By now we have all heard the term “short sale,” but few know what it is and what it involves.  If you are a buyer, you likely think that you are going to get a great deal, but if you are a seller, you probably have a more negative, uncertain view.  So, instead of guessing what this process involves, let’s take a look at the facts.

A short sale occurs when a seller sells his or her home for less than the mortgage owed.  This can occur for several reasons, but more frequently it’s due to the market value of the home dropping below the mortgaged amount and the seller having to sell for a variety of reasons. The result: The bank is “short” the amount owed to them.  The process often takes a long time and involves massive amounts of paperwork and disclosure.  The bank has the final say on the terms for the release of debt and what the repercussions may be.

It’s not uncommon for many homeowners to feel a sense of failure and embarrassment.

The Process
The first step in a short sale is to get the assistance of a short sale attorney or professional.  This person should NOT be your agent!  A realtor is generally no more qualified to negotiate your short sale than he or she is to do your hair. A short sale requires comprehensive knowledge, the full attention of the attorney, and time-consuming follow up. Most agents are not qualified for these circumstances.

Once you find the right negotiator, the next step is to get your home listed. Your agent should choose a price that is in line with market values.  A big mistake many rookie agents make is to price the house below its market value, hoping to quickly secure a buyer.  This strategy usually backfires, as the bank will do their own assessment and come back with a higher price, or ask you, “the seller,” to carry a large note for the difference.  You are in a better position to keep your listing in line with the market value, as you will likely lose your buyer if you ask them to come up in the original price.

When you secure a buyer, the fun begins.  Be prepared to submit everything but a blood sample!  You will need tax records, bank statements, pay stubs, and a breakdown of your profit and loss, and all documents will have to have your loan number on them.  A good negotiator will help you with this.

After all the documents are received and processed, they are sent to the bank where they will sit for several weeks.  The bank will eventually review the file and order a Broker Price Opinion (BPO) to determine if the sales price is in line with the home’s value.  While this may seem like a simple process, it may take several months.  Don’t be surprised if your first buyer gets frustrated and walks.  It happens a lot.

Once the bank reviews everything, they will either come back with an approval or decline in writing (verbally does not count).  They may ask you to carry a small note to absorb some of the loss, or give a cash contribution. This is a good thing, as traditionally a bank will release you from the debt if you pay into it.  The note usually is at zero percent interest for a small amount of time.  Let’s be honest here, paying 5K to get out of 100K in debt is a small price to pay.  A foreclosure on the other hand can leave you wide open to collections.  You are not allowed to make any money on the sale of the home; the goal is to get the debt released.  When done properly, a short sale will be much less of a hit to your credit than a foreclosure, and you can usually get a home loan after two years.

Be Knowledgeable and Patient
The key to a successful short sale is patience and understanding.  It won’t all make sense, and the bank will drive you crazy asking for documents you know they already have.  Keep in mind that they move at their own pace and oftentimes your statements expire.  The key is to be organized and understanding.  Hiring the right people will make this process much easier for you.  I can’t stress enough the importance of hiring a professional and not your agent!  Agents may have the best of intentions, but they will probably do more harm than good.  Don’t go it alone either! There is light at the end of the tunnel and the goal is to feel empowered, not embarrassed.

For a list of negotiators I have worked with in the past, email me directly at David@Daviddorman.com