Short Sale Process
When working with customers, I often get the question: “What exactly is a short sale and how does it work?” Before I give you my answer, let’s review the foreclosure time line and terminology (I will speak to Minnesota Real Estate specifically, but other states are very similar):
Mr. and Mrs. Homeowner are happy in their house and paying their mortgage on time. Unfortunately, a life change (loss of job, illness, divorce, etc), forces them to miss a payment. The bank that holds their mortgage (or the mortgage servicing company), calls the homeowner with a gentle reminder that they missed a payment and to feel out the situation. Maybe Mr. and Mrs. Homeowner pay the past due payment and life goes on, but maybe they don’t. Maybe they tell the bank they are sending the payment, but they never do.
Bank Processes Foreclosure
When the bank finally believes that Mr. and Mrs. Homeowner are not going to pay the past due payments, they contact their Minnesota real estate attorney. Mr. Attorney starts the foreclosure process by filing paperwork at the county court and is given a date for the sheriff’s sale. In the state of Minnesota, 95% of the foreclosures are done by advertisement foreclosure. The foreclosing bank must advertise in the paper (Finance and Commerce in Minneapolis) for 6 weeks prior to the sheriff’s sale. During this time, the bank will continue to try and get Mr. and Mrs. Homeowner to pay their past due amounts, including offering to add the missed payments onto the end of the loan.
At the Sheriff’s Sale
Unlike the information that the late-night infomercials give you, the sheriff sales in Minnesota are non-events. At 8:00 am, the sheriff “sells” the house to the highest bidder, which there is usually only one (the mortgage holding bank). At this point, the bank does not own the property, they simply have a legal right (called a “certificate of redemption”) to redeem the property at the end of the redemption period. The homeowner and/or tenants do not have to move on that date. It is just a legal proceeding.
The Redemption Period
The mortgage is now gone. Mr. and Mrs. Homeowner can not simply pay the past due amounts and make everything better. They must secure a new mortgage or find other sources of money to buy the certificate of redemption from the bank to stop the foreclosure process. This period is called the “Redemption Period” and lasts exactly 6 months, starting on the date of the sheriff’s sale. Again, the homeowner and/or tenants do not have to move out. Plus because the mortgage is now void, the bank will not accept any payments from Mr. and Mrs. Homeowner. They are living for free.
End of the Redemption Period
On the last day of the redemption period, the home legally becomes the property of the bank. They will typically have a company go over to the property and see if it is vacant. If the homeowner and/or tenants do not move out, they now have the same rights as a standard tenant that stays past the end of their lease. They must be evicted! The eviction process typically takes about 3 weeks in most Minnesota counties. Sometimes the bank will offer “cash for keys” which is where the bank will give the homeowner or tenant $200-$3000 to leave the premises cooperatively.
The House is now a REO
As soon as the property is confirmed vacant, the bank will change the locks. Depending upon time of year, condition of the house, and the bank’s backlog of properties, it can take 2-6 weeks for it to be listed with a Minnesota real estate broker. The list price is set by the bank after they obtain BPOs (broker price opinions) from 2-3 real estate agents to determine the market price. These are basically a mini-appraisals to help the bank determine a list price (it is not based upon what the mortgage amount previously was).
So What is The Short Sale?
A short sale is simply selling the house for less than is owed to the bank anytime prior to the end of the redemption period. This process is complex and typically can not be done by Mr. and Mrs. Homeowner. The short sale has some requirements:
- Banks most often will only talk with a licensed real estate agent or an attorney about doing a short sale. The homeowner rarely can negotiate a short sale.
- Mr. and Mrs. Homeowner must show that they can no longer pay the mortgage at the current amount. This will include submitting financial records and a “hardship letter” explaining how they arrived in this situation.
- While not an absolute, a bank will typically not discuss a short sale unless the homeowner has missed at least one mortgage payment.
- The bank does not set the price of the house in the short sale. The real estate agent will put the home on the market at current market value, which will most often be well below what is owed on the property and continue to reduce the price every couple weeks until an offer is generated.
- When an acceptable offer is received, the offer, the hardship letter, and Mr. and Mrs. Homeowners financial records are submitted to the bank for approval. A competent short sale real estate agent, such as a CDPE, will submit all the items that will be required by a bank with proper documentation to support the buyer’s offer on the property. Making a mistake at assembling the package or submitting incomplete or incorrect information to the bank can jeopardize the entire short sale.
- The bank will go through their internal processes to decide if they are willing to take a loss on the mortgage. Some banks are more organized than others. It will typically take 60-120 days from the date that an offer is submitted for approval to the bank to get approval. A competent short sale agent will be monitoring the file through the entire process.
- Many inexperienced short sale agents will fail to manage expectations of the buyers and seller and they will not understand how to manage the relationship and communication with the bank. Consequently the national average for successful short sales is around 25% for the average agent while most CDPE certified short sale agents it is 90%+.
- Once the offer is accepted by the bank, closing typically occurs in 30 days.
- While the home is allowed to be sold and the debt against the house (the lien) released, the seller may still be liable for the deficiency in the difference between the sale amount and the previous mortgage. The bank can ask for a promissory note or purse legal actions to secure a deficiency judgment against the borrower. A good short sale agent will work to prevent or minimize this risk.
Short Sale vs Foreclosure
Why is a short sale better than a foreclosure for the sellers:
- A homeowner that completes a successful short sale can be eligible to buy a home with a Fannie Mae backed mortgage in only 2 years versus up to 5 years with a foreclosure on their record.
- A borrower will have to disclose forever in the future if they ever had a foreclosure. A short sale has no disclosure requirements.
- The homeowners credit score should recover in as little as 12-18 months after a short save versus up to 3 years with a foreclosure.
- A short sale is not reported on a credit history report. A foreclosure remains on their credit for up to 7 years.
- Short sales should not affect any current or future employment or security clearances. Foreclosures can prevent a homeowner from being hired or even losing their job.