Getting a short sale approved is no easy task. Buyers can, and do, walk away if they feel the transaction is taking too long. Mortgage insurance companies frequently demand unreasonably high contributions from the seller, thus killing the deal. Servicing rights can be transferred to a new lender mid- transaction. The foreclosure auction occurs despite the lender repeatedly telling you that it was postponed. These are only a few examples of what can go wrong. Admittedly, many of the aforementioned reasons are unforeseen and cannot be prevented. The majority of short sales that fail, however, do so because the person handling the transaction makes a mistake and the buyer walks away prior to obtaining short sale approval. While it is imperative that the person handling the short sale negotiation takes certain steps to ensure a successful short sale, the buyer's agent plays an equally important role in the approval process. With a traditional sale, the buyer and seller negotiate against each other, whereas the agents in a short sale must work together to keep the transaction from falling apart. As someone with an extremely high short sale success rate, I encourage buyer's agents to take the following steps in order to ensure a successful short sale transaction.
The buyer's agent should always inquire as to specific transaction details prior to submitting an offer. You should always begin by asking the listing agent if they will personally be handling the short sale negotiation with the lender. If they use a third-party negotiator, then you will need to speak with that individual in order to determine their experience level. The first thing you need to ascertain from the individual handling the negotiations is the amount of liens encumbering the property. If the homeowner has two loans, then you will need to obtain short sale approval from both lien holders. As you can imagine, this fact, as well as the lenders' identity, will largely dictate how long the short sale transaction should take. Keep in mind, you should also confirm that all taxes are current and, if it is a condominium, whether all condo fees are paid because any delinquencies will result in additional liens that must be released prior to a deed transfer. Once you determine the total amount of liens, you should also ask whether the seller is already in default and, if so, whether a foreclosure auction date is scheduled. The last thing you want to do is spend a couple of months committed to a short sale only to find out that a foreclosure date is imminent. Finally, it is always a good idea to ask the seller why they are seeking a short sale. Although the seller does not need to provide specific details, the buyer does have a right to know whether the seller has a lender approved hardship and, therefore, whether they even qualify for a short sale. If the listing agent or third-party negotiator cannot answer these basic questions, it is highly unlikely that they have enough short sale experience to get your short sale closed.
Once you determine that the seller is a qualified short sale candidate, you should next turn your attention your client, the buyer. You should immediately provide the buyer with a reasonable short sale time-line. By doing this, you not only show the buyer that you have done your homework, but you also ensure that all parties are on the same page from the outset of the transaction. On the most basic level, all short sales consist of three stages: (1) offer (2) valuation and (3) negotiation. Thus, if you provide a reasonable estimate of how long each stage will take, it is much more likely that your buyer will remain a party to the transaction, even if an unexpected event occurs, such as the loan being transferred to a new servicer or the lender grossly overvaluing the property. Both of which, by the way, have happened to me. If, however, the buyer enters the transaction with the expectation that the short sale will be approved in one month, the lender never has a reasonable opportunity to complete the short sale approval process. An offer that expires in thirty days is not a strong offer and most likely not the "highest and best" offer because it never has a fighting chance to close. Instead, the buyer and seller should mutually agree upon a time period in which they reasonably expect the short approval to be obtained. That way, all parties are on the same page from the outset of the transaction. The simple task of providing the buyer with a short sale time-line will not only manage the buyer's expectations, but will also discourage casual purchasers from making an offer on a short sale property.
Simply put, short sale lenders do not like contingencies. The only exception to this rule is the mortgage financing clause and, even in that case, the buyer will have to submit a pre-approval or proof of funds letter showing that they will be able to eliminate the financing contingency shortly after receiving short sale approval. Thus, if you represent a buyer who needs to sell their current home prior to purchasing another, your client should not be looking at short sales. Another common contingency, and a source of contention, involves the property inspection. Most buyer's agents insist upon conducting the inspection after the lender approves the short sale. Most listing agents, however, don't like this because it gives the buyer the ability to walk away from the transaction at any time, without cause. In my opinion, an offer that enables the buyer to walk away at anytime is likely not the “highest and best” offer because the buyer is not committing to purchase the property subject only to short sale approval. The post approval inspection gives the buyer another opportunity to back out of the purchase with little or no penalty. The seller, on the other hand, is unequivocally making a commitment to the buyer because they effectively take the property off of the market once they submit the signed offer to their lender. Admittedly, I understand why buyers may want to not want to spend a few hundred dollars up-front on an inspection, but you could easily make the argument that this decision potentially costs the buyer more money in the long run. Keep in mind, once you submit the offer to the lender, you forfeit your right to adjust the purchase price. If you are buying an “As Is” property, such as a short sale, wouldn't you rather take into account all necessary property information prior to submitting your offer to to the bank? In other words, wouldn't it be in the buyer's best interest to find out whether there are any major property condition issues prior to committing to the transaction for 60-90 days? More often than not, a short sale fails because the buyer walks away as a result of the property inspection, not because the seller was unable to obtain short sale approval. Regardless of your point of view, it is always best to deal with the inspection contingency issue at the outset of the short sale transaction so as to avoid any potential disagreements between the buyer and seller.
Most short sale approval letters are only valid for 30-45 days, and the majority of buyers make the mistake of waiting until receipt of the short sale approval letter before they initiate the financing process. In today's market, it is virtually impossible for a buyer to obtain mortgage financing during this time frame. Moreover, simply obtaining a pre-approval letter from your buyer's lender is insufficient. Anyone with an email address can obtain a pre-approval letter. As the buyer's agent, you need to initiate contact with your buyer's lender and confirm whether they will be able to close within 30-45 days of receiving the short sale approval letter. I always ask the buyer's lender for a list of conditions that need to be satisfied in order to receive a firm mortgage commitment. Next, I make certain that the buyer completes as many of these tasks as possible during the time in which I am working on getting the short sale approved. This way, the buyer simply needs to update their financial information and conduct the appraisal in order to finalize their financing. While most short sale lenders will grant an extension, they are harder and harder to obtain, and in some cases the seller is required to update their financial documents and re-submit the entire file to the investor for review. In my opinion, it is much more efficient, and doesn't cost the buyer anything, if they eliminate all financing conditions during the short sale approval process rather than waiting until the short sale is approved.
If you haven't figured it out by now, short sales require the cooperation of all parties involved. Unlike a conventional sale, where the process is primarily adversarial, the buyer and the seller must work together during a short sale in order to get the deal approved. This includes the negotiation. Everybody knows that lenders prefer short sales to foreclosures, but they are not going to give the property away for less than what they deem as fair market value. By agreeing to the short sale, the lender is trying to mitigate their losses. As a result, the lender is going to attempt to cut their losses wherever possible. The most common method is to reduce real estate commissions or seller paid closing fees. Lenders also try to minimize their loss by demanding a cash contribution or promissory note at closing. This is where it pays to engage the use of a short sale professional, even if you are the buyer's agent. The short sale lender typically pays the negotiator's fee, so why wouldn't you take advantage of the negotiator's expertise? Furthermore, by encouraging your client to use an experienced short sale negotiator, you are showing the seller that you are committed to the purchase and taking the necessary steps to get the deal closed as efficiently and effectively as possible. The short sale negotiator should be able to leverage their expertise and get the lender to agree to the short sale with minimal financial damage to all parties. A good negotiator is one that it is able to convince the lender that the proposed offer will result in less of a loss than a foreclosure, while at the same time getting the buyer their desired purchase price and, most important, getting the seller out of a bad situation with minimal credit damage an no deficiency balance owed following the short sale. All parties must be willing to negotiate and showing the lender that everyone is willing to make concessions will greatly increase the likelihood of getting your short sale closed.
About the Author: Greater Boston Short Sales, LLC (GBSS) is Massachusetts’ leading short sale negotiator. GBSS assists buyers, sellers, real estate agents and attorneys with getting their short sales closed. Contact us today if you are a homeowner facing foreclosure or a Realtor seeking assistance with a short sale transaction. GBSS is a MARS provider. Please read our disclaimer HERE.