Anatomy of a Short Sale

Often, in today's real estate market, many homeowners who are in foreclosure or a position of needing to sell their property find out that they actually owe more to their lender(s) than what they can actually sell the home for. In this scenario, one of the more popular solutions is to conduct a short-sale. A short-sale is simply negotiating with the home owner's current lender(s) to accept an amount that is less than they are owed.

A properly structured short-sale transaction can be an attractive alternative and beneficial for all parties to the transaction. The homeowner is able to sell the property, get out from under the stress and strain of a foreclosure, and move on with their lives. The person buying the property, whether an investor or home buyer, is able to purchase the property, usually at a substantial discount, and the bank that is taking the short is able to avoid the high costs of the foreclosure and the risk of the property reverting back to them at auction, which results in additional costs to secure and upkeep the property.

It is said that every foreclosure property that ends up as an REO (Real Estate Owned by the bank) costs the lender approximately $50,000.

To many, that may sound simple enough. However, negotiating a successful short-sale is a complicated and time-consuming endeavor. While all banks and lenders require typically the same documentation on every short-sale package, each lender has their own specific requirements or procedures. When negotiating with lenders, it is critical to learn those procedures and follow them to the "T". Before an investor can even contact the bank to start the process, the investor must have certain required documentation from the seller of the property.

The first and most important document is the signed Letter of Authorization (LOA) from the seller authorizing their lender to discuss their loan with the investor or negotiator. Once in hand, the LOA must be faxed to the bank (sometimes several times) before the lender will discuss any aspect of their customer's loan.

In addition to a signed letter of authorization, the investor needs to compile many other documents to submit to the lender. Every bank mitigator will require the following:

A fully executed purchase and sale agreement contingent upon the lenders approval of the short sale. Note: Lenders want as clean an offer as possible. Therefore, do not add a lot of contingencies or other subject-to's.
An estimated HUD-1 settlement statement showing an accurate statement of costs and a net-payoff to the lender.
A hardship letter from the seller accurately describing the reasons why they are in foreclosure and why they are not able to make the mortgage payment in the future.
A financial declaration spreadsheet from the seller itemizing their monthly income and expenses.
3-6 months of seller bank statements.
Two years of seller's tax returns.
A property condition and repair estimate. (It is best to have a licensed contractor provide this estimate)

It is important to submit all the documents at one time. Do not piecemeal the paperwork to the mitigator. First, it can easily be misplaced by the lender and never find its way into the file and secondly, you need to make the mitigator's job as easy as possible. If he or she only has a partial package, he cannot go to management with your offer and it will just sit in purgatory.

Once the lender has a complete package submitted, they will request a Broker's Price Opinion (BPO) to be completed. It is critical that the investor be the point of contact with the person conducting the BPO. The investor should be prepared to give the lender's representative comps of similar homes in the area that support the value the investor is hoping to achieve as well as point out all of the defects or repairs that need to be done and give them copies of any repair estimates that you have.

By following the above steps, you should be able to navigate the realm of short sales successfully. While no one will have a 100% acceptance rate, you will certainly do much better than your competition, who are going through the process blind.

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