Basically, the definition of the short sale process is when the lender of a property allows the property to be sold for less than the amount due on the mortgage loan(s) secured by that property. With real estate values declining, it is more and more common for properties to worth less than the debt against them.

There are benefits for all parties involved. A short sale process is that it allows the seller to avoid the credit report damage associated with a foreclosure. A foreclosure can stay on your credit report for up to 10 years and can take an emotional and financial toll on you and your family. For the lender, it provides an orderly and predictable strategy without the additional time and expense of a foreclosure action.

But the pitfalls of the short sale process should be considered as well. The I.R.S. may consider any debt forgiveness as taxable income, thus resulting in a tax liability. Legislation has recently been enacted to exclude owner occupants from this liability, but you will need to talk with your tax advisor to determine how the potential tax consequences will pertain to your individual circumstance. IRS Debt Forgiveness Link

In addition, lenders can often pursue a borrower for the deficiency balance (the difference between the amount owed and the amount paid). in most CDPE transactions, this will be a part of the negotiations with the lender and releases from further action can often be obtained. Unsecured promissory notes are also a common remedy to address this shortfall with each borrowers situation and resolution being different depending on the lenders involved and the circumstances of the transaction.

The Short Sale Process

The short sale process can vary, but it will generally work as follows:

1) The homeowner will meet with an individual to review their situation and seek assistance in requesting a short sale. A Certified Distress Property Expert or real estate agent with experience in short sales will know the criteria required to obtain approval and begin to collect it. This information will all become part of what is known as the "THE PACKAGE". A marketing and pricing strategy will be decided and if possible, the home will be placed on the market. 

2) The agent will request the seller to issue a letter authorizing the release of personal information about the loan and the property to the agent so that contact with the lender and the agent can be established and placed in the file to allow the agent to present offers and maintain contact with the lender. Example of Authorization Letter

3) As the property is marketed according to the agreed to strategy, THE PACKAGE will continue to be prepared and needs to be the priority. This will include a "hardship letter," which will detail and explain all financial difficulties as well as the seller’s financial situation including bank statements, investment accounts, paystubs and other financial records often including the last 2 years of tax returns.

It is essential that THE PACKAGE be ready to submit as soon as an acceptable offer is received and must be accurate, thorough and complete. The transaction will require the lender to accept 10's to 100's of thousands of dollars less than the face amount of the debt and THE PACKAGE  is the story that supports the request for that consideration. The last part of THE PACKAGE will be the purchase agreement and HUD (Net sheet to the lender), pricing research and a Broker Price Opinion to support the purchase agreement, marketing history of the listing and it will normally approach 100 pages of information. 

4) At this point, once received by the lender, THE PACKAGE will be assigned to a loss mitigator with the lender and the evaluation process of the short sale will begin. If there are more than one lenders involved with the property, the above steps will be repeated for each lender. This process can be lengthy and 30 to 45 days would be easily expected and will depend on the lender. The importance of the completeness of THE PACKAGE is now evident as if it is incomplete, the file will get kicked requesting additional information and the process can be forced to start over. Because of the time involved, it is important to keep the prospective purchaser informed also and to streamline the time required as much as possible so as to not loose a buyer close to the end of the road.

5) During this process, the lender will be obtaining a Broker Price Opinion of their own, verifying the file, reviewing the purchase agreement and evaluating the hardship of the borrower. There are many things that need to come together and when the do, the lender will issue an acceptance of the short sale with a list of conditions. That acceptance letter is the prize you are looking for and their needs to be one from every lender who has a lien against the property. Example of Approval letters

6) At this point, the transaction becomes similar to a traditional transaction. Escrow will be the intermediary between the lender and the transaction and will be responsible for payments and staying within the criteria of the approval letters.

To summarize, the short sale process can be lengthy frustrating and at times... maddening. But if done correctly it is the closest that we come to a "Do over" and when you consider the dollars involved in some cases, one can understand the lender's requirements to be sure it provides them with the best return on their bad situation also. The lender avoids the uncertainty of the foreclosure process, the seller avoids a foreclosure on his or her credit report (along with potential bankruptcy), and the buyer hopefully got a good deal on a property.

Considering the complexity of the short sale process, you must be educated and you need to be sure that the agent you are working with understands the process and is motivated to represent you well in the negotiations, preparations and marketing of your home. If you are considering a short sale, make sure that you discuss your situation with a competent lawyer and accountant as well as the real estate agent. The more educated you are on the process and the more you know what will be expected of you and that you do those things, the easier the transaction will be.

Just repeat after me... "This too shall pass."