The Short Sale Process Part 1 – How to Hit a Bull’s Eye While Blind Folded

February 8, 2010

Residential

But Is It Worth the Wait?

But Is It Worth the Wait?

As an avid blogger I spend countless hours per week writing articles, reading blogs, and doing research to sharpen my understanding of commonly and some times uncommonly asked questions. One of the most common topics I come across is the short sale. Believe it or not there are still many people out there who think that a short sale is the quickest way to buy a home; hence the name right?

More often than not the question I come across regarding short sales involves an uncertainty of the length of time it will take to navigate this process successfully to the end. Unfortunately the answer can be equated to the number of licks it takes to get to the center of a Tootsie-Pop. Although we have the desire to play the part of the owl who can crunch his way to the finish line, our wings are tied.

Three Short Sale Questions I Commonly Encounter

  1. Why does a short sale take so long?
  2. Where are the disconnects that drag the process out?
  3. Given the huge demand for this type of sale from both sides of the transaction, what is being done to streamline this process?

In my experience as a Realtor® and a member of society in general, I’ve found greater success focusing on the solution to a problem rather than the problem itself. That said, the goal of this two part article is to explore the third question and in my effort to to do so I must set the stage by answering, the first two.

In Part One you will find time periods enclosed in brackets “[ ].” This will be my “Short Sale Timer” to help track the potential time of my hypothetical short sale scenario. As you read you may begin to think that this story has more turns than a “Choose Your Own Adventure” book on auto pilot and you are right!

PART ONE: A Typical Short Sale Process. Defining a Need for Regulation.

(If you are familiar with the short sale process and are more interested in the regulation portion please skip to PART TWO.)

[Day 1] A borrower finds themselves in a financial hardship and unable to afford their mortgage. At the same time they find out that due to falling home prices they owe more on their home than its current market value.  The challenge is how to get out of this mortgage, being upside down on their home. A few options are, bankruptcy, foreclosure, short sale, or a loan modification.

Bankruptcy and foreclosures having the strongest impact on credit are usually a last resort for buyers. I could not find any hard statistics on loan modification approval rate, however in my experience and extensive reading I have found that this process is unfriendly to many people who try to obtain one. As such many home owners are faced with one option: short sale.

What’s a Short Sale?

A short sale is when a borrower asks their lending institution to accept less money than what is owed on the loan. Given that banks do not lightly engage in this activity, the application process itself is daunting. From my experience on both sides of the transaction, a bank will often not even consider a short sale application until the property has been on the market for long enough to receive some offers. That said, the borrower must take the plunge into credit score ruin and stop making their payments. No bank will grant a short sale to a borrower who is making their payments! Yet again, some banks will not even consider a short sale application until there is an offer on the property. There in lies the first time consuming hurdle of the process.

How does a seller get an offer on a house that is worth less than what they owe in a market where people who qualify to buy are becoming more and more rare, while at the same time obtaining an offer that will satisfy the bank? This question becomes increasingly difficult because the bank will not tell the borrower what they are willing to take until they’ve received an offer that is worth countering.

The answer for any experienced agent is simple, put the home on the market for just under its market value and continue to periodically drop the price until you have dropped it low enough that you have received multiple offers. This is another time consuming step in the process as these offers do not come in all at once and often times the first offers do not stick around for the last few.

[Three months in] The agent may get an offer, then a week goes by and the price continues to drop, then a couple more, and finally when the agent has enough bids to hopefully satisfy the bank [Four months in] there is one last step before presenting the offers to the bank with the completed short sale packet. The agent now sends around a “call for best and final offer.” This is an important step because the bank often times does not negotiate and therefore people must prove in writing that the offer they made is their best offer. The call for best and final offer gives any buyers that haven’t dropped off during the wait a chance to raise their offer one last time before it is presented to the bank for consideration.

The borrower accepts the best offer, signs it, and their agent returns the signed offer to the highest bidder and informs the rest that they’ve just wasted a little over four months. The sad part for those people who were denied is they do not have proof that their offer was not the highest or best?they have to take the listing agent’s word on it.

Many Banks Take Three Months to Acknowledge a Short Sale Packet

[Four months, one week in] Assuming that the borrower has completed the rest of the short sale packet during the time their property has been on the market, they are now ready to submit. This packet, which contains a hardship letter explaining why the bank should consider approving the short sale, financial records backing up the letter, the listing sheet to verify that the home was listed for sale, the offer from the qualified buyer, and a third-party authorization form so that the agent can talk to the bank, must be presented to the bank in it’s entirety. If you submit an incomplete packet, it will be discarded. For this example let us say that the packet is complete at the time it was submitted.

Some banks take a minimum of three weeks to a month to acknowledge the receipt of the short sale packet. Many (who will remain nameless) take much longer. Taking into consideration how often these packets are “lost” or “never received” by the bank (no joke) let’s settle on three months for this step. Now that the bank has confirmed receipt of the packet the agent calls up and hits a road block: the third party authorization form, which was faxed with the short sale packet should have been faxed to a different fax number and therefore the agent cannot communicate with the banks representative. The agent quickly faxes it in, however it can take seven to ten business to receive and process this letter.

What’s a BPO and Why Does It Matter?

[7 months, two weeks in] After the bank has received the short sale packet, they assign a contact person, sometimes referred to as a negotiator. Now that the third party authorization has been confirmed, the agent may contact the negotiator and find out what the next step is. Most of the time the next step for the bank is to order a BPO. This is the banks version of a Comparative Market Analysis (CMA) and this number will determine what the bank feels the property is worth in the current market.

While ordering the BPO the negotiator reviews the offer to find out if, other than price, the terms of the offer are acceptable to the bank. If there is anything in the offer that the negotiator deems too risky to proceed with, such as the type of loan or an inspection contingency that might kill the deal, the negotiator will deny the offer without an explanation and make the agent put the place back on the market to get an offer with acceptable terms. There is no regulation on this step of the process either.

Often the original bidder is fed up after waiting five months or so and moves on to another property. Since this is common let’s say it happens only once in this case and because this article is turning into a novel, let’s say that the agent is able to find one of the other original bidders that hasn’t already become tied up in another property and convince them to write an offer with no contingencies and re-present the short sale packet to the bank. After another month or so of waiting for the bank to confirm receipt of the packet, we finally have the negotiator deem the terms of the contract, other than price, acceptable.

[Nine months in] Now that the negotiator has the results of the BPO, they compare that value to the offer price on the contract. Unfortunately, the bank thinks the value of the property is $200,000 and the offer price was $150,000. Hopefully the buyer’s agent explained that having the seller accept their offer is meaningless until the bank signs off. Being this far into the process the negotiator will most likely, in their benevolence make a counter offer. Since the chances are fifty-fifty that the bidder walks or negotiates with the bank to an acceptable amount, let’s say luck is on the side of the seller and the buyer and the bank settle on $175,000 and the bank gives approval to the contract.

[Nine months, two weeks in] Now the buyer has to ask their bank to borrow more money, assuming they are obtaining financing. At this point the borrowers bank orders an appraisal on the property.

Enter the Appraisal Hurdle

[Nine months, three weeks in] The bank appraisal comes back. The appraisal company the bank used is in California and the property is in Chicago. As such the appraisal company, not having a grasp on local values under values the property by $25,000, and the bidder’s bank denies the loan amount. Again, this story could take a couple different turns at this point: The bidder can back out, making the seller and agent put the home back on the market and start from scratch or go with a different underwriter and hope to get a better appraisal amount given that the BPO of the seller’s bank said it was worth at least $175,000. Let’s say the bidder really wants this property and decides to go with a different lender and the lender approves the loan based on an appraisal that corroborates with the BPO.

[Ten months in] We have a clear to close. Assuming no other surprises after the better part of a year has passed, the closing concludes and everyone goes their separate ways.

No Regulation

Depending on countless variables this story could be written and re-written many different ways. If everything would have gone smoothly, the process could have taken as little as four months. Had that buyer walked away after the first appraisal came back low, the process could have taken twice as long; this is especially true since as time goes on property values in many areas continue to fall making the situation that much more tricky.

At no point in this process were any of the steps by the seller, the seller’s agent, the seller’s bank, the buyer, the buyer’s agent or the buyer’s bank regulated in any way when referring to how much time they must complete each step in or what they’re expected to do. As a result, the process has the potential of being a significant waste of time for all involved, and often is. Many short sale endeavors still end up in foreclosure because of the obstacle course the seller faces. In addition, many serious buyers are turned away from buying a house as they have wasted precious time and hard earned money on appraisers, inspections, and more in their failed attempt to buy this short sale. One thing the housing market and the economy at large does not need more of is reasons not to buy a home. Hopefully this illustration or your own personal experience has clearly established the need for regulation of the short sale process.

Please look for Part Two of this article: What Is Being Done To Regulate the Short Sale Process?

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About Randy Whiting

Randy Whiting is a respected Chicago real estate agent at Lucid Realty a full-service brokerage that offers discounted commissions to sellers and rebates to buyers. With plenty of experience on both sides of the transaction and all type of sales be they conventional, FHA, short sale, or foreclosure; Randy has an experience-driven comfort level that usually rubs off on his clients. In addition, his experience working with developers allows him to provide an in-depth understanding of new development and gut-rehab properties as well as re-sales. Outside of his work as a realtor, Randy spends his time writing and performing music and enjoying the outdoors as often as possible. You can contact him at RWhiting@LucidRealty.com

View all posts by Randy Whiting

8 Responses to “The Short Sale Process Part 1 – How to Hit a Bull’s Eye While Blind Folded”

  1. Justin Boland Says:

    Randy, hats off. The Short Sale niche has attracted a lot of lazy bloggers and plagiarism entrepreneurs, and my daily Google Alerts on the subject are mostly noise.

    This, however, was excellent and comprehensive and actually taught me a number of new details, too. As someone who’s been doing web content for way too long, thank you for putting the time in to Do It Right.

  2. Short Sale Artisan Says:

    Randy, one of the best basic descriptions of the Short Sales process I’ve read so far. Very informative but not mind-numbingly so. I particularly like your discussions on the BPO and Appraisal steps.

    I think one thing as well that throws even another twist in this is when you have investors involved with purchasing short sales; and in particular when investors are looking to get creative with the note by either buying the note instead of the deed; trying to arrange a double-closing (which is increasingly becoming frowned upon and actually not even an option with the April 1st changes coming down the pike).

    Great post! A+

  3. Randy Whiting Says:

    This market is rewarding creative people., I have an investor that is looking to buy property now solely for the purpose of locking in a low interest rate as a selling feature (as an assumable loan) once the rates shoot back up.

  4. Mortgage Girl Says:

    “once the rates shoot back up”…the positive vibes are turning into a reality. Rates are starting to go back up after a few months of stalemate I think.

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