Understanding Short Sales And The Short Sale Process Part III

The short sale negotiator will request supporting documentation from the seller that the bank will request in order to process the short sale file. The ultimate goal is to have the short sale offer approved by the bank so it is imperative to give all documents to the negotiator as soon as they are requested in order for the short sale file to be processed as quickly as possible.

The bank will request the following items:

• Documentation and pictures of any damages to the property (the more the better). If there is mold or severe damages to the property then the bank will be much more willing to negotiate.
• Comparable sales supporting the cash offer from the buyer and why the bank should accept that low price. This must be based on solid comparable sales number of other bank owned properties and short sales that have recently sold.
• Broker price opinion (BPO) as to the value of the property according to a local real estate agent (damaged properties will have much lower BPO’s). If you can you should try and meet the BPO agent to ensure that your BPO is not out of line. This is not always possible.
• Financial hardship letter indicating why the homeowner can no longer afford to pay their mortgage. This letter should be written by the homeowner and should explain to the bank why the homeowner can no longer afford to pay their mortgage.
• The bank will request at least 2 years of tax returns
• The bank will require 3 to 6 months of recent bank statements
• Any other relevant information as to the financial situation of the homeowner for example job loss, disability or any other reason that resulted in the homeowner wanting to sell their house.
• Proof that the seller is prepared to file bankruptcy can help the case of the seller since this can significantly delay the foreclosure process. Many sellers facing foreclosure are behind on all of their bills and so bankruptcy is a real option for them to consider. This scares the banks since it means more time until they get to recover the property. If the homeowner has met with a bankruptcy attorney and is contemplating filing bankruptcy then make sure that this information is in the file and is also mentioned in the hardship letter.
• Estimate of damages and repairs needed and the cost of these repairs for the property to be in marketable condition. You can use an estimate from a general contractor for this since in this case high repair estimates from a general contractor will help justify your low offer.
• A solid case for why the buyer is not prepared to offer more for the property with supporting evidence. Good examples are current REO sales prices and estimates of repairs costs for the property. Sales at the same price as the offer price, or other low comparable sales by cash buyers on bank owned properties and short sales.

After all of this information is gathered by the short sale negotiator, it needs to be put together in a “short sale package” and then submitted to the bank. The loss mitigation department at the bank then reviews this package and takes it to their supervisors for review. The process is extremely time consuming and cumbersome and there is no guarantee that loss mitigation will even be interested in negotiating at all. They can also ask for additional bank statements, more documents repeatedly so it is important that the seller is willing to cooperate with the negotiator in a timely manner.

Any buyer will have to be a cash buyer so a proof of funds or a bank statement is an absolute necessity in order for the bank to take the buyers offer seriously. The buyer needs to show that they have the ability to pay for the property and that they can close quickly for cash. The buyer must be willing to show the bank a HUD (also called a “net sheet”) of exactly how much the bank will net on the sale of the house after all closing costs, commissions etc. The homeowner cannot derive any economic benefit and must be prepared to walk away from the house without receiving any compensation at all from the buyer or anyone else (violating this is mortgage fraud which is a felony).

It is preferable that the negotiator submit an offer with the condition that there will be a  “non-deficiency judgment” meaning that the bank will not go after the homeowner for the difference between the amount owed on the mortgage and the amount that the bank is accepting on the short sale. The previous owner will be required to report the difference as income (although currently this requirement has been waived for primary residences for another 12 months by the Obama administration). The bank will issue a 1099 since they will be deducting the loss for income tax purposes and the banks loss will be the sellers gain which by definition means income. Filing bankruptcy will not absolve the previous owner from any taxes that are due in the following year as a result of this 1099 so the negotiator should make sure that the seller is aware of this fact.

There is no guarantee that the bank will accept, review or even communicate with the negotiator once they have submitted a short sale offer. However over the past few years banks have become much more receptive to short sale offers than in the past and some banks are expediting the process with some short sales being completed in as little as six weeks.

It can be quite disheartening for a seller to spend a lot of time on a short sale with a negotiator and then to get a denial from the bank. Remember that as the seller there is no guarantee that the bank will accept the buyers offer. Many cash buyers that purchase these properties are buying the property with the intention of keeping the property as an investment property. These buyers will not over pay for the property and the buyer needs to offer high enough for the bank to accept the offer. There is no guarantee that the buyer will offer enough and there is no guarantee that the bank will accept the buyers offer. For this reason it is very important if you are considering a short sale to act immediately in order for the negotiator to have sufficient time to negotiate the offer and in order for the real estate agent to have sufficient time to market for buyers for the property. If you are behind on your payments and considering a short sale please remember that time is your enemy and you must act quickly.