A short sale is when a lender agrees to a person or entity selling property at fair market value even if the outstanding mortgage against the property is more than that value. In such a case, the lender generally forgives the balance due on the loan after the sale occurs, and the borrower is not required to pay off the remaining balance (though this isn’t always true).
Short sales are more likely to fail than standard real estate transactions, especially if there are multiple liens against the property, because all lien holders must consent to the same terms of the short sale. This can make for a tricky process, but one that is still possible to navigate.
Here is an overview of some of the steps of the short sale process:
- Property valuation: A lender isn’t going to approve a short sale if the property owner has enough equity in that property to sell it and at least break even. A key component of a short sale is the homeowner being upside-down on the loan (owing more than the home is worth). Therefore, an accurate valuation of the home is crucial to determining whether or not the short sale will ultimately get lender approval. This is typically accomplished with the services of a professional real estate appraiser, in some cases requested directly by the lender.
- Hardship letter: Beyond just having a value on the property, the lender will want to know why the property owner cannot maintain ownership of that property. The seller must draft a hardship letter that provides the lender with a list of reasons and in-depth explanations of their inability to continue making mortgage payments. The letter must be highly persuasive for the lender to approve it—a real estate attorney can be of great assistance in drafting this letter. Include details about income versus debts and other assets owned.
- Fill out the application: Lenders will be hesitant to give out short sale applications, so this might not be as easy of a process as one might expect. Be persistent in seeking your application so you do not get shrugged off by a lender who is unwilling to initiate the process.
- Prepare the contract: You’ll need to actually have an offer from a potential buyer for the lender to be able to approve (or reject) your short sale. The sales contract should state the deal is contingent upon the approval of the lender. Your lender may also be interested to see the listing agreement, as well as proof of the buyer’s ability to purchase the property.
The short sale process can be complex, so it’s highly recommended you do not attempt to get through the process without the assistance of a real estate attorney. Contact us today to learn more about our services.
J. Nash Davis is Chair of the Real Estate & Financial Services Practice Group at BoltNagi PC, a full service business law firm on St. Thomas, U.S. Virgin Islands.