Short Sales 101

Brushing up on your short sale knowledge is essential in this market since nearly 50% if all homes currently for sale are distressed (either short sale or bank owned).  Bank owned homes can typically be purchased within 30 days since the home has been foreclosed upon and title has been transferred to the bank.  Purchasing a bank owned property is very similar to purchasing from a normal seller yet there are much more disclosures involved.  A short sale means that the current owner is requesting the bank to take less than what is owed in order to avoid foreclosure—short the bank on what is owed is a way to look at it.  This requires approval from the lending institution. 

 The process:

 1)     To be a short sale, the homeowner usually is in default or in a position to be in default (divorce, loss of job, injury, etc) The seller most likely has tried to get their loan modified yet to no avail.  Next step is to place the home on the market as a short sale.

2)     The agent marketing the property will advertise to the public as a short sale.  Short sales are typically priced very aggressively yet it is important to remember that the bank determines the final price. 

3)     An offer is submitted to the seller and the seller accepts it in writing (unless the seller feels that the offer would not be accepted by the bank) 

4)     The seller will compile a short sale package for submittal to the lender (or lenders) that includes the executed offer, seller financial statements, bank authorization letters, previous 2 years taxes, a hardship letter and listing agreement. 

5)     Once the package is submitted to the lender the buyer and seller must wait for approval.  The lender will typically request an appraisal to be completed firstly in order to determine value.  Second, they will compare proceeds of the short sale to the proceeds received if the home is foreclosed upon in order to determine whether or not the sale can be approved. Banks such as B of A and Chase can take as long as 4 months for a response.  Patience is a virtue!

6)     The bank approves, rejects or counters the offer.  If there is acceptances of your offer then expect to close w/in 30 days after the approval is obtained. 

 It is important for a buyer who is pursuing a short sale to keep all options open.  Most offers submitted on a short sale can be cancelled at any time prior to bank approval by both the buyer or the seller.  With that, I suggest continuing to look for homes while the offer is working its way through the approval process.  More often than not, an alternate home will come onto the market that fits the buyer’s needs and IS NOT a short sale. 

 The lending institutions are working in association with the US Government to streamline short sales during the year of 2010 and beyond in order to decrease approval timeframes that in turn helps fewer homes go into foreclosure.  Personally, I have noticed that banks are already responding to short sale offers more rapidly and hope that the trend continues.