Short Sales 101
Put simply, a short sale occurs when the total amount owed on a property is greater than the amount the lender accepts for purchase. Short sales can only occur when the owner is delinquent in their mortgage. Prior to receiving a purchase and sale agreement, the seller cannot ‘apply for or ask permission’ of the lender agree to a short sale. The seller has to secure a buyer and have a written Purchase Contract in place.
Negotiating with the bank is an art, and to get the deal approved, you have to know how lenders think and how they make decisions. I recommend the buyer and seller use an attorney who has experience in working with lenders for short sales.
What the buyer and seller need to know:
1. The lawyer for the seller cannot submit the purchase agreement to the lender until contingencies are removed. The buyer may want to inspect the property before writing an offer. Unlike a traditional sale wherein an inspector detects issues greater than $1500 per item and the buyer and seller enter negotiation for a different sales price, there are no further negotiations in a short sale. Once the file is submitted to the lender, it cannot be altered. Again, the buyer has two choices, inspect the property before the offer is made, or inspect after—knowing that this will greatly delay the lawyer from submitting the deal to the short-sale lender.
2. The buyer will have to formally apply for the mortgage and have it approved well before the short-sale lender agrees to the deal—because the lawyer for the seller cannot send the short sale package to the bank without all contingencies removed.
3. Once the contingencies are removed, the lawyer for the seller will submit the deal to the lender.
Lenders are not prepared to handle the number of short sales files coming into their offices. The process can take 2-3 weeks or even a few months.
4. The buyer therefore needs to be in a position to wait for the banks reply.
5. Once the bank approves the deal, the bank will expect the buyer to close FAST.
(Yes, I know this is not fair, considering how long the lender took to make the decision), but this is a fact. Once the lender accepts, they are saying yes, not only to the deal, but to getting the loan off their books quickly.
6. Banks don’t want to foreclose. If you give them an offer that makes sense they are going to want to work with you. Foreclosing on properties makes them look bad.
7. Many short sale deals fall through because the buyer does not understand the process; I hope this will clear up many questions about why the offer has not been submitted to the bank as soon as the seller accepts the deal; why banks take so long to approve the deal; and why buyers need to pay for the inspections and mortgage approval before the deal is approved by the sellers lender.
If you have additional questions, I suggest you consult your attorney.
