Short Sale Defined
A short sale occurs when a lender agrees to accept less than the unpaid principal balance on a loan securing real property. By doing so, the lender avoids the additional fees and costs associated with foreclosure. The amount remaining after a short sale is called a deficiency. The benefit of a short sale to the borrower is that the deficiency is typically waived by the lender and reported to the credit bureaus as “settled for less than the agreed upon amount”. While this reporting is negative, it is much better than having a foreclosure on your credit report.
The short sale timeline has 4 stages. Below I will explain each in detail.
Stage 1: Marketing
During the first stage of a short sale, a homeowner secures the services of a real estate professional to market their property and obtain an offer from a qualified buyer. The length of time needed for the marketing stage depends on current market conditions.
Homeowners will likely receive offers from investors attempting to get the homeowner to accept an offer significantly below the fair market value. These offers should be avoided unless absolutely necessary as the lender will probably reject or counter offers well below the property’s fair market value. You are better off rejecting such offers and, instead, continuing to market the property in an effort to obtain an offer closer to market value offer. Keep in mind that this can take a little bit of time because finding qualified buyers in a depressed market is challenging.
The normal marketing time for a short sale from the signing of the listing agreement until reaching an accepted offer is around 30-60 days. A homeowner may receive an acceptable offer much sooner but, be prepared to wait at least 30 days and up to 60 days in slower markets.
Stage 2: Submission
The second phase of the short sale timeline is the submission stage. The length of time needed for the submission stage depends on the lender. The efficiency of short sale departments varies by the lender.
During the submission stage the lender will require the real estate agent to submit a short sale request, financial worksheet, hardship letter, supporting financial documentation, listing agreement, borrower’s authorization forms, the accepted offer, an estimated HUD1, a pre-approval letter for the buyer, proof of funds, etc. The submission stage requires a real estate agent to be diligent in responding to requests from the lender. The volume of paperwork in this stage is high and good communication is key to expediting the process.
The lender may frequently ask for additional information or revisions to the HUD1. The length of time that the short sale application remains in the submission stage depends on the responsiveness of the lender and real estate agent. The submission stage can take anywhere from 14-60 days, but you can expect an average duration of around 30 days.
Stage 3: Negotiation
Once the lender has received all of the documentation needed to satisfy the requirements of the submission stage, the negotiation stage begins. During the negotiation stage, the lender will order internal pieces of information needed for the lender to be able to review the offer accepted by the seller. The lender will order a 3rd party valuation of the property either in the form of a Broker Price Opinion (BPO) or the lender will order an appraisal. The goal of the lender is to obtain a 3rd party opinion of the fair market value of the subject property.
Once the valuation is complete, the lender can review the offer and determine if it can be accepted by the investor on the loan. If the lender thinks that the offer is too low or if the lender is unwilling to pay for charges listed on the HUD1, the lender will issue a counteroffer to the real estate agent. The real estate agent then contacts the buyer’s agent and the negotiations begin.
The seller has very little to do with the final outcome as the real issue is obtaining an offer from the buyer that the lender will accept. Once a price and HUD1 have been agreed upon, the lender will send the file to the investor for final approval. Once final approval is obtained, the lender will issue an approval letter and the short sale will advance to the final stage. The negotiation stage can take anywhere from 2 weeks to 2 months. However, the average time is around 30 days.
Stage 4: Closing
The final stage of the short sale timeline is the closing stage, which is the normal escrow period that involves inspections, appraisals, disclosures and escrow paperwork. The average time for the closing stage is 30 days.
From beginning to end the average short sale timeline will take between 4-5 months from signing the listing agreement to close of escrow. There are always exceptions and the process could be shorter or longer.