Short Sale FAQ
Frequently Asked Questions About Short Sales
1. What is a Short Sale?
The term “Short Sale” is used to refer to those real estate transactions in which the agreed-upon purchase price is insufficient to pay off all of the secured debt on the property (such as mortgages, trust deeds, state/federal income taxes, liens, property taxes or other local assessments) including the costs of closing, such as escrow and recording fees, title insurance premiums, real estate commissions, etc. If the seller is in bankruptcy, a trustee for the seller’s creditors will take control of the sale. In most Short Sales, the seller must secure an agreement from one or more third-party creditors to accept from the closing proceeds something less than the remaining amount of the debt due them. In other words, the debt is “shorted” or reduced. The one thing common to all Short Sales is that the final decision on price and terms of the transaction, as well as the identity of the ultimate buyer, will be in the control of third parties, usually creditors, whose consent to the transaction is required in order for the seller to convey clear title to a buyer.
2. What is the difference between a Foreclosure and a Short Sale?
A foreclosure is when the bank takes ownership of the property after the property owner has defaulted on the loan.
A borrower is “short” when the borrower owes an amount on his property that when combined with closing costs and commission is higher than current market value. A short sale occurs when a negotiation is entered into with the homeowner’s mortgage company or companies to accept less than the full balance of the loan at closing. A buyer closes on the property and the property is “sold short.” Both foreclosure and short sale properties are sold “as is” which means the owner nor the bank are willing to make repairs and the buyer accepts this responsibility.
3. Why do I need a Buyer’s Agent to purchase a Short Sale?
Working with a qualified buyer’s agent will help your chances of a acceptance of your offer. Working directly with the seller’s agent on a short sale is a conflict of interest. The Seller’s agent needs to negotiate directly with the bank on behalf of the seller. When an agent is negotiating a short sale with the bank, they need to be representing the seller’s best interest. As a dual agent, they have to be neutral through out the transaction which means they can not advise either the seller or the buyer making it difficult for all parties of the transaction. The best solution is for each party to be represented by an agent.
4. What happens if someone else makes a higher offer for the Short Sale property I want to purchase?
Since most third-party creditors will want to secure the highest and best offer for the property, they may insist that it remain on the market, notwithstanding a pending transaction. As a result, a creditor may withhold final consent until they have had an opportunity to compare one offer with other potential offers that may come in the future. In some Short Sales, a creditor may refuse to give consent to a pending transaction because they want the seller to accept another offer, or potential offer, with a better price or terms. As a result, the entire Short Sale process may involve a significant risk of delay or failure.
5. Do I have to wait for approval from the bank who is short selling the property before proceeding with appraisals and inspections on the property?
In Oregon, the statewide sale agreement form contains several contingencies dealing with such things as (a) buyer financing; (b) buyer’s satisfaction with the marketability of seller’s title; and (c) buyer’s inspection and testing rights. Some of these contingencies may require the buyer to expend money for such things as loan application fees, appraisals, inspection fees, testing, etc. For this reason, in Short Sale transactions, the deadlines for completion of buyer contingencies may need to be suspended pending third-party creditor consent. However, if consent is slow in coming and the buyer wishes to proceed anyway buyers must understand that there is a risk they could expend their funds only to later learn that the necessary creditor’s consent to the Short Sale cannot be obtained. Normally, buyers have no recourse for recovery of these expenditures.
6. We found another property that we like better. Can we get out of the contract with the seller?
Like any contract on a property, there are several times that the buyer can exit the agreement. If the bank has not accepted the offer, the buyers can exit the agreement by submitting a notice of cancellation. Additionally, after the bank approves the short sale, the buyer has the opportunity to inspect the property and exit the agreement by the inspection notice date based on the results of the inspection.
7. What changes can a Third Party Creditor make to the transaction and do I have any control over changes or decisions made?
In Short Sales it is not unusual for a creditor whose consent is sought to insist that other creditors who would be paid from the closing also share some of the cost. They may also insist that the sale price be increased, or require removal of provisions for the seller to pay certain repairs, etc. Some creditors may require an appraisal of the property before making any decision. Thus, in Short Sale transactions, seller and buyer must be prepared for delays resulting from changes to the price, terms and conditions agreed upon in the original transaction responses from third-party creditors, as well as other events outside of the seller’s and buyer’s control.
8. How long will it take to close a Short Sale transaction?
Lenders are overwhelmed. Depending on a particular lender’s backlog, it could take anywhere from 4 weeks to 6 months or more to get a response to the buyer’s offer. If multiple lenders are involved, the process gets longer and more difficult as all of the lenders must agree to the short sale. Because the sale cannot close without lender approval, the lender(s) essentially control the timing of closing thereby making it difficult for the buyer to plan a move.
9. Why did the Third Party counter back so high?
When a Short Sale is originally listed on the market, it is listed at its Market Value. The goal of a short sale is to get a ready, willing and able buyer to purchase the property before it goes to Foreclosure. Once a Short Sale property is listed at market value, there is a scheduled price reduction timeline which the Agent follows until an offer is received and accepted by the seller. Once all the seller accepted offers get submitted to the Third Party Creditor, the Creditor will do what is called a BPO or Broker Price Option on the property to determine what is a reasonable sales price. In most cases, the BPO will come back much higher then the final listing price. In cases where there has already been an offer accepted by the Third Party Creditor yet for some reason that offer doesn't close, the Agent will place the listing at the Bank Approved Price which is the price the bank as agreed to sell based off the BPO and other circumstances such as property condition.
10. Should I secure additional professional advice from a lawyer or accountant before entering a Short Sale transaction?
Short Sale transactions can be complicated and time consuming. They raise important issues, including income tax implications, liability issues for unpaid mortgage indebtedness, credit rating issues, bankruptcy issues, legal issues, and a range of others. Your real estate broker is not an expert in these areas. Sellers and buyers are strongly encouraged to secure additional competent professional advice before entering into a Short Sale transaction.
News Artical: Are you a good candidate for a Short Sale purchase?
Oregon Real Estate Forms: Short Sales - A Brief Summary for Buyers (PDF)
Oregon Real Estate Forms: Short Sale Addendum (PDF)
You May Qualify for $3,000 Relocation Money Through HAFA. Ask me How!
1. What is a Short Sale?
A Short Sale is the sale of a home when sales proceeds do not fully pay off the existing loan(s) and lender(s) accepts a discounted payoff to fully satisfy the loan.
The best part, the existing lender pays virtually all sales costs, including commissions, escrow and title fees and repair costs. You get your home sold, the loan(s) paid off and you avoid foreclosure.
2. Is a Short Sale right for me?
Mortgage lenders are increasingly willing to work with borrowers faced with a financial hardship to accept a discounted payoff on a mortgage. If you are faced with a hardship that makes it likely you will be unable to meet your obligation on your mortgage, your lender would prefer to settle the matter with you as opposed to taking the property through foreclosure.
As you consider the option of pursuing a Short Sale, remember your lender is looking to limit any potential loss on your loan. By completing a Short Sale, your lender has arrived at a solution that is, for them, much better than a foreclosure.
Bottom line, your lender wants to work with you.
3. If I do a Short Sale, how much will I have to pay to sell my home?
Nothing. It’s true, in most cases you will pay literally no sales costs if your lender approves the Short Sale. All commissions, title and escrow fees, and even most repair expenses are paid by the lender as part of the Short Sale approval. We will include the *following clause in the contract.
"Seller’s agreement to sell is subject to approval by existing lender of a Short Sale at no cost to Seller. Seller shall not be required to deposit funds to close escrow."
Remember, lenders approve Short Sales and accept the resulting loss in an effort to avoid bigger losses through foreclosure.
4. What sort of hardship would my lender consider legitimate?
To some extent, that will depend upon the mortgage company considering the Short Sale request. Generally, so long as the hardship is real and the mortgage company believes the loan is likely to become delinquent as a result, the Short Sale request will be processed by the Loss Mitigation Department. A big key to getting Loss Mitigation to accept a hardship is to submit a strong hardship letter. The hardship letter sets the tone for the entire file.
Below you will find a list of “hardships” that are common and frequently accepted by mortgage lenders.
- Family illness or injury
- Illness or injury in the extended family – particularly if it forces relocation
- Job relocation when the property is equity deficient
- Job loss or significant income loss
- Divorce or split of domestic partners
- Adjustment in mortgage payment or unforeseen increase in living expenses
5. I am current on my mortgage, will my lender consider a Short Sale
The answer is, maybe. Some lenders will accept a Short Sale file for approval on loans that are not delinquent. Other lenders will not accept the file until the loan is delinquent. We can put your Short Sale file together within a couple days and submit it for approval. (Remember, there is no charge for this). That is the best way to determine if your lender will accept a file for approval on a loan that is current.
6. Why would a mortgage company agree to accept a Short Sale?
There are actually several reasons why a mortgage company would approve a Short Sale payoff, including the following;
Legal Concerns – Mortgage lenders have come under legal pressure to work with borrowers to equitably resolve situations where borrowers are unable to meet their mortgage obligation, particularly when the borrower makes an effort to arrive at a compromise solution.
Wall Street is Watching – Mortgage lenders rely heavily on their ability to package and sell bundles of loans on the secondary mortgage market. They need to sell these bundles of loans in order to put the funds back to work by loaning the money again and collect loan fees along the way. If mortgages perform poorly after they are sold it could impact the lender's ability to sell their loans on the secondary market. A successful Short Sale gets the loan payoff resolved quickly.
Asset Management Expenses- If a lender acquires a property through foreclosure, the property will be managed until it is repaired and resold. It is expensive to manage real property assets - homes – spread throughout the region, the state and possibly even the nation. Keeping properties maintained, keeping utilities on, making repairs and the administrative costs attached to these activities are all costs the lender would prefer to avoid. A successful Short Sale eliminates most of these costs
Reserve Requirement- Delinquent and non-performing loans place another burden on mortgage lenders. For all delinquent and non-performing loans lenders must set aside funds in reserve to deal with potential losses. These funds cannot be put to work generating new loan fees until the bad loans are resolved. A successful Short Sale lets the lender put more money to work.
7. I have two loans, can I still do a Short Sale?
Yes. We can work with both lenders (many times the same lender hold the 1st and the 2nd loans) to put together a Short Sale transaction. Even if the value of your home is below the balance of the 1st mortgage, we can normally get the two lenders to cooperate.
In the end, neither lender wants to own another home through foreclosure.
8. My property is in rough shape and needs work, can I still do a Short Sale?
Absolutely. In fact, lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The lender knows the risk of loss goes up when they foreclose on a property that needs lots of work.
Aside from expense of completing the work, lenders are simply not set up to get the work done. They are in the loan business, not the fix- it business.
9. I am concerned about my credit, how will a Short Sale affect my credit?
The big key here is to avoid foreclosure. By nearly any measure, a foreclosure is the most damaging event your credit status can encounter - worse than bankruptcy. In the course of getting your short sale approved you may miss your mortgage payments, and these will show on your credit.
By avoiding foreclosure, you will likely be able to resume normal borrowing (car loans, credit cards, consumer goods and such) relatively quickly
10. How do I get started on a Short Sale?
Take to a qualified Short Sale Agent and your bank. When you do, there are a few things you are going to need:
- Income Record (W-2, 1099-MIS, Interest, etc)
- Asset & Liabilities
- Profit & Loss (If Self-Employed)
- Monthly Expenses, including:
- Any and all mortages and loans you have on all properties.
- Auto Payments
- Auto Expenses & Insurance
- Credit Card Payments (Min. Amount Owed Monthly)
- Health Insurance
- Child Care / Support / Alimony
- Utilities / Water / Phone(s) / Sewer
Once you have all this information available to you, give me a call. Even if you are missing a few items or don't know exactly what is asked of you, let me help. I will take the time to walk you through step-by-step and get your home sold! (503) 793-7542
This summary is intended to briefly address some of the practical and legal issues that can arise in a Short Sale transaction. This is not intended to be a complete explanation of Short Sales, does not constitute legal advice, and should not be relied upon in lieu of securing competent legal, tax and consumer credit advice.
