Understanding how short sales work in real estate
By Jerry Pinkas
Carolina Forest Chronicle
A short sale is a sale of real estate in which the sale proceeds fall short of the balance owned on the property’s loan. It occurs when a borrower cannot pay the mortgage loan for reasons such as unemployment, reduced income, divorce, medical emergency, job transfer out of town, bankruptcy, or death in the family. The lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process because it allows them to avoid foreclosure.
It is very important for sellers and buyers to understand what a short sale is and the process it takes. Because many buyers do not understand the short sale process, they become impatient. Actually, the buyers who cancel the transaction prior to short sale approval are the biggest problem facing short sale specialists.
In simpler words, a short sale is a win-win solution for the current home owner, the lender, and also the buyers. The bank/lender gets the highest price for a quick sale at the current market price. The homeowner gets his credit restored and gets relief from possible future legal actions like a foreclosure. In a short sale, the homeowners get complete relief from all of their mortgage debt. For a buyer, a short sale is also a win-win situation because he can own a great property for a fantastic price.
There are procedures the homeowners need to go through with the lender. The homeowner needs to prepare a financial package for submission the short sale bank. Each bank has its own guidelines, but the basic procedures are similar. The short sale package will consist of a letter of authorization, which lets the agent speak to the lender, completed financial statement, seller’s hardship statement, two years of tax returns and W-2’s, recent payroll stubs, last two months of bank statements, HUD-1 or preliminary net sheet, and comparative market analysis or list of recent comparable sales. This will let the lender understand that the seller cannot continue paying for the property, not that he just doesn’t want to.
The typical short sale process at the bank may go like this: bank acknowledges receipt of the file, a negotiator is assigned, a BPO (broker price opinion) is ordered, the file is sent for review, the bank may want an Arm’s-Length Affidavit signed, then the bank issues a short sale approval letter.
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