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Short sales are a hot topic right now — especially with the foreclosure moratorium set to expire at the end of June. That means we’re going to be seeing a lot more of them in the coming months.
It also means it’s likely that you or an agent who works for you will be asked to handle a short sale in the near future. But because this is a completely different type of transaction, it’s important that you know exactly what you’re getting yourself into. It’s not as simple as calling the bank and asking them to agree to a short sale.
If you handle the process properly, you’ll be helping homeowners in need ethically get out of a financial obligation they can no longer afford, avoid foreclosure and move on to the next chapter of their lives.
On the other hand, if you handle it improperly, you’ll make the situation worse for everyone involved. So, in this article, I’m going to outline seven things real estate agents need to know about short sales.
This will accomplish one of two things. It will either help to prepare you for the monumental undertaking of handling a short sale for your clients, or it will show you that you’d prefer to just refer these types of transactions to someone who specializes in them.
In either case, this knowledge will help equip you to have the knowledge you need when it comes to short sales.
1. Not every situation is a potential short sale
When dealing with a distressed homeowner, doing your due diligence is essential before putting any time and effort into negotiating a short sale.
I’ve seen far too many cases where a homeowner came to me after another agent tried and failed to execute a short sale, only to later find out they had plenty of equity and never should have considered that in the first place.
The first step here is to get the current payoff amount directly from the lender. A lot of homeowners and agents alike simply look at the mortgage statement and run with that number.
The problem is this is often inaccurate — especially when the homeowners are behind on their mortgage and are accruing penalties and interest. I’ve even seen cases where the difference between what the homeowner thinks they owe versus what they actually owe is more than $100,000.
The next step is to pull comps and establish current market value. This data, combined with the current payoff amount, will determine whether a short sale is the best course of action. The simplest way to determine if the homeowner has equity is to factor in all costs, and if the homeowner has to bring any funds to closing, it’s a short sale.
2. Collect all necessary documents upfront
As a real estate agent, you’re already used to collecting the documents necessary for the sale or purchase of a home, so you understand this concept well.
But a short sale is an entirely different beast because in addition to the standard paperwork that is required for standard real estate transactions, there is another set of information you’ll need to prepare, which varies from lender to lender.
This means you’ll have to find out exactly what documentation your client’s lender needs in order to facilitate the short sale, make sure it’s completed perfectly and then submit it all at once.
This helps streamline the process for both you and your client, and it reduces the likelihood of getting a “no” or major delays from the lender. When they have all the info they need and can see that you’re prepared and professional, your chances of getting a “yes” go up dramatically. I can’t emphasize the importance of that last part enough.
Most agents don’t know how to handle a short sale properly, and they demonstrate that to the lender by starting off unprepared and disorganized. This often leads to a lender refusing the short sale offer — and I can’t say I blame them. After all, why would they go through the hassle of this lengthy and tedious process if they don’t believe the agent can follow through to completion?
So, start the relationship off on the right foot by asking the lender what specific documents they need for a short sale, and then provide that to them in one organized package. Failure to do that will result in your package getting rejected.
3. If you get a ‘no,’ you’re asking the wrong questions or talking to the wrong person
I often tell people, “If you get a ‘no,’ you’re asking the wrong questions or talking to the wrong person.” What I mean by that is you have to first completely understand the process, and then talk to the right people about the right things.
The short sale process is complex and varies from lender to lender, so if you’re getting a “no,” you’re most likely asking the wrong questions. Asking the right questions requires you to thoroughly understand the process — specifically, the process as it pertains to that lender.
When you understand their process, you’ll be equipped with the knowledge to get a “yes” and keep the transaction moving forward.
If you’re certain that you’re asking the right questions, but you’re still getting a “no,” then you may be talking to the wrong person. Maybe they don’t know the solution so they tell you “no,” or maybe they don’t have the authorization to tell you “yes.”
Ultimately, you need to find the right person who can give you the answer you need.
This is often easier said than done because different employees working for the lender handle different parts of the process, and they may not know anything outside of their specific job. They may not even know who you should talk to about a particular problem.
Finding the right person often requires trial and error, along with a healthy dose of diplomacy, but it’s an essential part of the short sale process.
4. Communication is key
Because there is significantly more paperwork with a short sale, there is also significantly more communication necessary.
There are two reasons for this. The first is that it doesn’t take a genius to understand that more paperwork will require more communication with both the homeowner and the lender.
But the second reason catches most agents off guard, which is that the stress of the situation causes homeowners to be, let’s say, needier than the typical client. And who can blame them? They’re dealing with one of the most stressful things they’ll ever experience, so they’ll want a lot of reassurance along the way.
You’ll likely find that you spend a lot of time playing part-time therapist throughout the short-sale process. It is so important to keep in constant communication and set the expectations with your client right off the bat.
You should prepare for two to three times more communication needed to close a short sale compared to a traditional transaction.
5. A short sale is not a short process
Despite the word “short” being part of the name, a short sale isn’t actually a short process at all. In fact, a short sale will typically take at least three to six months because of the extra paperwork, communication, and negotiations that go into it compared to a standard real estate transaction.
This is why so many agents give up midway through the process. “Short” simply refers to the fact that the lender is accepting less than is actually owed in an effort to avoid an even more costly and time-consuming foreclosure process.
6. Relationships are essential
I’ve talked about how short sales require significantly more paperwork than a standard transaction. Aside from the obvious challenges this creates, it also creates another, more subtle challenge.
When a problem arises during a short sale, such as an error in the paperwork or missing info or any number of other things that could go wrong in this type of transaction, you want to be more than just a number to the lender.
Having the right relationships already in place helps ensure that they’ll contact you right away when they identify a problem and will be more willing to work through that problem rather than just killing the deal.
Relationships also help you to get the right answers in a timely manner.
Another benefit that comes from the right relationships is that when you have a track record of successfully closing short sales with a particular lender, their team knows you can deliver, and you’ll get more flexibility and support from them.
Relationships with the right people are essential to a smooth short sale process.
7. Everything is negotiable
Because a short sale tends to be more stressful than a traditional transaction, homeowners and agent alike are often reluctant to negotiate some aspects of the deal.
I understand the mindset. This is a high-stakes situation, and they’re scared to blow up the deal. But taking everything at face value can be a disservice to both the homeowner and the lender.
It can result in more costs for the homeowner, and if the deal can’t be closed because someone was afraid to negotiate, both the homeowner and the lender lose because that forces a foreclosure.
Everything in a short sale is negotiable. This includes what the lender is willing to accept at a payoff amount, to HOA fees, IRS liens and literally every other part of the transaction. You just need to be able to make your case justifying your position.
The rule I live by is never accept no. So many transactions that I have successfully closed wouldn’t have happened if I didn’t have that perspective.