What Is A Short Sale, Really?

I was asked recently about short sales, and while I could give the quick and dirty explanation, that was about the extent of my expertise. The quick and dirty?

A short sale occurs when the lender agrees to let the borrower sell the house for less money than what is owed on the loan.

I’ve only been a part of one short sale transaction, and so my experience with them is limited. And, thankfully, we haven’t seen many of them in the Blacksburg-Christiansburg area. Yet despite my lack of experience with them, I knew just who to call … my friend, Sarah Stelmok. Sarah is an associate broker in Fredericksburg, VA, and knows a LOT about the short sale and foreclosure process. Seriously. And if she doesn’t know what she’s talking about, then she ought to be an actress because she has me fooled. So I sent her an email and within minutes had a response from her, which she has generously allowed me to repost. If you’re a homeowner and facing foreclosure, consider a short sale and the following steps in order to minimize the damage. Each bank is a little different, so your agent should be in touch with the bank immediately in order to begin assembling the necessary steps.

1. Third Party Authorization – this letter will give the real estate agent permission to talk to the bank and the bank to talk to the real estate agent. It needs to be agent and loan # specific and have an indefinite end date. Some banks have their own forms they want you to use. This is another good reason to contact the bank ASAP.
2. List Property – Some banks want the property listed for the amount that is owed first, and they will be willing to drop to a more realistic price after a period of time. The listing agent will need to back up their list price with a good CMA! Remember, a BPO will be called out as soon as they receive a contract.
3. Get Contract – needs to be ratified by seller and buyer. Some banks want one contract at a time; others want to see them as they come in. Another reason to contact the bank ASAP.
4. Send Contract to Bank
5. You will also need to send – two years of W2s, the most current profit/loss form, listing agreement, a preliminary HUD-1 specific to the contract that you are sending, last 2 bank statements, and a hardship letter. They may also ask for proof of disability or being laid off, if applicable, and/or proof of other assets. Some banks ask for a little more info, but they will let you know when you call.
6. Be persistent, but patient - Make sure you ask how long it will take for a contract to work its way through the system. You want to hear it will take 30-45 days. You also want to ask about the likelihood the loan will be sold. They like to sell the loans right before they give you approval, and you’ll have to start the process all over if they do.
7. Stay as current as possible – Make sure you don’t get more than 2 months behind. Some banks will allow you to get up to 9 months behind, but they are harder to negotiate and keep off the auction block.

These steps will need to be done for each bank that is involved and each bank has their own process.

From the things I hear from colleagues who work in other areas of Virginia, the short sale and foreclosure process is an ever-changing experience, and I’m learning as much as I can about it. My thanks to Sarah for sharing this, you can find out more about short sales on her blog, SarahiouslySpeaking.com. And if you’re in danger of falling behind on your mortgage, email me and let’s see what can be done about it.

I may not have the answer, but rest assured I’ll know who to call!

Updated 6/10/09 4:38pm – Interesting bit of timing, and completely unplanned, but Danilo Bogdanovic of LoudounScene.com wrote “10 Questions To Ask Before Writing An Offer On A Short Sale“. It is a really informative post, I highly recommend it.

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Tagged as: Danilo Bogdanovic, foreclosure, Sarah Stelmok, Short Sales

Frank
There are several different naming variations that Banks have for their Short Sale Department; Loss Mitigation, Home Preservation, Default Servicing, Hardship, and some use the crazy name of “Short Sale Department”. When you call the bank, mention to the agent you are looking to perform a short sale and they will get you to the correct area.
As Jeremy mentioned, it is important to stay as current as possible. If a loan falls into a serious delinquent status, the account could be reviewed/placed for foreclosure, further collections efforts could be made, or the loan could be charged off (that’s a whole other topic). More importantly by the loan falling further past due, additional information/documents may be required to approve the short sale (which will extend the decision timeline), or the deal may completely fall apart.

Tina in Virginia
A very important step is being left out here. The homeowner needs to consult with an attorney prior to making a decision to pursue a short sale. In some cases, other options may be better financially for the seller. Also, the agent should not handle the short sale negotiations with the bank. That should be handled by an attorney because E&O insurance does not cover RE agents in short sales.

Jeremy
Good point, Tina, but I wonder about the short sales negotiations. I don't doubt that E&O; doesn't cover agents in a short sale situation, but I do question why so many agents are participating in short sales around the country without coverage. Any E&O; folks out there care to weigh in?

Jeremy
Frank this is great, thanks for that perspective. When a homeowner calls the bank to ask these questions, is there someone they should be asking to speak with, specifically?

For those keeping score at home, a 1099c is a Cancellation of Debt. One thing not known about short sales is that the IRS counts a forgiven debt as income if that debt is more than $600. So, if you short sale a house for $20000, the IRS will count at least $19400 as income on your income taxes. Be prepared for that. You can find out more about 1099c's online.

frank merritt
Speaking from the banking side, it is extremely important that people ask their bank about the possible deficiency balance. While the Commonwealth of Virginia allows the collection of deficiency balances, some banks have ceased this practice. People should not think that just because the bank has released their lien that debt is also released. It does not release the customer of their financial obligation. Finally, if the bank does release the deficiency balance, the customer could be subject to a 1099c.