The Real Estate Short Sale Process Step-by-Step

A lender isn't likely to approve a short sale if there's enough equity in the property to allow it to sell and at least break even if it foreclosed instead. The homeowner must be upside-down on her loan—that is, she owes more on the mortgage than the home's fair market value. 

This makes the first step critical—the value of the home must be established right at the start. 

It's easier to come to a price agreement with the lender when the home's value is close to the outstanding mortgage balance. Less than the balance is always workable, too, but success becomes unlikely when the home is worth more. 

Keep in mind that the lender will want proof of the value. A real estate agent can prepare a comparative market analysis (CPA) or a broker can provide a broker's price opinion (BPO). A professional appraisal can be a powerful tool. The lender might request one of its own as well. 

The lender will want more than a value before it agrees to a short sale. It needs to know why the homeowner must sell. Why can't he just continue living there? 

The seller must, therefore, prepare a "hardship letter" detailing the reasons that he's unable to continue making mortgage payments. Drafting this letter should be the second step in the process, and the letter should be compelling. The short sale won't be successful without it. 

It must be convincing and complete. The lender must immediately understand that the seller is in a position where it's either a short sale or a foreclosure or bankruptcy. The hardship he's experiencing isn't likely to be resolved in the near future. It might be unemployment, divorce, the death of a spouse, a serious illness, or an uninsured loss. 

The more ammunition the seller has to convince the lender that his back is against the wall, the more likely he is to get a good response. He should include details about his income, other assets he might own, and all the debts he owes. The lender will want to see that he can't qualify for another loan to hold him over until his financial situation improves. He doesn't own any assets that he can sell to raise cash.

Throwing in a little emotion isn't a bad thing, but try to keep the letter to one page and include documented proof of its statements if possible.

This isn't quite as cut-and-dried as it sounds. Lenders won't talk to investors, potential buyers, or real estate agents unless they're first instructed to do so by the borrower or homeowner. She'll want to get the approval of all necessary parties in advance and in writing before anyone contacts the lender, then she can submit these consents along with the application and the short sale package.

These consents will allow the lender's loss mitigation department to work with and discuss options with everyone involved and ultimately to express the lender's terms if the short sale does indeed go through. An actual meeting or meetings might be scheduled with the loss mitigation department to iron out these details for commercial properties, but this is less likely with residential properties.

Don't expect a warm welcome when you ask for an application to initiate the process. As a general rule, lenders aren't excited about short sales. You might have to keep after them and make multiple calls to get the application and move forward. 

The next step is to nail down a bona fide offer—a signed purchase agreement or sales contract between a buyer and seller. The lender needs something concrete to approve...or reject.

The contract should clearly and unequivocally state that the deal is contingent upon the lender's approval. You might also want to include a copy of the listing agreement showing the commission due to the real estate agent upon sale, and proof of the buyer's ability to purchase, such as a pre-approval letter from his lender or proof of cash deposits in an account. 

An arm's-length affidavit is also often required. This indicates that there's no pre-existing relationship between the buyer and seller, so the proposed sales price is truly indicative of fair market value. The homeowner isn't trying to help out the buyer by selling the property for a song. 

The more comprehensive your short sale package is, the better. Gather up and photocopy all the information you've gathered and submit it to the lender. 

The meat of your short sale presentation should back up the statements made in the hardship letter. Prepare a thorough and detailed set of documents and financial data to support the claim that a short sale is a good solution for the lender: bank statements, proof of income or lack thereof, proof of the value of any assets, credit card or other loan statements, tax returns, proof of a death in the family or illness—anything and everything that will substantiate the information outlined in the letter.  

The CMA, BPO, or appraisal should indicate that the home isn't going to sell for as much as or more than the short sale offer in the current market. 

The lender's loss mitigator will evaluate your numbers if you prepared a thorough short sale package, and he'll be gathering some numbers of his own. His goal is to ensure that this indeed is a situation that can best be saved by a short sale. 

He'll probably get a title report to ensure that no other liens are present against the property. He might want to meet with the broker who provided the BPO—another reason why those consent-to-talk letters are so important. 

Don't expect the mitigator to rush through this process. Remember, the bank doesn't want this short sale as much as the buyer and seller do. There's really no incentive for the mitigator to wrap up the review as quickly as possible. One or both agents involved in the short sale must typically stay on top of this part of the process with regular phone calls and queries. 

Ultimately, one of four things will happen after the loss mitigation review. The lender will approve the offer and issue a letter outlining its terms for the deal or it will reject the offer outright. But it might also reject the offer contingent upon certain circumstances that can be remedied, indicating that it will approve the deal if the remedies occur.

Finally, the lender might do nothing at all. It's acceptable to keep hammering away until you get an outright rejection or at least some type of definitive response. 

If the sale is a go, the lender should issue a preliminary settlement statement, detailing the date of closing, all closing costs, and if there are multiple lienholders, how much money each is to receive from the sale.

If there are no other lienholders, the lender collects all the proceeds at closing. The seller does not receive any money from the deal. Remember, by definition, she still owes a balance on the loan against the short sale property.

The seller should make sure that she gets a statement waiving the lender's right to pursue a deficiency judgment against her if possible, relieving her of any liability for paying off the mortgage balance after the sale.