A short sale is not a regular listing with extra paperwork. The seller, buyer, servicer, investor and sometimes a mortgage insurer or government guarantor all have a role. Add two agents, a title company or attorney and a property valuation, and there are plenty of places for the transaction to fall apart.
One mistake can cost everyone months and may cost the seller the opportunity to avoid foreclosure. This is not a transaction agents should casually figure out as they go.
Your short sale checklist
Here are seven steps that matter from the first seller conversation through closing.
1. Identify every decision-maker and get authorization
With the seller participating, call the mortgage servicer. Determine who owns, insures or guarantees the loan. Is it Fannie Mae, Freddie Mac, FHA, VA or an investor holding the loan in its own portfolio? Who can approve the short sale, and will the file run through the servicer, Equator, Fannie Mae’s HomePath for Short Sales or another platform?
Ask what type of third-party authorization is required and when it expires. Some servicers accept verbal authorization, some use their own form, and others accept a written letter.
The agent can guide the call. When the conversation turns to the seller’s finances or hardship, let the seller answer. Never create or embellish a borrower’s hardship.
2. Open the file when you take the listing
Do not wait for an offer to organize the loss-mitigation file. Starting early allows time to determine which seller documents are required, correct missing items and begin the valuation process.
Rules vary even within the same investor. Fannie Mae allows streamlined short sales with reduced documentation in some cases, but eligibility depends on the loan status and the borrower’s circumstances. Confirm whether the file needs a complete package or qualifies for a streamlined path.
Confirm how documents must be delivered. If the servicer requires the borrower portal but the authorized agent has no access, request third-party access, a secure upload link or another approved method. Do not have sellers share passwords or authentication codes.
Opening a short-sale file does not automatically stop foreclosure. Sellers should continue monitoring every legal deadline with the appropriate professional.
3. Send the listing to title or an attorney immediately
Use the title company, settlement agent or closing attorney appropriate for the state. Order the necessary title and lien work as soon as the property is listed.
Identify second mortgages, judgments, tax liens, HOA or condominium balances, probate issues, solar or PACE obligations and anything else that could prevent clear title or reduce the first mortgage holder’s net. Ask which municipal, utility and association searches or estoppels are also needed.
That same closing professional should prepare preliminary settlement figures when an offer arrives. Discovering a title problem at closing can destroy months of work.
4. Understand the valuation and support your price
Depending on the program, value may be determined through a BPO, appraisal, automated valuation or a combination of methods.
If the value is too high, do more than argue. Document the property’s condition, repair costs, insurance problems, relevant comparable sales, days on market, showing feedback and prior failed offers. Include active competition and builder incentives that affect what buyers will pay.
Use the investor’s formal process when one exists. Fannie Mae’s HomePath for Short Sales, for example, includes a value-dispute process. Evidence gives the negotiator something that can be reviewed and defended.
5. Vet the buyer for the short-sale process
The highest offer is not always the strongest offer.
Know the buyer’s true maximum, financing strength, closing flexibility and willingness to wait for approval. Obtain the required preapproval or proof of funds.
Then compare the offer with the rules controlling the file. If the investor prohibits a home-sale contingency, do not submit one. If specified documents require wet signatures, electronic signatures will not replace them. Plan early for out-of-state parties, original documents, notaries and delivery time.
A buyer who cannot meet the investor’s requirements is not a workable buyer.
6. Negotiate the lender’s net and the seller’s release
The lender evaluates what it will receive after approved expenses. Work with the closing professional to account for commissions, taxes, title charges, association balances, subordinate liens and any requested seller contribution.
Do not assume every investor allows the same expenses.
If an offer is below the investor’s figure, determine the buyer’s actual ceiling and submit the evidence supporting the lower value. Keep a purchase-price counteroffer separate from a requested seller contribution.
Never assume approval wipes out the remaining debt. The written approval must clearly address the deficiency, and the seller should obtain legal and tax advice.
7. Close exactly as approved
Read every line of the approval letter. Confirm the price, minimum lender proceeds, authorized commissions and costs, junior-lien payments, seller contribution, closing deadline, signature requirements, deficiency treatment, relocation assistance and any arm’s-length or resale restrictions.
The final settlement statement must match the approval. Do not add credits, fees or payments that were not authorized. If anything changes, obtain written approval before closing.
Make sure the closing professional understands short sales. A missing signature, incorrect figure or unauthorized payment can cause the servicer to reject the payoff or refuse to release its lien.
The work is worth it
Some short sales move smoothly. Others make everyone involved want to pull their hair out.
That is why agents need the right people on both sides of the transaction and enough knowledge to recognize trouble early. When the work ends with the seller avoiding foreclosure and receiving a written release from the remaining mortgage debt, it is worth the fight.
But nobody should learn this process by improvising with someone else’s financial future.
Money Matters Month is here. All September, Inman is focused on the financial side of real estate — the part nobody teaches you when you get your license. How to budget through lean times, protect your profits when business is good and find new ways to grow your bottom line no matter what the market is doing.
Patti Omalley is a real estate broker and educator. Get connected on Facebook and LinkedIn.
