In simple terms, a short sale occurs when a property is sold for less than is currently owed on that property.
Basically, the Lender agrees to accept an amount less than what is currently owed to them.
A Short Sale transaction can take 60-180+ days from the time the Lender receives the full short sale package. Everyone involved in a short sale should be patient with this process and must understand that the Lender(s) have their own timeframe and procedures.
Although the banks state that the average time it takes to review the file, gather additional information, obtain appraisals/BPOs (Broker Price Opinions) is 45 days, realistically, since most banks are inundated with short sale requests, the turn around time has been averaging between 90-120 days to get to a negotiator and/or get Lender approval. If there is more than one loan, this timeline may get extended as the 2nd lienholder may not consider the short sale package “complete” without the approval from the 1st.
A full and complete Short-Sale Packet may include:
Seller items: (Note: ALL documents going to the bank will need the name of the borrower as well as the loan number)
- Letter of Authorization or commonly referred to as 3rd party authorization – this letter allows Listing Agents/Escrow Officers and other parties to contact the Lender on Seller’s behalf
- Letter of Hardship – this letter is written from the Seller to the bank explaining why a short sale is being requested. This letter is most effective if it is hand-written by the seller as he/she can put in his/her own words what has happened to cause the request for the short sale. It can be typed, but again, more effective if hand-written, and it MUST be signed by the seller. Examples of hardship include:
§ Loss of Employment/Income
§ Decrease in work hours
§ Change in Monthly Payment – loan adjusted
§ Medical Issues
§ Loss of Tenant if it is an investment property
§ Death of Borrower
§ Death of Spouse or family member
§ Involuntary job relocation
§ Failure of Business
§ Decline in earnings if self-employed
If you do not have a valid hardship, the bank will not approve a short sale.
The hardship letter should be written in a business format. Write your name and address on the top left of the document. If you live at a different address, you may want to reference the property address for the short sale as well as the name of the bank and loan number you are referencing.
Date the letter with the current date.
The body of the letter is where you tell your hardship story. Make it from the heart, but explain the series of events that caused your hardship. You can include an outline and focus on the most important aspects of your hardship. Every little detail does not need to be written out as you want to keep the letter to two hand-written or typed pages if possible.
Close the letter by signing the letter and printing your name. Each person listed on the loan should be included on the letter. Both parties sign and print both names on the letter.
- Proof on Income/Assets – current 2 months paycheck stubs or profit and loss statement if self-employed
- 2 Years of Tax Returns, including W-2s – must be complete tax return if Schedule C is a part of the tax return
- Copies of Bank Statements – past 3 months
- Financial Worksheet – a worksheet that shows the bank your income/assets, monthly expenses, and all other financial obligations. This provides the bank with a snapshot of your financial situation.
- Copy of Listing Agreement
- Copy of Fully Executed Purchase Agreement
- Comparative Market Analysis
- Estimated HUD-1 settlement statement (provided by escrow/title company)
- Preliminary Title Report (provided by escrow/title company) – this will show the lender if there are any other liens on the property.
- Letter of Pre-Approval from lender
- Proof of Funds if the offer is a cash offer – Proof of Funds would be a copy of a recent bank statement or other document proving that cash funds are available for the purchase
Specifics of a Short Sale Transaction:
- The Seller(s) will receive “NO CASH” from the transaction.
- The Seller(s) have “NO ADDITIONAL CASH” and have provided proof of assets as requested by Lender(s).
- Property is being conveyed in “AS IS/WHERE IS” condition. There will be no warranties expressed or implied as to the condition of the property.
- Buyer(s) are responsible for payment of any and all inspections, appraisals, and/or certifications.
- Seller(s) should keep all utilities turned on while the property is being processed for a short sale. These must be kept on for showings and for buyer inspections and final walk-thru. If seller decides to disconnect any or all of these utilities for any extended period of time, there is risk of causing damage to the pipes or other fixtures in the property.
- Seller may choose to complete repair items discovered during the inspection process, however NO compensation to the Buyer for any repairs will be allowed by the bank in a short sale transaction.
- The Lender(s) will determine what, if any, buyer costs will be paid for by the Seller, up to and including Buyer’s Appraisal, Home Warranty, or other Buyer’s Closing Costs. Most lien holders have allowed up to 3% in buyer closing costs.
- Properties located in an HOA community are subject to compliance with State Mandated requirements as per NRS 116.4109. Seller agrees to provide any and all information to comply with these requirements. However, if Seller does not have means of paying for the HOA documents, other participants in the transaction may pay for the HOA Resale Package in order to complete the transaction.
- It is in the best interest of the seller and the short sale transaction to keep HOA payments current. Delinquent HOA fees can turn into collections and liens on the property. These liens WILL hold up the short sale closings and lien holders may choose not pay them.
- The actual selling price of the transaction will be determined by the Lender based on a net proceeds amount that the Lender is willing to accept as “payment in full” for the Subject Property.
- The Closing Date provided by the Lender is FIRM. Penalties may be assessed by the Buyer if the transaction does not close by the Closing Date. Time is of the Essence, especially if Closing Date is close to the Foreclosure Sale date.
- Buyer(s) are responsible for re-keying property, acquiring new remotes for garage and/or Association Gates, and mailbox keys once transaction is Closed.
Since the Lender(s) are considering the acceptance of an amount less than what is currently owed to them, the Seller(s) may have tax consequences as the Lender(s) are in essence “forgiving” the balance of the debt. This may be seen as a “Capital Gain” and may be a taxable event. It is advised that the Seller(s) discuss this matter with their attorney or accountant.