As my short sale inventory increases, I'm finding it absolutely essential to be able to explain the short sale process in a way that help distressed homeowners feel comfortable and confident in the process. As I always, say: "there's nothing short about a short sale". Although every short sale is a unique transaction, the average short sale is taking about 4-6 months before we receive approval from the banks. Then, the buyer is offered 30-45 days to close escrow. There are many steps in the short sale process, so let me offer an overview here:

Homeowner Defaults on Payments
By and large, it's only once a homeowner has actually missed at least one payment, do they begin to seek good advice to understand their options. In most cases, I'm hearing from homeowners who have pursued a loan modification only to find the terms unacceptable.

I'm generally called on at this point for consultation, only to find that a short sale is the only option to avoid foreclosure. My experience has taught me that the earlier the homeowner starts the short sale process, the higher the success rate. This is mainly because every month that the homeowner misses a payment, those missed payments and any penalties get added on to the balance of the loan. This creates a greater spread between what's owed and the property's current market value. The banks are using very precise calculations to determine what a good short aale deal is for them based on how much of a loss they are willing to take.

List Property for Sale
Once I am hired as the agent to list the property for sale, I go to work to determine market value of the property using a comparative market analysis. My goal in pricing the property is to price it such that it generates immediate activity. Ideally, I want my short sales to be receiving an offer within 2 weeks, and more ideally, more than one offer. In order to accomplish this, while ensuring that we get an offer that will be acceptable to the bank, I price the property within 10 percent below market value. This way, buyers can obviously see that it's a good deal. And I know that this will put us in an acceptable range for the banks including all the other settlement costs they will incur. YES, the bank pays ALL the closing costs, NOT the homeowner...that includes my commission.

Seller Completes Hardship Package
I provide my clients with a Short Sale Package which covers everything the bank will need from the homeowner in the way of documents that they will need to gather and fill out. I collect all this information and organize it in a very specific way so that it is easy for the banks to process the file. The number was staggering last year: 80% of short sale files ended up going to foreclosure. The #1 reason: banks rejecting files.

Submit Short Sale Package
Only once we have a solid accepted offer can we submit the Short Sale Package to the bank. Otherwise the file is incomplete and it will get sent to the shredder. The Short Sale Package is made up of the homeowner's hardship package, the signed offer, and the HUD1 Estimated Settlement Statement. This is something my escrow officer prepares which gives the bank all of the settlement costs and the net amount of the sale. Where the HUD1 gets tricky is in dealing with 2nd lienholders. We must make assumptions about what the 1st lienholder will be willing to offer to the 2nd, and at the same time, project what the 2nd lienholder will accept based on a percentage of the loan value.

Submission of the package can be the most challenging step in the process, as the banks are being inundated with files. Some banks are processing hundreds of files a week with limited staff. Many banks require files to be faxed in. An average short sale package can be 150 pages. With volumes of these documents coming in day and night, it's a miracle to get confirmation of receipt on the first go-round. Many banks require re-submission multiple times.

Negotiator Gets Assigned & BPO Is Ordered
Once the file is actually confirmed to be received by the bank, the file is assigned to a Negotiator. In an ideal scenario, the Negotiator orders the BPO (Broker Price Opinion) or appraisal within a week. This is rarely the case, however. It can take as long as 3 weeks to get the BPO ordered. Some banks are now requiring 2 BPOs or appraisals. The BPO/appraisal is the critical ingredient for a successful short sale, as this is the price that the bank uses to determine fair market value of the property. I meet the BPO agent or appraiser at the property armed with my own BPO. I have to work very hard to ensure that the appraisal comes in at or below our accepted price.

Negotiate the Short Sale
The short sale negotiation process is time intensive. Negotiators are hard to get on the phone since their days are mainly consumed with their heads buried in files made up of hundreds of pages. It's not unusual to leave daily messages, sit on hold for an hour or more, only to speak to the negotiator or get an email once a week saying "the file is still under review".

Bear in mind, that the bank is nothing more than a servicing company. The negotiator's job is to package the 'deal' so that it's ready for the investor's approval. Once the negotiator has collected everything needed for their 'case', the file is then taken to the asset manager behind the loan.

The final details are negotiated, and the lender agrees to accept the offer. If there are other liens on the property, such as a 2nd mortgage, this must also be negotiated and settled prior to the sale. Most 2nd lienholders will not negotiate until the 1st lienholder has approved the short sale. So at that point, the terms for the 2nd lienholder's release are critical to be completed quickly so as not to hold up the closing of the transaction. 1st lienholders generally offer no more than 45 days to close the sale. At this point, a final HUD-1 is drafted to reflect the final price and terms and the lender(s) signs off and issue a written approval.

I am proud to say that my track record is a 100% close rate on short sales.

If you or anyone you know wants more information on the short sale process or needs a consultation to understand if a short sale makes sense, please call me at 310-487-0099.

And please consider attending the next Town Hall Meeting for Homeowners to get the full low-down on short sales in Los Angeles.

All the best!

Dana

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