Short Sale Frequently Asked Questions by David Monroe

Short Sale Frequently Asked Questions

Everything You Wanted To Know About Short Sales... And Then Some.

Short Sale and Foreclosure Alternatives

I would prefer to stay in my home if possible. Are there other options available to me?: There are other options available to help you keep your home. Before attempting a short sale, you should always review all of the options available to you. You can get the free special report, “8 Ways to Avoid or Stop Foreclosure”, for details on the different options available.
When should I consider a loan modification instead of a short sale?: If you would like to stay in your home, you have stable income, and you could afford the mortgage payments if you had a lower interest rate, you may want to consider a loan modification first. The bank will typically require proof of your ability to make the lower payments, and if they approve, they’ll most likely make the approval contingent on a trial period (typically 90 days or more). In other words, they’ll allow you to make three payments at the lower rate, and if you make those payments on time, they’ll usually finalize the loan modification at the lower rate. You can negotiate a loan modification yourself, but sometimes a professional (such as an attorney) can produce more desirable results.
I’ve been trying for months to do a loan modification, but the bank keeps losing my paperwork and giving me the runaround. Is the same thing going to happen with a short sale?: This problem is quite common. Banks are overwhelmed with loan modification requests and are often disorganized. The same problem can occur with a short sale, which is why using a professional to handle your short sale is very important. A professional who understands the internal processes of the bank can prevent some of these problems from occurring.
What is a Deed in Lieu of Foreclosure, and is that something worth considering?: A deed in lieu of foreclosure is an instrument in which the borrower voluntarily transfers title of the property back to the lender to satisfy a loan that is in default and avoid foreclosure. This is not a commonly used option to avoid foreclosure, and it can have certain advantages or disadvantages for both the borrower and lender.
See our blog post, Deed In Lieu Of Foreclosure – Is It A Viable Alternative?, for more complete explanation of this option.

Short Sale Basics

Why would the bank accept a discounted payoff on my mortgage?

If you can no longer afford to stay in your home, the bank can either foreclose or accept a discounted payoff of the mortgage. The bank will usually lose more money by foreclosing and selling the property later as a bank-owned property than they will by accepting a discounted payoff.

My house is worth much less than my mortgage balance. Why would the bank agree to take such a big loss?

The bank will take a big loss regardless of whether they allow a short sale or choose to foreclose. The bank’s job in this situation is to mitigate their losses, and their actions will be based on what they believe will produce the smallest loss. In most cases, foreclosing on a property will produce a larger loss for the bank than a short sale.

What is a “BPO” and how does it relate to a short sale?

BPO is an abbreviation for Broker’s Price Opinion. It is a real estate agent’s opinion of the value of the property. When the bank receives a short sale package (Purchase and Sale Agreement, financial information, and other supporting short sale paperwork), they will typically pay a real estate agent a small fee (usually $75 or less) to produce a report based on comparable sales and active listings in the area to help determine the market value of the property.

Many BPO agents are in the business of listing bank owned properties and do BPOs in order to get bank-owned listings. This could create a conflict of interest, as they may submit a BPO that’s significantly higher than the actual property value, hoping that the bank will reject the short sale and give them an opportunity to get the bank-owned listing. However, BPO agents rarely get bank-owned listings for properties they did the original BPOs on.

Most banks will require the net proceeds from the sale to exceed a certain percentage of the BPO. If the BPO comes in higher than the actual market value, the bank could reject the short sale on the premise that the net amount from the sale is below the minimum percentage they can accept. A good real estate agent who is experienced in handling short sales will know how to increase the chances of a correct BPO by confirming that the BPO agent is using the correct properties as comparables and making sure the BPO agent is aware of any issues that could affect the property value (i.e. special assessments, major structural or mechanical problems, code violations, etc.) A listing agent that is on good terms with the BPO agent will increase the chances that the BPO will come in at the correct market value.

How long will a short sale take?

A short sale can take anywhere from a couple weeks to six months or more, depending on the lender. Some lenders are overwhelmed with several hundred short sale requests every day. There are now a few banks with streamlined short sale programs and can speed up the short sale process, but they may not have the streamlined process available for some types of loans. In the past, a short sale would typically get a faster response from the bank if the foreclosure auction was less than a month away. However, this is no longer the case with many banks, and waiting too long to start the short sale process could cause the bank to reject the short sale request. Experienced short sale mediators often times have strategies to get their short sales reviewed by the bank faster. Most short sales are currently averaging over 60 days for bank approval.

Are buyers really willing to wait weeks or months for a short sale to be approved?

If buyers are educated on the short sale process and timelines so they have the proper expectations, they are more likely to remain committed to the purchase. We give a special short sale buyer’s packet to prospective buyers and their agents prior to them making an offer on the property. This helps ensure that we’re working with a serious buyer who is less likely to back out of the deal. However, there’s no way to prevent a buyer from backing out 100% of the time, so we may also take backup offers in case the primary buyer does back out.

What costs are involved to do a short sale?

People usually look at a short sale as an option because they’re having financial difficulties. Banks understand that sellers in this position typically cannot afford to spend any money to get their house sold. Therefore, the bank typically pays all of the seller’s closing costs and real estate commissions. It is extremely rare for a seller to ever have to come up with any money at closing in a short sale situation. If you choose to seek legal counsel, you would incur that cost.

Can I receive any money at closing with a short sale?

It depends. Typically in a short sale situation, the seller would not be allowed to receive any money because the bank is taking a loss. However, there are some government programs (like the Home Affordable Foreclosure Alternatives, or HAFA, program) and some bank-specific programs from some of the larger banks (like Bank of America and Chase) that allow the seller to receive relocation money or other incentive money at closing.

How do I know what the bank will approve a short sale offer?

What the bank will accept depends on a number of factors. One of the primary factors is the particular loan product. Each loan product has specific loss mitigation rules, and these rules usually specify the minimum payoff that the bank can accept on a short sale. Therefore, it is important to get the property sold at an amount that will net the bank the highest possible net proceeds, thus increasing the chances of the bank approving the short sale. The BPO is also a significant factor in determining how much the bank will accept.

If a short sale is approved, how long will I have to move?

Banks will usually give 30 to 45 days for a short sale transaction to close after approval. You will need to move on or before the closing date, unless other arrangements are made with the buyer in writing (which is rare).

What documentation will the bank need from me?

Different banks have different documentation requirements. However, most banks will require at least the following from you:

Tax returns from the last two years
IRS 4506-T form that allows the bank to request copies of your tax transcripts from the IRS.
Pay stubs from the last two months
Bank statements for all bank accounts from the last two months
Hardship letter explaining why you cannot continue paying your mortgage
Personal financial worksheet (list of what you own and what you owe, monthly income and expenses)

We also include the following documents in the short sale package that is submitted to the bank: a detailed short sale proposal, Purchase and Sale Agreement, our own BPO valuation to support the purchase price, comparable sales information, MLS listing information, listing agreement, and estimated HUD-1 Settlement Statement (showing how much the bank will net from the sale).

Can a short sale be done if I’m current on my mortgage payments?

A short sale is still possible if you’re current on your payments. However, you may need to provide the bank with evidence that even though you’re current on your payments now, default is imminent. For example, if you just had an out-of-area job relocation, you may have been current on your mortgage payments up until you moved, but you know that you wouldn’t be able to make payments on two houses after you moved. Some lenders require you to be more than 30 days delinquent on your mortgage before they’ll approve a short sale, regardless of the situation.

What if I have more than one mortgage?

This adds to the complexity of handling a short sale, but a short sale can be approved regardless of how many mortgages are on your property. The challenge is that all of the mortgage lenders will need to approve the short sale, and sometimes one lender can approve fairly quickly while the other drags its feet, slowing down the whole process and causing the first approval to expire. Also, on a short sale, when the first mortgage lender is taking a loss, the second mortgage lender may only get 10% or less of what they’re owed. The reason they would accept this is because they would most likely receive nothing if the first mortgage lender foreclosed, and something is better than nothing. However, some lenders, specifically some credit unions, haven't figured this out.

What if I have other liens on my property (HOA lien, judgment, etc.)?

HOA liens and judgments are usually handled similar to mortgages in a short sale. HOA liens and judgments are typically junior liens—The mortgages that were originated before those liens were filed get paid off first, then the liens are paid. However, condo association liens, some federal liens, and municipal tax liens could be “Super Liens” that have priority over the mortgage liens. A short sale can still go through successfully with several liens on a property. However, some lienholders are more willing to negotiate than others, and some lienholders may not be willing to take a discounted payoff.

My loan has private mortgage insurance (PMI). Will the bank still consider a short sale?

Yes, the bank will still consider a short sale if your loan has PMI. The bank will file a claim with the PMI company, and the PMI company will determine whether they’ll approve the claim. The bank usually goes along with the PMI company’s decision (if the PMI company approves the claim, the bank approves the short sale). There are several different levels of PMI coverage, so it is difficult to determine what their requirements will be on a short sale.

Short Sales and Deficiencies

What is a deficiency?: A deficiency is the difference between what you owe the bank (principal, interest, late fees, tax arrears, legal fees, etc.) and what the bank receives as a net payoff from a short sale, foreclosure sale, or bank-owned property sale.
Can the bank come after me later for the deficiency amount after a short sale is approved?: The bank can pursue you later for the deficiency amount after a short sale is approved if they don’t specifically state in the approval letter that they will not. This can be an unwelcome surprise for anyone who thought the bank wouldn’t come after them later for the deficiency because they didn’t specify it in the approval letter. A minor oversight or incorrect assumption could cost you thousands of dollars or force you into bankruptcy. This is one reason why working with someone who has significant short sale experience is so important. When we handle a short sale, our we always request that the bank completely forgives any deficiency.
I’ve heard of banks sometimes requiring the borrower to sign a promissory note for part of the deficiency as a condition of approving the short sale. Could this happen to me?: This can happen, and is more common on loans with private mortgage insurance (PMI) than on loans without PMI. On loans with PMI, it is usually the PMI company that is requesting the promissory note, not the lender. The lender, who will be reimbursed by the PMI company for their loss, will typically approve the short sale if the PMI company approves their claim. Sometimes approval of the insurance claim is conditioned upon the borrower signing a promissory note to the PMI company for a part of the deficiency amount, usually on very good terms (unsecured, zero percent interest, amortized over 10 or 20 years). In some of these cases, the PMI company will accept cash in lieu of the promissory note (i.e. a $20,000 promissory note or $10,000 in cash). Fannie Mae has also been known to ask the borrower to sign a promissory note if there is not a significant financial hardship.

While committing to a promissory note to allow a short sale to go through often times may not be in your best interest, there are some cases where it may be acceptable. For example, if a foreclosure on your credit report could cause you to lose your job (if you work for U.S. Homeland Security, for example), it may be worth considering if the only remaining option is foreclosure. However, it may be possible to get the PMI company or investor to reduce the promissory note amount or release the promissory note requirement altogether. Also, if you do sign a promissory note and make payments for a year or more on the note, it may be possible to retain an attorney to negotiate a discounted payoff of the note for a fraction of the remaining balance. We recommend that you seek independent legal counsel prior to signing a promissory note.

Another similar situation can occur with the lender on a second mortgage. However, in this case the lender usually offers to release the lien, which would turn the second mortgage into an unsecured debt. Sometimes they’ll agree to reduce the interest rate or extend the payment term. It’s usually easier to get the second mortgage lender to release this requirement if they believe they won’t receive any money if the first mortgage lender forecloses and wouldn’t be able to collect from the borrower after foreclosure. The second mortgage lender usually receives a few thousand dollars on an approved short sale, so it often times makes more sense for them to take what they can get and forgive the remainder of the debt.

If you choose to sign a promissory note in order to get the short sale approved, it’s very important that a cover letter is included with the promissory note which includes language stating that the promissory note is only valid if the short sale is approved and the existing transaction closes. You don’t want to find yourself in a situation where you’ve obligated yourself to a new debt, but then the sale falls through for some reason and the promissory note isn’t automatically voided. This is one advantage to using a real estate agent with significant short sale experience.
I own additional real estate. Will that affect whether the bank approves a short sale on my home?: It depends on your overall financial situation and whether the additional real estate has equity. When attempting a short sale, the bank will usually want to determine if the deficiency can be paid from any other sources. If you own additional real estate with equity, the bank might require you to sign a promissory note for the deficiency (or a portion of it) as a condition of approving the short sale. Different lenders have their own set of requirements, and each lender will handle this situation differently.
Will the bank expect me to pull money out of my IRA or whole life insurance policy to cover the deficiency?: Retirement accounts are protected and are typically off-limits even in a bankruptcy situation. Bank negotiators may try to scare you into believing that they somehow have the right to that money, but they don’t. A whole life insurance policy may be looked at as a standard investment that is not protected. There may be other investments that are protected as well, but you should consult with an attorney if you’re not sure.

Dealing With The Bank

What if the bank counters back with terms that are not acceptable to me?

If the bank counters back with different terms, you are not required to accept their terms. The sale is contingent on the bank’s approval, and if they modify the terms and you don’t accept their terms, they won’t approve the sale. (Actually, they may decide to accept your original terms if you reject their counter).

Are some banks easier to deal with than others?

Yes. Some banks will approve short sales in as little as two weeks, while others could take six months or more. Also, the type of loan will affect the length of time necessary to obtain short sale approval. Some lenders, such as NationStar, can often times cause problems with the short sale process be requiring the listing agent to hold open houses and advertise on websites like auction.com, even if there's already a buyer under contract. Some large banks like Bank of America are working their way out of the loan servicing business and are transferring their loans to other loan servicers like NationStar and Greentree.

What are some reasons why the bank would not approve a short sale?

The most common reasons that a short sale gets rejected are:

The sale price doesn’t meet the “net to lender” minimum threshold percentage of the market value. Most lenders are now using a minimum threshold analysis that ignores the amount of debt and focuses on the market value of the property. If the net amount that the lender would receive is less than a minimum threshold percentage of the market value, the short sale will be rejected.
There isn’t a hardship. In short sales cases, the hardship letter and financial documents must prove to the lender that there actually is a hardship.
Incomplete short sale package. If an incomplete short sale package is submitted to the lender, they may just ignore it and move on to a short sale case that has all of the required documents. They typically won’t bother contacting you to inform you that some documents are missing.
Assuming that the bank negotiator can approve or reject a short sale proposal. Many people think that the servicing lender is the one who approves the short sale, and that they can actually negotiate with the bank’s “negotiator”. However, most loan notes are actually owned by a secondary market investor, and either they or a mortgage insurance carrier (if the mortgage insurance carrier has paid off a claim) approve or reject the short sale. Some investors will give a loan servicer "delegated authority", which allows the loan servicer to make some decisions on behalf of the investor without consulting the investor first. An experienced short sale real estate agent will typically be able to find out who the actual decision maker is.

I’ve heard about a strategy called “Produce the Note”. Does that really work?

The jury is out, so to speak. The strategy can be expensive in non-judicial foreclosure states (like Washington State), because you need to retain an attorney and sue the lender.

During the lending boom, many mortgages were sold off to other lenders or servicers or sliced up and sold to investors as securitized packages on Wall Street. In this process, many of the new lenders did not get the proper paperwork to show they own the note and mortgage.

The “Produce the Note” strategy requires the lender to prove it has the actual authority to foreclose, by requiring it to produce the original promissory note. There is only one original promissory note for your mortgage that has your signature on it. This is the document that proves that you owe the debt. The idea is that if the lender cannot produce proof that you owe the debt, they cannot foreclose. There are very few known cases where a borrower has used this strategy successfully.

A more detailed description of this strategy can be found on the blog post, Can the “Produce the Note” Strategy Really Stop Foreclosure?

I’ve heard of some banks changing the locks on houses where the mortgage is in default. Does that really happen?

Banks typically change the locks if the house is vacant and the mortgage is in default. They send out a field inspector to determine if the house is occupied, and if the field inspector reports that the house is vacant, the bank may send someone out to change the locks. However, banks have been known to mistakenly change the locks on occupied houses, but this is rare.

According to the Deed of Trust (the mortgage document recorded by the lender), the bank has the right to secure and/or repair the property if they believe it has been abandoned. This may include changing locks, boarding up doors and windows, and draining the water pipes to prevent the pipes from freezing.

See our blog post, The Bank Locked Me Out Of My House! Should I Call The Police?, for more details on this.

Short Sale Concerns

How will a short sale affect my credit?: Some sources claim that a short sale will have the same credit effect as a foreclosure. This isn’t necessarily correct. The credit implications of a short sale will always be less than a foreclosure. The exact hit on your credit score can vary, and will depend on how good your credit was before the short sale (was that the only problem, or were you behind on other bills as well?). The loan will typically show up as “paid” on your credit report. However, there will be a notation that states, “settled for less than originally owed” or something similar. The missed mortgage payments often times have more of a negative effect on your credit than the short sale itself.

Also keep in mind that mortgage applications ask if you’ve ever had a foreclosure. If you let the bank foreclose instead taking steps to avoid foreclosure, you’ll have to answer “yes” to that question for the rest of your life. Note that mortgage applications don’t give a timeframe for the foreclosure—They ask if you’ve ever had a foreclosure.
Will I be able to purchase another home after doing a short sale on my existing home?: You will most likely need to wait at least two years or more before purchasing another home after doing a short sale on your existing home. FHA has the shortest waiting period, which was recently reduced from three years to one year, if you meet certain qualifications. Fannie Mae qualification guidelines require a two year minimum waiting period for mortgage financing after a short sale. This is much better than the seven year waiting period required after a foreclosure. It is possible to purchase another home in less than two years after a short sale, but you would most likely end up paying a much higher interest rate since it wouldn’t be considered a “conforming” loan. Waiting periods change from time to time for different types of loans and depending on the situation that led to the short sale.
Will my neighbors find out about our financial challenges if we sell our house as a short sale?: Most likely, your friends and neighbors will not know about any financial challenges you may be experiencing unless you tell them. When you hire a real estate agent to sell your house, they should respect your wishes to keep your private information private. The fact that your home is being sold as a short sale must be disclosed on your house listing, but it doesn't need to be prevalent on all marketing materials.

About Foreclosure

I’ve received a foreclosure notice. Can I still do a short sale?: Absolutely. In fact, when you are in foreclosure, there’s a definite threat to the bank that they’ll get the house back, so they are typically receptive at this point. However, don't wait until the last minute to start the short sale process, since some banks will reject the short sale if you get too close to the foreclosure date.
How long after my first missed payment do I have before the bank can foreclose?: In Washington State, the trustee sale (foreclosure auction) date must be at least 220 days from the date of default if the property is owner occupied, or 190 days if the property is not owner occupied. Typically, lenders will send out a Notice of Default once the loan is at least 90 days past due. Then 30 days later they can send a Notice of Trustee Sale. The Notice of Trustee sale is recorded in public records, so from that point on, you can expect plenty of mail from investors offering to purchase your home, attorneys offering bankruptcy services, companies offering loan modification services, etc. You may even get real estate agents and investors knocking on your door offering to sell or purchase your house.
How late into the foreclosure process can I start a short sale?: Depending on the lender, a complete short sale package including a Purchase and Sale Agreement will usually need to be received by the lender anywhere from a few days to three weeks or more from the date of the scheduled foreclosure auction. We try to have a buyer in place and the complete short sale package to the lender at least 30 days before the scheduled foreclosure auction, although that is not always possible if we’re starting fairly late in the foreclosure process. Lenders will usually postpone the foreclosure auction if there is a pending sale with a qualified buyer, which gives them time to review the short sale package and make a decision.
What would happen if I just let the bank foreclose on my home?: In Washington State, if you let the bank foreclose, the foreclosure will be recorded on your credit report and you’ll have 20 days to move out. Most houses that end up at the foreclosure auction don't get purchased at the auction. They end up going back to the bank. Then the bank has to deal with the cost of owning the house, including repairs and maintenance, taxes and insurance, plus the cost and time required to sell the house (usually at a steep discount).

If you had more than one mortgage, the lenders with the non-foreclosing mortgage(s) can seek a deficiency judgment against you, making you liable for the unpaid balances on the other mortgages. You may have thought you had a clean slate once the bank took your house, but it often doesn't end there.

In addition, your insurance rates may increase since insurance carriers are now linking insurance risk with credit scores, and your credit score will take a significant hit with a foreclosure on your credit record. Employers are increasingly using applicants' credit history to determine who would be the best candidate for the job. There are reports that even Wal-Mart won't employ anyone with a foreclosure as a cashier, and law enforcement and homeland security personnel can be denied employment and possibly even be terminated if they've had a foreclosure. Many banks will automatically deny credit to anyone who has had a foreclosure on their credit record within the last 5 years.
Can I stop a foreclosure if I believe I was a victim of predatory lending?: It is possible, but it could get expensive. In general, a lawsuit against the bank will put a temporary stop to the foreclosure process until the details can be sorted out. However, it could cost thousands of dollars in legal fees to have an attorney perform a forensic loan audit and file a lawsuit against the bank. If you think you were a victim of predatory lending, we recommend that you consult with an attorney to help you determine if it is in your best interest to pursue the lender for damages.

Negotiating The Short Sale

Can I negotiate my own short sale with the bank?: You can negotiate your own short sale with the bank, but it can be very time-consuming and emotionally taxing and is typically less likely to produce the desired results compared to using a professional. There are so many obstacles that get thrown into most short sales, and it can be difficult to be objective when dealing with the bank yourself since they’re also acting as debt collectors trying to get more money out of you. Also, we believe there’s no reason for you to negotiate your own short sale when you can have your home sold by a professional and have the short sale handled by someone who is experienced with short sales at no cost to you. Banks will also require your house to be listed by a real estate agent in order for them to consider a short sale.
I spoke to a real estate agent that uses a third-party short sale mediator to handle their short sales. Is there any advantage to this?: That could be risky if the third party short sale mediator is not appropriately licensed by the Department of Licensing or Department of Financial Institutions. If an unlicensed third party negotiates a loan modification or short sale, they may be practicing law without a license according to Washington State law. The Washington State Supreme Court adopted General Rule (GR) 24 in 2001, defining the practice of law, which includes negotiation of legal rights or responsibilities on behalf of another entity or person(s). Anyone negotiating with the borrower’s lender on their behalf is negotiating the legal rights and responsibilities on the borrower’s original loan agreement with the bank, which would fall under the Supreme Court definition of the practice of law. The Washington Department of Licensing has also made public their official stance, which prohibits unlicensed third parties from negotiating short sales.

Some real estate agents use a third-party short sale service to negotiate short sales on behalf of their clients. Under the same rules, the third-party short sale service would need to use negotiators that are properly licensed. Many don't.

See our blog posts, Is Your Real Estate Agent Breaking The Law?, and Unlicensed Third-Party Short Sale Negotiators – Washington Department of Licensing’s Official Stance, for more information.
I spoke to a real estate agent that handles short sales for their clients themselves. Does this benefit me?: Working with banks on short sales can be time consuming. Real estate agents are in the business of helping people buy and sell property, and many don't have sufficient resources to handle the short sale process in addition to their traditional business. While the Washington Department of Licensing allows real estate agents to process a short sale as part of the real estate transaction, it's up to the individual agent whether or not they choose to spend the time handling all of the short sale processing details themselves.
Are there advantages to using an attorney to handle my short sale?: Using an attorney to handle a short sale had advantages at one time, and we’ve used attorneys in the past to process short sales. However, the short sale landscape has changed significantly, and we’ve found that in many cases there is no longer any significant advantage to using an attorney over a highly experienced short sale processing team. In most cases, you’re really getting a paralegal or a legal secretary that works for the attorney that does most of the work. The attorney generally doesn’t personally sit on the phone with the bank or personally send emails or fax information to the bank.

Many people mistakenly think that if an attorney is handling their short sale that the attorney is acting as their fiduciary. However, attorneys will require that you sign a short sale processing agreement, and this agreement typically states that the attorney is acting as a NEUTRAL. This means they are NOT acting as your fiduciary, and you would still have to go to another attorney to get independent legal advice, at your own cost. We recommend that you always seek independent legal counsel before attempting a short sale.

Attorneys work on a contingency basis with short sales, so they don’t get paid unless the transaction closes. Depending on the short sale attorney to give you legal advice during the short sale process could create a conflict of interest, since their goal is to get the transaction closed so they can get paid, and there are times when giving the correct legal advice may result in the transaction not closing and the attorney not getting paid.

Also keep in mind that many attorneys are getting into the short sale business as a way to make extra money. However, an inexperienced short sale attorney is no better than an inexperienced real estate agent in a short sale situation, and the Washington Bar Association is currently dealing with complaints against some attorneys that have misled or misrepresented clients in short sale situations.

We have a significant amount of experience working with attorneys on short sales, and we’ve found that using an experienced short sale processing team can provide a higher level of service and produce better short sale results than an attorney. However, if after reading this you’re still dead-set on using an attorney to handle your short sale, please contact us and we can refer you to a good quality attorney.

Selling Your Home

Why do short sale properties typically sell for below market value?: Because short sales can take some time to get bank approval and there’s no guarantee that the bank will approve, many buyers either aren’t willing or aren’t able to wait. Also, because many inexperienced real estate agents have been attempting to negotiate short sales for their clients (often with unfavorable results), many buyers and buyer’s agents prefer to avoid short sale properties altogether. This leaves fewer buyers available that can purchase the property, which puts downward pressure on the price that buyers will pay. Also, buyers usually expect a discount in return for the inconvenience of having to wait the extra time for bank approval.
Is it possible to get a pre-approved short sale price from the bank prior to finding a buyer?: Most lenders will not disclose what amount they’ll accept prior to finding a buyer. In some cases, the lender may specify the minimum net payoff amount that they’ll accept, but we’ve found that many of these “pre-approvals” cannot always be counted on, because the bank may come back after a buyer is procured and require more money even if the pre-approval was in writing. However, we have found that pre-approved prices set by HUD on FHA loans tend to be more reliable. In fact, HUD will often times accept less than the pre-approved amount for FHA loans. Some government sponsored short sale programs like HAFA and some bank sponsored short sale programs will provide reliable pre-approved purchase prices.

See our blog post, The Pre-Approved Short Sale Fallacy, for more information.
What if we have a buyer, but there isn’t enough time to close the sale before the foreclosure auction?: Once a buyer is found and the short sale package is submitted to the bank, they will usually postpone the foreclosure auction so they have time to review the offer as long as they have sufficient time after receiving the short sale package. Also, when the bank approves the short sale, the auction may be postponed again to allow time to close the sale. However, it is important to allow the bank some time to scan the short sale paperwork into their system, attach it to your loan file, and assign a negotiator. This can take anywhere from a couple days to three weeks or more depending on the bank.
My house needs a lot of repairs. Will anyone want to buy it?: There are plenty of buyers looking to buy fixers that they can renovate. Your house will need to be priced appropriately to attract the right buyers. We have a network of investors that are always looking for fixers to purchase. We make sure the bank is aware of the condition, so they’ll take that into account when determining what price they’ll accept.
What if my house ends up selling for enough money to pay off the mortgage(s)?: Then it’s time to celebrate, because a short sale isn’t required! If the proceeds from the sale pays off your mortgage(s), then you don’t need approval from the bank.

Working With Investors

An investor said they would buy my house, negotiate the short sale with the bank, then lease the house back to me with an option to buy it back in the future. Is this a good deal?

This is almost never a good deal, and is a very bad business practice for investors in our opinion. These situations rarely ever result in any benefit for the homeowner. In fact, Washington State passed a law in 2008 making it much more difficult for investors to do this because the Attorney General received a large number of complaints about this business practice.

The main problem is that the lease payments often times end up being higher than the mortgage payments that you couldn’t afford. Also, the option price is usually high enough that it’s nearly impossible for most people in this situation to successfully exercise the option and qualify to purchase the house back within the specified option period. If you’re unable to purchase the house back within the option period, you are usually required to pay an additional fee to extend the option, or you can get evicted. These purchase/leaseback deals rarely result in success for the homeowner.

An investor said they would buy my house and handle the short sale negotiations with the bank. Should I consider this?

In most cases, this may not be the best option to consider. However, there are some situations where this may be a good solution, as long as you know all the facts.

When selling to an investor on a short sale may be worth considering:

The foreclosure auction is just around the corner: If the foreclosure auction is less than two or three weeks away and you don’t already have a retail buyer in place, an investor may provide the best option for getting the auction postponed while the bank evaluates their short sale offer.
Your house is a fixer: If your house needs a significant amount of repairs, a retail buyer may not be able to secure conventional financing, and a cash buyer may be required. Investors need to make a profit, and purchasing a fixer at a discount and fixing it up can be a good way for an experienced investor to make a profit. When a house needs a lot of repairs, the bank will often times accept a larger discount in a short sale situation.
Your house is already listed with a real estate agent: In this case, your house has already been exposed to the rest of the market, so the bank will be more likely to consider an offer from an investor.

When selling to an investor on a short sale may not be a good option (unless it is already listed with a real estate agent):

Your house is in good condition: If your house is in reasonably good condition or only needs some minor cosmetic upgrades, the bank may not be able to justify accepting a large discount that an investor would typically require. The bank will attempt to mitigate their losses, so they may feel that the house could be sold to a retail buyer, thus reducing their loss on the loan.
You haven’t received a foreclosure notice or the foreclosure auction is more than 60 days away: If there is time to procure a retail buyer, the bank may not be willing to accept a heavily discounted offer from an investor. The bank may believe that less of a discount would be required if the property is listed for sale and sold to a retail buyer.
Your loan is an FHA or VA loan: HUD is now using a minimum threshold net receipt to lender percentage of the market value as a basis for short sale approval on FHA and VA loans. For example, they may accept a certain minimum percentage of market value if the purchase contract was submitted within 30 days of your home being listed for sale, a lower percentage if between 30 and 60 days, and an even lower percentage if later than 60 days. If the short sale proposal does not achieve the minimum threshold, it will not be approved. If your home hasn’t not been listed for sale and an investor offers to purchase your house, HUD may calculate the minimum amount that can be accepted based on a time-on-market of less than 30 days, causing the bank to require a higher net payoff.

Many investors offering to buy your house and handle the short sale negotiations are wholesalers. They don’t actually purchase the property themselves. They “flip” the contract to another investor for a fee (usually several thousand dollars). This means that they need to negotiate a discounted payoff with your bank that’s low enough for them to make their profit as well as the investor they’re flipping the property to. The success rate of short sales in this situation is fairly low, except when the house is in very bad condition. Also, many banks specifically state in their approval letters that the contract cannot be assigned to another buyer.

If an investor claims to be a cash buyer, ask them for proof of funds. If they’re negotiating a short sale on your home, they will typically need to provide proof of funds to the bank to get the short sale approved. If they really are cash buyers, they shouldn’t have a problem providing proof that they can actually purchase your home. If they don’t want to show you their bank account balance, sometimes seeing proof of other recent cash property purchases they’ve made can be sufficient.

Investors are a very important part of any real estate market, and we consider ourselves to be investor-friendly. There are some transactions that are a good fit for an investor and beneficial to the seller, and some transactions that are good for an investor but risky for the seller.

An investor said they would buy my house, but required me to sign the deed over to them while they negotiate the short sale with the bank. Should I do this?

You should NEVER sign the deed over to an investor for any reason unless it’s done through an escrow company as part of closing the sale of your house. The investor may claim that you’re not risking anything by signing over the deed, because you don’t have any equity anyway. However, by signing over the deed, you are signing the title of your house over to them—You no longer have ownership in the house, but you are still liable for the mortgage. Also, if you’ve signed over your deed then decide you don’t like what the investor is doing, you have no power to do anything since you no longer have any ownership in the property and the investor has full control of the property.

If an investor has you sign the deed over to a land trust in which you’re the 100% beneficiary, you are technically retaining ownership in the property, but the trustee (the investor) is typically given full control of the property. We recommend that you seek legal advice from a qualified legal professional before signing anything that you don’t fully understand.

There are other short sale purchasing strategies used by investors that don’t involve signing over the deed.

Determining Who To Work With

I’ve received numerous mailers and have had people show up at my door offering to help me avoid foreclosure. Who can I trust?

It can sometimes be difficult to determine who you can and cannot trust. However, here are some suggestions that may help you make an informed decision:

Who do they represent? Are they a real estate agent or an investor?
Look at their website. It should be informative, providing sufficient resources to help you make an informed decision (i.e. disclosing all of your available options). If they don’t have a website, that would definitely be a red flag.
Look up their company on the Washington Department of Licensing website to make sure they’re legitimate. You can do a search at https://fortress.wa.gov/dol/dolprod/bpdLicenseQuery/.
If they’re an investor, are they trying to buy property themselves, or are they marketing or prospecting for another investor?
Are they making unsubstantiated claims? For example, do they claim to have a 100% success rate? Are they saying, “Yes, we can do that” to all of your questions? Are they making it sound like no effort will be required on your part if you work with them? Does it sound too easy or too good to be true? If so, do some research before making your decision.
Ask how long the short sale process will take. If they don’t know who your lender is and they are guaranteeing a bank response in a short amount of time (under 60 days), they may be misleading you.
Ask about their experience working with your lender(s).
Ask who will actually be processing your short sale. Do they handle it internally? Do they use a third-party short sale negotiation company? How are their short sale processors licensed?
If they try to pressure you into making a decision now, you should probably avoid working with them. If they can’t give you a couple days or more to think things over, then they may be concerned that you’ll actually do your own research and find that they’re not the best solution for you. Someone offering to help you avoid foreclosure should never be pushy if they’re acting in your best interests.

I’ve heard of certifications like “Certified Distressed Property Expert” (CDPE) and “Certified Short Sale Specialist” (CSSS). Is this important?

Many companies are capitalizing on the record number of foreclosures and short sales in our real estate market by offering training seminars teaching real estate agents how to acquire short sale listings and process short sales. These training programs are typically one day or two day seminars, and after completing the seminar you’re given a “certification” like “Certified Distressed Property Expert” (CDPE), “Certified Short Sale Specialist” (CSSS), “Certified Short Sale Agent” (CSSA), “Certified Short-Sale Professional” (CSP), or one of many other “certifications”.

While some of these training seminars may contain quality material, it’s impossible to become a short sale expert after one or two days of training. The most critical factor, in our opinion, is short sale experience—And lots of it. While one of these certifications may demonstrate that the agent has learned the fundamentals of the short sale process, it’s no guarantee that they would know how to handle some of the “curveballs” that often times get thrown at agents handling short sales.

Also keep in mind that these designations all start with the word “certified”. Why? Because it sounds official. These are just designations that the creators of these training seminars have given to people who have completed their courses.

I’ve seen advertisements claiming a 100% success rate on short sales. Can this be true?

If someone has only attempted one short sale and it was approved, they could certainly claim a 100% success rate. However, anyone with significant short sale experience knows that not all short sales get approved no matter how well they are handled. While most lenders will consider a short sale as part of their loss mitigation process, there are some cases where the lender will not even consider a short sale because they would rather take the house back. The exact reasons can be complex and beyond the scope of this FAQ, but feel free to contact us if you would like more information on this.

Also, you may need to clarify their definition of “success”. Would they consider a short sale successful if the bank approved the short sale conditioned upon the seller paying a $50,000 deficiency on a first mortgage? How about if the bank approved the short sale but reserved the right to sue you later for the deficiency? We generally wouldn’t consider either of these situations to be successful outcomes, even though the short sale technically was approved.

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The information contained in this Short Sale FAQ is intended only to be used for general informational purposes. Foreclosure laws are a legal matter, and vary from state to state. There may be tax, credit, financial, and legal consequences associated with a short sale. Please seek independent legal counsel regarding potential legal consequences or for legal advice. Please consult with a tax professional regarding the potential tax consequences or for tax advice. David Monroe and Keller Williams Western Realty make no representations or warranties concerning potential tax or legal consequences relating to any final disposition of any property.