Selling your real estate property via short sale can be a practical option for distressed real estate investors trying to avoid foreclosure. However, the short sale process can be challenging and frustrating without proper guidance. Here are the steps of a short sale to help real estate sellers and buyers achieve a successful short sale transaction.
Short Sale Process for Real Estate Sellers
1. Make Sure You’re Qualified for Short Sales
With short sales, real estate investors sell their real estate property for a discounted price approved by the lender, usually a bank. As mentioned, a short sale is an option for real estate investors who are distressed – meaning they are falling behind on the mortgage payments, or the value of the investment property is less than the mortgage owned, or both. Thus, in order for the lender to consider real estate investors qualified for a short sale, they have to demonstrate financial hardship (such as unemployment, divorce, medical emergency, and bankruptcy) and that the real estate investment property does not have enough equity to pay off the mortgage. The lender won’t approve the short sale if the mortgage can be recaptured with a regular sale.
2. Contact a Real Estate Agent
If you qualify to sell your home via a short sale, the first step in the short sale process for real estate sellers is contacting a real estate agent. Keep in mind that the short sale is a very complicated real estate transaction, thus it should be handled only by a real estate agent who has significant experience in the short sale process in real estate, and a strong track record of success in negotiating short sales for his/her clients.
Your agent can verify whether you would indeed qualify for a short sale. Once you decide to pursue the short sale process, you will have to sign a written authorization so that the agent is able to contact your lender on your behalf. Real estate sellers also need to sign a listing agreement with the real estate agent so that the investment property can be put on the market immediately at the low end of the fair market value.
3. Gather the Necessary Documentation
The next step in the short sale process for real estate investors selling their real estate property is to collect the documentation that proves their current financial status. Basically, you have to prepare a financial package and submit it to the lender. Each state has its own guidelines and requirements; however, short sale packages mostly include:
- Letter of authorization
- A copy of your listing agreement
- Preliminary closing statement
- Completed financial statement
- A hardship letter detailing the negative financial circumstances surrounding the seller
- 2 years of tax returns
- Last 2 months of bank statements
- Comparative market analysis or list of recent comparable sales
4. Sell the Investment Property
Depending on the lender, you have to submit the previous documentation either once the real estate property is listed or when you have an offer on the real estate investment property. Once you have an offer, the lender will have specific requirements for the short sale process to be completed. Real estate sellers have to send the short sale package using certified mail, then have the real estate agent continually follow up with the lender to get a timely reply to the proposed offer. If everything goes well, and the lender accepts the offer, then close the deal. However, in the case of the lender rejecting the offer, real estate sellers should request a reason for the rejection in writing and continually negotiate with the lender until both parties come to an agreement. Once the sale is complete, the lender will remove the existing mortgage.
Short Sale Process for Real Estate Buyers
Real estate buyers are having a harder time finding their dream real estate property due to fewer listings on the market and higher prices. If you’re patient enough, then buying a home on a short sale can save you money. However, there are some factors to consider. Here’s the short sale process when buying a real estate property:
1. Hire a Real Estate Agent Experienced in Short Sales
Exactly like real estate sellers, experts recommend real estate buyers to work with a short sale specialized agent to advise them during the short sale process. In addition, not all real estate agents are willing to go through the short sale process because the transactions are long and tiresome and sometimes offer less compensation.
A real estate agent with experience in short sales will find out how much the seller ownes on the real estate investment property, the number of the mortgage liens against it, and the condition of the house. Real estate buyers could ask real estate agent for a list of comparable sales before writing a short sale offer.
2. Submit Your Best Offer the First Time
Real estate buyers who really want the real estate investment property should be willing to offer near or at-list price. If you want your offer to be approved, your price has to be somewhat close to the market value. The best thing to do when you come across a short sale investment property you want is to submit your bid quickly so that it will have a chance to be considered by the bank.
Real estate buyers offer their price to the seller first and the lender second. After the seller accepts the offer, the listing agent will send the following items to the bank:
- Listing agreement
- Executed purchase offer
- Buyer’s preapproval letter, copy of earnest money check, and proof of funds
- Seller’s short sale package
If the package is incomplete, the short sale process will be delayed.
3. Don’t Expect the Seller or Lender to Negotiate
In the short sale process, experts claim that real estate buyers have the right to get an inspection. However, don’t expect real estate investors selling their real estate investment property in a short sale to make any repairs; since they can’t afford the mortgage, they obviously can’t afford any repairs.
Real estate investment properties sold in a short sale tend to be “as is” properties. Nonetheless, real estate buyers need to have the house inspected because it’ll help them make a final assessment of any necessary repairs and how much they’ll cost.
4. Consider Additional Costs
As mentioned, the seller in short sales doesn’t have equity in the real estate property to pay for repairs, closing costs, and the agents’ commission, and their lender is less likely to help. As a result, the agent representing real estate buyers may require them to pay a short sales fee or commission. Real estate buyers should be aware of all fees prior to closing. Lenders often won’t complete the short sale process if real estate buyers don’t agree to pay these fees.
5. Get Financing
Unless paying cash, real estate buyers have to get pre-approved for a mortgage loan in order for the seller and the bank to take the offer seriously. However, before officially applying for the mortgage, make sure that the lender has approved the sale price.
The Short Sale Process at the Bank
Real estate buyers may wait a very long time to get a response from the lender. This is why both real estate sellers and buyers need to have patience in short sales. Furthermore, it is vital for the agent to regularly call the bank and keep track of the short sale process. Often, submitting complete packages in advance can help to speed up the process. Following is a typical short sale process at the bank:
- Bank acknowledges receipt of the file.
- A negotiator is assigned.
- A Broker Price Opinion (BPO) is ordered, which the bank probably will refuse to share the results.
- A second negotiator may be assigned.
- The file is sent for review based upon the Purchase and Sale Agreement (PSA).
- The bank then requests all parties to sign an Arm’s-Length Affidavit.
- The bank issues a short sale approval letter.
The Bottom Line
As you can tell, short sales are a waiting game; this process could take a long time to complete. However, they can be a great real estate investment deal for real estate sellers and buyers with time and patience. Visit Mashvisor to get all the information you need on real estate investing, in addition to guides and tips to become successful real estate investors.