Short Sale

Short sale means that you sell your home, and the amount of money that you get for the home is short of what is needed to pay off the mortgage loan on the home. 

In other words, your home is worth less than what you owe on it, and you sell it anyway, without needing to pay anything out of your pocket.

Why would a mortgage lender let you sell your home in a short sale, for less than what you owe?

Because the alternatives for the mortgage lender are more expensive than the short sale. 

Usually in a short sale, the homeowner can no longer afford the mortgage payment, and applies to the bank for approval of the short sale. 

Sometimes the owner is just behind in payments, and sometimes the property is already in foreclosure. 

In either case, the bank is looking at foreclosing and taking the property, and then attempting to sell it for as much money as possible. 

Once a bank takes a property in a foreclosure case, the property becomes what is called "Real Estate Owned", or REO property. 

The process of obtaining REO property usually involves the having the property vacant for some time, and commonly exposed to the elements, and to vandals. 

REO property commonly is damaged by various causes, and is in relatively bad condition, and worth less than when it is occupied by the owner. 

So a mortgage lender typically receives less money for a REO property than for the same property sold as a short sale. 

Another reason for the lower price of REO property is that a mortgage lender will not disclose any problems with a REO property, and will not make any warranties or provide standard items such as a survey. This makes a REO property more risky (Tips buying Foreclosed homes )for a buyer than the same property purchased from an owner who occupies it.

When a mortgage lender approves a short sale, the bank usually wants to be sure that the owner can not afford to pay the mortgage loan. So the mortgage lender demands to see documents during the short sale approval process. 

If the mortgage lender is going to loose tens or hundreds of thousands of dollars, then the mortgage lender is going to be as sure as possible that the owner is out of money. 

The documents that the mortgage lender will want to see from the owner prior to approving a short sale:

  • Previous 2 year's tax returns
  • Most recent two months bank statements 
  • Pay stubs most recent
  • Hardship letter showing what happened that left the owner unable to pay
  • Financial statement signed by the owner, showing current property, debts, income, and expenses. 

The documents are similar to what are needed for a mortgage loan modification application. 

To apply for a short sale, the property should be on the market for a few months, and then any contract offers should be submitted to the mortgage lender, along with additional documents beyond what are supplied by the owner. 

These include a proposed HUD-1 form showing that no money will be received by the owner from the sale. An authorization form permitting the mortgage lender to talk and deal with the Realtor and Lawyer for the owner is also needed.

The listing agreement history is needed. The showing history is also needed. A brokers price opinion for the property is also needed, showing comparable sale prices. A cover letter from the realtor and/or lawyer for the owner is needed, asking for approval of the short sale.

While waiting for approval of a short sale, the owner is usually living in the home, without making any mortgage or property tax payments. The mortgage lender usually makes property tax payments during this time period. People often ask about this.

If the mortgage lender quickly approves a short sale, then the mortgage lender will not need to make any property tax payments, so it is largely the fault of the mortgage lenders that they get stuck with these expenses. The mortgage lenders have reasons for delaying the short sale approval process, bases on their economics, so we don't expect them to change their behavior without some government action preventing foreclosure sales for mortgage lenders who act in bad faith with the owners. We don't expect any such government action. We expect that short sales will continue to take 3 or more months on average for approval by the mortgage lenders.

Short sales include authorized payments to persons other than the mortgage lender, even though the mortgage lender is losing money. The standard real estate broker commission is 6% total for both sides combined, or about 3% for the seller agent and 3% for the buyer agent. Usually the seller agent keeps more than half of the total commission, or about 3.5%, and pays about 2.5% to the buyer agent. These fees are sometimes attacked by the mortgage lender. However, Fannie Mae issued a policy statement that lenders are not to attempt to reduce realtor commissions which are 6% or lower, and making reference to that policy usually causes the mortgage lender to stop asking for a discount. Payments for seller attorney fees, title insurance, property taxes, transfer taxes, and occasionally buyer incentives are also allowed, and reduce the amount recovered by the mortgage lender. It is often said that the mortgage lender, or bank, pays the fees. This is technically correct, since if the fees are not charged, then the payment to the mortgage lender is increased. The mortgage lender is losing typically a lot of money on a short sale transaction, and therefore has a lot of power over the terms of the transaction. The mortgage lender will not approve a short sale if the terms of the sale do not seems advantageous to the mortgage lender.

There are frequently payments authorized to second mortgage holders. Sometimes these can kill the short sale, since the second mortgage holder will demand a high amount of money in exchange for approval of the short sale in some cases in exchange for approval of the sale, while the first mortgage holder will approve only a small payment to the second mortgage holder. Skill by he attorney and realtor in this situation is essential for approval of the short sale.

When a property is listed for short sale, and contract offers are obtained, some buying realtors will insist that the property be removed from active listing status while waiting for approval of the short sale. We recommend that our buyers not sign a contract until the buyer first agrees to let the property remain as an active listing. If we don't do this, then we expect that the mortgage lender will not trust the transaction, and will not approve it. We meet people all the time who attempt a short sale on a home, and fail because they never had the property listed. The mortgage lender is rightfully suspicious of deals which are not supported by active listings. If a property is not available to someone who might be willing to py more for it, then why should the mortgage lender agree to take a loss on the money recovered from the sale? There are a lot of investors who try to buy a home in a short sale, and then flip it to a higher-priced buyer at the closing a couple months later, when the mortgage lender approves the lower sale price. To the mortgage lender, this means that the home was worth a significantly higher price than what the mortgage lender is agreeing to sell it for, and that the mortgage lender would therefore benefit from having the home offered on the market to more buyers. Restricting the listing status does not help the short sale approval process.

The listing price should also be appropriate. If the listing price is too high, then there will not be many showings of the property. Mortgage lenders do not like a short sale which has very few showings. They tend to trust the deals which result from a large number of showings. Therefore, if a contract is offered to the mortgage lender for approval at a price of $220,000, and the list price is $280,000, the bank might have a problem with the offer, and might suspect that the realtor or seller is deliberately keeping the listing price high in order to sell the house to a friend, relative, or other insider. The listing price should be reduced to within 10% of the contract price in order to attract more, and potentially higher offers. in other words, the example should be reduced to an active listing price of about $240,000, in order to attract a buyer who might be willing to pay $230,000, or $240,000, or more. We always have realtors who want their buyer to be the only one with the potential for approval of the short sale. These realtors do not understand the short sale process, or the mortgage lender's position and power in the transaction. We usually refuse the requests if these realtors, and we expect that their buyers often withdraw their offers. That is fine. The house is being sold for its actual value, and therefore will attract other buyers in the same price range.

I want to mention the HUD-1 document one more time. The seller or owner of the home usually needs to certify that he is not getting anything from the short sale of the property beyond what is disclosed on the HUD-1 form, and that the short sale of the home is not to a friend, relative, or other insider. The mortgage lender will never trust or approve such a transaction. The owner usually has to also certify that he is leaving the home as soon as the short sale of the home is completed.

Finally, the future of short sales depends on the continued drop in home prices. The reason for the drop in home prices is the surplus of available homes, compared to the number of people available to live in them. The solution to the housing market crisis is to prevent the construction of new homes for a time and/or to demolish a lot of the older junk homes. Government will not prevent home construction, since home construction is an important economic factor, so the free market will take care of it. Home prices will continue to drop until home builders can no longer afford to build homes for the prices at which the homes are selling. Then the home building will slow to the point where the population can catch up to the amount of available housing. The next thing after that will be an increase in interest rates. An increase in interest rates will cause an increase in the cost of buying a home, without an increase in the price of the home. So home prices will remain stable, at low levels, during the years of increasing interest rates. Then, after interest rates top out, and begin to fall, home prices will rise again. That is five or ten years away, so 2015 or 2020.