Short Sale Explained
What Is A Short Sale?
“A short sale occurs when the lender agrees to take less than the full amount required to pay off existing loans in full because the outstanding loan balance is greater than the proceeds realized from the sale of the property.”
When a loan is viewed as a potential short sale by the lender, the once friendly lender is now a debt collector, looking out solely for their best interests.
If you are considering a short sale in California, you need to know all the options and the potential long term consequences of each option. That is why working with an agent, like myself, that is well versed in short sales as well as the addition of a short sale negotiator with a near to perfect success rate.
The short-sale negotiation process consists of 8 main steps:
- Build the entire short-sale package & make sure the file is complete before sending to lender
- Ensure file has been received by lender & continue sending until it has been received
- Follow-up with lender until file has been assigned to a rep
- Follow-up with rep until BPO is ordered
- Follow-up once BPO has come back & negotiate the file (with all lien-holders)
- Inform Seller of all requests for additional paperwork
- Solve complicated problems and issues along the way
- Follow-up until lender feedback has become final and short-sale approval letters have been received
Having a successful short sale negotiator in place can literally make or break a deal. They should be performing a detailed analysis of the homeowner’s financial situation to ascertain if they are likely to qualify for a short-sale transaction.
After it’s been determined that the seller is a strong applicant for a short-sale, the negotiator will go about building the formal short-sale proof package. this presentation of financials, real estate market data, and other factors, the short sale negotiator is effectively “building a case” for the transaction. It is only worth it to a lender to perform a short sale if their net is higher. If not, it is in the bank’s best interest to foreclose.
Next, a case is built that will demonstrate the lender’s net will be higher and showing the short-sale is in their best interest in order to recover a maximum net. On average, it takes between 5.5 and 7.5 hours of time to build our package. As you know, a critical error that many make is: they only send what the lender asks for and nothing more.
The lender only requests a very basic set of financial documents. To the homeowner or the untrained professional mind, this list of documents appears to be complete, but is actually not complete at all! Much more information is needed for the loss mitigation rep to effectively make a decision.
On the typical file, the lender rep is forced to plunder through an unorganized set of documents and piece together the analysis of the file on their own. With insanely high file volume these reps do not have the time to organize and piece together the analysis on their own.
If you’re smart, you have a short sale negotiator in place that will actually spoon-feed the analysis to the lender in small pieces they can quickly understand. The reason it is so worthwhile is because it allows the rep to really understand the file faster and in a much more efficient manner.This results in the reps paying attention to the negotiators requests more quickly.
A major complaint shared by those who submit their own files is getting “ignored” by the lender reps. One of the reasons for this is due to their confusion on what to send to the lender. There are too many files to work and not enough time to work them due to the foreclosure process which is fast in California. As such, the lender reps must be very selective and choose which files to work. The power of the short sale package makes it very easy to get their attention and get them to work your file over another.
After the entire package has been built and were able to gain the lenders attention, next the follow-up process begins. Many times the package must be sent 4 to 5 times to finally get the package logged into the system. Getting the package logged is step one. Step two is getting the package assigned to an actual work-out negotiator. Until the file is assigned to an actual negotiator it is not being actively worked. It is just sort-of sitting in limbo land until it does get assigned. the negotiators job is to follow up until the file has been assigned to an individual negotiator.
Once the file is assigned, the short sale negotiator has an opening discussion with the rep at which time the Broker Price Opinion (appraisal) is ordered. After the BPO has been ordered the negotiator will receive a call from the agent performing the BPO (typically within 48 hours). If they do not receive a call from the agent, they follow-up with the lender again to have them re-order the BPO.
After the BPO has been performed it goes from the agent’s hands into the lender’s office. Then it gets logged in their system and finally makes its way to the rep’s desk. It takes between 5 to 15 days for this to occur.
Once the rep can view the BPO, they are able to review the file and start making some decisions. The review process can take several weeks. The volume that the lenders are dealing with slows down the process. Some reps can have up to 400 files on his desk. If this rep can get 20 files reviewed per day (in additional to all his other tasks) it will take 20 days for the file to get reviewed.
Most reps are required to work their files in order…from oldest to newest. This creates a cue where there is a waiting line until the file has reached its turn in the review order. The negotiator will continue to follow-up with the rep to ensure that the file is reviewed as quickly as possible.
After their review comes the negotiation portion of the process. During which the selling side determines what type of offer the lender will accept, and what type they will not accept. As you can imagine, sometimes the offer that’s on the table is not acceptable to the lender. Sometimes a counter-offer will be issued to the buyer, and other times a new BPO (appraisal) needs to be completed (if the initial value was inaccurate).
After an acceptable value has been reached, the rep will submit the full file for management review. Very seldom does the rep have the authority to make decisions on his/her own. The file must be reviewed by management to gain final approval. This portion of the process takes 1 – 2 weeks to complete.
Many loans are not “bank owed”. They are owned by a different “investor”. The investor owns the paper and is the ultimate decision maker on the file. If the file is investor owned (instead of bank owned) many times the file must now be submitted for investor approval. Who the investor is (and what their file volume is) determines the length of this portion of the process. Investor review typically takes between 1 to 5 weeks to complete.
As you can tell, the short-sale process is a very lengthy one, and contains many different pieces requiring a lot of attention for someone to manage this process properly, and ensure the file continues moving along successfully.
Hopefully this overview of the process has helped you understand the many different components that are contained in the approval of a short-sale. A common question that our buyers ask is: long will it take to receive feedback on my offer?
From start to finish it can easily take 60 days to receive feedback on an offer (if not longer). This why it’s so important for the buyer to pick one home that he likes and stick with it. There are a lot of folks running around and putting in low ball offers on multiple properties. The lender only wants to work with the highest and best offer. All of the other offers go in the trash, so it’s completely useless to have 5 low-ball offers active because not a one will be accepted.
The lender works with one offer; only the highest and best. This is why the best course of action is for the buyer to make a strong offer on one property and stick with it.
Some buyers need to be in a home in 30 days, so obviously this buyer should not bid on a short-sale. This type of buyer should bid on a home owned by an individual seller where bank cooperation isn’t needed. If a buyer can wait 60-90 days to get into the home, then he/she should be bidding on a short-sale.
Once the file has received final approval from the investor the loan is fully approved for a short-sale. Keep in mind that all liens on a property must be negotiated (not just the 1st mortgage). Most properties have more than 1 lien. The short sale negotiator will negotiate every lien no matter how many there are. 2nd mortgages are very common too, including less common liens such as judgments, state tax liens and IRS liens. After the negotiation of all liens has been complete the file has been fully approved.
At this point the buyer can now move forward with his/her inspections and appraisal, and the Real Estate transaction proceeds as normal just like any other real estate transaction.