Understanding Short Sales - East Bay Area Real Estate

UNDERSTANDING SHORT SALES:

In a "normal" sale, the seller has money left over after paying closing costs, commissions and the outstanding balance of any loans/mortgages against the property. This money is known as "net equity". It is the money the seller puts into her pocket after the sale (but before paying possible capital gains taxes). Unfortunately, there are a growing number of sellers who, due to a variety of reasons, find that they owe more on the property than it is currently worth. They are "upside down", or have "negative" equity.

There are two ways to handle "negative" equity. First, if the seller had the funds available, he could pay off the negative equity by writing a check to the lender(s) at the close of escrow. This way the lender gets paid in full and there are no adverse consequences to the seller's credit rating. The second way is with a "short sale". The assumption here is that the seller does not have a load of cash to make up the deficiency. It is also often that a seller in this situation has stopped making payments on his mortgages and is suffering from a degraded credit rating because of this. Foreclosure could also be on the horizon.

With a short sale, the seller (or seller's real estate agent) asks the existing mortgage holder(s) to accept less than the outstanding balance on the loan. Under the right circumstances, a bank will agree to this because it will be less costly to them when compared with their only other alternative: foreclosure.

How does an agent get the lender to agree to a short sale? Having successfully closed 5 short sales recently, here's what I've learned: it takes technical skill, a lot of patience, and an understanding on how to negotiate with the bank employee ultimately left with the decision to approve the sale.

PART II - The How-to of Short Sales

The Package

The technical skill involved in getting a short sale approved by the Seller's lender starts with knowing which sellers are good candidates for a short sale and which are not. For instance, someone who is simply "upside down" but can otherwise afford to pay the deficiency is not a good candidate. Just because the seller says he cannot afford to pay is not sufficient. The agent will have to look closely at the seller's complete financial profile (income, assets, liabilities, credit rating). I've come across a few short sale listings where the listing agent did not do her homework, and thus is really just wasting everyone's time. The rest of the technical skill comes from knowing how to assemble and deliver a good "package," providing all the information that the lender will need to make their decision. Each lender may have a different "punch-list" of documents that they require.

Patience

Patience is not only a virtue but a requirement in a short sale. It is required of everyone: the seller, the buyer, the buyer's lender, and of course, the agents involved. One deal I did recently took 3 months before getting approval. Keep in mind this was three months of NOT knowing if they would approve the sale. They could have taken all that time and then told us NO. During the wait, it is possible that interest rates rise, making the property less affordable to the buyer. The buyer's lender will want to "lock-in" an interest rate, but most rate locks expire after 30 days. That's not likely to be enough time. And it can be awfully frustrating for the seller, who is trying to "do the right thing" and not walk away from the property, and is otherwise trying to move on with his life. All the while, the listing agent is trying to follow up and inquire about the status of the package, only to not have repeated voice messages to the lender left unreturned. (published April 2008)