What is a Short Sale?


A short sale is real estate transaction where the seller owes more money that the property is worth. The seller is asking the lender to accept a lower amount as payback for his mortgage debt. Its not unusual for a homeowner to have more than one loan or lien outstanding on his home. For instance, the seller may have a home equity line of credit HELOC that was tapped to generate needed cash. The seller may also have overdue homeowner association fees. All lenders involved must individually approve their loan amount forgiveness. This satisfaction of debt requires written approval. This is called the short sale approval process and can take several months to complete. A short sale approval document typically includes a timeline for the close of escrow and conditions for the sale.

Short Sale is Approved, What Next?

Once the short sale approval document has been delivered to the seller, the actual sale of the property can begin. At this point, contingency periods are typically in effect and the buyer and seller move forward to close escrow on the date defined by the lender. The buyers deposit check is cashed into escrow and any inspections that are contingent on the sale are done. It is very important to comply with the close of escrow deadline defined by the lender. Some lenders will cancel the deal if this deadline is not met and the entire process must reboot and start again. Its interesting to note that most lenders will not even start the short sale approval process until an acceptable offer has been submitted. Also, the short sale is sometimes not approved by the lender so its a good idea for the buyer to continue shopping during the approval process.

When is the Buyers deposit check cashed into Escrow?

The deposit check is cashed into escrow when the short sale approval letter has been delivered from the lender to the seller and then from the seller to the buyer.

What does the Seller need to do in a Short Sale?

The seller must initiate contact with the lender to get the ball rolling. The homeowner must comply with all requests from the lender until the short sale is approved and escrow closed. The lender usually creates a short sale package to be completed by the seller. This package may request a Letter of Hardship, supporting financial documents, tax returns, retirement accounts, list of assets etc. The Letter of Hardship is written by the Seller and details the reasons why the Seller feels that the lender should allow the short sale. This should be very convincing.

How long does a Short Sale take to close?

There is no set formula for this time period and all lenders are different. Its typically 3 -6 months for the short sale approval. Once approved the transaction can move towards the close of escrow. This period can take an additional 30-60 days and involves the buyer property investigations, removal of contingencies and title/loan signings.

Note:Its important that the seller and buyer have clearly defined and agreed upon expectations at the contract level. This is usually done with a short sale addendum that defines the transactions semantics including how the deposit check is to be handled and how contingency periods will work. The buyer should make sure that they clearly have a way, if needed, to back out of the deal prior to removing all contingencies.

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