How to Sell Your Home as a Short Sale: Everything You Need to Know
Short sales were common in the recession a decade ago, but they still happen today. A short sale is a type of home sale that occurs when the homeowner owes more to the bank than the home is worth. Short sales can occur in places where homes have been suddenly devalued. Often, a short sale is what the homeowner must go through if they want to move or cannot afford payments on the house anymore.
There are many steps involved in selling a home as a short sale. Working with experienced professionals and preparing your documents are only the first steps in the process. Being prepared for the short sale can make the experience better and can help ensure that your short sale will be a success. Knowing what's coming during the short sale process can help as well. Here's what you need to know to get started with the sale of your home.
Before a Short Sale
Because the lender stands to lose money during the short sale, the lender must agree to allow the short sale to take place. Not all lenders will accept short sales from mortgage borrowers, and not all properties qualify to be sold as short sales. Before a homeowner can proceed with a short sale, they must first gather some information about their house, including:
- How much they owe
- How much their home is worth
- State restrictions and laws around short sales
- Whether their home qualifies for a short sale
There are many ways to find out this information, but the primary way that many homeowners find out whether they're likely to be successful selling their home as a short sale is by consulting with a real estate professional.
The best real estate professionals will already be familiar with the state laws around short sales and will be able to give the homeowner an estimate on the value of their home. A good real estate professional may also have a sense of how a particular bank will react to a short sale—if they have worked with other homeowners trying to do the same thing with that particular bank in the fairly recent past.
How to Complete a Successful Short Sale
Short sales, much more than standard home sales, are complicated. Whereas a standard home sale can take about 6 weeks to complete, a short sale can take many months and may involve a great deal of back and forth with the bank. Short sales usually involve selling a house for below market price because home buyers must have incentive to go through the many rounds of paperwork and steps required to buy the house from a bank. Below are some of the most common steps homeowners must take on when they sell their home as a short sale.
Call the Lender and Engage with Professionals
Most banks and lenders have a specific department to deal with short sales. Before the homeowner can sell their home as a short sale, they should first coordinate with the bank's professionals to find out which department (and perhaps who in that department) they will be in contact with throughout the process. Most banks have specific requirements that must be met before the short sale can be approved. To ensure that pursuing a short sale is not a waste of time, the homeowner must first ensure that their home meets their bank's requirements.
Some real estate professionals will complete this step for their clients. Homeowners who are considering a short sale should begin by contacting a real estate professional who has worked with short sales in the past. Some real estate professionals even specialize in this. Homeowners should begin their search for a real estate professional by asking whether the real estate professional has experience with short sales. The real estate agent they select should be able to provide information about how they have handled these types of transactions in the past.
Submit a Letter of Authorization
Many lenders will not do business with the homeowner's real estate professional unless the homeowner first submits a letter of authorization. This letter is a permission slip that authorizes the bank to share personal information about the homeowner's loan with that real estate professional. The letter of authorization should state information like the address of the property, effective time period, loan number, the name of the real estate professional and the contact information for the homeowner.
Once the letter of authorization is on file, working with the bank becomes easier because the real estate professional can be more directly involved in the short sale process. Usually, the real estate professional takes over coordination with the bank at this point.
Preliminary Net Sheet
The preliminary net sheet is a document that projects the possible financial outcomes of the short sale. The preliminary net sheet has information on it like how much the house is expected to collect at the time of sale, what the unpaid loan balance is, how much unpaid late fees will come out to and other information. The preliminary net sheet shows whether the house is expected to bring in profit at the time of sale. If the net sheet shows a profit on the sale of the house, then the house is not a short sale, and the homeowner can proceed without getting permission from the bank.
The preliminary net sheet must be drawn up by a real estate professional or a lawyer. Homeowners who are intending to sell their home as a short sale should work with their real estate professional to determine who will write up this important document.
Proof of Income and Assets/Copies of Bank Statements
Most banks do not want to grant permission to a homeowner to proceed with a short sale unless they can determine for themselves that the homeowner has little choice. Banks do not want to lose money on a home loan, but also do not want to allow a home to go into foreclosure (which can be even more time-consuming and expensive than a short sale).
Therefore, homeowners who want to sell their home as a short sale should start by providing proof of income, information about their assets and copies of bank statements to their lender. This paints a full picture for the lender and gives the lender the information they need in order to decide whether a short sale is the right course of action.
Unusual check activity, large deposits or withdrawals could be called into question. Homeowners can prevent delays in the process by documenting reasons for unusual financial behavior and sending it along with the bank statements. The more information the bank has up front, the faster they may be with their approval.
A real estate professional can help homeowners decide which statements and financial documents will help the bank make its decision. It is the job of the homeowner to gather this information and provide everything they can to the bank.
Comparative Market Analysis
The comparative market analysis is a document that shows the lender how much the home is worth. The comparative market analysis is a complex document that evaluates all the comparable homes that have come onto the market in the area in the last 6 months. By evaluating homes that are for sale now, homes that have sold, transactions that have ben canceled and transactions that are pending, the real estate professional can paint a full picture of the true value of the home. This document is a supporting piece of information for any homeowner who is trying to make the argument for a short sale approval to their bank.
When comparing the home to other homes in the area, the real estate professional must look at homes of a similar size, age, construction and with similar features. The real estate professional will look at the number of bedrooms and features like whether the home has a pool. The closer the real estate professional can come to finding comparable homes in the area, the easier it is for the real estate professional to pinpoint the true value of the home.
Purchase Agreement and Listing Agreement
The purchase agreement and listing agreement is the documentation showing the contract between the seller and the buyer. The bank will ask to see this documentation in order to assess whether the short sale should proceed. It's very common for the lender to attempt to renegotiate the fees and other agreed-upon details.
The renegotation of the purchase agreement and other steps of the short sale process can take months. Some banks never really respond to inquiries about short sales. Sometimes during the waiting period, the buyer chooses to walk away from the purchase. This is one of the risks of trying to sell the home as a short sale. Once the renegotation is complete, the purchase can proceed more normally.
Short Sale Closing and Post Closing
During the escrow process, once the negotiation has been completed and an offer is on the table, it is up to the buyer to perform inspections and go through the motions that would occur during a more typical home closing. The closing occurs on or before the date required by the lender in the approval letter.
Closing costs relating to the mortgage loan are paid largely by the buyer, and fees relating to the agent are paid largely by the seller (in this case, the lender). It is rare for banks and lenders to allow buyers to negotiate closing costs.
Contact Your Real Estate Professional Today
If you're a homeowner who would like to sell your home as a short sale, contact a real estate professional today. Short sales are time-consuming, but working with a real estate professional throughout the process can help the home seller rest assured that they are on the right track.