Overview of the Short Sale Process

Short sales are becoming less frequent in southwest Florida, but there are still some short sale properties available.

A short sale means the owner owes more than the house can sell for in the current market or it is nearing foreclosure, and so the lender is agreeing to sell “short” of what is owed. So for example, if the seller has a mortgage of $500,000 but the current market valuation of the property is $350,000, the bank must agree to take a loss of $150,000. These transactions take longer because of bank involvement, sometimes up to 6 months from the time the offer is made.

While the seller will agree to accept and sign an offer, it’s really the lender holding the cards and determining if price and terms are acceptable. Nothing proceeds on the purchase transaction until the lender(s) have signed the offer and agreed to all terms. Very few short sale transactions reach closure – about 10%.

And bear in mind that if the short sale property is listed at, say, $250,000 that does not mean that’s what the bank will take for the home. Often, they counter at a higher price.

In some cases, there are multiple lenders or “investors” involved. Banks often sell mortgages in whole or in part. For example, suppose the seller’s original mortgage was with Countrywide. Countrywide may have sold 50% of the mortgage to Bank of America and 25% to CitiGroup (and so three lenders must now agree to take a loss on the note — an unlikely result.)

Also, while the buyer is waiting to hear from the lender(s), other properties, non-short-sale, are selling and buyers may regret missing an opportunity while waiting.

Buyers looking at short sales need to also take into consideration liens against the property and be very certain to obtain clear title and purchase title insurance. There are situations where it can be nearly impossible to determine how many lenders/investors have a claim on the property.

Basically short sales are a fit for pure investors that can handle the risk and for those with the patience of a saint. Here is a diagram provided by Bank of America summarizing the process and parties involved:

Short Sale Disclosure

Buyer is advised that a short sale transaction requires third party approval from one or more lenders and that there may be other parties involved in negotiating the transaction on behalf of the seller. A short sale means the owner owes more than the house can sell for in the current market or it is nearing foreclosure, and so the lender may agree to sell “short” of what is owed. For example, if the seller has a mortgage of $500,000 but the current market valuation of the property is $350,000, the bank must agree to take a loss of $150,000. These transactions take longer because of bank involvement, sometimes up to 6 months from the time the offer is made.

Following are possible events and outcomes to be aware of if you contemplate or enter into a short sale contract.

List price versus approval price. The list price is the seller’s agent asking price. In most cases, it is not a bank-approved figure. The bank is seeking market value on the property and looks to get 85-100% of its market value. The lender has an appraisal or BPO (broker price opinion) on file documenting the current market value of the property. If your offered purchase price is less than they lender will accept, they decide whether to a) not approve the short sale, b) counter offer your price and/or terms, or c) do nothing, letting the Approval period / contract expire.

Net assessment and additional fees. The lender in a short sale generally works to a net figure after expenses. This is the purchase price minus commissions, back taxes, back HOA fees, and any other claims on the property. A Short Sale Approval Letter may state they will pay up to a certain amount, potentially leaving an outstanding balance to be negotiated by seller and buyer (for example, unpaid utilities, a negotiator fee, or a portion of unpaid HOA fees). In most cases, the lender and seller look to the buyer to cover an outstanding balance—the seller rarely has the funds to make up the shortfall. If an outstanding balance cannot be negotiated (neither seller nor buyer will pay the amount, individually or combined), often the Short Sale is not considered approved. This is a fluid situation and the options available depend on the contract terms and associated riders.

Repairs. Most Short Sales are “AS-IS” meaning the property conveys in its current condition without allowance for repairs. Should the inspection show items not working, missing, or in need of replacement, the expense of correcting the defects is the responsibility of the buyer after closing. As with additional fees, the seller and/or lender is unlikely to agree to the expense of repairing or replacing faulty items. Reference the inspection clause of the contract to ensure you have the option to either continue with the purchase or cancel the agreement due to the results of the inspection.

Escrow (earnest money deposit) up front. Some sellers’ short sale negotiators are requesting an escrow deposit at the time of the seller acceptance. In the past escrow was not due until the lender had approved the short sale. Some short sale contacts have a two-staged escrow: initial deposit at acceptance and additional deposit at lender approval (or after the inspection period). Escrow is always at risk if you do not perform on the contract per all terms, before and after short sale approval.

Multiple Lender Disagreement. If there is more than one lender involved (for example, the seller had a mortgage and a home equity line), approval from both lenders is required before there is full short sale approval to release the seller from obligation and permit transfer of title. It is possible to get approval from the first lender but the second lender could stall the process or cause other delays such that a full approval is delayed or not given.

Attorney or Other Third Party Involvement. If the seller has engaged an attorney or loss mitigator to negotiate the short sale, there may be additional documents the buyer is requested to sign. Since the attorney is representing the seller, such documents will be in the seller’s favor, not the buyer’s. As with any contract or addenda, carefully read and understand all terms and your performance requirements and seek legal counsel prior to signing if you are not completely comfortable with the language and terms.

Personal Information. A lender may require Social Security Numbers and/or Date of Birth as a means to verify that the transaction is arms length.

Cancellation. Should you decide to cancel outside of the contract terms, the seller could demand performance (that you proceed with the purchase), demand escrow on behalf of the seller, or sue for damages.

Buyer Responsibilities

Upon entering into a short sale contract for purchase, you are bound to that agreement and:

  • Need to keep a close watch on the dates: escrow deposit (when due), expiration date of the Short Sale Approval Time Period, auto-cancellation date of the Short Sale Approval and contract, and inspection period start / end dates following the approval.

There is no standard timeline on short sale approvals: each bank is different, and each transaction is different. Therefore a short sale approval could take 30 days or 180 days. Most Short Sale Riders have two time periods: expiration and auto-cancel. If the short sale approval time period expires, the buyer’s agent can do an extension of the approval period to keep the contract in force. If the short sale approval time period expires and you do not want to proceed with the purchase, a cancellation form must be signed and submitted. Do not assume that the Approval Expiration and the auto-cancellation dates are the same.

  • Cannot cancel the agreement during the Approval time period unless otherwise provided in the contract.
  • Must deposit the escrow deposit within the number of days stated
  • Must perform per the other terms of the contract (inspection, loan application and similar) upon receiving Short Sale Approval or as otherwise provided in the contract.