All right, you know you’re in short sale territory. You have a piece of real property, you owe more than you will generate from the sale, and you’re actively trying to sell the property. What information do you need to begin generating? What will be asked of you? What will the bank be doing to consider an offer?
First, the bank will ask you for a whole host of information. This information includes:
1. Your Listing Agreement with your realtor: The lender wants to make sure you have listed the property, and have an active listing. Your realtor should be able to provide this document, since you likely signed it at the time you first listed the property.
2. Financial Information: The lender wants to know what your financial condition looks like. So, they will ask for income information (see below) and expense information. You must be able to provide information indicating how much you spend on things like insurance, utilities, groceries, gas, phone service, child care and any other recurring cost you typically pay in a given month. They will take this information and generate a predicition of your “discretionary income” - i.e. the amount of money you have left over at the end of a month.
3. W-2’s from prior years: To verify the information in #2 above.
4. Prior year Tax Returns: To verify the information in #2 above.
5. 2 Previous Months’ Bank Statements: To verify that you are not hiding cash (no, seriously, if you have $50,000 in the bank, you can bet they will ask you to PAY any deficiency - and will deny any short sale).
Second, once you find a prospective Buyer, the lender will require that you provide:
6. A fully-executed purchase agreement: To verify that the contract actually exists. As a short sale applicant, you tend to become an incidental party to the transaction - meaning, there is little reason to negotiate specific terms that will improve your position. You know, as the seller, that you will walk away with no cash (in most instances), so there is little reason to negotiate terms. HOWEVER, you should carefully consider the contract terms to address your specific circumstances. Items such as move-out dates and dealing with tenants (if this is a rental or investment property) can become very important matters in the short sale area.
7. A Buyer Prequalification Letter: Your lender doesn’t want to waste time considering a contract that won’t close. If the lender approves, they want to make sure that the buyer has the wherewithall to close.
8. A Proposed HUD-1 (Settlement Statement, etc.): To consider a short sale, the lender must know the net proceeds that will be applied against the outstanding principal balance of the loan. The proposed HUD provides this information.
Third, the lender will order what is called a “Broker Price Opinion” (”BPO”). This is like a mini-appraisal, performed by a realtor rather than a licensed appraiser. The lender must determine whether the offer price is reasonable - you will likely not get away with a complete “fire sale” price. In my experience, as long as the offer price is within about 10% of the BPO, the offer will be given serious consideration.
The BPO will be affected by the performing realtor’s subjective opinions regarding the marketplace and direction of prices. If the realtor is not conservative in their estimate, the offer may be dead on arrival. In my experience, the BPO makes or breaks the deal - which is frustrating since you have absolutely no control over this piece of the process.
If the BPO has only considered the exterior of the property, and the interior drastically impacts the valuation, then you should seriously (loudly and continuously) ask the lender to re-perform the BPO by going inside the property. Depending on the circumstances, you may be able to get some traction with this idea.
Fourth, and finally, the lender will provide approval or rejection. We will deal with approval here only. The lender will likely submit additional addendums to your existing purchase contract. These may include: (1) a Contract Addendum (re-establishing that this is an as-is sale), (2) a Closing Date addendum (requiring closing within a short timeframe), (3) a Listing Agreement Addendum (extending the listing agreement if necessary) and (4) an Arms-Length Transaction Addendum (stating that you are selling to a third party, not a related party. This one is designed to ferret out fraudulent transactions where you are receiving cash outside of closing, where you are essentially trying to perform a refinance in another’s name, where you are trying to get out from under onerous loan terms, or the like).
If you get this far, you’re ready to close. Just cross your fingers your Buyer has not gotten cold feet by now!