Short Sales

What is a short sale? A “Short Sale” is a real estate transactions in which the agreed-upon purchase price is insufficient to pay off all of the secured debt on the property (such as mortgages, trust deeds, state/federal income taxes, liens, property taxes or other local assessments) including the costs of closing, such as escrow and recording fees, title insurance premiums, real estate commissions.  It is a complicated process with legal, tax and credit score ramifications and you are encouraged to seek professional advice in those fields before entering into a contract.

Short Sale Flow Chart Sellers Short Sale Flow Chart Short Sale Flow Chart for Buyers
Short Sale Process Flow (Seller) Short Sale Process Flow Short Sale Process Flow (Buyer)

Common Phrases and Terminology in Short Sales:

BPO (Broker Price Opinion): this is the bank’s version of an appraisal.

Hardship: most short sales require a documented hardship.  This includes but is not limited to job/income loss or reduction, divorce, death in the family, illness, change in payments of an “exotic” loan, etc.  A bank is unlikely to approve a short sale without a hardship.

Deficiency: the amount of money the bank is being shorted.  The bank may require a promissory note, a promise to repay the deficiency over time, to release the loan.

Non-recourse: One of the goals of the short sale process is to have a non-recourse approval from the banks.  This means that they are not requiring a promissory note to release the loan.

Short Sale Package: this is the documentation submitted to the bank along with the offer from the buyer.  The package includes the hardship letter and detailed financial information and tax returns from the seller.  The package is assembled before the home is offered for sale but is not submitted until there is an accepted offer from the buyer.  The package must be updated throughout the approval process.  Required bank statements may be downloaded from the Internet but a screen shot or printout directly from a website will not be accepted.

The First: the first loan or primary mortgage on the property.  The first mortgage lien holder is entitled to be paid in full before the next mortgage lien holder.

The Second: if there is second mortgage it may be held by the same bank or a different bank as the first.  If there are two loans and only the second is short, the first does not have to approve the sale.  If both are short, both must approve the sale.  Even if the same bank holds both loans it is likely that they are managed by different departments that act in isolation from each other.

Lien: all liens against the property must be cleared before a sale can be completed and title transferred.  Liens include mortgages, taxes, and judgments.  Liens are usually paid in the order the were filed against the property but property taxes take priority.  Many loans have property taxes and insurance impounded and are a part of the monthly payment and have already been paid by the bank.

HAFA (Home Affordable Foreclosure Alternatives): The HAFA government program is scheduled to run through 2010 and allows eligible homeowners the benefit of a HAFA short sale is that you are no longer responsible for the difference between what you owe on your mortgage and the amount that your home sells for (Non-recourse). You will also receive $3,000 in relocation assistance upon successful closing of your short sale.  The Making Home Affordable website has more detailed information about eligibility.

Deed-in-Lieu of Foreclosure: With a deed-in-lieu of foreclosure, you voluntarily transfer ownership of your property to the servicer— provided the title is free and clear of mortgages, liens, and encumbrances. Generally, if you make a good faith effort to sell your property but are not successful, a servicer may consider a deed-in-lieu of foreclosure.

Arms Length Transaction: Since the bank is taking a loss on the sale they won’t allow the sale to be to a family member, business partner or allow for terms not disclosed to the bank.

Logic: logic may not apply during the approval process.  Luck helps but accurate, timely and detailed paperwork submission and persistent Realtor negotiation on the seller’s behalf trumps both luck and logic.