Why do banks take so long to approve a short sale?

This question comes up over and over again from Realtors, homeowners and homebuyers everywhere I go. A one sentence answer doesn’t exist for this question. If you truly want to know the answer to the question, “why” continue reading.  This means you will have to take a step back from your particular emotional situation enough to really listen to what’s being said because everyone wants their deal approved NOW. 

Banks are under no obligation to approve your short sale.  I know what you’re thinking, reader. You’re thinking, “Well if the G.D. bank would just approve my short sale faster, they wouldn’t be losing so much money!”

Let’s start at the beginning. A homeowner is said to be in a short sale situation when he or she owes more than what the home is currently worth, is in default and must sell.  Traditionally, homeowners agreed to pay back the difference between what was owed and the sales price. The short sale seller signed a new, unsecured note at closing and promised to pay back the difference in regular monthly installments.  The only cases where the debt was “forgiven” was for true financial hardship cases where there was absolutely no way the homeowner could ever repay the difference. An example would be the untimely death of one of the breadwinners. But that was then.

In today’s politically charged, loan modifications for all, HoHo, let’s-dump-everything-into-FHA environment, homeowners in a short sale situation today are receiving debt forgivness and even temporary tax exemptions on top of that.  Don’t worry, the rest of us tax payers will pick that up for you.

The first step in figuring out why your short sale is taking so long to be approved is to inquire about whether the homeowner is asking the bank to forgive the difference or if the homeowner is gainfully employed and able to pay back the difference.  This all must be proven and documented to the lender’s satisfaction.  If the homeowner is asking for debt forgiveness, the short sale will take longer to approve if the bank does not have all the required documentation.

Thought question: Why would any lender approve a short sale, especially one that requires debt forgiveness, unless there is proof that foreclosure is imminent? Answer: They won’t.  Lenders have to weigh the costs associated with the short sale proposal against the cost of foreclosure.  If a homeowner has not yet defaulted on their loan, the bank has little motivation to approve the short sale. Why not wait for a better offer to come along?  (Note, homeowners reading this article should always consult with an attorney if you are selling short, in default, or will be in default on your mortgage loan(s).)

All loan servicing departments have processes in place for dealing with short sale approvals.  They may not have fancy computer systems so that everything is automated but maybe that’s a good thing. Look where automated underwriting got us.

Next step: Homeowners must prove that they do not have the money to make up the shortfall. This means sending in copies of all bank statements, tax returns, w-2s, and other supporting documents to verify that the homeowners is financially insolvent. Short sales are reserved for people with NO MONEY. 

Gentle reminder: The new sale must be an arms-length transaction.   Another common problem that lenders must watch for is when the real estate agent on the transaction happens to be the “assigned” buyer on the purchase and sales agreement.  The lender is not going to be thrilled in paying a real estate commission on that kind of transaction. Further, there are plenty of foreclosure rescue scams happening nationwide. Lenders scrutinize short sale offers to look for signs of fraud.  Tanta reminds us:

Is it the job of the Loss Mitigation Department to care about clearing your local RE market? No. Is it their job to care about keeping your buyer wiggling on the hook long enough to get papers signed? No. Is a short sale supposed to be a painless alternative to foreclosure for anyone involved? No. There are no painless alternatives. There shouldn’t be. There cannot be.

Next, everyone who is patiently waiting for the bank to approve the short sale must now realize that once the bank says “okay” to the short sale, there very may be a long list of investors who own pieces of this mortgage loan. Each and every investor will have to give their approval for the short sale.  We enjoyed many years of growth in the real estate industry and the overall economy thanks to the invention of Residential Mortgage Backed Securities.  RMBS made millions of dollars for many people.  The downside to securitizing mortgage loans and then selling off slices of each mortgage to different investors is that when it comes time to tell the investor “you’re going to have to take a haircut” that investor gets to have a say in the matter.

Calling loan servicing and yelling at them over the phone will get you nowhere.

I would like to be first to predict that the next meltdown will be loan servicing.  But perhaps my prediction is so obvious as to not be much of a prediction at all.  How much longer can they sustain this level of stress and pressure, with their current staffing levels, while the banks are facing enormous losses?  Of course when that meltdown happens, I predict our government will step in and mandate harsher regulations on servicers, which will be passed on to the consumer in the form of higher interest rates.

Loan servicing use to offer what it said: “service.”  It was treated as a cost center on a bank’s balance sheet.  Over the past 15 years, servicing became a “profit center” and the highest expense, namely labor, was cut to achieve profit goals.  This is one more lesson in underpricing. The cost of “good” loan servicing in which phones are answered and files processed smoothly, would have cost us all way, way, way more on the retail end, than what we paid. 

Let’s say we could create instant loss mitigation nirvana today.  All phones are answered on the first ring, all short sales are approved with no questions asked, no documentation required, no proof of hardship necessary, no proof of financial insolvency needed, and all Realtors receive their full 6% commission. 

The consequences of not performing due diligence at the loss mit stage are disaster for all of us. Compare this to the current nirvana we just left behind: A world where anyone could get a mortgage loan with no verification of ability to repay, with massive fraud still being uncovered.  We need to do it right this time, and it takes TIME to do proper short sale loss mitigation.

About Jillayne Schlicke

Educator in the field of mortgage lending and real estate. Follow me on Google+

Comments

  1. I have been reading this blog for almost a year and have never posted a comment. This is one of the best articles written for the current real estate market and situation with short sales I have read in the last 6 months. I have advised buyers that short sales can take some time, but have not been able to articulate in depth all reasons why it takes so long. I am sending a link to this article to my broker because of the great info and great way it has been presented along with a link from my newly designed website due to be posted in 2 weeks.

    Thank you for all the Rain City Guide authors for the great information that helps us in Arizona.

  2. Jillayne wrote: “I would like to be first to predict that the next meltdown will be loan servicing. But perhaps my prediction is so obvious as to not be much of a prediction at all.”

    First, thank for writing this piece.

    Second, as to the quote, I really think this is the root evil of the problem. Last year, pre-August, I was dealing with two lenders and it was obvious they had staffing issues then. It was so obvious it caused me to have my mom sell her Citigroup stock (above $50, thank you).

    That said, I don’t agree with all your conclusions. The problem with banks is that they start this entire process too late–when an offer comes in. There should be a process where the distressed homeowner can submit all their information to the bank prior to listing the property, along with comps for the property. The bank should have a method of verifying comps and then be able to approve the list price. Banks need to be more proactive, not reactive. The borrower should pay something for this (which is problematic).

    But that connects up to the staffing issues. They’re so used to spending as little as possible to service loans, that being proactive isn’t in their DNA.

    The one thing you’ve mentioned is the mortgage backed securities approval issue. I’d always assumed that there were some guidelines rather than actually requiring approval. If there aren’t there should be.

    Finally, I really think the issue of liability after the short sale is a non-issue. If homeowners are anything like my potential debtors for bankruptcy, less than 5% would accept paying more than $20,000 to avoid a bankruptcy or a foreclosure.

  3. In my dealings with the Workout Department (oh yeah — feel the burn!), I have observed that they are better suited to short sales arranged by real estate “investors” rather than genuine arms-length transactions. When an “investor” is involved, the buyer (i.e. the investor), has plenty of time to work with the bank to identify an acceptable sale price. If it takes the Workout Dept. four weeks to simply appraise the property and assign a negotiator — no problem! The buyer is not going anywhere and will work with the lender.

    In contrast, a bona fide buyer is looking for a new home. They don’t want to hang around for 6-8 weeks before the sale is — hopefully — approved by the lender. They want to know promptly whether or not the sale will go through so they can get an inspection and move forward with the deal.

    Now here is the irony: the “investor” makes money by squeezing the lender to accept as little as possible, and then immediately re-selling the property for its market value. The investor’s profit is the difference between the short sale price and the market price. In other words, the investor makes money by taking equity that should go to the lender towards satisfaction of the debt. By having procedures in place that work well with investors — but not bona fide buyers — lenders are costing themselves money.

    It’s not the sort of cost (or loss) that shows up on a financial statement, but it certainly does impact the lender’s bottom line.

  4. Jillayne does a great job of explaining many of the reasons that short sales can be drawn-out, and problematic. However, I think there are a couple other factors to consider.

    1. SOME lenders are in such dire financial straits that they simply cannot afford to forgive a significant amount of non-performing loans: doing so would require the bank take immediate write-downs on their books and force them into FDIC conservatorship. I suspect this is a large reason why IndyMac was so notoriously difficult to work with on loan modifications. Of course, different lenders have differing degrees of stress and will thus have different degrees of willingness to look at debt forgiveness.

    2. The people responsible for managing non-performing loans don’t want to take the blame for losses, and want to cover their behinds by letting the whole foreclosure process play out. This even extends to REOs. Instead of listing REOs at market clearing rates, many lenders resort to something more like a reverse auction, where they list the posessed homes for ridiculous prices to start with, and then slowly keep ratcheting the prices down until it sells. Trying to make low-ball offers on REOs is often fruitless, since the lenders are just unwilling to accept any big loss. Instead, to get a good REO deal you just have to wait a couple years for the price to have FINALLY been reduced enough that it is a bargain. Then point here, is that by never accepting an offer that is significantly below list, the people managing the non-performing loan portfolio can insulate themselves from ANY blame for losses and “giving” assets away.

    In short, lenders can have very powerful motivations governing how they handle non-performing loans, and accrue losses, that might be in direct conflict with the concept of just minimizing losses over-all.

    • Banks claim write-downs based on derogitory performance 90% of the time, and not actually when the asset goes into foreclosure.

  5. Before the LM (loss mitigation) department will even look at a file they will need:

    1. Purchase and Sale
    2. Hardship letter
    3. Documentation of the borrower’s financial profile.
    4. An estimated HUD worked up by escrow.

    Then, the only person who can get things moving is the LM underwriter. The agent needs learn the name of the underwriter and figure out a way to have a conversation AFTER the documentation in is order. The rest of the staff’s main job is to keep everybody away from the LM underwriter. If you have an established relationship with the LM underwriter, this process gets much easier as they like to work with people who know what they are doing. LM underwriters hate incomplete files and educating people along the way.

    If there is a first and second involved, this has to be done for both loans. The agent may find themselves to be conduit between two underwriters delivering settlement offers between them.

    As far as commissions. Agents do not always give up commissions. This is often a “blink” test. (Whoever blinks first, loses). After everything is settled and they go after commissions, just say no (in a nice way). I preserved all commissions in my last 2 short sales.

    This practice of real estate is becoming very specialised. I am considering referring out future short sale business to short sale specialists. True specialists have good relationships with the LM underwriters.

  6. Jillayne:

    You make some valid points. However, it is situations like this one here that frustrate people. My office mate has a client who is purchasing a $1 million dollar condo. The seller was a flipper caught with his pants down. We get to closing (docs and money at the table!) and find out the seller is short to close $28k because he is out of money. Closing postponed.

    Because of tightening guidelines, the buyer doesn’t have great financing options. The borrower’s loan disappears because the program will be discontinued in two days. She has to close NOW.

    No one can get anyone on the phone at the bank to approve a short sale of $28k on this deal. The buyer has money at the freaking closing table! We sent the wire already! But Noooooooo. The bank needs to think about this. Take a $28k loss on a $1 million mortgage and have the loan off your books less than 24 hours after agreeing VS forcing the seller into foreclosure on a $1 million dollar condo in a slow market because the banks wants to go through their “process” and you can’t find anyone to make a common sense black and white decision.

    The dumbasses at the bank aren’t getting that the buyer will not be able to buy this place two days from now. It is cheaper to just suck up the $28k vs waiting another six months to a year to sell a place and hope the current owner is making payments and the home doesn’t go into foreclosure.

  7. Sniglet, I don’t believe 1 or 2 above is correct. On number 1 the difference on the houses in foreclosure isn’t going to be that great, and in any case they’d only be delaying the results by a few months. But most importantly, it doesn’t explain why they’ve always been this way!

    As to number 2 I once dealt with a debtor whose loan officer was promoted to Special Collections (or whatever it was called) at Seafirst, adn then assigned that loan. Talk about lucky, because that was a bad loan!

  8. Kary wrote: “the difference on the houses in foreclosure isn’t going to be that great, and in any case they’d only be delaying the results by a few months”

    Really? Isn’t it possible for a lender to still keep the value of a home they have foreclosed on (and become an REO) on their books at a higher than market rate price? It wouldn’t make sense for lenders to be forced to make write downs on REOs if they wind up selling them for more than the price of the original mortgage, so I find it hard to believe that they would be forced to take a write-down on REOs before they actually sell the unit.

    If this is the case, then there could be a strong incentive to keep REOs listed indefinitely at far higher than market prices if that could delay the need to take write-downs in the books.

  9. Gosh, Sniglet, I hope you don’t work in the financial industry. I’m pretty sure your suggestion runs afoul of many federal laws and required accounting methods. And people wonder how we got into this mess…

  10. Craig wrote: “I’m pretty sure your suggestion runs afoul of many federal laws and required accounting methods”

    There is a lot of grey in accounting rules. Not everything needs to be marked to market. Just look at how banks have been able to justify keeping higher values on the debt securities they hold than the actual paper is trading for in the real world. I’ve heard bank CEOs rant about how the illiquidity of the markets mean that the “market” prices aren’t truly accurate, thereby justifying their decision not to mark their assets down to the actual market.

    Banks are OPENLY declaring that they aren’t marking down all their assets to market prices, so I don’t see why that same logic wouldn’t also apply to REOs on their books. The only time you are FORCED to take a write down is when you actually sell the asset (or foregive some of the principal).

  11. Sniglet and Craig-

    You are both right in some sense.

    FASB has changed its position before. It recently tried to change Rule 140 essentially forcing QSPEs back on balance sheet by Jan 2009. Then it changed plans and pushed the date to 2010 after realizing it would probably put a lot of banks out of business.

  12. I didn’t realize I should ask how the homeowner is planning to request a short sale with their lender. We just put an offer on a house but a short sale package has not yet been delivered so we don’t know what the lender is going to say. Tenants currently live in the home, so I’m not exactly sure what the financial status is of the homeowner.

  13. Hi Susan,

    Typically, your real estate agent would be keeping you aprised of the situation and the real estate agent for the seller would already have been working on putting together the package for the lender.

    Since this is a non-owner occupied home, I would question whether or not you actually have a short sale going on, as short sales are reserved for people in financial distress, with no assets

    If the homeowners own other real property, the underlying lender may request that the seller take on a new secured lien against their primary residence.

    Now you don’t have a short sale. You have a “seller to bring cash in at closing” transaction and this might go much faster for you.

  14. Hi Steve,

    Thanks for your kind words. How’s the short sale market in Arizona?

  15. Susan,

    Hopefully the short sale was disclosed to you up front.

    Be prepared for the long haul. This could take time. In post 5, I listed what needs to go to the bank before they will begin to consider even looking at the file. If there is more than one loan (1st/2nd and sometimes a 3rd) this will add more time.

    Depending on the skill and knowledge of both agents involved, it could take from long to longer to get an answer from the lender(s) as to whether they will be accepting or declining your offer.

  16. Hi Kary,

    Can you do me a favor and say more about this? Thanks:

    “If homeowners are anything like my potential debtors for bankruptcy, less than 5% would accept paying more than $20,000 to avoid a bankruptcy or a foreclosure.”

    Do you mean from your experience, that less than 5 percent of your clients would agree to pay back the difference if it was over $20K and they’d let the home go back to the bank without trying to sell short?

  17. Hi Craig,

    How has the new Distressed Property Law affected what’s going on with loss mitigation and investor purchasers? Are you seeing any radical changes?

  18. Jillayne, “Since this is a non-owner occupied home, I would question whether or not you actually have a short sale going on, as short sales are reserved for people in financial distress, with no assets”

    Often, the seller is out and renting themselves. The seller can still show hardship if they are going backward. And you’re correct, it will definitely be something the bank will look at in the borrower’s financial profile.

  19. Hi Sniglet. Thanks for raising some interesting observations in comment #4. Here are my thoughts:

    1. SOME lenders are in such dire financial straits that they simply cannot afford to forgive a significant amount of non-performing loans.

    This is one of the reasons why the short sale approval process takes so long. Hey folks, if the short-selling homeowner is willing to pay back the difference, those short sales get approved much faster. The loss mit department is weighing the reasons for and reasons against saying yes to the short sale or simply just foreclosing. Competent real estate agents who are highly knowledgeable in this process can help speed up the process by doing all this math for the bank ahead of time.

    Sniglet, several months ago, when Countrywide was preparing to be purchased by BOA, I heard reports in all my short sale classes from Realtors that Countrywide was approving short sales left and right. No long wait times, no huge documentation burden. They were highly motivated to just get rid of the problem instead of burden BOA with the REOs. Let’s call it a real estate abortion.

  20. Sniglet says: “2. The people responsible for managing non-performing loans don’t want to take the blame for losses, and want to cover their behinds”

    Often, the person responsible for originating the toxic crap and the person responsible for managing the disposition of it, are two different people.

    However, at a corporation that holds onto its servicing portfolio, that person is ultimately the people at the very top.

    The loss mit manager is compensated in many different ways. An example would be a bonus for getting rid of a certain percentage of REOs in inventory, by the end of a quarter, or a bonus for holding short sale payoffs to a certain percentage of the loan balance. They are motivated externally by money to make goals, however, this is all in context of making sure all state and federal laws are followed, as well as loss mitigation “best practices” which just basically means sound underwriting at the loss mit stage.

  21. Jillayne — this is a prettty small part of my practice right now so I don’t have much insight on the impact of the Distressed Property Law. Sorry about that.

  22. Hi Greg,

    Regarding your comment number 5, I have received two calls in two days from real estate agents who want my opinion as to my recommendation of a good short sale agent.

    One was from a former student whose broker will not allow him to list short sales and the other from an agent who does not feel competent in this area and believes his borrower will be best served with someone of a higher caliber. Oh my gosh here’s a new email from a third agent.

    Maybe there can be some GOOD that will come out of the new Distressed Property Law in that agents will refer out on these transactions. Some agents will chose to specialize.

    Do you think this will be good for home sellers/buyers or am I just dreaming again?

  23. Hi Russ,

    Great story from comment #6

    “We get to closing…and find out the seller is short to close $28k because he is out of money. Closing postponed.”

    The loss mit department doesn’t care about the new buyer and their loss of loan options. It’s totally not their job to take a macro approach. You’ll drive yourself insane if you believe that they’ll care. :)

  24. Jillayne,
    Fewer and fewer agents and brokers want to engage in Distressed Properties because of the law. The short sale procedure has not changed as a resultof the law. No good at all comes from this law. it is BAD, BAD, BAD for the consumers in this state. As I wrote a long time ago, our AG agrees and has vowed to repair this sad piece of legislation.

    Re:comment 5. The underwriters are so swamped that they LOVE agents who know what to do. There are agents across the country that are specialising in short sales, and their files generally get pushed up the ladder, as they have existing relationships with the LM underwriters.

    This is intensive work (and stress) for RE agents, especially when more than one mortgage is attached to the house.

    Email me and I’ll pass along some referral ideas to you. At this point I do not want to publicly proclaim anyone as competent until I feel comfortable enough to put my name to them.

    FWIW, everyone is frustrated with the process. The process is much different than it was 1-2 years ago. We used to be able to talk with LM during the listing phase. Now, they won’t engage unless they have P/S, hardship letter, financials and HUD. LM depts. are simply swamped. What I have found is that when they have everything in front of them, they are reasonable and work hard to come to a fair conclusion. I’ll tell you that I would not have their job (and the stress that goes with it) for any amount of money.

    This is truly the dirty side of real estate from every direction. I, for one won’t throw rocks at LM departments. While it can be argued the banks have it coming, their poor employees never bargained for this mess.

  25. Jillayne

    I am always the first to admit when I have a weakness in an area, and short sales fall into that area. I have not got involved in any short sales and hope not to have to. I most likely would refer it out to another agent that has the knowledge to get the job done right. REO’s are a different story since the bank now owns the property.

    • Hi Steve,

      Depending on what state you are located in…I’m in California and have been doing short sale negotiations for about 2 years now, call me absolutely crazy but I love the challenges. I have only failed at the ones where the seller was an investor and was trying to delay foreclosure and continue to collect rents for as long as possible. sorry but served them right for trying to use my talents like that. The other unsuccessful short sales were due to the lenders coming back with higher than market counter offers and forcing the homeowners to foreclosures due to the credit default swaps, wher the investor takes out insurance against the borrower defaulting…kind like a nice payday for them if they default and go to a foreclosure. Now however, they have finally discovered this with Goldman Sachs as we should all know. We are stuck in a small time frame where some of the banks hold their short sales for so long due to the monies they recieve for their toxic assets, the more toxic assets they hold, the more money gov’t gives them.

      Anyway, I can teach you short sales, I also have been doing loan modifications for free and have saved people about $1000 on thie monthly mortgage payments, I know exactly what the lenders look for in the financials on both short sale and loan mods. I would love to share my knowledge, I think the more people empowered to this knowledge will help the market and understanding what’s really happening. My husband is also a financial advisor and insurance broker so he has the knowledge in the financial arena that is tied to the real estate industry.

  26. For Russ,
    First of all, your office mate should have picked up on the possible shortfall on from the title report. We need to be reading these in these times with possible shortfalls in mind.

    Suggest to him they extend for 2/3 weeks and quickly send the items I suggest in comment 5 to the lien holders. DO NOT OMIT THE ESCROW PREPARED HUD. They may push a transaction up the ladder if there is a buyer ready to close. The agent representing the seller will have to be very forceful about being heard and getting to the LM underwriter. The lock will go out the window, but if the terms are still close and the buyer wants the house it’s worth the shot. There is higher odds of succes than you would think in this scenario.

  27. Jillayne wrote: “Do you mean from your experience, that less than 5 percent of your clients would agree to pay back the difference if it was over $20K and they’d let the home go back to the bank without trying to sell short?”

    What I was actually referencing was the percentage of people that would opt for Chapter 13, where they’d repay part of their debt, compared to opting for Chapter 7 where they’d walk away from all of it. Not that many people want to pay back their debt when push comes to shove.

    Now you will see a lot of people go to extreme lengths to avoid foreclosure. The the context of this piece is walking away, so I’d think that the percentage that wanted to walk away and then pay would be about the same that would want to file a bankruptcy and then pay.

  28. Jillayne wrote: “Do you think this will be good for home sellers/buyers or am I just dreaming again?”

    That fewer agents do them is probably good (specialization). But the problem is the ones dropping out are not necessarily the bad agents. In fact, I’d probably go so far to say that the ones doing them are probably either ignorant of the risks, or have grossly underestimated the risks. Doing short sales is not a wise decision, IMHO, but I’m very risk adverse.

    The other problem is the buyer side. Because of the 20 day rule, many buyers would be leery of short sales, even if their purchase isn’t within 20 days of any foreclosure sale. Given how long a short sale takes, it’s very possible that the sale might be approved at a point where the 20 day rule was applicable–creating quite a problem for the buyer. Even worse, some buyers might equate any distressed property with the 20 day rule, which clearly isn’t the case. But that won’t help a distressed homeowner one bit.

  29. I don’t keep current on what banks have to report, but don’t they have to report the number of non-performing loans that they have? And if so, would simply foreclosing remove it from that statistic?

  30. Hi Kary,

    Banks have to report delinquencies. They also report the number of loan modifications made, and then they follow that up with the percentage of homeowners who were granted a loan mod that ended up delinquent again anyways. So the loan is still reported as a performing asset.

    Only when the foreclosure process is finalized, and there was no bidder at the auction does the bank move that over to the “non-performing asset” column.

  31. Jillayne:

    Thanks for writing this, I look forward to hearing more in your class.

    It makes sense that investors are better suited as short sale buyers, because there is simply no predictable timetable for closing them.

    The one I just finished took 105 days, from offer to closing.

    The second good idea presented here is to discuss with my client the prospect of turning it around for a quick resale.

    I’ll be sending this link to several folks that may benefit.

    • Jillayne,

      I have a question. I have an approved short sale from the seller lender and was ready to close, ordered all the reports and we were getting docs. My client (seller) decided to tell me he filed chapter 7 BK and put all debt in including the home, do you know anything about the procedure for this? I did some research and found out our lender (seller’s) is ok to proceed because we approved before BK filed…what is the next procedure as far as the BK court? Please advise anyone who may have dealt with this or just simply knows the answer.

      Thanks

  32. Jillayne, any idea how they have to account for it after the sale? I’d be surprised if they could use the bid price, but maybe they can.

    As to short sales making more sense for investors (which I agree with), the banks need to realize that it’s not in their interest to practically exclude a much larger class of buyer just because they’ve been arrogant for years and want to continue to be arrogant.

  33. According to this Times story, citing a Redfin analysis, a “bank being involved” only makes the property 46% more like to be sold at a significant discount. That’s the lowest category of the ones they mention. The most likely is property owned by someone in excess of 20 years.

    http://seattletimes.nwsource.com/html/realestate/2008097106_homesales07.html

    Now part of that might be a lower initial asking price, but ignoring that, this fits with what I’ve always said in that if you’re a buyer there are better places to look than short sales. And those other places don’t have the risks that short sales have.

  34. Hi Kary,

    In the Times story “bank being involved” also included REOs, homes that had already been deeded back to the bank and were on the market again.

    Deep discounts on REOs should be expected, however, it takes time for the banks to lower the price. At the Connect conference a few weeks ago, the agents from Florida were telling me that the banks are only now starting offer deep discounts on their REOs in order to move their inventory.

    We must also not discount Q-Diddy and Sniglets questions about the banks wanting to hold back before having to come clean with investors and regulators. This may be the biggest motivator of them all.

  35. I made an offer on a home that has been sitting on the market since 02/2008. The Agent remarks states that it is an, “Approved Short
    Sale”. My question is: Does it take just as long as a short sale that isn’t
    approved? I mean to hear back from the bank?

  36. Hi Lee,

    As the buyer, your agent (if you have a real estate agent working for you) can inquire about this by asking the agent for the seller to provide deeper clarification about what “approved short sale” means in the agent remarks.

    Typically, “approved short sale” is a good sign. This traditionally means the homeowner has completed all the preliminary paperwork required by the lender and the lender has given a conditional approval…..subject to receiving an offer from a bonafide purchaser.

    Typically, this would mean a faster bank approval.

    However, the current crisis we’re all living through is nowhere near “typical.”

    Your agent can as the agent for the seller for regular updates such as a weekly update.

    If the home seller is in default on their loan and foreclosure is imminent, the bank may approve your short sale offer faster.

    If your offer was written with an expiration date, such as “buyer requires that the bank make a decision on the short sale no latter than ____ date____” then you can move on with your life and buy something else if the bank can’t make their decision within your required timeframe. Consult with your Realtor and/or your favorite real estate attorney for further details.

  37. Another issue with Short Sales is the agents that don’t have the experience or knowledge on handling a short sale. Many agents don’t qualify sellers to determine if they would qualify for a short sale. Like Jillayne stated, short sales are for people with no money. Many homeowners want out just because their home is now worth less than they owe and they think this should be a reason to short sale!

    I don’t know how many times I contacted the listing agent on a short sale and started asking questions to determine if it’s worth my client’s time in making an offer and found out that the listing agent hasn’t even contacted the bank yet to get the short sale process started.

  38. Question: I’ve heard that recent federal legislation prohibits lenders from conditioning approvals of short sales on the sellers’ willingness to enter into a new note re-affirming a portion of the original note, or bringing cash from their own pockets to the closing table, to make up some of the shortfall. In other words, I’ve heard that the feds have said that a short sale is final, and there can be no continuing financial obligation on the part of the sellers on the original note once the short sale is approved and closed. Is this true, and if so, could someone please cite me to a resource I can use in one of my short sale transactions? Thank you!

  39. Phil — I have not heard this and would be extremely surprised if it was true. I may be wrong…

  40. Hi Phil,

    Where did YOU hear that?

    I’d be curious to know.

    What state are you in?

  41. Jennifer Koby says:

    I don’t know if anyone could help answer my short sale question..but here goes. I am in the process of buying a short sale condo. The bank approved our offer and we were to get the condo inspected today. Our agent just called and told us the home owner has just filed for bankruptcy. what happens now? we are told the owner can pay a fee to have the condo removed off of his bankruptcy list. How much is that fee? Do I still have a good chance with this sale??

    • Hi Jennifer,

      I just asked a question like this on the side of a listing agent. So you are the buyer and your agent came and said we are in a delay mode because the homeowner filed a BK, same thing just happened with my seller. I had everything ready to close and he informed me he filed a chapter 7 which menas he put the home in the charged off debt. Normally, there would be no need for the sale, the BK basically voided the need for the seller to continue a short sale…the home would go to foreclosure. In my situation because we were so close to closing, there were tons of costs already incurred and the invoices are sitting in escrow waiting for escrow to close and they will be paid through the escrow by either buyer funds or seller/lender funds. I called the BK attorney and asked what do I do now…he said he could file a form to the BK court which costs him $400 and he doesn’t ever have his client pay for that, well his client just happens to be my client and I told my client he better help pay that considering if this sale doesn’t go through, I’m sticking all the invoices back on him because he screwed up the closing of this sale.

      My problem is that now the attorney probably won’t get the form signed off by the BK court until at least the hearing which occurs on June 15th, we needed to get close by the end of this month according to the lender (seller’s) and it just so happens that the buyers price lock on their loan docs expires on June 11th, which means an extension and or re-lock and depending on what rates are at that time, could cost the buyer in payment and there is a fee to re-lock a loan.

      Just to answer some of your concerns as the buyer. Hopefully that helped a little.

  42. Hi Jennifer,

    Bankruptcy complicates things. If your homeowner was already in default on his/her loan, this could temporarily delay the eventual foreclosure (state laws vary) and typically, the bankruptcy judge has a say in allowing the short sale to continue on.

    You still have a good chance with this sale; it may just take a little longer. Try to get the real estate agent for the seller to obtain an estimate as to when the bankrutpcy judge will make a ruling in this case. Good luck!

  43. Jennifer, if the owner filed Chapter 13 then they possibly/probably could get the bankruptcy court to approve the sale, which would most likely be faster than the short sale process, depending on how far along that is. In Chapter 13 it’s often possible for the court to approve the sale over the objections of the creditor. Same answer for Chapter 11, which is somewhat of an unlikely chapter to have filed, except that some courts may be reluctant to approve a sale early on in the Chapter 11 process.

    If it’s Chapter 7, the most likely chapter, then most likely the filing of the bankruptcy will only hinder the sale. The debtor’s attorney would need to get the property “abandoned” so that your sale could go through, and then you’d still need the bank’s approval. So it adds an extra step.

    Finally, note that the above would likely vary by state because state laws do affect bankruptcy, and that my knowledge of the bankruptcy laws is mainly as it existed prior to the amendments a couple of years ago–they could have changed things. What I would suggest is find out if the debtor even wants to bother with the sale at this point, and if they do find an attorney that works primarily for bankruptcy trustees or creditors and get some local advice.

  44. I have a situation. I signed a contract for a short sale that was approved by the bank but not by the “PMI” Private mortgage insurance. The price was $280,000 and the mortgage insurance wanted $23,000 more. I had already sent in my down payment of $10,000 that was cashed. I was put on hold for a good 2-3 months and then the PMI decided they weren’t settling on the $280k and sent me back my down payment. They put the house back on the market for $299,000. I want the house but I feel what they did wasn’t fair. Is there any recourse for me as purchaser/consumer legally?

  45. What they did is absolutely fair as they are the ones that would take the loss off the top. You can put your $280,000 offer back in and if no one is willing to pay more, then you will get the house at the same price. They are just trying to capture as much as they can, and that is their right. “The Bank” was insured for the loss by them, so what “The Bank” approved is basically irrelevant in this case.

    This is Jillayne’s post, and I’m sure she will answer you as well. That is my $.02.

  46. Tomeco — this is not legal advice. The only conceivable legal remedy you would have would be against the seller. If the seller was foolish enough to sign a purchase and sale agreement that was not contingent on “lender” approval (defined as including the PMI issuer), then you could sue for specific performance. In that event, the seller would be liable for the difference between the amount owed and the contract price.

    Against the “lender,” however, you have no claim. Ardell summarizes the issue nicely.

  47. Jillayne,

    Something else to point out is that if the short sale is being handled by a REALTOR, hopefully this REALTOR is a short sales expert. Lenders at the current time do not have the time to teach this right now and are booked solid.

    Luckily… we learned all about this back in the Pre-boom real estate days with our first short sale back in 2001… at the time I did not think all of that new “learning experience” was really worth it… But.. it has worked wonders today.

    Anyways.. my point is that the actual Listing Agent handling the short sale plays a HUGE part in the short sale. Servicers are slammed and when you know what they need (before they ask for it), it works wonders. So well… that we were referred FSBO sellers that had their own buyer to handle the short sale for them.

  48. Andrea Davis says:

    Hi, Question……I’m trying to sell my house (short sale). I do not have a fani-may gov. backed loan. I can’t refi, and was not approved for a re-mod. My lender is countrywide (aaaaa I know).I owe 728,000 and fair market value is 519,000 and I never refinanced.I have stopped making payments 3 months ago. I sent in ALL and more than all the paper work needed..I have an offer for 518,000, so I faxed it with more needed paper work they asked for. Its being reviewed.
    1.. What are the odds of them approving it????
    2…Will my husband and me be able to by a home in the next 3-4 years if the shortsale goes through???

    • Hi Andrea,

      Jillayne answered very well on these points, I just wanted to add a little of my experience and expertise if you can use it. If your husband wasn’t on the loan to begin with, he can qualify to purchase as long as all other terms apply for qualification. The reason I’m saying this is you asked if your husband would be able to purchase, seems to me he wasn’t on it or you weren’t because of they way you only had 1 name. Short sales are shown as “settled for less than” on credit. However, they can help your credit just a tiny bit better than foreclosure, the reason being is they apply the pay off to the balance and whenever you pay down a balance your credit goes up a little, the problem is the late mortgage payments in the process, they affect your credit tremendously but can definitely be corrected with a little time. You will need to get credit in order and you will probably be required to put more money down and have more reserves in the bank.

      How do you know the home is worth $518,000-519,000? You need a BPO or appraisal by the lender to determine what they believe value is, after that it seems to me you are very likey to get approval if value is what you have offer for and you have proven hardship to only be able to short sale or walk away and that this is a primary residence and not a rental, they have a strictness about rentals and hardships, they rarely go through. Oh yeah, just to add another bit of advice….continue to follow up with the lender and make sure they have all documents needed until they come to an approval, seriously, the only way to get anything done is to be proactive and I mean almost daily and document the conversation and who you spoke with on what day. Also, if you don’t like what you hear from one person at the lenders, call again to either confirm they were giving the right information or they were just saying whatever they felt to sound good…I know from a lot of first hand experience from these banks.

  49. Hi Andrea,

    A: Are you agreeing to pay back the difference? If so, your short sale would go through faster. Has CW completed their own appraisal and indicated that 518-19 is fair market value?

    A: In terms of a future loan, you are not considered a high-risk home borrower and will likely, in the future, be paying a higher interest rate and will be asked to put more money down. If you can qualify for an FHA loan, they will accept borrowers with imperfect credit as long as you can show that your financial distress situation was only temporary. Example: Great credit, bad thing happend. Bad Credit. Recovery. Good credit again.

    But that’s assuming FHA is around in 3 to 4 years.

  50. “Are you agreeing to pay back the difference?”

    If Andrea and her husband sign a note to close the short sale “faster”, and that becomes a judgment against any future property owned, she will not be able to buy. The new home escrow will include an outstanding judgment search, and the new lender will not fund if there is an existing judgment.

    The shortfall is over $200,000. If she signs a note to pay that, I don’t think she can buy a house until that $200,000 is paid. What are the odds that is going to happen in 3-4 years?

  51. Just to be clear, you don’t necessarily have to sign a new note to be liable.

    Second, if it is $200,000, then chances are a bankruptcy will be necessary to deal with the shortfall. Very few people could deal with that.

    Third, this gets to another example of where someone should be spending a few bucks to consult an attorney. If a foreclosure would result in no deficiency, then doing a short sale would be a rather questionable decision. Doing it without professional advice would not be advised.

  52. Is a professional going to force the lender to sign a forgiveness agreement on a short sale?

    If the owner goes to foreclosure, will they still have to pay off the second mortgage?

  53. What method gets rid of the 2nd mortgage without the owner having to pay it, Kary?

  54. Only the second foreclosing first, or the second agreeing to waive the debt would get rid of the debt (that I’m aware of).

  55. Andrea Davis says:

    Hi, I was told that a short sale will post on our credit as (dept-relingwished or dept- paid)..And only hurt our credit for 3-4 years, different than a forclosure.

    If some who has a forclosure wont have to pay back the money the owed, then y would I have to pay the differnce in my situation on a short sale.

    Isnt it (the lender agrees to let the borrower sell for less than owed. I was told there is a slight chance I might have to pay 10% on the difference thats all which is not a problem, I just need it sold.

    All these people including myself in Ca that are trying for shortsale, im sure 90% of us, dont or wont have the money to pay the difference or they wouldnt be in my situation, Ca market is way down from when i bought in 2005.

  56. Andrea, CA has different laws. You really need to consult an attorney there about your rights and liabilities (as would be the case also if you lived in WA).

    As I understand CA law, I don’t think they can typically get a deficiency from you if your loan was a purchase money loan (used to buy the property) as opposed to a refinance. But that’s just what I’ve read, I’ve never practiced in CA, so my information could be wrong or there could be exceptions I’m not aware of.

  57. Andrea,

    I also have heard that the second is forgiven in a foreclosure, but not necessarily a short sale, in CA but not WA. So you really do need an attorney to go over it before you choose short sale over foreclosure. I don’t think the 2nd is expressly forgiven in WA via foreclsoure or short sale. But CA…foreclosure vs. short sale could make a huge difference without an express WRITTEN guarantee that they are not going to come after you for the 2nd.

    I believe in both states any shortfall from the 1st is forgiven in a foreclosure.

  58. “come after you”

    I shouldn’t have used those words as they may say they are not going to actively pursue the debt, but that doesn’t mean they aren’t going to attach a judgment to your name just in case you try to buy something later.

  59. Andrea Davis says:

    I have an 80 20 split loan thats what they gave me from the start. So im not sure if thats called a second, cause they both are with CW.And again I have never taken money out or refied on this loan at all.

    The point off doing a short sale is to be able to buy another home with in 3-4 years apposed to foreclosure will hold me up 7 years.

    Today CW told me they were setting me up with an appraiser cause I have an offer on the house.They wouldnt appraise the house till i had an offer, talk about backwards.

    Countywide told me this ..
    The short sale would remain on our credit for 7 years but we would be able to buy another home in 3-4 years, apossed to foreclosure is worse.
    We might have to pay 10% on the difference of what it sold for and what we owe (10-99 tax return)..
    Thats it. They never said we would have to pay it back some day. ???

  60. Hi Andrea,

    Get it in writing. Everything they’re saying….ask them to provide you with copies of sample documents that you’ll be signing well ahead of the closing date. Take the documents to a local attorney, even if you’re only hiring him/her for one hour.

  61. “They wouldn’t appraise the house till i had an offer, talk about backwards.”

    Real appraisals cost money. Usually about $400 a pop. Those are hard, out of pocket costs for a lender. Sometimes they do a BPO in advance (cheaper) and a full formal appraisal at time of offer. If they did a full appraisal on every house BEFORE an offer, they would be wasting a lot of money on the houses that don’t get an offer and go to foreclosure. Sometimes they use the BPO (Broker’s Price Opinion) and don’t bother with the cost of a formal appraisal. It depends on the amount of the shortfall.

    The 20 is the second, the 80 is the first. That they are the same lender doesn’t matter and in CA it may not matter as much as it does in WA.

    “They never said we would have to pay it back some day.” That’s a whole lot different than your getting, in writing, a commitment that they won’t attach a lien for the shortfall. Omission of terminology about repayment, does not mean you don’t have to pay it some day.

    I have had clients in the past see a judgement on their record from a debt “collector” who never tried to collect the debt. They just attached the judgement eliminating the cost of trying to collect it.

    Don’t sign anything without having an attorney look it over for express language regarding future liability for the shortfall amount. Make sure you tell the attorney you want to know if they can come after you for the shortfall, or the attorney may OK the paperwork without looking for that language, particularly if the paperwork is silent on the matter.

  62. I’ve always thought the bank should give the owner the option of paying for an appraisal so that a decision on a short sale could be made faster.

    And again, don’t be too hung up over the release language. If the shortage is small enough it can still be in the seller’s interest to go ahead with the sale. The number is not likely to get smaller by not going through with the sale, except perhaps with a foreclosure, and there’s some benefit to avoiding a foreclosure. That’s worth something.

  63. Andrea Davis wrote: “The point off doing a short sale is to be able to buy another home with in 3-4 years apposed to foreclosure will hold me up 7 years.”

    Rhonda or Tim could probably address this best, but don’t confuse the time something remains on your credit report with the ability to get credit. Also, don’t assume what lenders are doing now will be the same in 3-4 years.

    My understanding is that a lender can ask you on a credit application: “Have you ever had a property foreclosed.” You’d have to answer yes even if it’s 15 years ago. What the lender does with that information is up to them (or the program they’re using).

  64. Kary said, “And again, don’t be too hung up over the release language. If the shortage is small enough it can still be in the seller’s interest to go ahead with the sale. The number is not likely to get smaller by not going through with the sale, except perhaps with a foreclosure, and there’s some benefit to avoiding a foreclosure. That’s worth something.”

    Andrea already told us the shortfall is over $210,000 and in CA (vs. WA) that might go away with a foreclosure. She needs to see an attorney before signing closing papers on that short sale. I totally disagree that she shouldn’t “be too hung up over the release language”. She needs to be VERY hung up over the release language.

  65. I find it incomprehensible that folks would deal with an issue involving whether or not they owe a debt of $200K, without consulting a lawyer.

    I hate paying high fees as much as the next guy, but if it’s going to be about that much money, I’m sure I would find a way to make sure it’s done right.

    I’m assuming that the paperwork the lender offers for a short sale, or deed in lieu of foreclosure is not a cookie cutter (and unalterable) contract, like the standard deed of trust that borrowers sign with their mortgage.

    Maybe if the number of these gets high enough there will be a standard contract. I shudder to think.

  66. I was just talking about the deficiency in general, not for Andrea’s specific case. For each person the number “worth it” to avoid a foreclosure would be different. $5,000 would probably be worth it to a lot of people. $20,000 not so many. When you get into the six figures, they’d be very rare (absent significant earnings capacity, etc.)

  67. This article does a great job of getting inside the “enemies” head. Of course the bank is not really the enemy but when you have just been disconnected for the 3rd time after waiting on hold for a combined total of 132 minutes, it can feel that way. I think what this article really makes clear is that a short sale will be a lot more work, require a lot more time, and even then will not necessarily end in a sale. We do this as a service for our clients and as Jillayne correctly points out with the help of a lot of other professionals, such as attornies.

  68. SD ShortCutz says:

    Andrea! I hope I have caught you in time!!! I am a short sale expert in San Diego California and used to run a department in foreclosures at a nationwide lender like Countrywide. Whoever told you that information about what you would have to pay back may be trying to take advantage of you!! I need to give you some information!!! 1st of all your loan is non-recourse. From what I read I believe you purchased your home between 2005-2007 and you never refinanced. You are in the clear for that reason. 2nd of all, banks are not filing deficiency judgments!!! When a short sale is approved, the remainder of the debt is written off as a loss for them. You are very lucky both of your loans are at Countrywide!! Sometimes 2nd mortgage lenders (if separate from the 1sts) like BofA will drag their feet for months and ask you to sign a promissory note personally guaranteeing the difference. But as for CW, not only do they have a class action suit against them which requires them to forgive at bare minimum $28,000 per loan starting December 1st for certain scenarios, but they are fairly easy to work with now that they have 1.) been acquired by BofA 2.) the bailout passed and they were able to afford to hire much more staff in their SS departments and 3.) the class action suit approaching deadline.

    You said CW has assigned an appraiser to give a value on your home. It is very important to make friends with this person! Do anything you can to make him/her like you!!! CW tends to come in HIGH on their BPOs (appraisals) which could mean he will appraise your house for $550,000 and no one will offer that much, so they will foreclose. (If they do appraise it at that amount, I would retain an attorney or talk to me for referrals.) There is an entire industry dedicated to Influencing the BPO so that your appraised value comes in low and your offer is immediately pushed through (or if you are buying the house, it will get you a good deal). Plus, there is a kid of industry standard for a package to deliver to the BPO agent so that your BPO comes in nice and low. But most realtors don’t even know about that either. For you, if your BPO agent (appraiser) has not yet come through yet, I would have a few things ready to give him: 1.) wine (or lots of kindness). You gotta make him like you. 2.) 3 comparable sales of your home model in your neighborhood showing closed sales at LESS than $518K. You can have your realtor do this or go on zillow.com and find them (do it!). 3.) Your offer. Make sure he knows what the offer is so he knows where he has to come in at. 4.) The listing. It helps if your listing shows $518,000 or LESS because then you got what you expected. But if the listing price is more, talk about how the house sat on the market last year and this year and la la la… and never sold until (Thank God) now. 5.) Quotes for repairs. If your home needs repairs, get someone quickly to give you a high bid to give him. 6.) A sexual predators report for your neighborhood. Research your zip code online (free) and throw that in and mention “There are a couple new sexual predators in this neighborhood and we think that’s why prices here dropped badly recently”, as it negatively affects the agent’s idea of your home’s value. 7.) Lastly, whatever you can put together, place your hardship letter on top. As you may know, your hardship letter should be the sob story among sob stories and should detail all instances of medical health, diagnoses, anxiety, stress, illnesses, injuries, family death or health problems, job loss, seeking jobs, abuse, marital problems, desperation, bankruptcy threat, home needing repairs, credit card problems, using credit cards to pay mortgage, selling things to pay mortgage, borrowing from family and friends to pay mortgage, family disowning you, or any other negative issue tied to your home. These are a few I have helped clients with that really help the case. Ideally you want to have given a severe hardship letter such as this to your bank, but if not, write one for him.

    Also, on the hardship letter, it helps immensely to say “I have met with a bankruptcy Atty (or have been speaking with) and the short sale is my last effort to avoid bankruptcy. You see, borrowers who file bankruptcy are under protection for a long time that lenders call “BK Stay” in which you can sue them if they touch your house (as long as its occupied). And believe me on this one, because I had to prepare a defense case for the lender on one last year.

    It is too bad that you have already submitted the offer because there is a clause that I require all the offers I submit to have on it “Upon acceptance of this offer lender(s) to report on credit “Paid as agreed” and will not file deficiency judgment.” Not that they will file one anyway!!! But it is always good to have something they signed off on in writing! Do not agree to pay back ANY deficiency. You can get out of this by a $50 letter from an Accountant!!! (But would not need it anyway if you filled out your income and expense sheet to show a large loss every month and being upside down on assets.)

    I also want to mention your protection from the 1099, as you have an IRS exclusion working for you put in effect by President Bush (God I hope Obama doesn’t reverse this too). There is a special form to give your tax preparer which is a release from indebtedness and will release you almost automatically from $250,000 of debt for a short sale, and potentially more if needed and handled correctly. I wish I was a CPA right now just to go around helping everyone release their short sale tax liability!! But sadly, I’ve never heard of a single other real estate agent who knows about this exclusion and helps their clients with it.

    Lastly, I want to mention your availability for buying a new home in the future. I’ve got good news. Most short sales do effect credit drastically and immediately, but of course, not as bad as a foreclosure. Your scores will go up dramatically if you follow a system outlined by this credit repair education company I have worked with and referred clients to. Also, many of the items reported in conjuction with a short sale can be removed from your credit report through a loophole. This company also takes care of that! There are ways that some banks will lend to you immediately following a short sale, but under FHA guidelines right now you will be able to buy another house in 2 years, providing you qualify with income and your credit has been clean ever since. However, if you work with people who really really know what they’re doing, you can get a house within a year after your short sale.

    Good luck everyone and have fun!!

    Lindsey Kinnsch

  69. My boyfriend and I have put in an offer on a short sale home. The buyers have approved the offer and yet 5 weeks later, we still haven’t gotten an answer from the bank as to whether or not this will be our home. We have turned in notice to move from our apartment and need to do so within 40 days. Because we haven’t heard, we are forced to move on to a search for a home that is not a short sale or not in foreclosure.
    I understand this can take time, but 5 weeks is a long time to wait. I don’t know what exactly the banks are still reviewing. They wanted to close in one week. And we were told that 5 weeks ago. Well that’s not going to happen being that it has to be inspected, appraised, etc. So now the banks are going to lose more money and wait until another offer comes along which will start the process all over. And we bid $2000.00 under the asking price. I’m not sure if most people would bid that close to the asking price on a foreclosure. Good luck to the banks that are prolonging this process.

    • Aaron Evans says:

      Lenders love to play the “can’t close” game. In fact, the application fees, appraisal fees, inspection fees, etc. all go to them or their partners whether the loan closes or not, and amount to nearly the total profit of selling a mortgage on the market (i.e. to a Fannie May feeder) and may even be more these days.

      Don’t let Realtors or Lenders suck you into this trap, they’ve been doing it forever, but these days, it’s virtually their only revenue stream, and otherwise prudent buyers who waited out the bubble are their prime targets.

  70. Patricia:

    Surely, your Realtor advised that this was not only a possibility, but almost a certainty?

    I have not participated (in lending) in ANY quick turnarounds for short sales, but several slow ones.

    The bank’s lack of urgency exceeded my lowest expectations.

    Short sale purchases are best left to investors, and folks that are willing to break a rental lease, and pay the consequence (if one exists).

  71. SD ShortCutz says:

    Hi Patricia, 5 weeks would be a delight! Most take 5 months. In fact, most of mine have taken 5-6 months from start to finish. What bank is the property with? Smaller banks can sometimes be faster. As far as the asking price, it means nothing. What you should do is try and find out the average of 3 recent comparable sales within a mile that have sold within 90 days. This is will be pretty close to the value of the bank’s BPO or Broker Price Opinion, and the value that the banks will use to compare. Banks will usually accept a net of 82% of this value (so subtract out realtor commissions, closing costs you ask to be paid and about 1% for taxes), but they will occasionally counter for higher. What I have found is banks are not motivated to consider the short sale until the property is approaching the date when the property will hit the auction block at a trustee sale or sheriff’s sale. One of my properties that I finally got an approval on was supposed to go to sale back in September, so it even took the bank several months after that, as you can see. Most sales now, whether short sales or bank-owned, have to be approved by the Investor, the company who owns the shares and who is taking the loss. Most of these are Freddy Mac or Fannie Mae, and many have to go through several stages of approval. 1.) The Servicer : Countrywide, Homecomings, Chase, etc. 2.) The actual Lender (called the Investor) : Freddy, Fannie, sometimes that bank, or another. 3.) The PMI Company : this company insured the loss if the borrower or the lender had private mortgage insurance on the loan. Sometimes they will require the borrower to hold a portion of debt or a personal note so that they can collect on their loss. If this is the case, the borrowers (sellers) may not want to owe anything afterwards, so they may prefer to let the property go into foreclosure.

    If I were a buyer in today’s market, I would do the following:
    1.) Tell my landlord I need to revoke the 30 day notice, as your property will not be ready in time. Don’t give a 30 day notice until your offer has been approved by the bank. PERIOD. From there your agents will open escrow. If your landlord is reluctant because he/she has already placed an ad, offer to refund their advertising cost. It will be much easier and cheaper than having to move twice.
    2.) Target straight sales with no bank/lender approval, only the seller. Most of these are GROSSLY overpriced, but may be worth it to you. Some straight sales owned by investors or those who did not refinance to buy a hummer in cash or go to Hawaii may be perfect, so have your agent email you some listings and go through them all and look for ones that don’t say short sale or REO.
    2.) Target REOs or bank-owned properties as they usually have shorter waiting periods.
    3.) Target short sales that have falled out of escrow or the agent knows what the bank will accept. Your agent should call before making the offer to suss it out.
    4.) Make multiple offers. Often frowned upon, but currently necessary to avoid having the buying process take over a year. If your agent is cutting edge they will encourage it and do everything they can to help you with this. If not, you may have to train them a bit or find a new agent.

    Let us know what you decide to do!

    Lindsey Kinnsch

  72. Adding to SD ShortCutz,

    Be willing to have your lender do an appraisal. You will have to pay for this, but if it appraises for near your offer price, you can give that to the seller to give to their lienholder.

    If you do buy the property, you have to pay for an appraiser, so it is not a duplicated cost. If the appraisal comes in high, much higher than your offer, then at least you know why the bank isn’t approving your offer.

    Often the short sale approval will be forthcoming quickly if you have an appraisal that matches your offer.

  73. What is the average percentage a bank will usually be willing “lose” on a short sale?

  74. Jenn,

    They really aren’t willing to “lose” anything. They want fair market value. The game has become to convince them that the offer IS current fair market value.

  75. Hi. We signed a contract for a short sale almost 30 days ago with a clause to pull the contract (within 30 days) if not approved. The short fall on the house is about $100,000. The lender was Countrywide, which I understand is the worst company to deal with. The negotiator had the BPO from the listing agent and requested an appraisal. It was completed. CW will not disclose the price. Then they requested two of their own BPO’s on the property. Both are back. The original selling price on the house was 249,000. The house is now worth, in today’s market, somewhere between 185,000 and 200,000. Can we expect an approval or even a counteroffer within the next 20 days? We have a lease with a 30-day clause to renew. Why do agents tell you to put in a clause to hear back within 30 days if there is no shot of ever hearing back in 30 days?

    Kathi

  76. Hi Kathi,

    I’m assuming that both sides have their own Realtors. Yes?

    If your Realtor didn’t tell you this, then I will: With short sales, you must start with extremely low expectations.

    It sounds like the agent for the seller hired a third party negotiator to help. Maybe you could be in direct communication with the negotiator. Part of negotiations is to balance patience with persistence.

    I would guess that the reason the Realtors had you put a clause in the paperwork about wanting to hear back in 30 days is to put Countrywide on notice that if they don’t respond within 30 days, then you will have the opportunity to walk away and buy another home, forcing CW to get their act together if they want this sale.

    Realize that all loan servicing departments are completely swamped right now. The closer your homeowner is to foreclosure, the higher the priority in loan servicing to work on that file.

  77. The negotiator was at Countrywide. My agent has authority to contact them. She got a letter of permission from the sellers. I was listening to a phone conversation she had with someone at Countrywide in the Short Sale Department. He said that the negotiator had everything they needed and the first phase would close on 2/28. He told her to call back on Monday to see if there was more news or to escalate the issue.

    When my realtor called the day before she spoke with someone else who told her something totally different. It’s like the right hand doesn’t know what the left hand is doing. Do you think it’s possible to actually get more info on Monday. I really loved this house and would hate to walk, but my apartment lease is looming in the near future and I have to think about that too. Would offering more money do anything? I appreciate your help and guidance. One thing, they have missed four payments totalling around 6,900.00 to date. No default was entered yet on this house. I guess that means we are far from foreclosure.

    Kathi

  78. Hi Kathi,

    Loan servicing departments and systems at banks were never designed to handle the volume and stress that we’re experiencing during this historic foreclosure event. Yes, it is possible that you’ll be able to get more information on Monday.

  79. Thanks Jillayne. I feel more positive about this now. I was even willing to wait it out and move twice if I had to. Though I can’t convince my husband to.

  80. Hi Kathi,

    Being a short sale buyer is an up and down, roller coaster ride. You and your husband could come up with a series of action plans, depending on what happens from this point. At least that will give you a sense of control.

    For example, how long are you and your husband willing to wait for THIS house? 2 months? 6 months? 8 months? At some point, you both will have a definite cut-off date that you’ll both be willing to live with…..especially with declining home values.

    A fair percentage of short sale transactions never close and instead, they end up in foreclosure for a wide variety of reasons.

    So talk about this together when you’re in an “up” moment! :)

  81. My realtor called Countrywide again this morning. They escalated the file. Not sure what that means, although the gentlemen she spoke with today did say that our offer was right where the BPO’s came back at. Is this encouraging? The payoff amount would be about 60,000 more than our offer. The market value is not there in today’s market.

  82. hi everyone i have a full price offer in on a house thats a short sale.. its been 50 days and i have yet to hear much..they took the house off the market and my offer is the only one. wamu is the lender for the owner and i feel like they keep stalling…each week my agent says they say “we need blah blah blah” “call us back in 7 days” they have done this 3 times.. i really like this house and i dont know what else i can do but wait..any advise??

  83. We are approaching 4 months since we put in our “full asking price” offer on a short sale. We have heard very little. Our offer expires in 3 weeks and the house is still on the market.

    We went through it last week…things our turning up missing…started with shower heads….hopefully they will accept our offer before the whole house gets carted off.

    It seems to me that before a home gets listed as a short sale with price on it that the lender would have already agreed to sale it at the asking price. I know in my business if I advertise a price I better stick with it.

    Unfortunatly, we are using a family friend as agent who is very green.

    Any help would be appreciated

  84. Hi Mike,

    1) How close is the seller to foreclosure? Have they defaulted on their loan and has a trustee sale auction date been set?

    2) How experienced is the SELLER’s agent? If the seller’s real estate agent is experienced with short sales, they should be more knowledgeable about the entire process and be able to tell you what they (agent and seller) have done to make sure that it doesn’t take any longer than necessary. For example, the seller has to provide a packet of information to the bank.

    3) The agreed upon price that the lender would absolutely LOVE to have would be….drumrolll…..the full amount owed to the lender! Anything less than the full amount due would have to be substantiated by today’s current market value, determined by your asking prices…..along with a neutral third party’s statement of opinion. The indutry word for this is called a BPO, “broker price opinion” in which another real estate agent completes a mini appraisal, giving the bank an idea of what today’s fair market value is on the subject property.

    Banks have a duty to their shareholders and to their regulator to minimize losses so they want to be sure your offer is at or near fair market value.

    You can as Mr. Green Agent to ask the agent for the seller the following questions:

    - Has the seller completed his/her “short sale” paperwork that the bank will need?

    - Has the BPO been completed?

    - Has the seller already defaulted on his/her loan? If so, has the trustee sale date been set?

    -How many short sale transactions has the seller’s agent successfully closed? (If the answer is zero, add at least two more months onto your wait time.)

    The closer you are to the trustee sale, the more the banks are willing to put your package closer to the top of the pile.

    I’m sorry to hear that you are having to train Mr. Green Agent/family friend how help you. That must be awkward.

  85. I’m so glad to see this. I’ve got SIX current offers on short sales. I don’t want to buy a Short Sale specifically, it’s just that 75% of the homes for sale are short sales.
    I started in Oct 2008 to put full asking price offers down with 50% down.

    I still have not heard back from any of these stinkin banks.

    In almost every case, I am certain the sellers are hiding up to $800k and getting the bank to do short sale.

    It’s sad that all these sellers are living for free in nicer homes than I have. I work my butt off and pay every bill off on time.

    I guess this is an example of the good guys finish last.

    I wish more “normal” homes will come on market soon so I can never even consider another short sale again.

  86. We’re going into our 7th month of waiting to purchase a condominium offered as a short sale. The seller has hired Matt Martin Realty to act as there negotiator. The problem, beyond the obvious, is that we are not able to get definitve information about the status or progress and my relocation must occur soon.

    We get weekly updates from the negotiator but they are unspecific, redundant, and vague. Our realator believes that all you can do is wait and that any degree of direct enquiry with the lender would likely be detrimental. We’ve also requested direct communication with the seller but have not been able to get it.

    We’re at the point where we may have to walk away. Is there anything we can do? If we had direct contact with the lender and negotiator, as was the case with you Feb 27 poster, Kathi, we’d have a greater chance of knowing exactly what’s happening.

    Do you think that is a reasonable request?

  87. I’M DESEPERATE HOMEOWNER, UNFORTUNALLY ME AND MY HUSBANDO GOING TO DIVORCE, ASHLEY HE LEFT HOME FOR ANOTHER WOMEN, AND I CAN NOT PAY THE MORTAGE, SO I DECIDE GO THRU SHORT SALE, I SEND ALL MY INFORMATION TO THE BANK ( FLAGSTAR) ON AUGUST/08 AND MY AGENT PUT THE HOUE FOR SHORT SALE. PASS AROUND 05 MONTHS OR MORE FINALLY WE RECEIVED ONE OFFER. THE BANK NEVER GAVE THE ANSWER, KEEP JUMP MY CASE FROM ONE TO ANOTHER DEPARTMENT, RESULTS I LOST THE OFFER, NOW BACK IN JUNE I RECEIVED MORE TWO OFFER, AND NOTHING YET, ONE OFFER ALREADY DROP OFF, AND ANOTHER PEDING. KNOW THE BANK SEND ME TO NATIONAL QUICK SALE I GUESS THAT’S THE NAME, ANYWAY….. NOW THE BANK STILL TELLING ME , THE GOING TO TAKE AT LEAST 60 DAYS FOR CLOSE THE HOME…….
    I DO NOT WANT TO GO FORECLOSURE,,, I WAS PAYNG THIS HOUSE UNTIL LAST MARCH…. I CAN NOT DO IT THIS ANYMORE, I NEED FIND A PLACE FOR ME AND MY KIDS……HELP…..

    Reply #341757

  88. Hi Lucy,

    Contact your state’s Bar Association and ask for a referral to an attorney who specializes in short sales. If you do not have money to hire an attorney (even if just for a few hours) ask your state bar association for a referral to free legal aid.

    HUD-Approved Housing Counselors can also help you find a new place for you and your children.

    I am very hopeful for you at this point. It sounds like your lender/servicer is working with a company that specializes in processing short sales. This is GOOD NEWS because it sounds like the process will speed up from this point.

    Many short sale homeowners express frustration at having to wait so long. I know it’s hard. You’re almost done!

  89. We’re on day 88 (from offer). Frustration is starting to creep up. We made a cash bid of 215 on a short sale (outstanding mortgage 230 one bank, 20 second bank). Second bank verbally approved weeks ago. First bank did 2 BPOs. Interior one came in at 250, exterior came in at 290. Lots of work needs to be done on the inside. Citi told us it went to the closing department on July 20 and expect to approve/decline with 10 days. Two days later, we were told it was assigned and expect and answer in 72 hours… well, you get the idea.

    Honestly, I wouldn’t mind the wait if it wasn’t for the “10 days” and “72 hours” comments. I am at the point I want to walk away (I could after July 15 per contract) but it’s so close and yet so far. We’re told that what’s holding it up in underwriting is the fact the offer is low compared to the BPOs. So why don’t they just decline then, if it’s so low? Or is the fact that they’re taking so long to consider it a good sign? I’ve asked these questions every day to keep myself sane. I understand that the banks don’t consider the buyer. It’s a number to them, not a person. But if it’s a formula they use to make their determinations, then we either fall into that number or not.

    Or maybe we’re on the cusp. Walking away is an option and we could just stay where we are. While we could get back the 2500 we put down as earnest money, we’d still be out about 1200 for the inspection and attorney. I just wish we’d get an answer.

  90. How come a the bank can sue you for additional payments after they approve short sale?

    • Kendra — because in approving the short sale, the lender is only agreeing to release the lien on the property. In other words, the buyer takes title to the property free and clear of the mortgage so the lender no longer has the ability to force the sale of the property in order to satisfy the debt. However, the lender does NOT always release the debtor from the debt itself. Thus, unless the debtor signs a new promissory note, the lender has 6 years from the date of the last payment to sue the debtor and reduce the debt to a judgment. At that point, the lender can enforce the judgment, i.e. take steps to forcily extract the money owed from the debotr, such as wage garnishment.

  91. John Hosegood says:

    I’m a Realtor that does short sales exclusively for about 2 years now. I suppose you could say it’s a niche but it seems there are more of us everyday.

    At any rate, I agree with most of what you said, except that it seems your perception of where the frustration comes from is a little misplaced. The length of time it takes isn’t usually the problem. It’s the length of time it takes for them to begin working on it thats the problem. MOST of the time, files sit for months before they even process them. When you call for status reports you get 4 different answers from 2 different people.

    Fancy this. If you are in a declining market, as most of us are, and a buyer makes an offer of $200,000 on a home that is realisticly worth $220,000, (everyone wants a deal, right?) and the offer takes six months to get a final approval it may only be worth $190,000 by then so it won’t even appraise. The bank is approving this price based on old information in the BPO because the BPO is 4 or 5 months old in some cases and they will NOT look at any updated information. “House next door sold for $20,000 less last month and it’s 1000 sqft bigger? Nope, don’t want to hear it. Home sat vacant and was vandalized and the AC stolen since the offer was made? Don’t want to hear it, that shouldn’t affect the value.” And let’s not start with all the comps that appraisers and BPO agents get sent back and rejected by the bank because they don’t like them because they’re too low or good forbid, they were REO’s or short sales themselves so they don’t want to see them.

    Actual scenario: My client had a home that we had listed at the short sale price of $99,000. A buyer submitted an offer in June last year of $94,900. The bank supposedly did their due diligence and came back with a counter offer of $118,000 and change. I explained that it took a price of $99k and a period of 4 months at that price to get an offer of $94,900 and that 2 other LARGER homes, ON THE SAME STREET were listed lower than $118k and were having no luck. No matter. The bank foreclosed in December. The home resold on the REO market in May of this year for $64,545.

    Who won? Everyone lost. The bank lost even more money than they had to, plus foreclosure expense, plus holding costs, plus about $10,000 worth of updating and repairs they did in preparation for the REO sale. The homeowner has a foreclosure on his credit and a single mom of 2 lost a house she really wanted and could legitimately afford in a location she wanted to be in. Not to mention, I lost a sale that made sense to everyone but the bank. But like you said, no problem, the tax payers will pick up the additional loss on that. We are losing money right now, but we’re losing sooooo much more than we have to on a regular basis.

    Until there are some standards that this process is held to, and until the process becomes more proactive, we are not going to see this situation go away.

    On one last note as far as current mortgage holders go, most are still being told that the bank will not modify or mitigate a short sale because they are not behind in their payments by 90 days. They are pretty much telling them that they have no hope of getting any relief unless they stop making payments. Where is the logic in that from a profit/loss perspective?

    • Aaron Evans says:

      The bank doesn’t lose any money by not accepting a short sale. They get the property plus any payments that have been made. They do lose the BPO fee (if one is performed) of $50-$200 and whatever internal filing is needed (apparently very little) plus forclosure red tape. Call it $2000, or about half their origination fee. In other words, every month paid, is pure profit. There might be lost opportunity costs, but don’t forget that over 70% of mortgages are owned by the same entity, and that’s practically a monopoly. Short term profit doesn’t make sense right now when squeezing competitors (independent home owners) out of the market is the real game.

      • Hi Aaron,

        Not sure what you mean when you say “70 percent of the mortgages are owned by one entity.” Can you elaborate a bit? Thank you.

        • After today’s news I would think he means Fannie Mae, and Freddie Mac.

          This really was a great article that hit every point about short selling a property.

          The idea of short selling was to cut your losses, but assume you have to pay back the short, except in, as you say, hardship cases. You did present that well, also, about the political climate.

          What I really liked is that you mentioned the servicers. You are the first person to mention that as a cog in the mechanism.

          Just really a great article.

  92. I am a first timehomebuyer who just recently had an accepted offer on a property going thru a short sale. This article was excellent to give me some backround information on what is going on. I have a few questions:

    1. I have a signed contract from the seller and myself and the selling bank cashed my deposit into their escroll account. Does this really mean anything for me yet? It was explained to me that no other offers can be accepted now so I began to get excited. However, the bank can still decline this offer even though I offered the seller’s asking price? I don’t understand why the bank wouldn’t already be in the loop on this and advise the seller that if they list it for a certain price and it sells then they’ll approve the short sale. The whole process seems backwards to me. Is the bank going to say no and have the property go back on the market for the same price that I offered? The price already dropped 4 times (25%) and had been on the market for 4 months. Why is the seller even going thru this if they don’t have something already worked out with their lender?

    2. This whole article and comments seems to be very negative on the short sale process (the truth hurts) but I didn’t see any data on how many of these actually go thru. The article seemed like there’s basically a 0% chance for it to happen.

    Thank you for any comments.

  93. John Hosegood says:

    Chris- The process is most definately inperfect for sure. That being said, I have made my living for the last couple years just about solely on short sales so they do go thru pretty often. While we would absolutely LOVE the lenders to give us a heads up ahead of time on what they are willing to take, the reality is that it would be almost impossible for them to do it. The shear volume alone that they have on the table right now makes it tough enough and then you would have to factor in what timeframe it takes to get an offer. Has the market declined further? Has it gone up? Usually, the mortgage companies give short sale approvals for a specific period of time when they are approved. Once your short sale is approved, your acceptance will only be good until a certain date. You will need to be able to close by that date because the approval is based on how much of a monetary loss the bank has accepted and approved on the transaction.

    Also, lets not forget that if our friends Fannie or Freddie are involved then they get their say too. And we know how fast our government responds.

    At the end of the day though, the banks can’t waste resources researching a price on a home for which an offer may never come on. Plus, again, what they’ll approve today may be different than what they would approve 2 months from now depending on market conditions in your area.

    My experience has been this. If the listing agent on the home is experienced in short sales, it makes a huge difference. Most of the agents that are inexperienced in this area drop the ball long before the offer ever comes in. For instance, if this home is the nicest one on the block and list price is 50% lower than anything sold for in the area within the last couple months, probably not going to get an approval. If the seller has yet to assemble their required documentation and you have to wait around after the offer or peicemill it together over a few weeks, that takes longer and tends to have the file “lost” on the bank’s end. I could go on for a while.

    We hear your frustration and their have been calls from everywhere to standardize the process for everyone to handle these the same way. I’d love to see that happen but it most likely will not.

  94. John – Thank you for the insight. All these posts are great.

    Here’s a few additional details about my situation. The area that I’m looking in is in Connecticut in a fairly upscale area. I am very new to the whole process and to real estate in general but from all that I’ve reseached, the northeast and especially the area that I’m looking in has not been impacted to the extent that a lot of the areas that people have been posting about on the message board (arizona, florida, california). I just doubt that the listing agent has “extensive” experience with short sales just due to where their office is. My agent also mentioned that the bank that we’re dealing with is small bank that she’s never heard of – hopefully that’s a good thing.

    I’m hoping that the combination of small bank and less short sales in the area may be good for me. I’m just keeping my fingers crossed!

    I’ll keep on posting as this develops more.

  95. Hi Chris,

    Answers appear after your question:

    “I have a signed contract from the seller and myself and the selling bank cashed my deposit into their escroll account. Does this really mean anything for me yet?”
    No.

    “It was explained to me that no other offers can be accepted now so I began to get excited. However, the bank can still decline this offer even though I offered the seller’s asking price?”
    Yes.

    “I don’t understand why the bank wouldn’t already be in the loop on this and advise the seller that if they list it for a certain price and it sells then they’ll approve the short sale.”
    Well, some banks may do this but many wait until the offer comes in. Then the bank will order their own mini-review appraisal called a Broker Price Opinion to try and get a neutral opinion as to the value of the home. The bank has a duty to its shareholders to get the highest price possible, in order to minimize losses.

    “The whole process seems backwards to me. Is the bank going to say no and have the property go back on the market for the same price that I offered?”

    Well, how close to foreclosure are we here? If the homeowner is still making their payments, the bank can wait around for a better offer if they think the home should sell for more. Why would the bank rush to take your offer when they can delay reporting the loss on this house for another reporting quarter?

    “The price already dropped 4 times (25%) and had been on the market for 4 months. Why is the seller even going thru this if they don’t have something already worked out with their lender?”

    I don’t know the seller’s motivation. It could be many things. Maybe they are trying to stay in the home as long as possible before having to move out. Maybe this short sale is what they’ve worked out or hoping to work out with the lender. The seller probably would not be going through this if he/she did not have to.

    Thanks for stopping by RCG.

  96. Happy Home Owner says:

    I had an accepted offer on a great house Oct 2008. Short sale. I spent the next 8 months after that looking at homes a few times a week as backup. I never found anything better. I harassed both agents weekly for status. After almost 9 months, I get a call from the listing agent telling me that the bank is giving me 30 to close escrow or I will be penalized $150 per day until escrow closes.

    My first reaction was joy. Then I got pissed off. I waited 9 months for the bank, and now i get 30 days to close escrow or have to pay them? Well I did manage to close escrow in 30 days and I am so happy that i finally got the house.

    i spent 9 months trying to get inside the mind of the bank, analyzing why they do the things they do, wondering why they didn’t want to hurry up, etc

    In the end, it hit me. There is no strategy. These banks are totally clueless and we give them way too much credit by thinking they have some master plan. i bought the house for 60% of the loan amount the short sellers had on the house. in other words, the sellers just stole/swindled/?? almost one million dollars from the bank.

    Moral, be picky, fall in love with a house and stick with it. Just get a good price though.

    • Happy Home Owner,

      Your story was encouraging to me, but we have been waiting even longer now on buying a on a short sale. We are now 2 weeks short of a year (that’s right, 12 months) since we made our offer. The deal is complicated, with three lenders plus a tax lien involved. We thought we were at the finish line back about 6 months ago, but that wasn’t the case. We have since learned (at least it seems) that the third party negotiater working for the seller is the primary cause of our troubles (not withstanding your correct assessment that the banks don’t seem to have a clue). In particular the person negotiating on this sale seems to have a long history of screwing things up and making people made. Ugh! We keep looking at other properties too, and sometimes find some we like, but very often in this market they are short sales too, and we don’t necessarily want to start all over again from scratch…

  97. This is a great article. But it is missing 1 crucial fact. How servicers get paid. Yes it would be a disaster if all short sales are approved instantly because everyone would be dumping their houses on the market when the market takes a downturn. There would be no sense of collateral anymore.

    But services get PAID as long as they are “servicing” a loan. It is a myth that they only get paid if the homeowner is paying. The investors pay them until the loan is paid off or the houses is sold / foreclosed on.

    So, when a company like Aurora Loan Services tells us that it takes 240 days for a short sale to be completed and submitted to their investor, this is because they are draining every dollar out of the investor(s) before they let it go. If the investors new this, they would be furious. But they are kept in the dark and told “it’s a long process” or “We are backed up with so many short sale requests.”

    I have witnessed so many “mistakes” by the banks it’s incredible. When we have an offer on the table, and that buyer walks, but then we have a backup offer with the EXACT SAME TERMS, then why would we need to start the file all over again as if it was never submitted? BofA loves to do that. One thing this does is makes their graps on that loan as long as possible. In turn, it also cloggs their pipeline up and makes things go slower. They do it on purpose….believe me.

    Thoughts?

  98. Love the article Jillayne, well put. I have been working short sales all through the Country, some take 30 days, other like B of A take 9 months. I feel like the rules of real estate, ethics, disclosures, common customer service all of has been thrown out the window with short sales. The lender does not understand the process, loss mitigation does not understand the process, and both buyers and sellers do not understand the process. What drives me crazy more than anything are BPO agents which value homes well above what buyers are willing to pay for them. Selling a short sale is like walking on a tightrope. All the elements have to be in balanced harmony or else the deal will fall through at the very end. It’s almost like for every 10 short sales listed today only 5 go through eventually. It is too bad as one year from now, it will get worse with negative equity. Option Arm Loans and 5/1 Arms.

  99. Hi Ramin Lavi, Yes, short sales will be with us for many years. We shouldn’t expect the banks to funnel a bunch of money into making the process better; it seems to be to their best advantage to delay reporting the losses and pushing this out for years.

  100. Hi Mike,

    I see the logic in what you’re saying. One would think that investors would analyze their current contract with servicers and specifically outline the process for mitigating losses in the event that a short sale is a better option than foreclosure.

    I’ve got to think this is in their contracts, but what we’re seeing now is defaults of epic proportions. Something this huge was not planned for.

    I’m guessing that no servicer could promise an investor a great turnaround on processing the short sales. It’s just not feasible with the amount of money put into properly staffing a high functioning loss mit department. Servicing would demand a higher fee than the investor is willing to pay.

    What say you?

    • Jillayne,

      I have a question. I have an approved short sale from the seller lender and was ready to close, ordered all the reports and we were getting docs. My client (seller) decided to tell me he filed chapter 7 BK and put all debt in including the home, do you know anything about the procedure for this? I did some research and found out our lender (seller’s) is ok to proceed because we approved before BK filed…what is the next procedure as far as the BK court? Please advise anyone who may have dealt with this or just simply knows the answer.

      Thanks

  101. That’s the thing. Investors are getting killed right now on servicing fees, because homeowners’ loans are being serviced 6,9,12,24,36, even 48 months after they miss a payment.

    At this point, we all know short sales and foreclosures are not going to go away any time soon. The only way to get rid of these short sales and foreclosure is to literally “cleanse” the current market of homeowners who are behind on their mortgages. Just let everyone short sale…clean it out, and start over fresh with new homeonwers. We all know how tough it is to qualify for a loan these days. So, anyone buying anything really has to be super qualified.

    If the banks and servicers keep dragging out the process, it is going to cost them tons of money, and make this recession last a long, long time.

    It’s like a 100 people trapped in a burning building, and the doorman is letting 1 person out at a time, checking each one to make sure they didn’t steal anything. Just let them all out so you can put out the fire!

    And this loan modification BS that has gone on. How greedy can you be? Here is a solution. Everyone who has higher than a 6% gets a 6% 30 year fixed, P+I loan. if you can’t afford it, you get to short sell.

    The banks should just admit they screwed a lot of people with bad loans, Neg Ams, 2 and 3 yr Arms with high margins. Just admit it…you made billions, now you are like the guy who made a bad investment and refuses to admit they made a mistake, and won’t listen or just take the loss…just wants to spend every dollar they have to try to fix it….when they should just cash it out and start over.

  102. Annie CA says:

    Sort of a different topic but…I recently made an offer, that was accepted by the seller, for a short sale. I am currently waiting for bank approval, its only been about 3 weeks, and I’m not expecting to hear by tomorrow by any means. My question though is concerning the home buyers tax credit. Being a first time home buyer, I was hoping to purchase before the home buyers tax credit expires at the end of April. I was wondering if by signing a purchase agreement before the expiration date qualifies me for the credit, once my short sale goes through? I read that if you are in contract before the expiration, even if you have not closed, you are still eligible. Does anyone have any confirmation/information on this?

  103. You have to be in contract by the end of April (which you already are) but you ALSO have to close by the end of June.

    The exact language from the IRS website is: “If a buyer enters into a binding contract by April 30, 2010, the buyer has until June 30, 2010, to settle on the purchase.”

  104. This is truely the first time I’ve read anything that made any sense out of short sales. We are currently waiting on an offer that we put on a short sale. It has been months and we haven’t heard much of anything. This is the first time that I’ve read something, that (a) made sense and (b) explained a little of WHY short sales take a long time. I feel much better about the situation. Thank you.

    • Depending on what state you are located in…I’m in California and have been doing short sale negotiations for about 2 years now, call me absolutely crazy but I love the challenges. I have only failed at the ones where the seller was an investor and was trying to delay foreclosure and continue to collect rents for as long as possible. sorry but served them right for trying to use my talents like that. The other unsuccessful short sales were due to the lenders coming back with higher than market counter offers and forcing the homeowners to foreclosures due to the credit default swaps, wher the investor takes out insurance against the borrower defaulting…kind like a nice payday for them if they default and go to a foreclosure. Now however, they have finally discovered this with Goldman Sachs as we should all know. We are stuck in a small time frame where some of the banks hold their short sales for so long due to the monies they recieve for their toxic assets, the more toxic assets they hold, the more money gov’t gives them.

      I also have been doing loan modifications for free and have saved people about $1000 on their monthly mortgage payments, I know exactly what the lenders look for in the financials on both short sale and loan mods. I would love to share my knowledge, I think the more people empowered to this knowledge will help the market and understanding what’s really happening. My husband is also a financial advisor and insurance broker so he has the knowledge in the financial arena that is tied to the real estate industry.

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  105. Richard Martrin says:

    Excellent article and explains a lot about why it can take so long for lenders to process short sales, this is a relitively new ball game for most agents and lenders,and not every one is familiar with the high risks and processes involved, but it looks like the current situation is going to be around for some time to come and I am sure real specialists are emerging who are going to excell and feast off the situation. the article made a lot of good sense and painted a clear er picture of the present day lending situation.

  106. Wow, just found your site and I can see why the blog is so popular. The articles I’ve read so far, like this one, are well thought out and show a very high level of knowledge. I think its important to note that there are often up to four different entities involved in approving a short sale: 1st lienholder, 2nd lienholder, servicer, and mortgage insurance company. Getting all these various parties to agree to anything is a major stumbling block we regularly come across that hinders short sale approval.

    Great job to all the authors and I’m now a regular reader!

  107. Hi Dave, uhhh, maybe not. On a short sale maybe there’s only one lienholder. Maybe there’s no mortgage insurance. Maybe there’s no second servicer because the loan is being serviced by the bank. You missed investor approval. Maybe the seller qualifies for the HAFA program.

    In reality short sales are a moving target with guidelines, rules and programs undergoing constant change. A mortgage is a like a machine with many moving parts. Nobody’s an expert, we’re all having to learn as we go along.

    Lenders squeezed lots of profit out of loan servicing during the bubble. Servicing loans was a regular cash cow. Now we’re having to go back and unwind and extrodinarily high number of loans. Lenders were not prepared for it and we’re all having to live through the dark side of low cost mortgage lending.

  108. What a load of self serving crap.

    So why do the banks even LIST short sales, if they have no idea if its going to happen? This is the problem in a nutshell. The banks are unwilling or unable to make any decisions on this matter, and instead are hoping for full default and then foreclosure.

    Come to Las Vegas. You want to see how banks are destroying a city, here is the epicenter. So they have all these short sales and foreclosures. If its a short sale, good luck getting your bid to be taken seriously. They will leave you hanging for months, then the deal will fall through because they have waited out the homeowner and he finally has to declare bankruptcy. So the house is foreclosed on. The homeowner is evicted, then the house sits there, month after month, the bank refusing to pay homeowners association fees, or do ANY upkeep for the house. The houses here are, literally, rotting in front of us, because the banks flat out refuse to set a price, and honor it.

    Again, explain why any bank puts a price on a short sale if they are unwilling or unable to honor it? The answer is, because the banks do not want to sell the house in short sale, and instead just want the house back in foreclosure. This poor little me crap that this blogger wrote has no understanding of how the real world works. These actions by the banks, that create these empty, un-kept houses, is making suburban slums out of once thriving communities.

  109. Why would a bank prefer foreclosure to short sale? Just curious. Don’t they get more $ on a short sale?

  110. “Again, explain why any bank puts a price on a short sale if they are unwilling or unable to honor it?”

    Barry, in our area the seller and agent often put the price on without “the bank” providing input on price until there is an offer to present to them. Some exceptions.

    Jillayne is teaching a class today and will likely offer her thoughts when she’s free.

    “Why would a bank prefer foreclosure to short sale? Just curious. Don’t they get more $ on a short sale?”

    a c, Often a short sale offer may be less than what the bank thinks they can sell it for if they take possession via foreclosure. Whether they can or not is not known until they play it through. They will order a Broker Price Opinion or sometimes do a full appraisal. If the offer is a lot less than that, they will foreclose and sell it themselves. The cost is higher…but if the offer is a lot less than market value they may be better off by foreclosing.

    Again, I’m sure Jillayne who wrote this post will see these when she is free and add her thoughts as well.

  111. Hi Barry,

    I do hear that Nevada is going through some very, very hard times with all the foreclosures. You have my sincere empathy. Tell us more about the neighborhoods. There was a Fair Housing case recently back east where lenders were accused of NOT taking care of REOs in African American neighborhoods v. homes in caucasian neighborhoods.

    Well I happen to agree with you in many ways. I wrote this blog post in 2008 and now that I re-read it I notice that I predicted that we’d see a crisis in the loan servicing arena.

    Here’s how I’m going to call it: Banks/lenders can’t rely on the sales price of a contract to direct market value because parties in the transaction aren’t arm’s length; they all gain something when the deal closes so banks/lenders need to rely on a person with nothing to gain or lose to give them a fair market value estimate via a Broker Price Opinion. Arguably some BPOs are not done well, others come in right near the sales price but a high BPO can throw the short sale negotiations sideways.

    One solution would be to require a higher level BPO, say, a full appraisal instead of a BPO. But that might take a legislative change in your state. (they do require this in other states.)

    Another solution might be to wait a little longer to see what the Attorney General lawsuit against the servicers brings.

    In WA State we now have a state law that requires the lender servicer to enter into forced mediation when the borrower defaults to force everyone to show their hand including the lender AND the homeowner.

    Thanks for stopping by RCG.

  112. Jillayne,

    Will the new law help the seller get a list price approval in advance of listing a short sale? Some kind of binding approval of what price they are looking for so agents don’t simply keep dropping the price every two weeks with no idea if the lender would accept that number?

  113. Ardell! This is one of the potential bright spots of the new Foreclosure Fairness Act. The lender will have to bring to the mediation table their latest BPO and their math worksheet showing the price they need on a short sale to make the short sale work.

    • Interesting, except there usually isn’t a BPO done on all properties prior to foreclosure and, so it is not likely that there will be one at the first meeting with the owner. Most often the BPO is not ordered until there is an offer.

  114. “there usually isn’t a BPO done on all properties prior to foreclosure”

    Actually loan servicing orders BPOs all the time on homes where the owner is in default, close to the trustee sale, if the homeowner is seeking a loan mod, and for other reasons, too. Yes, BPOs are also orderd on short sales after an offer comes through.

  115. Depending on what state, in California their is no deficiency judgement between what the money owed to what the sale price sold. However, this is strictly for primary homes and first lien holders only. You need to look at the approval letters very carefully and make sure the lien is released and that you don’t have your client sign the approval if their is a promissory note needed or cash contribution from seller for any amount. I had this with Bank of America and I called my negotiator and simply said “what is this”, my client was going to just walk away, they have no money look at their financials, they said, Ok just take it off in the counter or addendum- that simple, but they will try to get agents to get their sellers to sign and be responsible later, always look at those approvals carefully.

Trackbacks

  1. [...] Now it is time that we examine the final stage in the short sale process. There is n doubt it is the most overlooked piece in the short sale and can be the most devestating to the seller. I am talking about the deficiency judgement! [...]

  2. [...] Why Do Banks Take So Long To Approve a Short Sale? /*@cc_on @*/ /*@if (@_win32) document.write(“”); var script = document.getElementById(‘__ie_onload’); script.onreadystatechange = function() { if (this.readyState == ‘complete’) {} }; /*@end @*/ if (document.addEventListener) {}SHARETHIS.addEntry({ title: “A Deeper Understanding of the “Short Sale””, url: “http://maxsell.net/a-deeper-understanding-of-the-short-sale/” }); [...]

  3. [...] Nix of Maxsell Real Estate posted a link to a very informative post by Jillayne Schlicke describing what Buyers can expect in a short sale transaction, and why short sales can take so [...]

  4. [...] Short Sales —- Question From Today’s Short Sale Class —- Should You Buy a Short Sale Property? —- Is a Short Sale a Bargain? ____ Why Do Banks Take So Long to Approve a Short Sale? [...]

  5. [...] And today, the Nat’l Assoc of Realtors applauded a bill that was introduced to try and force lenders to process short sales faster.  Can you hear me laughing? I wrote a blog post on just this topic a few weeks ago. [...]

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