There are many misconceptions about short sales. I am going to try and give you a good idea of what constitutes a short sale. First of all, a short sale is only approved by the lien holders. Real Estate agents don’t make these decisions, homeowners don’t make this decision, and home buyers don’t make this decision. The lien holder has to feel that a short sale is in their best interest. They need to determine that they are going to take a loss and how to minimize it. The lender isn’t going to approve a short sale if the home owner hasn’t missed any payments in most cases. They need to review the financials of the home owner. They typically ask for the two most recent pay stubs, prior years’ tax returns, and the two most recent bank statements. The home owner is also asked to submit a hardship letter.

The biggest misconception that I have heard is that an individual has bought a second home for investment purposes. The market has dropped and they can use the short sale process to get out of their investment. Because you have made a bad investment, the lien holder is not going to let the investor better his position at the lenders expense.

Short Sales are done to help the lender try and keep the homeowner out of foreclosure period. Lenders are in the business of making money, by lending money, not reprocessing properties in a declining market.

Short Sales are a process that occurs in pre-foreclosure. The time line is as follows.

1.)    Homeowner misses mortgage payment. The lenders customer service starts to call and collect debt.      

2.)    After the third payment is missed, the lender hires an attorney and files a default notice with the court and the result being that the collateral of the loan is put up for auction. (The House). At this point, the lender moves the account (The File) to the loss mitigation department since customer service could not collect the out standing balance on the note. The default notice has a court date before a judge. The judge can dismiss, delay, or up hold the lenders request to foreclose. I have heard of judges in Kissimmee, Florida delaying the default notice if the homeowner is accompanied by a licensed Realtor that has listed the home. I even read something today that a judge in Ohio dismissed the default notice. Most homeowners ignore the notice and fail to appear. Leaving the judge little or no option but to uphold the default notice.

3.)    With the court dockets full of these default notices, about 100 a week here in Osceola County, Florida. The next process is delayed about six months. That is the auction at the court house where the lender has the opportunity to sell the property and recoup some of their loss on the loan. With properties not bringing much at auction, supply and demand principals, lenders are forced to buy the properties back and sell them as REO’s.

Misconception number two, the homeowner needs to move out or be evicted after being served the notice to appear in the default hearing. The property belongs to the homeowner up until the time it changes ownership at the auction, usually up to nine months after the first payment was missed. They cannot be evicted unless they evict themselves.

Misconception number three, the homeowner cannot do a short sale because they cannot afford the closing costs and Real Estate commissions. These are figured into the short sale by the bank and are paid out of the proceeds of the sale. The Lender pays them. Is the Real Estate agent guaranteed their commissions, No.? The lender may negotiate them with the Realtor to find a way to minimize their loss.

So, the reason a Realtor would want to do this is, to save the homeowner from foreclosure and extensive damage to their credit report. This service should help solidify a relationship with the Realtor and the homeowner. When the homeowner is ready to buy their next home, the Realtor will get a sale. The Realtor is also giving a service to the lender, A relationship that may yield REO’s from the lender in the future. Most importantly, a commission is involved in the Short Sale.

The next post will deal with the qualifying process. Please post any and all questions you may have on this topic.

The Resident Mark