Understanding the Short Sale Process

Whether you are a homeowner or a buyer wanting to purchase a particular home in Central Indiana, the sale or purchase of a short sale property is a time consuming, complicated, and challenging process for your agents. However, the rewards far outweigh the challenges. For the listing agent, helping the homeowners resolve a financial issue and get out from under the mortgage with integrity, reserving their credit worthiness for the future, is quite a rewarding experience. For the buyer agent, helping a home buyer purchase a home with built-in equity after the recent collapse of home values is very satisfying. It is important to understand the quality of your real estate agent who is willing to take these cases on and give that person your highest respect.

Starting the Short Sale Process
Once a homeowner contacts the agent to sell the home, the agent will review with the homeowners the various alternatives to foreclosure. That is required by law for them to do.

Next, the real estate agent will review with the homeowners the listing contract and provide various disclosures, which they will need to sign if they agree to proceed.

When all of the forms are complete, the disclosures are signed, and all of the required documents are collected, the agent will then prepare the case and list the property for sale. The agent uses a price reduction strategy to find buyers.

What to Offer for a Short Sale Property
Lenders use the minimum threshold analysis to evaluate and approve or reject a short sale. That means that after deducting all of the costs of the sale on a form called the HUD-1, or estimated settlement statement, the net amount that will go to the lender is greater than a specified percentage of the fair market value (fmv), then it will be approved. If not, then it will be rejected.

So what is that percentage? It varies from entity to entity and even with the loan product. If the offer is made less than 30 days after the home is listed, the minimum threshold must be 88% of the fmv. If the offer is submitted between 30 and 60 days after it was listed, then the minimum threshold is 86%. Finally, if the offer is submitted more than 60 days after listing, the minimum threshold must be 84%. Some entities have minimum thresholds higher, and some lower.

Will the lender let you know if your offer is too low? Possibly. Some of them will counter-offer to you; some will not, but you can submit another offer; however, with some there is a drop-dead provision, where if they reject it they will not accept another offer for 30 days. Often, that is too late. So the offer must be carefully considered for achieving that minimum threshold that at this point you can only guess.

Preparing Purchase Contracts
When a purchase contract is submitted as an offer, that offer must meet the short sale requirements, which is then accepted by the sellers. If you have an agent who is experienced with short sales, they will understand and help the buyers meet those requirements.

What are those requirements? First, the buyer should add a statement: "Buyers understands and agrees that acceptance of this offer is subject to third party lender approval within 120 days". Why 120 days? Because short sales are taking that long to obtain approval very often. Sometimes even longer. Sometimes shorter. You must be prepared to wait and remain patient. If you think that you cannot wait this long, or you must make your sale contingent upon the sale of your current home, then short sales are likely not for you.

Another requirement, well not requirement, but strongly advised, the offer should add the statement: "Buyers accept property as-is, inspection only for major defects affecting habitability". Why? Because if the lender sees that the buyers may back out at the last minute without a really good reason, they will often reject the proposal. Some do, some do not. So this statement makes your offer a stronger one. Finally, it is hopeful that the agent is able to keep the offer open for multiple offers. Why? Because it helps the lenders to see that the agents attempted to obtain the highest sale price possible. If so, then add this statement: "Buyer understands and agrees that multiple offers may be accepted by Seller for submission to lienholders."

After submitting the short sale proposal
Most of the time, the proposal will be submitted by fax to the servicing lender (SL). On some occasions, it will be shipped, which may take up to a week for them to receive and post. Even when the proposal is submitted by mail, it may take 3 -7 days for the lender to get into their computer system. They will have an incoming fax department who receives the fax and then images each page into their computer system. When the proposal contains more than 100 pages, this is time-consuming, even with great technology.

Some of these entities are very easy to work with and efficient. However, some of them are very disorganized, and inefficient. Some of them regularly lose documents, even after they confirm that the documents have been received and are readable.

This is an important point to make here. If your agent tells you that suddenly the lender has lost the documents, or now needs updated documents, or other issues, please remember that some of these lenders are a real problem sometimes and we have to just be patient and re-submit the documents.

So, how long does it take?
Remember, it takes several days for your agent to draft the proposal and submitted to the lender (SL). Then it takes 3-7 days typically for them to get it imaged into their computer system.

When the housing market and economy collapsed, suddenly they became overwhelmed with cases. At the same time, those banks suddenly experienced a huge loss of revenue. Some failed. Others were bought out. The result? Very lengthy processing times because those negotiators/analysts have more cases than they can handle quickly.

Bottom line, the loss mitigation department, which is what this department is commonly called, will assign the short sale case to an analyst or negotiator. There may be a long wait period just to get the case assigned. This may take anywhere from 15 to 30 days.

Once it is assigned to the negotiator, and sometimes it can be done beforehand, the negotiator or someone will order the appraisal or BPO. It takes anywhere from 3 to 15 days to get this appraisal ordered, completed, returned, and imaged back in.

After they have the appraisal or BPO, the case is then sent to either the SMI, or the MI carrier, or both. The SMI’s and Mi carriers have experienced the same huge increase in cases and they likewise are taking abnormally long to review and approve the short sale. This will add to the length of time it takes to obtain a response.

All together, you can now understand that it may take a long time to obtain approval. We recommend that you expect up to 120 days or more for this to happen.

How often should the agent call the lender?
There is a widely held belief that the “squeaky wheel gets the grease”, so calling often, even every day is appropriate. Not so! Every time the agent calls the bank, the call is logged into the case data base log along with notes about that call. Prior to being assigned to a negotiator, the case legally cannot be put ahead of another case. Why not? Because they cannot put a one case ahead of another case that was submitted earlier for fear of a discrimination suit.

Once the negotiator begins working on the case, it is important to stay in good graces with that employee. They are usually low paid, under a lot of stress, and their tactic against their perceived harassment brought bout by constant contact could be to tank the proposal and cause it to fail.

So, calling repeatedly will usually only irritate the people and motivate them to tank the proposal. Even call center people who handle the inquires for status will see the notes and may become irritated when they see constant calling.

So how often should the agent call? The agent should call 3 days after submitting a document. A call is appropriate at the end of any quoted period of time. A call is also appropriate at the end of every week just for a status check to report back to clients.

It is important to be understanding and make certain you do not pressure the agent to be constantly calling the lender. The negotiator does not really negotiate, but merely processes. Arguing with them or calling constantly can only cause your case harm.

What happens next?
When the approval finally arrives, it is in the form of a bank release document. That document will provide various conditions for approval. Some of these conditions are normal, but some of them may be unacceptable. Unacceptable conditions used to be negotiable, and sometimes still are, but most of the time they are to be accepted or the proposal is rejected.

Hopefully, the bank release conditions will be acceptable and your case will have a smooth close. After approval, the buyers will need to finish with inspections, obtaining loan funding, getting the settlement statement finalized, and then the go close on their new home. The sellers need to find a new home, pack, and clean to get ready to move.

Summary
We have tried to give you a good understanding of the short sale process and what to expect from your agents. Hopefully, this will help you tolerate the time it takes to either get your home sold or to get a great home for a great return on your investment dollars. If there is anything you do not understand, please contact our Fishers Indiana real estate team and we will be happy to talk to you about it..