Anatomy of a Short Sale: Part I

I thought it might be interesting to give readers a glimpse of the details that go into handling a short sale transaction, from beginning to ‘end result.’  I say ‘end result’ because though the whole point is to get the transaction closed before the threat of actual foreclosure, short sales have a lot of parties and variables involved and many do not close successfully.  The point is to be successful here for your clients, but since I likely will follow some of the actual happenings from transactions, I want to keep this real.

First, the reaons for a short sale on the part of a seller are numerous.  A seller could have gotten in over their heads for a variety of reasons.  Perhaps their loan interest rate was indeed an ARM and adjusted to the point of ridiculousness or there was a health-related issue or a loss of a job.  Divorce can certainly change the picture of affordability.  Often times, the reality of a short sale comes to the homeowner(s) gradually.

The specific reasons are important to know and understand from a couple of vantage points.  First, the Realtor needs to understand if the reasons really warrant the short sale in the first place.  One has to feel that the situation is untenable.  Second, given that the lender will be looking for a hardship letter that calls out why the homeowner needs the bank(s) to approve a short sale, the circumstances should be compelling.

After having had a consultation or more with a homeowner, the Realtor will make the determination if the transaction is something that they want to pursue with the homeowner.  Many Realtors do not work short sales and so will decline the business right away.  Other Realtors specialize in short sales and so take on short sales readily though some will decline some short sales if the particular circumstances don’t merit their involvement.  Other Realtors will take the business on but work with a negotiating company that specializes in short sales.  Let’s assume that there is interest by the Realtor here to move forward.

At this point before signing documents for the actual listing, the Realtor should provide documents to the homeowner(s).  These documents will spell out what the Realtor will need to move forward.  Here’s a partial list:

• Personal Financial Statement - Spells out the financial condition of the homeowners.  This is a very detailed statement capturing income, expenses, debts, and other information to give a very clear snapshot of the financial condition of the homeowners.
• Hardship Letter - A simple letter that calls out the reasons for why short sale approval is being requested.
• Tax statements going back two years.
• Copies of delinquent bills
• Copies of bills or other information that lends support to the hardship letter
• Paycheck stubs (usually for two months)
• Disclosure form - This is very important for the Realtor to disclose to the homeowner several disclosures including that there is no guarantee of success.  This may be a single page disclosure.
• Authorization form - Gives the Realtor and/or negotiating company authorization to contact the lender(s) on the homeowner’s behalf.

Why is it important to do all this before getting the listing paperwork finalized and the property on the market?  First, it allows the homeowner(s) to spend dedicated time focused on getting all the paperwork together.  It can take a week or more for the homeowner to articulate their financial picture, hardship letter, and collect all relevant documents.  Second, by the homeowner going through this process, they are showing a certain level of commitment to the process.  If a homeowner is unsure of there going down the path of a short sale, then they simply need to spend more time thinking about what they are doing.  It may be that the short sale is more of a choice than a necessity.

Regardless, the homeowner needs to be committed to what amounts to a long and trying process.

More to come in Part II.

Email this Post

Tagged as: how to do a short sale, Short sale, short sale process