Remember, when we bought our homes, we agreed to pay the amount of the loan plus interest. When home values were appreciating, no one expected the lender to take part of our equity. Now that prices are declining, suddenly everyone wants the lender to eat the loss.
The lender will sometimes eat the loss in a short sale situation if the seller can document a hardship. However, they may still demand that the seller sign an unsecured promissory note for the shortage - despite the financial hardship.
Lenders are allowing some short sales because they make financial sense to their investors, rather than going through the foreclosure process. But for a seller with the means, they will most certainly want to at the least share in the loss with the seller.
Other options are for the seller to pay the shortage themselves at closing (this used to be the common method of selling a home with no equity), or they may want to consider renting out the home, or they may want to consider staying in the home. All three of these options will also save the seller's credit score.
The seller gets an offer and presents it to the bank.
The seller supplies the bank with all the required documentation proving they have no assets/cash/job to make the payments or payoff the loan.
The bank hires an Agent or Appraiser to value the property.
If the bank feels they will net more from the offer on the table, vs. foreclosure, they will accept the payoff.
As of today, the Short sale process takes about 3-4 months.
Worst case, and a common case, is after 3-4 months the bank denies the offer, and the buyer starts looking for another home. The good news is at this point the bank will let the seller know what value they expect (based on the BPO), and the seller can get the next offer approved quickly.
That's a rather general question to a very detailed subject.
A short sale, as you know, is when an owner needs to sell a home, but owes more on the home than it's current value. Thus, they will be "short" monies at the closing table, and are not in a position to bring the additional funds to closing.
If the sellers qualify for a short sale, due to a financial hardship, the lender may allow them to sell and either write off the balance, or ask the sellers to sign an unsecured note for the difference.
As a listing agent, it is recommended to speak with their lender or lenders before listing the property to determine if they will consider a short sale and what their requirements are. Typically, they will require a complete financial package, completed by the sellers, including a financial statement, copies of their last 2 years federal tax returns, copies of the last 3 months of bank statements and pay stubs, and a hardship letter detailing their situation.
The complete package (never send in an incomplete package) will typically be submitted with an offer from a buyer, including an estimated HUD1 and the buyer's pre-approval letter. Offers should be accepted by the sellers "subject to lender approval."
Most lenders take from 30-60 days to either approve or decline the offer, and will give you 30 days to close from the date of their approval. All short sales are sold in as-is condition, and no monies may go to the sellers. If the scheduled foreclosure date is less than 30 days away, you very well may be given less than 30 days to close on the house.
As a buyer's agent, you will want to ensure not only that the listing agent is familiar with short sales and understands how they work, but that they also already have the completed financial package in their possession before you spend any time writing up an offer. You will want to prepare your buyers that they may need to wait 30-60 days or longer before they receive an answer from the lender. (I've had an answer in less than a week once, typically in 30-60 days, and in one case we waited 6 months for the lender to deny the sale). If the buyers need to be in a new home within a certain time period, then purchasing a short sale may not be for them.
It takes a lot of patience on the buyers' part to get through a short sale.
On the listing agent's part, it requires a lot of determination, the ability to prepare all of the paperwork completely and accurately, as well as the ability to remain in contact with the lender on an ongoing basis until you receive an answer.
I hope this helps!
Are they stuck eating the loss?
Please call Gary Seymour (Seymour Law Firm) He does many seminars and also has an ebook that explains. Check out http://www.theseymourlawfirm.com. He has spoken at my previous office and for the Valley Board of Realtors as well. He is an excellent contact for short sales. 203-924-6700. Hope this helps.
William Raveis Southport