Over the course of the last few years I find myself having to explain the procedures of a short sale often. Most people know the basics of what they are, but have no idea of the details involved. “Short sale” has become one of catch phrases from the fallout of our housing bubble burst, and sadly it looks as if it may continue to be used for some time. The inquiries come from those in a situation where it may be something they have to consider or from the plain curious.
There is nothing more disheartening than receiving a call from a client I sold a home to in the height of the market. It is a call I dread, most certainly if they are being forced into a move. Running through my mind immediately is, “Oh no! I have to tell them their home is not worth what it was when they bought it!” Most are not shocked with this news, as you would have to live on Venus to not realize “the market has changed”. There are many though who own the “prettiest house on the block”, so can’t imagine the crash could not apply to them. Once the reality sets in, the conversation ensues about where they stand, and how can I help them.
There are many reasons that prompt a move when negative equity is involved. Unplanned life changes and uninitiated events are some that force people into situations they did not elect to be in. The ugly part is that these reasons are only magnified by the fact that they now are going to take a hit on their credit, in many instances through no fault of their own. There are job losses, job transfers, divorce, and, sometimes, even death that force this situation. We all have heard too many stories about those that simply walk away for no
good reason other than making a “prudent” financial decisions, and these stories often infuriate, but there are many more others who have done all they could to keep their homes and are genuinely out of options.
There are borrowers who jumped through the hoops to try and qualify for a loan modification using the Home Affordable Modification Program (HAMP), which was designed to enable borrowers that meet eligibility requirements to avoid foreclosure by modifying loans to a level that is affordable and sustainable for the long-term.
Then there are those who have to sell and will try to qualify for the Home Affordable Foreclosure Alternative program (HAFA). This provides incentives in connection with a short sale and is used to avoid foreclosure. The trick is you need to first qualify for HAMP to proceed to HAFA, and many homeowners for various reasons do not. There may not be enough proof of “hardship” after all the evidence is reviewed. Loan mods are not always what they seem.
HAFA would streamline a short sale and allow a borrower the approval to do so prior to their home being listed. This, if able to come into play, makes the process of a short sale a bit more smooth. If a borrower continues to proceed with a short sale after they have been denied HAFA, they need to start the process with the bank all over again, often resubmitting identical documentation even if it has only been a few short weeks.
Navigating a short sale is tough. The banks can be very uncooperative, and too many agents are misinformed or lack the necessary knowledge and experience. The expectations of buyers and sellers as to how long the process will actually take are too often unrealistic. Expectations must be managed with from the get-go. Frustrating for agents are issues and obstacles that are completely out of our control. This was a hard concept for many of us, self-employed agents who are accustomed to managing and controlling the real estate transaction process, to understand. It took time to “get it”. The concept is even more frustrating for clients who have never been exposed to a short sale and do not understand why the banks’ processes seem so illogical at times.
This is the quick and dirty version of how a short sale typically goes:
A client needs to list a home due to a life-altering situation or a simple matter of affordability. They call their Realtor who then breaks the news to them that their home will not sell for what they owe on it. It is now our job to prepare the listing and market the home to obtain an offer at the highest price, and also help advise our client on their options and the best approach for the short sale. We then help our client navigate the mounds of requested documents the bank will need to see. This always involves, at a minimum, two years’ worth of tax returns, two months’ worth of all bank statements, one to two months’ worth of pay stubs, a complete list of monthly expenses, and a letter of hardship. This is just to get started.
The bank typically will not look at any of this documentation until you have submitted evidence that the home is listed and an offer from an actual buyer. Once this has all been faxed to the bank – yes, faxed, because banks have been slow to adopt modern-day conveniences like email and electronic signatures, the waiting game begins.
Once the bank has verified that they received the paperwork, typically a steaming mound of documents totally more than 50 pages, which can take a week or more, they will assign you an intermediary who you will most likely never, ever talk to. You feel grateful if are ever lucky enough to receive an email from them, but generally you get your updates solely from customer service at this point.
The intermediary could be one of many who will touch this file. This person generally is the one that sets up the BPO (broker’s price opinion), which essentially is their appraisal, and you continue to wait. The BPO can take anywhere from two weeks to a month to be completed. Once the BPO is returned and if you’re lucky, you will finally be assigned a negotiator, or at least the person who will review the file to set you up with the negotiator. Most banks will not divulge to you the BPO number. It is a guessing game, one that Realtors should “win” based on the comparable sales data we scrutinize, but remember — sometimes there is no logic involved.
At this point, your agent will (should) call the bank daily for an update to find out when they are going to be given the contact number or email address for the actual person who is working on the file (the infamous negotiator. This typically takes weeks. Eventually, the negotiator will contact the agent, at which point they will typically require more documentation — updated pay stubs and bank statements, since the ones sent in originally are clearly now outdated. And although you and your agent have been waiting for months for some sign of human life at the bank, this updated documentation will be required NOW lest your file be returned to the bottom of the stack. There is nothing more frustrating than having to explain the lunacy of the process at this point to a client. “Yes, I know Mr. Client, we have not heard squat in 45 days, but now we have, and they need it by noon or the hostages die!”
Despite the request for updated documentation, which is generally considered a positive indicator that someone is finally paying attention, the bank at this point may or may not tell you if the offer is going to be accepted. Short sale offer acceptance is always accompanied by multiple, scary disclosures, conditions and counter offers. The counter offer frequently involves price. This is when, as agents, we have to figure out where the additional funds will come from, and if it a higher price is even warranted. Many times it is not.
There are many factors that the person performing the BPO may not have taken into consideration. Does this house sit on a busy street? Are there repairs that are needed? Can you buy the house down the block with all the bells and whistles for less? Does the appraiser even live in this county? In these instances, if the buyer or seller is unwilling or able to meet the demand, the agent will typically request an appraisal review.
At this point, I put together a portfolio of sorts with the comps in the neighborhood. “Look,” I point out, “this one has granite in the kitchen, a pool in the back yard, and it is selling for less”! I dig up all the homes I can to show them they are “off” in their determined value, and if necessary put each property on a nice little map showing proximity to the subject property.
Sometimes the bank is actually happy with the purchase price but they would like a monitory contribution from the seller. Some sellers may be able to provide a contribution; others may not. Many seller contributions I have seen come directly from retirement, which often involves a penalty for withdrawal. This is not ideal, especially for those who have true hardships. The bank’s attitude is beg, borrow, or steal; they do not care, as long as they get the additional funds.
Oh, lest I forget, there could also be a second lien holder – or third. If so, see above, rinse and repeat. Second lien holders, even if they are with the same lending institution, have their own, separate process for review and approval and require their own documentation. They are also at the mercy of the first lien holder as
to the proceeds they will receive. It is highly likely the second will request more than what was offered to them by the first. Again, we find ourselves scrambling to find the additional funds, or to get the second to agree reconsider and accept the payoff to which the first lien holder has agreed. This really is a topic that could take another ten paragraphs to explain, but ultimately a second could further delay the process another month or more.
Once all these issues are worked out and negotiated, and you have been provided your 10th HUD-1 (settlement statement), you may be issued short sale approval and escrow can finally be opened.
“Hello, Mr. Buyer, are you still there”?
So now we have short sale approval and the buyer who hopefully didn’t get tired of waiting can start their investigations. If we are lucky and hold our breath, the physical inspection and termite report will come back clean enough, and the buyer will wish to proceed. Requests for repairs on a short sale can be very hard to navigate. The bank, as a rule, will not pay for any repairs. Termite work can throw a glitch into the continuation of escrow as well, but can be requested with a new HUD showing how it will affect their bottom line. Some banks will allow for Section 1 termite work (active infestation) to be paid out of their proceeds, others will not.
Finally, you are home free! This, of course, assumes that there is not an issue with the buyer’s loan.
To recap, total time, start to finish, is four to six months on average. And this is only if your original buyer has stuck around for the party.
Short sales have made things very interesting for agents. Many avoid short sales because of the amount of time and effort they involve. In some sort of twisted way, I actually like them. There is a huge sense of accomplishment in closing a short sale. The challenge is invigorating, and I know that you have helped someone through a difficult process with compassion, patience, and understanding. For the lack of control I have in dealing with bank, I have also found ways to encourage them to have my client’s interests in mind as well. This is done with tenacity and fortitude (failure is not an option), but most importantly with being persistent, respectful, and always professional.
Finally, many agents use “professional short sale negotiators” to assume the responsibility of communicating with the lenders. While there is nothing wrong with this, I do not. Rather, I believe that by relegating responsibility for and control of this critical aspect of the short sale process, I am not acting in my client’s best interests, as they have hired me to act as their fiduciary and their advocate. Sure, it would free up much of my time, but conducting my business based on quality, not quantity, is the only way I can sleep nights.