As an agent with experience in short sale transactions, I've decided to prepare a detailed explanation, although not thorough, of the process. Please keep in mind that each transaction is different.
Short Sale – The sale of a property in which the lender consents to receiving a loan payoff of less than what is still owed by the Seller on the note secured by the property. In the transaction, sufficient funds are generated to cover all of the Seller’s closing costs (commission, title charges, escrow fees, etc.) and the payoff of any existing loans and/or liens of record without the Seller having to deposit funds to make up the shortage.
Lenders typically agree to short sales because they can avoid the following:
* spending time and money to foreclose, evict borrowers, and resell properties
* adding a bad loan and REO to their portfolio
* paying property taxes, insurance, maintenance, foreclosure fees, holding costs, and repairs for REO properties
* risking theft and vandalism to the property, either by the borrower before they vacate the premises or by others when the REO property is vacant
Not all Sellers qualify for the short payoff assistance. Lenders will require the Seller to provide them with proof of hardship.
Here is the way this type of transaction usually goes: The listing agent takes the listing and completes an estimated net sheet for the Seller to determine how short he/she will be at close of escrow. The listing agent then contacts the Loss Mitigation Department which handles the short pay for the lender(s) who hold(s) the existing lien(s) on the property and requests a copy of their criteria to submit in order for the lender(s) to consider granting the short sale.
Lender(s) usually ask for:
* a current appraisal on the property
* a hardship letter from the Seller explaining exactly why he needs to do this
* current credit report on the Seller, financial statement, employment verification
* copy of payoff statements for any subordinate liens on the property
* current statement of account from the property management company, if applicable
* Preliminary Report
The listing agent submits these items to the lender and then waits for their approval or disapproval while marketing the property with the contingency that this approval would be required prior to close of escrow.
When the Buyer makes an offer that is accepted by the Seller, then escrow is opened. The selling agent should be sure that the C.A.R. Form SSA is used as an addendum to the purchase agreement. If not, then the escrow instructions must reflect the contingency for the short sale.
Escrow will then order a Demand Statement for the lender(s) and include estimated seller closing statement (showing everything except for the payoff of their loan) and a certified copy of the escrow instructions and a copy of the C.A.R. contract and preliminary title report. The lender will want to review all terms of the transaction before even considering whether or not to participate in the short payoff.
Upon receipt of the written approval from the lender directly to escrow stating that they will accept the short payoff and still issue a full reconveyance for their trust deed, then the process really begins. Escrow will need to thoroughly read the Lender’s Instructions and proceed to comply with them.
The lender may request the following from escrow:
* delete the credit from the Seller to Buyer for closing costs
* disallow the Seller charge for the home warranty policy
* require the commission to be reduced from 6% to whatever the lender feels is reasonable
* require that termite work be paid by someone other than the seller
The lender wants to reduce the amount of their loss as much as possible. Escrow will forward a copy of the lender’s letter to both agents and ask them to re-negotiate their transaction and get back to escrow so that an amendment can be prepared to be signed by all parties, and a new estimated closing statement prepared reflecting any changes required by the lender. It is not unusual for agents and/or buyers in these types of transactions to pay some of the costs that the Seller will not be allowed to pay. Buyers need to know that repairs of the property, requested from the Seller, probably will not be approved.
Final approval must be given by the lender at this point, for escrow to proceed to close. The timeframe to close after the final approval will be determined by the lender, so agents, buyers and sellers must be made aware of this fact. The new lender will also need to be aware of this fact and must be able to perform. If escrow does not close in the timeframe permitted, the approval process will need to be started all over again by sending the lender a new estimated closing statement and a request for an extension. Written instructions must then, again, be received by escrow in order to proceed with the close.
In a transaction where there is only one lender to be paid, that lender will usually take the entire amount of the proceeds remaining after payment of the selling costs they have previously approved. Agents and escrow must be especially careful here to be sure estimates are accurate.
In the case when there is more than one lender, the listing agent will need to negotiate with each of them. There are cases when the junior lien holders will have to accept a flat amount, or in some rare cases, no money at all.
No matter how many demand statements exist, the Seller must sign approval of each and every one. The Seller will also need to approve the written lender instructions from the lenders agreeing to the short payoff.
Short Sale Approval (or “Demand Statement”) – Generally, a 1 to 2-page letter given by the 1st and 2nd Trust Deeds approving the sale of the property, which will result in a short payoff of the mortgage. It lists the criteria that need to be met.
* approves the purchase price and indentifies both the Buyer and Seller by name
* outlines the required minimum payoff amount * specifies the exact date on which Close of Escrow should occur
* includes wiring instructions
Short Sale Addendum (C.A.R. Form SSA) - This form makes any short sale transaction subject to lender approval by a particular date. Thus, this form will create an express contingency, for the benefit of both parties to the transaction, whereby both sides agree that the entire agreement is contingent on the Seller’s receipt, by a particular date, of written consent from all existing secured lenders and lien holders to reduce their loan balances by an amount sufficient to permit the proceeds from the sale to pay the existing loan balances as well as other costs, (including commissions) without requiring the Seller to place any funds in escrow. On this form, the parties would also agree whether the time periods in the purchase agreement for inspections, contingencies etc. should begin as specified in the purchase agreement or on the day after Seller delivers to Buyer the written notices of the lenders’ consent to the short sale.
BPO (Broker’s Price Opinion) – A detailed report prepared by a real estate broker, indicating the fair market value of a property based on nearby comparables and the condition of the subject property. Typically a BPO is ordered by the 1st Trust Deed once a short sale approval has been given.
Trustee’s Sale, or Foreclosure – A public auction wherein the lender of record causes the real property to be sold for nonperformance of a mortgage (foreclosure sale). The sale usually takes place outside the County Recorder’s Office or outside the Trustee’s office. The opening bid for this auction is generally the outstanding loan amount (unpaid principal balance), all accrued interest, late charges, advances (if any) and the foreclosure fees. Any one who attends with cash or certified funds sufficient to cover the bid amount may participate. The property is sold AS-IS, with no warranties except clear title.
REO (Real Estate Owned) – The term given to properties which revert back to the lender at the Trustee’s Sale. These properties become non-performing assets on the books of the lending institutions and are usually sold through either real estate brokers and/or asset management companies.