Short Sales

Definition of a Short Sale
              A Potential Short Sale is when the Listing Price (Asking Price) may not be high enough to cover the payment of all liens (mortgage loans, taxes, HOA fees, etc.) and closing costs and the Seller says they will be unable or unwilling to bring sufficient funds to the closing to do so.  The Seller might be SHORT of the money necessary to become free and clear of all liens associated with the property.  The Seller is usually in the process of negotiating with the lien holder(s), especially the mortgage note holder, to have them agree to take a loss.  That way the Seller might be able to sell the property and not continue to owe money to anyone after the sale closes.

              A Short Sale occurs when, at the closing, the Sale Price (Purchase Price) is not high enough to cover the payment of all liens and closing costs and the Seller is unable or unwilling to bring sufficient funds to do so.  The Seller is SHORT of the money necessary to become free and clear of all liens associated with the property and all or some of the lien holders have already agreed to absorb a loss.  In most cases the Seller won't continue to owe money to anyone after the sale closes.

The Term "Short Sale"
              There are many homes on the market now that are listed as short sales. While the occurrence of short sales is not new, the large number of them at the same time is something not often seen locally or nationally.

              Many people purchased homes in or near the peak of the housing market with a variety of mortgage loans designed to get them into a home quickly and easily. These loans were not designed to take into account that the housing market, like all other markets, won't rise continuously forever.

              Those borrowers have now found out that whatever rises too high will correct itself and fall back down. The rise can be gradual or sudden and the fall can also be gradual or sudden. When the reduction in value is quick and not much principal has been paid off a mortgage loan, these home owners (borrowers) can find themselves "upside down" on their mortgage. They owe more to the lender on the balance (principal) of the loan than the property is worth.

              Willing buyers will offer a lower price to one of these sellers than the seller needs to pay off the loan. The seller might be willing to sell at or near a buyer's offer because they are behind on the loan payments and all other recent comparable sales have been in that price range. However, unless the seller can bring money to the closing, the money available at closing will be SHORT of the amount needed to satisfy all or some liens and closing costs. Of course if the seller doesn't have enough money to make the regular payments, how will they bring money to the closing?

              The seller is most likely looking at a foreclosure on the home by the lender and a foreclosure will have a very negative impact on their credit history and score. A short sale will also have a very negative credit impact but not quite so bad as a foreclosure.

Short Sale Negotiations
              In order for a short sale to happen, the Purchase & Sale Contract that was negotiated and signed (executed) by the Buyer and Seller must be approved by the lien holder(s).  In almost all cases that means that the contract has to be submitted to the lender (bank, credit union, or mortgage company) for approval before the closing can be scheduled.

              The lender can do three things when a short sale contract is submitted to them. They can reject it and proceed towards foreclosing on the home. They can counteroffer it back to the seller who then has to renegotiate the contract with the buyer at a higher price. They can accept it as written.

              When the lender accepts the price negotiated between the buyer and seller, it is actually agreeing to write off some of the seller's debt as uncollectible. The lender will take a loss by accepting only part of the balance (principal) still owed on the mortgage loan at the closing. The remaining amount, in most cases, will be forgiven, but noted as paid in full at a lower amount than still owed. In some cases the lender will still require the seller to pay off the difference later. Sellers (borrowers) should make sure that they know whether or not they will be free and clear of the lien or still have a lien against them after closing.

              A lender will agree to a short sale in cases where the alternative of foreclosing on the property and taking ownership is projected to cause a bigger loss. The expense of foreclosing, the time involved, and a potentially lower priced sale later, sometimes makes a short sale more appealing to a lender.

Short Sale Timeline
              Short sales have a history of taking considerably more time than regular sales. The seller must realize that even though the lender may have agreed to consider a short sale, a foreclosure is imminent.  Most lenders won't even talk to sellers about a short sale until the seller (borrower) is at least three months behind in payments. The seller must submit a "Hardship Letter" and proof of income and assets to prove that they do not have the financial ability to continue living in their home and making mortgage payments. They must also prove that the current sale value of their home is much lower than the mortgage balance.

              When the lender agrees to consider a short sale, they might give an indication of the lowest amount they might accept, but in most cases they will just wait for an offer to come in from a buyer.  

              Even the fact that an offer has been submitted to the lender won't stop foreclosure proceedings with many lenders. The short sale and the foreclosure can be handled by different departments that sometimes don't share information.

              The buyer must have tremendous patience. Several weeks to several months can go by before hearing back from a lender and then the only communication might be a rejection or counteroffer.  Many banks and credit unions are swamped with short sales and are considering them with reduced staff.

              Many times the original lender is merely the collector of the payments and is no longer the holder of the lien. Lenders usually sell their mortgages to investors or U.S. Government backed entities such as Fannie Mae and Freddie Mac. In recent years many mortgages were bundled together and sold as securities to domestic and foreign brokerages that sliced them into pieces and sold parts to other investors. It may take a long time for the servicing or handling bank to track down the actual owner of the lien and get their approval of a short sale.

              Due to the time involved many buyers drop out before a short sale is approved. Therefore many sellers will accept "Back-Up Offers" to keep their hopes alive.  It's not unusual for a seller to accept several offers with the intention of finding one that their lender will approve.

Summary
              Short sales are a complex and time consuming solution to the declining residential real estate market. They work only in a small percentage of cases where the lender agrees to take a loss on the mortgage loan and the buyer has the time to wait for this decision to be made. The seller, buyer, lender, realtor, and closing agent must work together diligently.  It takes experience, knowledge, and skill to successfully negotiate a short sale.

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