This morning I attended a seminar on short sales, and it occurred to me that if we as agents need more information about the subject,  that surely the public is in an even greater need to know.  Herein I will attempt to explain the short sale and the pros and cons of such a transaction.

A short sale happens when a seller owes more on the property than the property is worth, and the sale must be approved by the lender(s) before it can proceed.  In the Reno market approximately 50% of our listings are short sales.

As a buyer considering a short sale, you must be aware of the following information.

First we’re going to consider the various types of sales and time-lines. 

In a normal sale where the seller has equity in the property, the seller will respond to a offer to purchase somewhere between 24 and 48 hours, and when accepted that contract can close quickly; i.e., 30 days or less.  So, the entire process can be approximately 32 days.   

In a foreclosure, where a bank owns the property, it may take the bank (seller) a little more time to respond to an offer (5 to 10 days) but once the offer is accepted the contract can close in 30 days, making the entire escrow about 40 days or so. 

In a short sale the offer is first presented to the owner of the property.  The owner may agree to the terms of the sale within 2 days; next that agreement must be forwarded to the lender(s) for approval, along with a “package” that the listing agent compiles, which could take another 3 days.  Once the bank approves the sale agreement, they will request an appraisal to verify the value of the property, and this could take another 2 weeks.  Once all of that information is received, it can take the bank up to 90 days or more to review the deal.  If the lender then agrees, you have 30 days in which to close the transaction.  All totalled this amounts to 140 days or more. This is not a transaction for the faint of heart, the inpatient, or anyone who needs to close quickly.  I have had occasion to close a short sale in 60 days, but this is not the norm.  Each lender has their own rules and way of doing business, and the agent must adapt to their protocol.

Next we will look at what needs to be included. 

Now, in order for the listing agent to present an offer to a lender, they must first produce a seller’s “package” which I mentioned above, and a complete net sheet showing how much money the lender is going to forfeit because of this sale. 

The seller’s package includes but is not limited to: 

Financial Hardship Letter, financial statements, mortgage statements for all loans, 2 months of most recent pay stubs, 2 months of most recent bank statements, 2 years of tax returns, 2 years of W-2s or 1099s, all liens on the property, and alimony and child support documents. 

A seller cannot claim a short sale just because he is losing money on his/her sale.  He must prove hardship.  Types of hardship include a mandatory job relocation, extended military leave, loss of job, divorce, medical emergencies or death to name a few.  If the seller cannot substantiate a hardship, then the short sale will be denied and the home will more than likely go to foreclosure.  It is the listing agent’s job to determine hardship and have that approved by the bank as quickly as possible so that the home has a chance of being sold as a short sale before it is marked for foreclosure.

Why would a buyer consider a short sale?  You have a great potential to purchase below market value while still having a chance at seller concessions; i.e., where seller will pay closing costs, etc.  There is less competition than bank foreclosures because of the timeline.  Probably the most important factor is that the perfect home was found and time was not of the essence.

I would counsel buyers not to consider a short sale if they have timing restrictions, they have a contingency (they have a home to sell before they can purchase this one) they have an inability to handle stress or they haven’t met strict financial requirements.  When making an offer on a short sale you MUST have an approval letter from a lending institution and be able to write an earnest money deposit check for 1% of the purchase price.

After you clear the hurdles of the timeline and restrictions of a short sale, you need to deal with the listing agent.  The success rate of short sales in our market is very low.  As I said, 50% of our listings are short sales, 34% of those are under contract, but last month only 12% of those under contract actually closed.  The statistics aren’t very good, and the Board of Realtors has only been tracking these numbers since April.  So, what can you do as a buyer?

Look to your agent for lots of help.  When you go to write an offer on a property your agent should be asking the listing agent many specific questions about the property, the liens, how long in arrears the owners are, and if a sale date has been set.  He/she can also inquire as to how many short sales this agent has been involved with and how many have closed successfully. 

If the answers to some of these questions seem shaky, you may want to consider hiring a third party negotiator to handle the deal.  If the listing agent agrees, there are many competent third party negotiators that can take over the transaction to give it a fighting chance of coming to closing successfully.  The cost of this negotiation can be paid by the bank as a closing cost.

If the lisitng agent is lax in putting together the financial package for the lender your chances of success diminish substantially.  Specific documents are required by lenders and they need to be presented in the order in which the bank demands or they may not look at them at all.  They have far too many deals to review to deal with incompetence. 

If you feel that the listing agent is competent, is communicating regularly with the negotiator and is making progress, then you are on your way to successfully closing what could be the deal of a lifetime. 

One more important point or tip I will add for buyers.  When making an offer on a short sale or a foreclosure, make sure you opt for the additional title insurance coverage.  This will cost you approximately 10% more than the average policy, but it will cover you for many mistakes which may and can happen along the way, such as liens not being released, etc.  For example, a mechanics lien may not be filed for 180 days and may not show up until after the closing. 

Not every agent works with short sales or even wants to, so make sure you and your agent are comfortable before proceeding.  Keller Williams has been working hand in hand with our local Association of Realtors to produce an Addendum for every short sale contract which will protect the buyer and spell out various conditions which need to be openly addressed.  Hopefully in the next few months these measures won’t be necessary, but until then I am armed and ready.  Let’s hope you are too!