission from the bank to do a Short Sale before they start advertising the house as a Short Sale.  It’s always best to get as much information from the bank as possible so you know the process and standards they expect. 
• The numbers have to make sense!  Slapping any old price on the home is not going to work.  You need to be able to justify the list price and the contract price.
• The bank will usually not talk seriously with a Seller until there is a contract on the table.  This will vary with each bank, but most don’t want  information from the Seller until they have a ready, willing, and able buyer. 
• The Buyer may have to pay their Realtor the difference in commission, if the bank will not pay what was offered to them in MLS or what was agreed to in a Buyer Representation Agreement.
• The bank will take their time in reviewing contracts.  This is not a speedy process. You will not close in 30 days.  Some banks take up to 6-9 months to respond to a contract.  HAFA has not improved the short sale timeline like it was supposed to.  The banks are overburdened and understaffed to be able to handle the amount of defaulting loans.  Be prepared to be patient.    
• You will be given a very limited amount of time to close the deal once the bank has approved the contract.  Sometimes just a week.  As more and more banks are getting used to processing short sales, we are seeing the closing timeline closer to 30 days.  This means that some loan programs are not compatible with the short sale transaction, as they take longer than 30 days to process.  You better have a fast and good Lender.  Most of the time the short sale bank wants the property off their books by the end of the month. 
• The bank can change their mind at any time!  There are more and more accounts of properties going to foreclosure just days before short sale settlement.  This happens for a number of reasons.  The main reason is that two different departments are involved and neither speaks to the other.  If you get a foreclosure notice after you have short sale approval (in writing), contact your REALTOR® immediately!  You can also close on the house and then the bank can refuse to issue a Certificate of Satisfaction, therefore the Seller’s deed of trust cannot be released.  This is a severe cloud on title!  Title insurance will not be issued on a short sale transaction where the short sale bank reserves the right to change their mind.  Now what?
• You really need to close this deal at an attorney’s office.  There are so many legal obstacles in this type of transaction.  It is best to have an attorney on hand to explain everything to you.  Attorneys can also help ensure that the bank is abiding by Virginia real estate law.
• You may not be getting a great deal on the house, or at least not as good of a deal as some Foreclosures.  The banks want market value.  There is no magic formula to calculate how much the bank will be willing to take.  They want market value.
• The house is being sold “As-Is.”  The bank will not allow the Seller to agree to any repairs.  So, all repairs are the responsibility of the Purchaser, this includes mold!
• Inferior liens are not wiped clean.  The Seller or Purchaser can still be held responsible for back HOA dues, mechanics liens, etc.  The Seller can still be liable for 2^nd mortgages.  Virginia is a Lien Judgment State.  All liens can be filed as civil suits against a person.  There could be a deficiency judgment against the Seller for the amount that the bank lost because of the Short Sale.  Currently the IRS is not going after Sellers who occupied the dwelling as their primary residence for the deficient amount as taxable income; however, this could change at the end of 2012.
• Investors can expect to sign a promissory note or bring cash to the settlement table to make the short sale happen.  It’s just the way it is.  Banks are no longer accepting the entire burden of the bad investment.  If you have money, the bank will ask for it.
• The bank may not cover all closing costs.  Recently, banks have only been agreeing to pay all mandatory state and local fees.  The seller may be responsible for everything else. 
• If your bank accounts are at the same bank that holds your mortgage, they have every right to drain your bank accounts to help cover the deficiency amount.  They typically drain your accounts within 48 hours of settlement.  You can try to fight it, but they have a right to the money. 

 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.  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
• Contract – ratified by the buyer and seller.  Most banks want to see one contract at a time.  Other banks will want to see the contracts as they come in.
• 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
• Hardship Letter - this explains why you want to short sale and why the bank should allow you to short sale
• Preliminary HUD-1 that is contract specific - this is prepared by the settlement company that will be handling the transaction.

 Reasons Why Short Sales Fail:

• The contract price is too low, too high, or does not match the Broker’s Price Opinion
• The Private Mortgage Insurance (PMI) company does not agree to the contract price
• The mortgage investors do not agree to the terms of the contract
• The buyer is not financially qualified
• The REALTORS® are not trained in effective short sale negotiation
• The buyer gets impatient and walks away from the deal
• The seller does not provide information to the bank in a timely manner
• The seller does not agree to the terms of the short sale
• The seller lied on their initial application for the mortgage
• There is not enough time to do the short sale before the foreclosure date

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. 

Feel free to contact me with any questions regarding Short Sales and the Short Sale process .