Desperate homeowners across the country are finding that getting a short sale approved can take six months or longer, and in many cases, these deals collapse due to a variety of complications. Knowing how to approach a short sale will increase your chance of success.
A short sale occurs when a mortgage holder agrees to accept less than the balance due on a home because of a financial hardship. Many homeowners owe more than their home’s value and are facing foreclosure, so they’re racing against the clock to get a short sale approved.
Short sales and foreclosures accounted for about one-third of all U.S. home sales in June, according to the National Association of Realtors. In the Las Vegas area — one of the hardest hit by the real estate slowdown — short sales accounted for 27.6 percent (6,137 units) of all listings in late July, according to Applied Analysis, a financial advisory and economic consulting firm in Nevada.
The workout package
The process starts when a homeowner submits a short sale offer and related documents to the lender. Most banks require owners to submit a hardship letter explaining their financial woes, as well as bank statements, pay stubs, tax returns, and retirement and investment account statements. Having an incomplete package can delay a short sale.
“You see sellers that don’t want to provide all the financial documentation necessary for the lender to make that financial hardship decision,” says Ed Smith Jr., chairman of government affairs and industry relations for the California Association of Mortgage Brokers.
Lee Ann Ward, a broker associate with Exit Realty Leaders in Crystal River, Fla., says about 80 percent of her business is short sales. But requirements vary from lender to lender.
To save time and money, more banks are skipping full appraisals and relying on broker price opinions, where the broker does an analysis to arrive at a fair market value, Ward says. But when a lender, seller or buyer doesn’t agree with the valuation of a home, it can kill a short sale. If the valuation is lower than expected, for example, “the buyer can just say no, that’s not acceptable … I’m moving on to a better house,” says John Anderson, a broker/salesperson for Twin Oaks Realty in Minneapolis.
Inexperienced lenders
Short sales also get short-circuited because many banks are unfamiliar with the process, says Travis Hamel Olsen, president of the National Short Sale Center in Scottsdale, Ariz. “Unfortunately, many of them were slow to react at the beginning of the short sale trend.”
For half the listing commission, Olsen’s firm negotiates with banks on behalf of homeowners and selling agents who may not understand the process or have time to handle all the details. Business has jumped about 500 percent from July 2007 to July 2008, and Olsen expects demand to stay strong.
Anderson says buyers must understand the short sale process and be prepared to wait. “I’ve had more buyers this year get into it two to three weeks and then back out and say, ‘I can’t wait anymore,’ and that’s after I told them up front this could take 8, 10, or 12 weeks.”
Still counting
Try eight months. That’s the length of time Smith says one short sale he’s involved with in Chula Vista, Calif., has stretched out — and the deal hasn’t closed yet, partly due to the home’s declining value. Two accepted offers have fallen through because the value continues to drop mid-sale, from about $600,000 two years ago to about $376,000 now.
Another snag is the fact that there are two liens, also a common complication. All lien holders must approve a short sale, even if they lose money. In many cases, second lien holders, such as home equity lenders, withhold approval, figuring they’ll take their chances with a foreclosure proceeding.
