Short Sale Procedures
Listed below is the paperwork required to successfully negotiate a short sale and will be followed by a brief explanation of all the items:
- Authorization to Negotiate
- Signed Sales Contract
- Broker Price Opinions
- Preliminary HUD-1
- Hardship Letter
- 2 months of bank statements (W2, 1099, tax return, etc.)
- Income and Expenses /Budget Sheet (this is used to determine if your will qualify)
- A list of your Assets and Liabilities
- Photographs of the home (interior and exterior)
- Repair Estimates
- Newest Comps
- Local Headlines
- Other documents related to current market value (lis pendens listings, sale listings, etc.)
The very first step in creating a short sale package takes place when I meet with the homeowner(s). From this information we will work to determine if you are a good candidate for a short sale (can't afford your current loan).
As your Short Sale Seller's Agent, I will be speaking to the lending institution on your behalf. I will your need authorization. An “Authorization to Negotiate” form is a very simple document that states you, as the agent, will be negotiating on behalf of the homeowners. This form should contain the borrower’s name, your Social Security number, date of birth and other relevant information including the address of the home facing foreclosure. Once complete, this document will be faxed to the bank so that you may now negotiate with your agent instead of you. With written permission to speak with the bank, the agent can now start to collect pertinent documentation from the homeowner. The banks have a standard set of requirements for paperwork they need in order to complete a short sale. This includes a sales contract; this means that by the time you send in this offer package to the bank, you have a buyer in place for the property facing foreclosure. It is this situation that confuses some agents and homeowners. Simply stated, in order to complete a short sale, we must show the bank that the amount of money we want to give them (which is obviously less than the amount owed) for this short sale is the true market value for the home. The best way to accomplish this is to have a buyer who is willing to pay a certain price and who has signed a contract with a deposit. You’ll want to be sure the contract clearly states “subject to third party approval,” which means your lender’s approval of the sale.
A creative way to show the bank that this is fair market value is to first list the house at what is owed to the bank. As an agent, you want to show the lender that you tried to sell the house and give them all the money owed to them, but the listing price doesn’t represent market value anymore. In most cases thi sis impractical becasue you don't have time before the foreclosure date.
We will document the number of people who were showed the home and the marketing done on the property. Once this is tried and failed, reduce the price of the home to a more realistic number that will attract buyers. Additionally, we will have a broker’s open house. We will prepare a BPO’s (broker opinion sheets) from as many brokers as possible. This will help in showing the bank what true market value is in the homeowner’s neighborhood. The opinion sheets will present tteh brokers opinion of the market conditions. I also like to provide market condition reoprts like the Comford Report and ASU's other Market Studies. Once we find a buyer for the home, the price is on the contract (this number should be similar to the broker opinion sheets). You are now ready for the next part of your short sale package. The bank will require a HUD-1, or in this case, a preliminary HUD-1 since we do not know all the final numbers that will appear on the HUD-1. Keep in mind the seller must net zero once this transaction is complete. The preliminary HUD-1 should state the sales price minus all the buyer’s expenses which includes commission (yes, your commission), closing costs, points, attorney fees, etc. The number left after all the fees are subtracted is essentially the amount of money that is being given back to the bank at the time of the closing.
The next step is to acquire a hardship letter from the homeowner. After all, there was a reason they fell into financial troubles. This letter should be very explanatory, honest and detailed. However, the reasoning must be an occurrence that was involuntary; such situations include a loss of a job or family member, illness or other unforeseen circumstances. Laziness, irresponsibility or "I am upside down", or"the value of my home fell" are not excuses for defaulting on a loan.
The lender will also require two months of bank statements to go along with your shorts ale package. This includes W2s, 1099s and tax returns. As the representative agent, I have to show the lender that the homeowner is unable to pay the mortgage. There should be no savings accounts, and if there is money in a savings account, we have to supply a budget sheet showing its use. This is the personal budget of the homeowner. The Budget sheet lists all the personal finances including what it costs for gas, car insurance, dry cleaning, food, and any other expenses that they incur throughout the month.
Be aware that one of the first things the bank will do once you submit your short sale package is to order their own drive-by BPO (Broker Price Opinion). Some lenders insist on access to the property to prepare a BPO. To justify your sales price, we must prove that the home is worth what it is being sold for and not a penny more. I will Take photos of all the rooms, any damage the house has, repairs that need to be done, anything that would validate your sales price. Include photos of the outside of the property and different views from its exterior. Each photo should be labeled with simple statements like, “crack in wall” or “broken window.” Another great item to include is a list of repair estimates. If you can get several estimates, that would be ideal.
The next item to include that will challenge the results of the lender’s BPO are recent comparable sales. Be sure to use current values; any homes that closed that day or that week. Include only the most recent comps in neighborhoods in very close proximity. Nothing will prove to the lender what the true market value is better than the most recent available comps. To add to the value of your short sale package even more, begin to collect local headlines. Since the bank may be in another state or region of the country, this will help show them what is taking place in your local market, today. If you’re currently subscribed to a lispendens service, you can show the bank the number of defaulted properties in your neighborhood. Should you want to enhance your package even further, you can consider including some competing properties that are listed for sale in your neighborhood. There are many ways to prove to the lending institution that the sales price is in fact what the true market value is at that current time and place, and that their BPO could be incorrect if it returns a higher value.
All though it may seem like a lot of paperwork goes into the short sale package, what you must understand is that the more documentation we send the bank, the more they’re going to realize that you’ve put together a full and complete package. This package is so important that the outcome of your short sale rides on it. Your short sale package should be submitted to the bank by overnight envelope, fax and email.
Once we collected all of these items, and have submitted them to the bank by the three methods mentioned above, it’s a waiting game. And, it cannot be stressed enough, that the more complete our package is, the better the outcome will be. While waiting for the bank’s approval, there are many ways to keep the process moving along.
It is important to closely watch the deal, as many buyers get anxious and try to break the contract and find a home they can purchase right away with more certainty.
During this waiting time the home must be maintained in the same condition and not allowed to fall in to disrepair of any sort or the buyer will walk.
