PROCEDURES OF A SHORT SALE FROM START TO FINISH
1. First a home owner decides to sell their home and comes to the realization that they are upside-down and no
buyer will offer them enough to fully payoff all the liens on the property as well as the costs involved with the sale.
2. Then the home owner needs to collect and process all of the information the lender will need. They need
to provide all the paperwork related to their situation available for review to all authorized parties.
3. Need to have contact and cooperation with all the legal owners and co-borrows with an interest in the
property. The owners and co-borrows all need to know how the process works from start to finish as well as who are
the best parties to get involved in a successful short sale.
4. Get a Purchase Contract from a buyer willing to negotiate with the lender for short sale.
5. Get Proof Of Funds letter from that buyer.
6. Get all of the lender’s and lien holders names, addresses and account numbers as well as the servicer
information associated with the loan and (when applicable) any Private Mortgage Insurance holder.
7. Call the lender’s loss mitigation department. The purpose of the initial call is to get the name of the
representative who is handling that account and their direct phone number and/or extension and fax number
to send in the authorization form. You will also want to find out what is the best method of contact they best
respond to, by phone, email, fax, or a combination. If it is by phone, ask the rep when is usually a good time
to reach them and make note where they are located as well as the time zone.
8. Get the short sale packet from lender and ask if they can email it to you or if they have a file online for
download, if not they will most likely mail it to the home owner.
9. Repeat these steps for any other junior lien holders.
10. If a foreclosure sale date has been set then the owner may need to delay the sale. It is best to
negotiate with the lender to have them stop their foreclosure first, then other types of stall tactics are
11. Put entire short sale package together.
12. Both Fax and mail short sale package overnight to lender.
13. Contact the loss mitigation representative every 3-4 days to make sure they have everything and if there is
anything else they need from you to help the short sale process. You should do this through short emails, faxes
and phone conversations.
14. Lender acknowledge receipt of package within 30 days.
15. Lender stalls for up to 2 months to consider offer and will have stupid tasks they need to accomplish.
16. If the lender requires any stupid tasks to be done then kindly negotiate with them that they are no party to
the sales contract, they simply need to accept a short sale settlement amount in order to allow the owner to transfer
title free and clear to the buyer.
17. If the lenders say "NO", they should also give you a counter offer. If they counter offer, ask them where
they got that price. Kindly explain to them that based on the current condition of the property your realtor has told
you it would sell for much less.
18. The lender should tell you that this is what they believe the property to be worth. Ask them when they got the
BPO done, and explain to them that the homeowner told you that nobody from the lender came by to take a look
at the house and things have changed significantly since then. It must have just been a Comparative Market
Analysis based on Fair Market Value or drive by BPO. Was that BPO based on Comps of deals with typical motivation
from both buying and selling parties? Since this is a distressed sale the BPO has to be based on only REO or
Foreclosure sales from last 6 months. Refer back to your comps or any additional ones since submitting the short
sale package. Make note of what the depreciation rate has been for the past few months.
19. If the property is in need of significant rehab work then ask them if they can resend out the realtor who did
the BPO months ago and you would be more than happy to show the realtor the house so they can see why the
house is in a condition that makes it worth a lot less. Once they agree to a second BPO, ask them if you can
contact the realtor to set up the appointment, or if they want the Realtor to contact you.
20. They are all willing to do a short sale on almost every property if the house has little or no equity and the lien is
delinquent. Your job is to show them that it is better to take the short sale now than take it to foreclosure
and sell it as an REO 6-12 months later. Your ability to convince them that the house is worth less than what
they think it is worth is crucial.
21. Lender orders a new BPO and scheduled within 2 weeks or up to 2 months.
22. Counter offers may go back and forth 3-6 times. If everything goes well, you influenced the BPO down, you
proved your case and the lender says yes.
23. Acceptance letter from the lender should map out the conditions of the short sale and its timeline, full
payment for the loan and they are forgiving the remaining balance of the loan to the homeowner and will not file a
24. Addendum to the contract that states what the final purchase price will be.
25. Turn in to title/escrow company.
26. Submit the acceptance letter for the closing to the title company or to the attorney that is doing the closing.
REQUIRED ITEMS FOR A SHORT SALE
Blue type: Provided by Loss Mitigation negotiator:
Black type: Required from property Owner
Red type: Put together by listing agent
Cover letter: Usually the cover sheet explains what is in the short sale packet, why you are requiring a short sale
and the reasons for accepting the offer. Overview of REO and distressed sale comparatives which show sale value.
The condition of the house and the amount it will take to fix up the house. Other data that you may want to include
are crime data, foreclosure rate in the area, redemption period (if you have one in your state), and the average days
on the market for homes. Always remember you should never include anything that will hurt your chances, only
include additional information that helps justify your offer. Statement that you are “Paying CASH” and buying the
property “AS IS” and what all the lenders/lien holder's bottom line cash settlement of the short sale will be.
Table of Contents: It makes it easy for lender to go through packet quickly to find what they are looking for.
Purchase Contract: Fully ratified by both buyer and seller. Including Property address, all Owners names, Parcel
ID#, county and sold comps to support sale price.
Hardship letter: Describe what the problem is and that there is no way to make another payment. Give details that
you are a victim of circumstances and what economic hardship affects you. It is also good to state that you really
want to sell to named buyer and beg to please accept this short sale offer. Include any documentation that supports
this hardship. Must be had written,
Financial analysis packet: Simply, this is a list of what the home owner’s monthly expenses are compared to their
monthly income. (need to show more money is going out than coming in.)
The lender will request financial information from the borrower. The borrower must now convince the bank that they
are experiencing a financial hardship and can not make the agreed upon monthly payments. Think of it as a
backwards loan application. It is important to give the lender precisely what they want at this stage without lying but
also paint a grim picture of the borrower's financial circumstances. The borrower must simply prove they do not have
the income to make the payments.
Tax returns for Federal 1040 (2 pages and be sure to sign on page 2) last 2 years complete with all schedules. (If
the homeowner does not have copies they can obtain copies using a form called Form 4056-T. This is a Request for
copy of Tax Return.)
Bank Account Statements last 2 months. (Homeowner’s 401k, IRA, and stock brokerage accounts. Very few ask
for this information, but it does happen.)
Disability Doctors verification if applicable. If some health reasons are involved then any supporting documentation
such as Doctors/medical bills or a short letter from a Doctor.
Paycheck stubs last 2 months or (Layoff from work document if applicable.)
If any of the requested information is unavailable, please write a brief letter of explanation as to why it is unavailable.
Authorization release form: Gives permission from home owner for 3rd party to communicate with lender to
negotiate a deal.
Affidavit: Shows the lender that seller will get no proceeds from sale as required by law.
Short sale packet: Disclosure forms that were sent out by the lender to be filled in.
Mortgage Statement/Correspondence: Monthly billing statement and letters of default that lender sent owner
including the default letter and Foreclosure notice if applicable.
Broker Price Opinion: Based on REO type properties only, sold within last 6 months, that match property as best
Low comparables: Additional pages to show where the BPO came from.
Repair/Rehab Estimate: From licensed contractor. (You would like this estimate to be as high as possible)
Paint- interior and exterior
Kitchen counter tops
All floors in each room
Shower or bath
Roof repair or new roof
New fixtures around the house
AC and heating
Windows- new energy efficient
Landscaping to conform with neighborhood
Bad pictures: Any that you can send along with the packet would be significant to help support the offer price.
Offer sheet: State you are buying the property with “CASH” and buying the property “AS IS.”
Purchase Contract: Between buyer and the seller(s) contingent on lender approval.
Proof of Funds letter: Show where buyer’s cash is coming from.
MLS listing agreement: Current listing agreement and commission for Realtor, also any recent previous
Other Liens: Property taxes, 2nd Mortgage and any other types of junior liens on the property. (Acceptance letters
from the lien holders or waiver of lien forms signed for closing if applicable.)
HOA association: Delinquent monies report showing total payoff as well as what the normal yearly dues are.
Preliminary HUD 1 form or “Net Sheet”: What the bank will get bottom line and shows buyer is paying all the
closing costs. To do a proper HUD1 you will need to have name of all lien holders, yearly taxes, HOA yearly dues,
Title Policy cost, State Transfer Tax cost and Real Estate Agent commission if one is involved with the deal.
It is important to remember that this is like a mortgage loan application package and
incomplete packages result in denial of the application.
What is a "Short Sale"?
Definition: A sale of property in which the proceeds from the sale fall short of the balance owed on a loan secured by
the property, of which the lender agrees to allow some forgiveness of the dept as satisfaction and payoff on a
mortgage or trust deed. A short sale is also known as "Short Payoff", "Pre-foreclosure sale" or "Upside Down sale".
What’s in it for _________?
Bank/Mortgagee: Smaller financial loss since it is faster and less expensive than foreclosing. Better value and
bottom line price then letting it go to Foreclosure and then becoming a REO. Banks know from experience that REO is
always the worse option for recovery. The sooner a Bank can get bad dept off its books and put some cash back in
circulation the sooner it can make more money. Home owner still has an interest in the property which lessens the
chance of additional damage or decline to the property.
Investor: Inspect property thoroughly with all due diligence and disclosures, no competition like auction bidding
war. Time to line up end buyer or exit strategy. Earn a profit at close of escrow.
Home Owner: Free living until sold, save credit from worst blemish foreclosure. Salvage their credit from getting
worse. Prevent the lender from suing for deficiency. Much better position to qualify to buy another property in the
future. Provides peace of mind with predictability knowing exactly when the sale will close and time to plan out when
you will need to vacate the property. There's no risk that sheriff's deputies will come to your door one morning to
Neighbors: Salvage highest home values possible. Paid up taxes at sale of property means one less delinquent
burden they will have to carry. Safety and security since home wont go vacant to attract neglect and crime.
Real Estate Agent: Earn commission either on buying side or selling side. List property for sale which can attract
more clients. Focus in on your job as transaction coordinator and let a 3rd party loss mitigation professional do the
hard negotiation with the lender for approval. Listing contract on a home that is priced correctly which can actually
sell in today’s market.
What homeowners may benefit from a Short Sale?
A Short Sale may be an option for any Real Estate owner that has a need to sell when the property value or total cost
of sale is lower then the payoff of all the liens on the property. Industry terms for this is "upside-down" or "under-
When a property owner comes to the realization that a short sale is the best option for them they need lender
approval in order to satisfy payoff of the note in order to transfer title free and clear.
This negotiation is all done through communication with a bank's loss mitigation or workout department.
The lender will always try to play hardball in order lessen their loss as much as possible.
In order to get the lender to agree to any short sale the property owner needs to prove that not only is the property
work less then what is owed but also that they can no longer meet the agreed upon mortgage payments due to a
permanent economic or financial hardship.
Extenuating circumstances influence whether or not banks will discount a loan balance and how much of a loss they
will take. These circumstances are usually related to the current real estate market, the borrower's financial situation
and the lenders own internal motivation.
When the home is sold with lender approval of a Short Sale the buyer's mortgage broker, all real estate
agents/brokers, loan officers, title and closing agents all retain their profit.
All remaining proceeds of the sale go to the lender as satisfaction of the debt/mortgage note. The property would
then transfer to the new buyer clean and clear of the sellers obligations.
How are short sales Negotiated?
There is no regulatory agency governing short sales. It is all about negotiation with the lender through
communication with a bank's loss mitigation or workout department. Today lenders may accept short sales whether
or not a Notice of Foreclosure has been issued or recorded with the locality where the property is located. However
when a home owner is delinquent long enough on their loan it will eventually put them in default of the note and
soon to face foreclosure. This is the greatest motivation a lender could need in order to do a short sale.
What 3rd parties can help a homeowner accomplish a short sale?
Short Sales are a relatively complex and highly specialized type of real estate transaction due to the wide-ranging
group of parties, parameters and processes involved.
When they are not handled by a knowledgeable and experienced professional short sale deals have a high failure rate
and often do not close on time to save homeowners from foreclosure.
For this reason the best sources of knowledge and expertise in short sales are short sale negotiators, loss mitigation
specialists and real estate lawyers who specialize in short sales.
What are some obstacles to negotiating a short sale?
Their may be another party with an interest in-between the bank and their own loan who may have the ultimate say-
so in negotiations. Such entities could include a loan servicer, another investor and a mortgage insurer. All have to
approve the Short Sale which could take additional time or kill a short sale. This could cause substantial delay in
approving and closing the short sale. Secondary lien holders such as a second mortgage, HELOC, judgment or tax
lien holders also have to agree to the short sale and reduce their lien interest in some amount or another. Often times
the senior lien holder has certain limits as to how much a junior lien holder can receive. If the lender required
mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a
claim to offset the lender's loss in the short sale.
This is just a topical overview and in no way a legal guild of any type. There are no tax or legal advice conveyed here
in anyway. We are required by law not to give any legal or tax advice or opinions on tax or credit ramifications to
your decisions is such matters. You should consult an attorney of your choice who is qualified on such matters.
Different lenders have different policies and procedures which vary from case to case and all short sales differ from
any other transaction.