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What Is A Short-Sale?
The simplest definition of a short-sale is that a home is sold, with the lender's approval, for less than the amount that the current owner owes to the lender. A short-sale may not always be the best option for the owner, and there are consequences to executing a short-sale, so make sure the owner carefully considers their options before choosing this route.
Is a Short-Sale the Homeowner's Best Option?
There are times when a homeowner has limited choices in determining when they need to sell. For example, they may have a financial hardship and simply can't afford the home any more, they could be going through a divorce, or they may need to move for work. Whatever the reason, when a homeowner finds themselves in a situation where they need to sell their home, and they owe more on the home than it is currently worth, the property may be a candidate for a short-sale.
In many cases, if the homeowner's situation is temporary financial hardship, he or she may be able to negotiate with the bank to forgo or forebear one or more payments or even adjust the interest rate until the financial situation improves. While it may eliminate or delay the ability of the agent to list a particular home, it is important that the homeowner be aware of this option. In today's market, it's unknown what a lender may be willing to negotiate. If the homeowner is unable to make an arrangement with the lender, then the short-sale may be the best option.
The Agent's Role
Once the homeowner has exhausted the other options, and decides a short-sale may be the best option, it's time for the Realtor to get involved. At this stage, a good agent will take an active role in working with the lender as well as the homeowner. The agent lists the home, making sure to follow these rules:
A. If the home is a Short Sale, it MUST be identified as such in the listing. Make sure to select one of the short sale fields in the listing input screen. Failure to do so will result in a fine.
B. If the lender has already approved the sale price the home is listed for, then the listing should be classified in the MLS as "Short Sale, price previously approved" If the listing price has NOT been pre-approved by the lender, the property should be listed as "Short Sale, price subject to 3rd party approval."
C. If an offer is awaiting approval, the listing agent must also indicate this in the listing.
D. And finally, if showings are not currently allowed, the listing agent must also disclose this in the public remarks and the Showing Instructions in the listing.
When the listing is complete, the homeowner will need to authorize the agent to speak to the lender on their behalf. The agent needs to know exactly what the lender requires, and help the homeowner get this in place. It doesn't help you or your client to get a solid offer and then find out the lender won't negotiate or even talk with you. From this point on, the agent should coordinate with the lender with respect to the real estate transaction. However, the agent should be careful NOT to attempt to provide tax, accounting, or other advice to the homeowner.
Once the listing is placed, potential buyers will begin finding the home. It is important for the agent to continue to represent the home fairly for the homeowner. In almost all cases, the short-sale will appear on the homeowner's credit report, so it is still important to get a purchase price near market value to lessen the impact as much as possible. However, it is also important to the homeowner to sell the home as quickly as possible, so be aggressive and strike a good balance, but don't go to the bank with an unfairly low offer. If the purchase price is too low, the lender is unlikely to approve the sale, which results in frustration and wasted time for all parties involved.
Working with the Lender
When there is a valid offer from a buyer, the agent then helps the homeowner collect all the appropriate data the lender needs, sends it to the lender and awaits a decision. There is a great deal of information that the lender will require, and it is very important to be extremely diligent in collecting ALL of the information the lender requests. Once the agent has all the documentation and submits it, this offer is just like any other offer made on a property, and the agent should review the listing status.
If the owner wishes to continue marketing the property while the offer is being considered, then the listing can continue with an "Active" status.
If an offer is accepted and sent to a lender for review/approval the listing should be changed to reflect the status of "Offer Under 3rd Party Review" on the MLS.
If the property is not available for showing this must be clearly indicated on the MLS in the fields provided in the Showing Instructions AND in the PUBLIC REMARKS areas of the listing.
Some have wondered why a lender would accept a short-sale rather than just foreclosing on the home and then selling it themselves.
1. First, most lenders are not in the business of owning residential real-estate. Their success depends on the money flowing THROUGH their business, not sitting static in a home they have to manage.
2. Second, the foreclosure process is a LONG process, typically taking 6 to 12 months, during which time the bank isn't receiving payments, and can't use the money tied up in the home.
3. Third, according to the Joint Economic Committee of Congress, a foreclosure typically costs the lender at least $50,000.
4. Finally, after a foreclosure, the lender can still only sell the home for market value (after they spend some money getting it ready to sell). This is why it makes sense for the lender to accept a short-sale at market value now, rather than accepting the same market value after having foreclosed on the home.
That said, some lenders have a policy of simply never accepting a short-sale. Other lenders have some very specific criteria for a short-sale. The better relationship an agent develops with the lender and the more knowledge the agent has about the lender's criteria, the better the agent will understand how to perform his or her duties for the homeowner.
One other thing the agent needs to keep in mind during this process is that it is an extremely difficult process for the homeowner. In addition to whatever problems are forcing the sale of the home, there may be significant financial consequences to the homeowner that will extend far into the future. There may also be other problems such as divorce, illness or bankruptcy involved. Understand that the homeowner may be emotional, irritable or worse as the agent works with them through the sale.
After The Offer
Hopefully, if the agent has done their job well, there will be an offer on the home relatively soon. Of course, the agent will have already spoken with the lender, and will already have a list of information that the homeowner needs to prepare. That list will typically include things like tax returns, a letter explaining the hardship, checking and savings account information, complete expense information, all appropriate documents relating to the offer and the value of the home, and potentially much more. The agent should have the homeowner start working on their part of this information right away, and make sure they understand the things they will need to provide to the title company, MLS and others.
As soon as all the documents are ready (time is of the essence), the agent should forward those to the lender, preferably using a method that can provide delivery confirmation. The agent should also call the lender to personally confirm receipt the following day. Once the lender has the documents, it may take some time before the offers get assigned to a representative. The current national financial situation has significantly increased their workload. Many agents make it a practice to call the lender around once per week just to check in, get a status and see if there is any additional information the lender needs. They seem to feel they get faster results than if they just wait for the lender to call. It is probably also a good idea to document the dates and details of all the discussions with the lender. It is unusual for a decision to be made within a week or two. According to most reports, a decision will typically be made in 30-60 days. Typically, the lender will first assign the case to a representative, then order some form of appraisal, and then the representative will call the agent to begin final negotiations.
As soon as the negotiations are complete and the final agreement has been made, it then goes into the escrow process. At the end of the escrow process, the sale is complete and the agent has completed their responsibilities. However, the homeowner should still consult with their CPA at least, and possibly an attorney to understand the consequences for their taxes, credit and any specific issues unique to their circumstances such as divorce decrees.
The information and materials contained within this article (or in this section) are provided to our subscribers for general information purposes only, and do not constitute legal or tax advice in connection with any property or transaction. Information in this article should not be relied upon as guidance on any particular transaction. Each sale transaction is complex and unique, and this area of real estate may have serious consequences for the Buyer and Seller. Advice on any particular transaction can only be given by qualified tax and legal professionals familiar with the circumstances of each transaction.
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