Short Sale is a type of Real Estate transaction where the owner of the property owes more money than the seller would receive in a sale of the property.  In most cases the value of the property has decreased below that of the mortgage amount.  For example, assume a property was purchased for $500,000.00 with a $475,000.00 mortgage purchase at the height of the real estate market.  It is possible, depending on many factors, that the property may only sell now for $450,000.00.  After the costs of selling including realtor’s fees, attorney’s fees, realty transfer fee, etc., there may be as little as $410,000.00 left to pay the seller’s mortgage off.  The sale is then “short” of the mortgaged amount and the seller must receive “short sale” approval from the bank in order to release the obligation to the bank. 

Short sales are treated differently with every mortgage company.  Some companies are easier to deal with than others and the requirements differ widely.  The following is the general procedure for most short sales.  However, each short sale is different.  Do not rely on the outline below and assume a transaction will progress in the same order.

Hardship

Most mortgage companies will require a “hardship letter” stating why the seller is unable to pay the mortgage.  The company will also usually require proof of the sellers income.  Most commonly this is requested in paystubs, bank statements and a balance sheet showing income v. expenses.

Listing the Property

Some mortgage companies require the property be listed at market value for a certain period of time, often three months.  After the property has been listed for this period of time the mortgage company will accept the request for the short sale. 

Request for Short Sale

When the contract is signed the seller’s attorney submits the contract to the seller’s mortgage company with all supporting documents.  Most mortgage companies ask for the seller’s financial information, listing agreement, proposed settlement statement, preapproval letter or proof of funds from the buyer, and buyer’s information. 

Response from the Mortgage Company

This tends to be the most frustrating part for the parties in short sales.  Although I once had a mortgage company reply to my client’s request the following day, the mortgage company is usually very slow in responding.  The estimated time for a response is three months, however, this varies drastically between companies.  Most attorneys will insert an escape clause for the buyer so that the buyer does need to wait an indefinite amount of time.  If the mortgage in that amount of time, often 60 days, the buyer may cancel the contract without penalty.  Another clause buyer’s attorneys may insert in the contract is whether the buyer needs to apply a mortgage and do inspections before a response from the mortgage company is received.  The idea here is that if the mortgage company is not going to agree to the short sale, then the buyer should not have to expend money on inspections and application fees for buyer’s mortgage.  The other side of this argument is that the buyer should be ready to purchase as soon as possible after the parties receive approval from the mortgage company and if there are inspection issues with the property the parties should know as early as possible.

Inspections

Sellers of short sales typically do not have any money to make any repairs to the property.  The buyer must clearly understand that most short sales are strictly “as is”.  The buyer needs to be protected so that the buyer may cancel the contract if there are issues.

Negotiating with the Mortgage Company

Often the seller’s mortgage company will respond to the short sale request with a counteroffer.  This counteroffer may ask the buyer to put up more money, it may ask the seller to contribute money, it may ask the seller to sign a personal Note beginning after closing, and/or it may attempt to cut some of the seller fees paid to realtors, attorneys or other legitimate expenses.  During this time the seller’s attorney will negotiate with the mortgage company until an agreement can be reached.

Final Approval

When an agreement is reached the seller’s mortgage company issues a written statement stating that it will accept a certain amount of money and any other agreed upon requests in exchange for releasing the property.  There will be requirements on closing that must be upheld.

Closing

At closing the buyer will accept the property free of any liens.