If you’ve heard of a short sale, you’ve probably also heard they take forever and are very uncertain. As a result, the question is, should you submit an offer on a short sale at all? If so, why? The answer is an unequivocal yes! However, you need to work with someone who really knows what they’re doing. The biggest problem with short sales today is that there are a lot of people trying to process short sales, and most don’t have a clue about what they’re doing, or worse, they think they know what they’re doing and they’re incorrect. We have discovered a lot of folks are giving bad advice because they do misunderstand the issues. Brokers and sometimes even attorneys generalize from one short sale experience to the next and create a perception of catastrophe due to some bad experiences. I’m here to tell you that short sales can be a win/win/win: a win for the seller because they avoid a foreclosure, a win for the lender because they do not have to pay for a foreclosure and then resell the property at a substantial loss, and a win for the buyer because they get a good deal.
Let’s start with a working definition of a short sale. A short sale is the process used by a lender in order to accept less than they are owed, in exchange for releasing their lien on a property. Why in the world would any lender ever do that? The reason is that on average lenders make about 38% more in short sales than they do in foreclosures. Nonetheless, lenders have an obligation to their stakeholders to prevent fraudulent transactions from taking place. Obviously, if there is no distress and no threat of foreclosure, then the lender would rather collect the full amount due. Sometimes the lender will reserve its right to collect some or all of the deficiency amount (the amount they accept that is less than the full amount they are owed) in the future. This is a pitfall that must be carefully explained to sellers.
Who is eligible for a short sale? The answer may be obvious: those who are in some kind of financial distress and who will likely allow a foreclosure to take place unless there is a short sale or loan modification. Generally speaking, lenders must verify a financial hardship. To do this, most lenders require a full financial package including, but not limited to: two years of tax returns, two months of bank statements (business and personal), two months proof of income (paystubs, profit and loss statements, W2s, etc.), a hardship letter and a ledger containing assets, income, expenses and liabilities. Lenders also often require a form called 4506-T because they are going to obtain a transcript of tax returns from the IRS and a copy of a credit report to double-check the completeness of the information they are provided.
Now, let’s look at who processes the short sales for the lenders. Some lenders do it themselves through in internal department, others have their servicers process for them, while others have a third party processing company do the work (or some combination). This is where one needs some expertise. In order to know the requirements of each lender, servicer and/or third party processing company, you have to have done a pretty large volume of transactions and kept track of what each company requires. Most lenders do a poor job of explaining how they process, their timeframes and requirements. You also have to understand that each lender likely has several different types of short sale programs, each with their own set of rules, requirements and consequences.
How long should a short sale take to close? If one knows what he’s doing, it takes approximately 90 days to receive an approval on a short sale. This time period can be shorter or longer, depending on the negotiator and requirements of the underlying investor. Lately, we have seen short sales taking less time to process. Our fastest processing time has been 7 days. Our longest is still going, and it has been over two years. I will not bore you with the details of the longest one – it has to do with a million dollar loss for the lender and some unimaginable structural problems.
Over the coming weeks, we will explore the short sale process to help you make the best decision towards buying or selling a short sale property. We look forward to hearing about your experiences.
Alaris Properties, LLC