What is the process of a short sale?

If you find yourself in a situation where you need to sell quickly and your home is worth less than what you owe, then a short sale might be your best option. This guide outlines the essential steps in negotiating and completing a short sale.

Selling at a Loss: Short Sales Explained

A “Short Sale” occurs when the current market value of your property is less than the amount you owe on it. Homeowners often find themselves in this difficult position due to external factors like market changes, which can lead to selling via a short sale. For homeowners looking to avoid bankruptcy or foreclosure, a short sale might be a more favorable option.

When your lender agrees to a short sale, they accept less than the total amount owed on your mortgage. However, not all lenders accept short sales, and not every seller or property is eligible. If the lender finds it financially beneficial to foreclose instead, they may choose that route.

In a short sale, lenders are in complete control of the process and must approve any offer before the owner can sell the property. Lenders rarely suggest short sales to homeowners; instead, they expect the homeowner to explore other means of paying off the loan first. However, in cases of financial hardship, a short sale may be discussed as an alternative to foreclosure.

How a Short Sale Impacts You

A short sale may still affect your credit score, although some lenders might forgive the remaining debt. If the debt is forgiven, the forgiven amount must be reported to the IRS as income. Therefore, it’s important to be aware of the tax implications.

Remember, selling your home via short sale is very different from selling under normal market conditions. For instance, the lender plays an active role in the process, unlike in a regular sale where the lender might not be involved until a payoff request is made. Also, expect more paperwork and delays when completing a short sale.

The Role of Your Real Estate Agent

At the Marchena Home Team, we understand that navigating a short sale can be overwhelming. That’s why we’re here to manage the process for you. With our extensive experience in Southern California real estate and short sales, we will oversee the negotiations with your lender and ensure the necessary documents are submitted on time. Unlike some agents who outsource this vital task, Michael and Anita Marchena personally manage the entire process to maximize your chances of success.

Here are some key questions to ask when hiring a real estate agent to handle your short sale:

• How many years of experience do you have selling short sales? Look for an agent with at least three years of short sale experience.
• How many short sales have you successfully closed? The more closed deals, the better the agent knows how to work with lenders.
• Do you see any potential problems with my short sale? Experienced agents can foresee obstacles and help you navigate them.
• Who will negotiate my short sale? Make sure the agent handling your sale is personally involved in negotiations.

Contact Your Lender

Once you’ve hired an experienced real estate agent like Michael and Anita Marchena, your next step is contacting your lender. You may need to navigate several departments to find the right contact for short sales, but persistence is key. Avoid the “work-out” departments and aim to get in touch with someone who has decision-making authority regarding short sales.

Submit Your Letter of Authorization

To allow your real estate agent and other professionals to communicate with your lender, you must submit a letter of authorization. This letter should include:

• The Date
• Your Name
• Best Contact Information
• The Property Address
• The Loan Reference Number
• Your Agent’s Name and Contact Information

Preliminary Net Sheet

A preliminary net sheet is an estimated closing statement that shows the sales price you expect to receive, the cost of the sale, unpaid loan balance, late fees, and real estate commissions. Your closing agent or lawyer can help you prepare this.

Draft a Hardship Letter

Your real estate agent will help you draft a hardship letter to explain to your lender why you can no longer afford your home and need to sell through a short sale. Attach proof of your financial hardship, such as credit card bills or W-2s, to strengthen your case. Lenders generally understand that certain hardships are unavoidable.

Submit Proof of Income and Assets

Your lender will require full financial disclosure. Be prepared to provide information about your savings, stocks, bonds, properties, and any other assets you may own.

Submit Copies of Bank Statements

You’ll need to submit bank statements to your lender. Be prepared to explain any unusual transactions or large cash withdrawals that might appear suspicious.

Prepare an Accurate Comparative Market Analysis

Your real estate agent will prepare a comparative market analysis (CMA) to show that property values in your area have declined, helping justify the short sale to the lender. The CMA will show:

• Active properties on the market
• Pending sales
• Properties sold in the past six months

Purchase Agreement & Listing Agreement

Once you have a buyer, your real estate agent will submit a sales contract, along with your listing agreement, to the lender for approval. It’s important that the sales contract notes the deal is contingent on the lender’s approval. Some lenders may renegotiate agent commissions or request payment for certain items, such as termite inspections.

Most lenders will also require an arm’s length affidavit, ensuring there’s no pre-existing relationship between you and the buyer, confirming that the offer reflects fair market value.

Get an Approval

Once the required documents are submitted, the waiting game begins. Michael and Anita Marchena will be your advocates, persistently following up with the lender to secure approval for your short sale. While the process can be slow, we remain committed to seeing it through to completion.