Recently it was reported that about 50% of all home loans in Arizona are currently at or near negative-equity. This means that the balance owed on about half of all home loans in Arizona is at most only 5% greater than the home’s value. More significant though, most of these loans are severely underwater, meaning that the balance owed on the loan is much greater than the value of the home.
In this situation, homeowners whose loans are underwater have only a couple of real options: (1) stay in the home and continue paying the mortgage, (2) walk away and allow the bank to foreclose, or (3) pursue a short sale of the property before a foreclosure occurs.
I consult with a lot of homeowners who are facing one of the options above and want advice on what to do, if anything. Many of these people , for whatever reason, cannot stay in the home. Typically, my recommendation to homeowners who are faced with the prospect of not being able to stay in their homes is to pursue a short sale.
WHAT IS A SHORT SALE?
Stated simply, a short sale is when you sell your home to a third-party and the net proceeds from the sale are less than what is owed to the bank. Because the proceeds from the sale to pay off the loan (or loans) is less than what is actually owed to the bank, the bank or the note holder on your home must agree to and approve the short sale.
(For purposes of short sales, it is important to make the distinction between the loan servicer and the note holder. The loan servicer is the bank or company to whom you make your monthly mortgage payment. The note holder is generally an entity different form the loan servicer. The note holder owns your loan and is the final recipient of your monthly mortgage payments. In short sale, your real estate broker or agent is typically dealing with the loan servicer, but it is the note holder who makes the decision on whether or not to approve the short sale.)
HOW DOES A SHORT SALE WORK?
In order to initiate a short sale, you do not have to first contact the loan servicer. If you are a good candidate to short sale your home, the first step in the short sale process is to simply list the property for sale with a licensed real estate broker or salesperson.
Once the property is listed and priced aggressively, your real estate broker or agent should start to receive inquires and offers for the property. From the seller’s perspective, it does not really matter what the offer price is as long as it is an amount you and your broker or agent believe the lender will accept as a short sales price. As the short seller, you will not net any proceeds from the sale, thus it really should make no difference what the contract price is as long as the it is a price the note holder will accept as a short payoff.
Once a purchase contract has been entered between the seller and the buyer, the real estate broker or agent will need to get documents from you, the seller, to submit to the loan servicer as part of the short sale packet. Typically, the short sale packet submitted to the loan servicer consists of the following documents:
- 3rd party authorization
- Financial statement(s) (generally on forms provided by the loan servicer)
- Hardship letter
- Most recent bank statements for all checking, savings, investment, retirement accounts, etc.
- Most recent pay stubs if you are employed or profit and loss statement if you are self-employed
- Most recent tax return including all schedules
- Purchase contract
- Listing agreement
- Preliminary HUD-1 settlement statement
- All marketing materials and the MLS listing for the property
Once these documents have been gathered and organized, your broker or agent will submit them to the loan servicer for their review.
Once the loan servicer has received the short sale packet, the loan servicer will assign an underwriter or negotiator to oversee the file and do their due diligence. Typically, the underwriter or negotiator will solicit additional information or documents and it is not uncommon for the underwriter or negotiator to ask for items that have already been provided. (Negotiators can be terribly nit-picky so it is important that your broker or agent is extremely organized. The less work the negotiator has to be, the better and the easier it will be to get the short sale approved.)
During the negotiator’s review, they will typically seek what is called a broker’s price opinion (“BPO”). This is where the negotiator requests from an independent real estate broker or another real estate professional his or her opinion of the fair market value of your home to be short sold. For short sales of more expensive homes, oftentimes the negotiator will order a full appraisal.
Once the BPO (or appraisal) and all required documents have been received, the negotiator will work with the note holder and any private mortgage insurer to either approve, disapprove, or counter the short sale purchase contract.
If the negotiator approves the deal, he or she will send to your broker or agent a short sale approval letter which will outline the terms and conditions under which the home can be sold. If the purchase contract is for a decent price that is close to the home’s fair market value, the short sale terms and conditions will likely allow the buyer to close on the home within 30 days form the date the short sale approval letter is received.
The short sale process outlined above is a basic sketch. In addition to the steps outlined above, there are always other hurdles to be cleared and hoops to jump through.
If you think you might want to short sale your home, we can go through all aspects of the process and analyze your specific situation to determine if a short sale is appropriate for you. We have negotiated a number of short sales and have been extremely successful in getting deals to close which deals have greatly benefited our clients.
Give our office a call to set up a consultation either in person or over the telephone.