Short Sales: What to expect

Content Written By: April Wilson, Ryan Winter LLC contributing writer

Many real estate professionals expect an uptick in short sales this coming year following the struggles seen in 2020. US Patriot Title, a title company in Jacksonville, is committed to helping real estate professionals around Florida understand how short sales work so they can better serve their customers. Realtors representing a seller will need to walk their client through how the process works, explain their eligibility for a short sale, list the property correctly and negotiate buying options with the lender.

Why do homeowners list as a short sale?

Homeowners have an option to list their home as a short sale if they run into unforeseen hardship (divorce, medical emergency, job loss) and their home is worth less than what is left on their mortgage. “A short sale, or pre-foreclosure sale, occurs when a property is sold for less than the amount due on the mortgage,” Jean Folger wrote in a article on the short sale process. This means the homeowner cannot sell the home for enough money to pay back the lender for the loan taken out on the home.  

While a short sale does affect the homeowner’s credit, it does less damage to their credit than a foreclosure. In many cases, a short sale is a better option than foreclosing on the home. Lenders many times will cooperate with a short sale because it is an easier and shorter process than foreclosing and repossessing the home. 

With many Americans losing work, losing loved ones, and experiencing expensive medical situations in response to the COVID-19 pandemic, many professionals, unfortunately, foresee homeowners needing to sell their property as a short sale, or fall into foreclosure. 

What does the short sale process entail?

Once a homeowner realizes they need to sell their home or risk being foreclosed on, they will reach out to a real estate professional to value their home.

At this point, the value of the home in the current market will either be enough for the family to pay off their mortgage and any liens on the home or not. If the value of the home is not enough to satisfy what the homeowner owes on the mortgage, the homeowner will have to decide if they want to go through the process of getting approval for a short sale. 

As their Realtor, it is important to advise your client to seek additional legal and tax advice before deciding to move forward with the short sale process. While a short sale may be the best option, the decision shouldn’t be taken lightly. There are many possible legal, credit and tax ramifications for selling as a short sale. Your client should be well informed about their specific situation before making their final decision.  

The National Association of REALTORS recommends advising “the seller, in writing, to obtain separate legal, credit, and tax advice.” NAR goes on to say that, “A short sale should never be the first choice because it carries with it serious negative credit and, possibly, tax consequences.”

If the homeowner feels a short sale will best suit their financial situation, they will need to write a letter to their lender explaining what hardship they are experiencing and why they are requesting approval for a short sale. Along with the letter, the homeowner will need to send the lender documents supporting their request (documents showing loss of job and income, medical financial statements, divorce documentation, the current evaluation of the home, tax documents, etc.)

The lender will review the documentation and work through possible alternative options with the seller. Hopefully, the seller and lender can work something out, but, sometimes, a short sale is the best option for the circumstances the homeowner is under. NAR encourages homeowners in this situation to consult with a “HUD-approved credit counseling agency prior to making any decisions.”

Listing Process

Once the lender is aware and open to a short sale, the home can be listed for sale as a short sale. From here, the process is similar to selling any other home. People visit and look at the home and offer an amount for the home based on what they feel the property is worth. The difference is, the Realtor has to help price the home not only for what will sell quickly but also for an amount the lender will approve of. Once an offer comes in that the homeowner approves, the offer goes to the lender for approval.

Approval Process

This is where the process can get a bit lengthy. The real estate professional will negotiate the offer with the lender for approval. 

 “If the seller accepts the offer from an interested buyer, the listing agent sends the lender the listing agreement, an executed purchase offer, the buyer’s preapproval letter and a copy of the earnest money check, and the seller’s short sale package,” Folger says in the article.

The lender will review the packet from the homeowner and the offer from the potential buyer. This process can take weeks. If the lender accepts the offer, the seller and buyer can move forward with the sale. It is important to note that none of the money from the sale goes to the seller. 

After the sale is complete, the seller will want to continue working with legal, financial, and tax professionals to satisfy any outstanding balances and hopefully minimize any negative results.

What should a buyer know and expect?

Buyers can get great prices for homes through a short sale. Many times these homes are priced low because the seller wants to sell quickly. A potential buyer should do their research to make sure they are actually getting a good price. While a short sale can be an opportunity to get a home at a discounted price, Investopedia warns that some short sale homes aren’t priced this way. It’s important as a real estate professional to understand the true value of homes to help protect buyers.

The drawback is in addition to the seller accepting the offer, the lenders have to approve the offer. In a short sale situation, the lender has a lot of power over the sale of the property. The offer approval period can take time – weeks, even months.