5 Steps to Short Sale Success

Published July 19, 2017

Short sales are not particularly complicated, but they do require a lot of work to close successfully. Here’s what you can expect.

Considering selling your home even though you owe more than it’s worth? The short sale process isn’t necessarily complicated, but it is time consuming and nerve-racking. Before you decide to take the plunge, take a look at all of your options, talk to your real estate agent, and know what to expect.

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Most homeowners considering a short sale—the sale of a property for less than what is owed—do so because they are facing foreclosure. Although it’s not necessarily complicated, a short sale isn’t an easy fix either. The process involves completing a financial package, including a hardship letter, and convincing the lender to accept less than what is owed.

If you are selling the property and presenting the lender with a buyer, you and your agent have to be sure that both the buyers and the buyers’ agent understand the process. Short sales can take as little as two to three months to get approval, but some can take even longer. Impatient buyers might decide to balk if they don’t understand the process.

A short sale can be an acceptable solution if you are facing a foreclosure and don’t have many options. Just understand that a short sale can also be stressful, time consuming, and involved. Here are the five steps you’ll need to complete to successfully short sell your property.

Assess your situation

Short sales only apply in a narrow set of circumstances. Banks don’t let just anyone out of their financial obligations. To get relief, you’ll first have to demonstrate hardship. Usually, this is a major, life-changing event that drastically impacts your finances such as divorce, unemployment or job loss, a medical emergency, job transfer out of town, bankruptcy, or death.

Next, you need to owe more on your loan than the house is worth. To determine this, you need what you owe on your mortgage and outstanding liens as well as what the home is worth. You can get an estimate of your home’s value using Zillow, but for an accurate figure, consult with your real estate agent. He’ll pull the data on what comparable homes have sold for in your area and let you know what you can expect from the sale of your home.

Obviously, if you find that your home is worth more than you thought, a short sale doesn’t apply. You can simply sell the home as you normally would, pay off the outstanding amount of the loan, and move forward.

Contact your real estate agent

If you owe more than the home is worth and you haven’t contacted a real estate agent yet, now is the time to do so. Make sure your agent has experience successfully closing short sales. Since the process can be involved and one misstep can derail your efforts, you want an agent you has a track record of moving things forward and convincing the bank to accept his short sale packages. An experienced agent will also be able to go into more detail about what you can expect and discuss any issues relative to your specific situation.

One of the first things your real estate agent will ask you to do is sign a letter authorizing him to contact the lender on your behalf. This will allow him to start the short sale process and to begin building a relationship with the lender’s loss mitigation department. It also reliefs you of the task of negotiating directly with the lender. The agent will do that for you.

Prepare the financial package

You will have to convince the lender that there is no way you will ever be able to repay the loan and that it is in his best interest to take the short sale amount instead of foreclosing. To do this, you will need to complete a financial package.

Exact requirements vary slightly depending on the financial institution, but typically, you will need to provide a HUD-1, financial statement, two years of tax returns, two years of W-2s, 30 days of pay roll stubs, your last two months of bank statements, a comparative market analysis or list of recent comparable sales, and a hardship letter.

The hardship letter is your story, written by you, in your own words. It explains how you got into your present situation (for example, a job loss), what you have tried to do to get out of the situation, and why this situation will not change in the foreseeable future. Throw in statistics, percentages, sob stories, whatever it takes to make your case. But, be prepared. Writing it all down can be depressing.

Present an offer to the lender

In the meantime, your real estate agent will list your home and begin marketing it. This part of the process doesn’t differ much from a conventional home sale. Depending on the market and your asking price, the house could be on the market for a few days or a few months.

When an offer is received, your agent will present it to the lender as an alternative to foreclosure. The lender will then verify all the information from your financial packages, including comparable home sales, and determine whether it makes more sense for them to accept the offer or proceed with foreclosure.

Negotiate with the lender

Through the process, your real estate agent will be working the loss mitigation department, whose job is, by definition, to mitigate the lender’s loss. Expect the lender to come back with a different opinion about how much the home is worth or asking for different terms in the sale.

Your real estate agent will have to respectfully defend your position and the deal and communicate with the buyer and his agent. This is where hiring a real estate agent who is experienced with short sales can really pay off. On average, only one quarter of all short sales successfully close, but an experienced real estate agent might close 90 percent or more, if he knows how to submit the paperwork properly and negotiate with the lender.

A final thought

A short sale can help you avoid a foreclosure, but you have to be committed to completing the paperwork and doing whatever your agent asks you to do within a timely manner. You also have to have a lot of patience.

If you’re not sure whether a short sale is right for you, contact your real estate agent to discuss your circumstances and options.