Short sales are common in today’s real estate market. When a seller experiences financial distress and needs to sell their home, they will run into trouble if their mortgage balance is higher than the current market value of their house. In such a situation, a seller will ask their bank to approve a short sale, where the bank agrees to release the loan on the home for less than they are owed.
Short sales can be a pain in the butt, because you have to wait around for the seller’s bank (or banks, if they have two mortgages) to approve the short sale. The process can be maddeningly bureaucratic and time consuming, and it can be unclear what price the bank is actually going to approve. Many short sales take 2-3 months to receive bank approval, during which the bank is analyzing the market value of the house via a Broker Price Opinion (BPO).
So you patiently wait for bank approval for 3 months. What happens at that point? Once the bank has reviewed your offer, reviewed the seller’s financial documents and completed their own internal analysis, they will issue a short sale approval letter. I’ve seen lots of these letters from a variety of different banks, but most of them are pretty consistent. Here is what a short sale approval letter typical contains:
- Approved Sale Price – This may or may not be the price in your offer. If the bank believes that the market value of the home is higher, this may very well come back at a higher amount than your offer, so this is a potential for an unexpected surprise.
- Closing Date – Their approval is dependent on the sale closing by a certain date, usually 30 days from the date of the letter. If you can’t meet that deadline, the approval may become void, but most banks will approve 1-2 extensions if you pay a per diem fee for the additional interest accrued. Don’t mess around too much with the closing date. I’ve seen deals die when requiring extensions before.
- Closing Costs – The bank will outline the exact closing costs that they will allow to be taken out of the sale proceeds before they are paid. These include real estate commissions, escrow/title fees and other expenses that a seller is required to pay for.
- Seller Contribution – A bank may require the seller to bring funds to the deal to approve a short sale. This could be money that the seller pays at closing, or more likely would be a requirement that they sign a promissory note with the bank to remain indebted to the bank for some of the remaining balance of their loan. When sellers are in a poor financial situation, it is unlikely that they will have money to contribute and also may not want a monthly payment hanging over their heads after the deal closes, so this is another area where short sales can fail.
- AS-IS – Banks will pretty clearly say that the proper is sold “as-is” and no repairs will be made. In almost all cases, they do mean it. It is exceedingly difficult to negotiate any sort of repair items with a bank on a short sale. If the seller does have some money available, it may be possible to negotiate with the seller, but many times the seller doesn’t have any funds available.
- Sellers Will Not Receive Any Proceeds – The whole idea behind a short sale is that a bank is allowing the loan to be paid off for less than they are owed. If there is any extra money from the transaction, it certainly will not go to the seller. The bank requires that it be paid back to the bank.
- Payoff Demand – The letter will outline the closing procedures, any review requirements and will instruct the escrow company on how payments must be made.
When a short sale approval letter is issued, it is critical that both the buyer and seller review its contents and be comfortable with the closing terms before moving forward. Buyers of a short sale need to understand the price they are being required to pay and need to be able to meet the closing timelines required by the bank. Sellers need to understand how they are going to be released from their debt, or if there is a remaining balance requiring a promissory note from the seller.