Navigating the Short Sale
A short sale occurs when real estate is sold and the proceeds from the sale are less than the amount needed to pay all debts which are secured by the real estate. Because the proceeds from a short sale are insufficient to pay all debts owed, the lenders must approve the sale. Unsurprisingly, mortgage lenders have historically been reluctant to approve short sales. However, as a result of increased losses suffered by lenders in the recent foreclosure crisis, lenders have become increasingly more willing to consider short sales as a viable alternative to foreclosure.
Requirements for approving a short sale vary by lender and by the circumstances. Generally, a lender will not approve a short sale unless extenuating circumstances exist which render the owner unable to repay the loan and, because of a drop in the market value of the property, proceeds from a sale would be insufficient to cover all debts which are secured by the real estate. Extenuating circumstances are not mere hardships such as buyer's remorse, a decline in the value of the real estate, or the purchase of a different home; instead, lenders will likely require circumstances such as divorce, job loss, medical emergency or illness, death, or bankruptcy, which truly render the owner unable to pay the debt.
The ability to effectively and efficiently navigate an owner through a short sale is invaluable; this ability enables a Realtor or owner's attorney to build strong rapport with other real estate professionals, strengthen his or her referral base, and even strengthen the area's real estate market by decreasing the number of foreclosures. However, negotiating a successful short sale requires more time and effort than a typical sale and the risk that the sale will fall through is much greater. Fortunately, there are measures that can be implemented to increase the likelihood of closing a short sale.
Do Your Homework. Conduct a title search on the property early in the process to find out exactly how many lienholders exist and the amount of the outstanding debts. Determine if the owner is in default on any of the debts and whether legal action has been initiated. Ask lenders what their short sale requirements are to determine whether a short sale is possible. Conduct a comparative market analysis to determine a realistic value for the property. Calculate a good faith estimate of the sale proceeds, considering all costs of the sale, taxes, penalties, interest and commissions.
Document Appropriately. Obtain written authorization from the owner so you can communicate with the lender(s) on the owner's behalf. The listing contract should provide that the owner's acceptance of an offer is subject to lender approval. Similarly, the sales agreement should provide that the sale is expressly contingent upon lender approval. The Pennsylvania Association of Realtors ("PAR") has short sale addendums which may be used for these purposes. PAR also has a notice regarding owner documentation which informs owners of the types of documentation a lender may require during the short sale process.
Presentation is Everything. Keep in mind that for a lender to agree to a short sale, the lender must be convinced that the property cannot be sold for the amount due under the outstanding debt(s). Present the lender with all the information needed to make this conclusion. A hardship letter should explain the extenuating circumstances which prevent the owner from paying the debt(s). Enclose proof of the hardship, such as bankruptcy or divorce filings, death certificates, notices of layoff, or medical bills. Provide bank statements, pay stubs, tax returns, and other financial documents to evidence the owner's financial situation. Supply the lender with a comparative market analysis to show that the property simply cannot be sold at a price sufficient to cover the outstanding debts and closing costs.
Know Your Alternatives. Always be mindful that there are alternatives to a short sale. It may be possible to work out an agreement with the mortgage lender or the lender may accept a deed in lieu of foreclosure. The owner may be able to liquidate assets to cover a deficiency or borrow funds from friends or family. The owner may decide to keep the property, attempt to refinance based upon financial hardship, or rent it out.