The Anatomy of a Short Sale

Small home: Helsingor, Denmark

The Anatomy of a Short Sale

 

The following story is a true account of a short sale transaction in which I was both the listing and buyer’s agent. While every short sale  is not a nightmare, my experience is offered as an example of what can occur. Buyers should also be aware of the possibility that the short sale may not close before the property is sold in a foreclosure sale at the courthouse steps.

 

The Accepted Offer

On July 6, 2011 an offer was written and accepted by my seller client. At that time the seller had two loans with a single major bank and the contract price was about $80,000 below the total amount owed. Since I had modest prior experience working with a lender on a short sale, other than what I had learned in continuing education classes, I employed the help of a local real estate attorney. (This is strongly recommended, since they deal with these transactions every day.) The first step in the process was to submit the signed contract into the bank’s online short sale system. This was followed by the uploading of the “short sale package.”

The Short Sale Package (“SSP”)

While the information required varies from lender to lender, the typical “package” includes the items shown below. If there are multiple mortgagees, each lender will need to receive a SSP.

1. Short sale proposal cover letter- This is a one page summary of the homeowner’s situation, which explains the primary cause of the hardship, how much is owed, the home’s estimated market value, the extent of any needed repairs and the amount of the offer.

2. Seller’s signed short-sale payoff application.

3. Seller’s hardship letter – The most effective letters include an apology, an explanation of the circumstances which led to this request and a recounting of the steps already taken by the seller to solve the problem him/herself.

4. Seller’s financial information- The financial information is a list of assets, liabilities and monthly cash inflows and outflows. The list of assets and liabilities must be as of the date of the letter and show the current balance of each item. The cash inflows and outflows must also be broken down to show each individual source and use of funds.

5. Seller’s supporting financial documents- This will include current pay stubs, W-2s, tax returns, bank and credit card statements.

6. Supporting hardship documentation- This might include an employment termination notice, medical bills, divorce decree, or whatever is the basis of the hardship. Please note that simply a loss of equity doesn’t constitute a valid hardship.

7. Repair estimates for the property, if necessary – If a property needs immediate repairs to fix a leaky roof or plumbing, provide at least one bid to make those repairs.

8. Market analysis of property with subject’s sales history- The realtor will complete this task.

9. Marketing documentation, with feedback from buyer’s agents (if any) – The realtor will complete this task.

10. Signed purchase contract.

11. Buyer’s preapproval letter showing the address of the property and any lender contingencies or a current bank statement showing proof of the funds needed to close.

12. Copy of certified escrow instructions, if applicable.

13. HUD-1 Settlement statement.

14. Preliminary title report, if available.

What next?

It might seem simple to accomplish, but in my case the seller had to send in the SSP 3 times, as it was “lost” the first two times. This delayed the process about 60 days, since the lender wasn’t forthcoming about their loss of the documents. Because of the delay, he had to submit updated paystubs, as well. (Fun and games…)

 

The waiting begins… and then a counter offer!

In an effort to keep my clients abreast of the processing of the offer by the bank, I attempted each week to contact the asset manager (my contact with the bank), via email or voice mail. Unfortunately, I only heard from the asset manager when he needed something from my clients. Additionally, his deadlines were very tight, which made it even tougher on my clients. None of my emails or voice mails was ever returned.

The asset manager finally ordered an appraisal in September. We receive no further word from the asset manager until late October when a counter offer was received. The counter offer was about $40,000 above the contract price agreed to by the buyer and seller. The buyer then raised his offer by $5,000. The buyer’s counter offer was only slightly higher than the contract price, since the home inspection revealed the need for a new roof and other repairs. A few days later, on a Friday around noon, the lender rejected the buyer’s new offer and asked for a final offer. Over the weekend the buyer decided to accept the bank’s last offer. Bright and early Monday morning, the attorney attempted to enter the acceptance into the lender’s system only to learn it was too late. The entire transaction had been deleted from the system.

 

Time to start all over again….

Given that we had come this far, the buyer didn’t want to walk away. We all thought that since the documents had already been submitted and we had agreed on the price in the lender’s counteroffer, the only remaining task was for the lender to confirm the contract. Wrong…. The asset manager apparently thought the buyer had enough time on Friday afternoon to make up his mind. (Like the buyer didn’t have a busy schedule of his own!!) Because the asset manager had closed out the file, we had to start at the beginning and resubmit all of the paperwork once again! Needless to say both the buyer and seller were both shocked and frustrated. However, they both decided to start over and resubmit the SSP and an updated buyer preapproval letter.  The attorney submitted the documents with the new offer price, which equaled the amount of the lender’s last counter offer.  We soon learned a different asset manager had been assigned to the property. I attempted to explain to the asset manager, via email, the history of the transaction. Unfortunately, this effort didn’t influence the asset manager to vary from a strict adherence to the lender’s formal approval process. The asset manager requested another appraisal in December 2010. In early January, the lender offered yet another counter offer, which was about $5,000 above their previous proposal. The buyer rejected that offer and stayed with his last and final offer. True to form, the lender then asked for the buyer’s final offer.  (The lender’s procedure of asking for a “final” offer in this instance is absurd, since “final” or “highest and best” offers are only requested by sellers when two buyers are bidding on the same property. Final offers are never requested when there is only one buyer and he/she has already made a counter offer.) A few days later, we received an email affirming the contract was accepted, and a closing date was set for January 13, 2012.

 

Now it’s time for the buyer’s lender to act foolish…

Now that we had an agreement between the buyer, seller and the seller’s lender, the buyer’s lender ordered their own appraisal of the property. (This is a normal part of any purchase, when the buyer isn’t paying cash.)  In early January, the buyer’s lender advised us that their appraiser noticed that it looked like the driveway was shared with the home next door. The seller confirmed this fact to the buyer’s lender, who then asked for the documentation establishing this dual responsibility. The seller had no such documentation and advised the buyer’s bank. The bank then reported that they would need to search the county’s property records before deciding what to do next. Two weeks passed by and still no word from the buyer’s lender. With the closing date of January 13th almost upon us, the attorney requested an extension from the lender. The lender gave us until January 31 to close the deal. On about January 23, I received word that the buyer’s lender needed a signed, notarized agreement between the seller and his neighbor, which formalized this shared responsibility vis-à-vis the driveway.

 

We’re almost done, but not quite…

Given the torturous path the deal had taken to that point, writing and having my seller and his neighbor sign an agreement, covering the shared driveway, seemed like a simple task. Close, but no cigar… The neighbors weren’t easy to contact and I had to convince them to take time off from work so they could sign the document in front of a notary public. Four days later, the fully signed and notarized original document was delivered to the lawyer who in turn filed it at the courthouse. Now we just had to wait for the underwriter, at the buyer’s lender to finally approve the mortgage.

 

A done deal, at last!!!!

The underwriter did eventually sign off on the transaction and the contract was closed on February 3, 2012. (Yes, we needed the bank to approve another extension through the 3rd.) Seven months of emails, phone calls, contract extensions, problem solving and cajoling everyone to stay focused was quite a learning experience for all parties. TGIO (Thank God it’s over…)

 

Final thoughts…

While my experience isn’t typical, it’s certainly not uncommon. Until lenders have fewer foreclosure and short sale properties in their inventories, the harried clerks responsible for processing these transactions will make mistakes and the time to get to the closing table will remain longer than necessary. Before entering into a short sale transaction, make sure the due diligence has been done (e.g., how many mortgages are involved, etc.) and the buyer doesn’t have an unreasonable expectation of how soon it will close. If a buyer has a closing date deadline of less than 6 months, they probably shouldn’t even consider a short sale property. Don’t forget my blog post on Short Sales & Foreclosures in Kentucky, for additional useful information.

Photo: Flickr creative commons by Mollenborg’s Photostream