While many short sales are different, there are three basic stages to each short sale. They are the Document Collection Phase, the Negotiation Phase, and the Closing Phase.
Document Collection Phase.
In this stage, the lender or servicer evaluates whether to consider a borrower for a short sale. The lender requests a litany of documents, which typically include the last two federal tax returns, the last two months’ bank statements, the last two pay stubs, a financial worksheet detailing monthly income and expenses, a copy of the listing contract showing that the property is for sale, a preliminary HUD-1 Settlement Statement showing the projected amount of money the lender will receive, and a real estate contract with a buyer.
This is often the longest stage of a short sale. If the borrower does not submit documents in a timely fashion, then the lender will want all new documents. For example, the lender wants the last two pay stubs. If the borrower submits the pay stubs from February, but waits until April to submit their most recent tax return, then the lender will expect to see the April pay stubs even though the February pay stubs were submitted. Some borrowers have expressed consternation when the lender repeatedly asks for documents that were submitted earlier. Our advice is to keep giving the lender the documents they request. Remember that the lender will not advance the file out of the Document Collection Phase until they are satisfied that they have a complete, up-to-date package.
In this stage, the lender assigns a negotiator. The lender’s negotiator may ask for additional documents from the borrower or their representative, who could be a real estate agent, a third party short sale negotiator, or an attorney. If there is a mortgage insurance policy in place, the bank negotiator will communicate with the mortgage insurer to see how much the insurer will pay the lender and if there are any restrictions on how much of a loss can be incurred. The lender’s negotiator will liaison with the borrower and their representative. The bank negotiator will likely order an appraisal or Broker’s Price Opinion (BPO) to ascertain the current value of the property.
If the bank’s requirements have been met, the negotiator will send the short sale package to the decision-maker, who is referred to as “the investor.” The investor is a person with approval authority working for the true lender of the money. The investor may take days or even a few weeks to make a decision. That decision will be either be a short sale approval, a counteroffer, or a rejection. The decision is relayed to the bank negotiator, who then informs the seller or their representative.
The short sale approval may include terms or conditions that the seller cannot accept. For example, the buyer might state in the real estate contract that they need a $10,000 credit from the seller for buyer closing costs. The lender may approve the sale price but only allow $3,000 in seller assist for the buyer. If that is the case, then the buyer has to determine if they wish to buy the property and come out of pocket with $7,000 more than they had hoped. It is plausible that a short sale approval could include conditions that the seller or buyer cannot accept.
If there is a counteroffer, the lender will impose a deadline for a response. In some cases, the deadline may be less than 24 hours. In many cases, the deadline might be two or three days away. In some cases, the lender will dictate that the counteroffer is a take-it-or-leave-it amount. In other cases, the lender will be open to a counteroffer from the buyer or seller. In most short sale counteroffers from the lender, the bank calls for a higher sale price. It is important for the seller and buyer to respond to the lender within their time frame, or the bank could close the file.
Once the seller is satisfied with the terms of the short sale approval letter, the short sale advances to the Closing Phase.
The final stage of the short sale is usually the shortest one. The buyer and seller must make the necessary arrangements for the sale of the property. They must comply with the terms and conditions of the short sale approval letter. If the lender states that the settlement must happen within 30 days, then that is a strict rule. A buyer should not be lackadaisical and believe that they can simply request an extension for more time.
The title agent or attorney must ensure that the closing costs and fees on the final HUD-1 Settlement Statement match the approved settlement expenses in the short sale approval letter. The lender only approves certain closing costs, and if there is a discrepancy the lender can unwind the entire sale. We have seen a couple of instances where the lender wired the money back to the title agent because the final HUD-1 Settlement Statement had unapproved closing costs.
Since the lender may have strict rules on which closing costs are approved, in numerous short sales there are still expenses that must be paid at settlement but will not be allowed to be paid out of the proceeds of the sale. For example, assume that a house is located in a development where the Home Owner’s Association (HOA) has a transfer fee of $750 that traditionally is paid by the seller of a property. The lender might not approve payment of the $750 fee. However, the fee still has to be paid at settlement. Therefore, the buyer might expect the seller to pay for all or at least some of it. If the seller does not have sufficient funds to pay that amount, then someone else will have to contribute. That could be the buyer, and it could include contributions from the real estate agents, attorneys, and title agent.
In the below example, the seller’s mortgage lender approves the sale price of $245,000, the 6% agent commission, the 1% transfer tax, $4,550 in closing costs, and a minimum net proceeds of $223,300. However, just three days before the settlement the title agency discovers that the HOA requires a transfer fee of $750.00. While the parties hope that the lender will generously absorb the additional $750 in closing costs, the lender adamantly refuses to permit some of their proceeds to be used to pay the HOA fee. Therefore, the parties look to the seller to pay the $750, as that is a fee typically paid by the seller in a traditional, non-distressed transaction.
Below are the numbers:
$ 245,000 Sale price
- $ 14,700 6% real estate agent commission
- $ 2,450 1% realty transfer tax (each state is different)
- $ 4,550 Approved closing costs and pro-rated property taxes
- $ 750 HOA transfer fee not approved by lender
- $ 223,300 Mortgage payoff, as the lender takes a $56,700 loss
$ (750) Amount that the seller or other parties must pay
If the seller has the $750 and is willing to pay that amount at settlement, then no one else in the transaction has to contribute money. However, in some cases the seller is so short on money that they state that they are unable to pay anything. Then a last-minute negotiation occurs between the buyer, listing agent, and buyer’s agent. In some cases, the buyer may pay some or all of the fee as a buyer’s assist to the seller’s closing costs. Or perhaps the agents will each take a little less in commission.
It is common in short sales for the final numbers to be slightly off from the approved costs mentioned in the short sale approval letter from the lender, which was probably issued a few weeks prior to the settlement. We encourage the seller to save up at least $1,000 just to plan for last-minute expenses. Also, the buyer, agents, and any other participants in the short sale should be open to the possibility that there might be some last-minute contributions required to make the sale happen.