In these difficult financial times and crazy inflated markets, more and more sellers are finding they need to sell their homes for less than they owe on their mortgages, known as a "short sale". This can be a good deal for you as a buyer, as long as you're aware of the extra time and work required to make it happen. Hopefully, this will help you understand more why this can be so time consuming and also, how much work we are doing behind the scenes, if you will.

First, let's define what exactly a "short sale" is.

Short sale - a sale of real property for an amount less than the unpaid balance of its first mortgage. The sale proceeds, after costs such as real estate commissions, escrow, and title, are passed along to the lender, who agrees to accept the proceeds as payment in full, despite the shortfall. Such a sale requires the consent of the lender and may create taxable gain for the seller to the extent of the debt forgiven by the lender. Short sales may also affect the credit of the seller.

The Mortgage Lender's "Short Sale" Factors

The seller's mortgage lender will be considering many factors in deciding whether to approve a short sale, including:

Whether the seller is deserving of a break, due to financial hardship caused by unforeseen circumstances such as layoffs, divorce or illness,  or whether it would be cheaper to simply repossess the house.

The banks or lending institutions Loss Mitigators sometimes receive bonuses based on how many defaulted loans they can clear up, so they're more likely to pay attention to our sale when we show them we're taking care of as many details and objections as possible. In other words, we are documenting and proving our offer makes sense! This is where our experience and specific training come into play. There are many benefits and options, we as licensed real estate professionals can offer over the other so called "loss mitigation specialists" and especially the unlicensed inexperienced investors.

The Short Sale Process

There are specific processes we must follow for almost every single short sale approval. We are going to discuss some of these processes to help you the buyer, and you the seller, better understand why this can be a lengthy process. Remember, the end result will benefit all those involved, so it is worth while to hang in there and let us complete the process.

First things first. Before we can present anything to the bank, we must have a signed accepted sales contract. Along with the contract, we must have a pre-qualification letter or proof of funds letter from the potential buyer. This will show the lender that the buyer is qualified and serious to purchase. This is the first requirement and a must.

It will be necessary to be specific about the seller's financial difficulties with what's called a "hardship letter." The mortgage lender may also require pay stubs, copies of medical bills, checking account statements and other appropriate evidence from the seller. The seller's mortgage lender will look at the seller's credit reports to verify the seller's financial predicament. This will all take extra time.

The next major step is the lender ordering their own property evaluation. This is generally done through what is called a "BPO" - Broker Price Opinion. The lender will order this BPO through a third party company, which will have a local Realtor go out and basically perform a CMA - Comparative Market Analysis on the subject property. Banks do not usually order a full blown appraisal from a licensed appraiser. These cost the lender more money that a BPO and normally take a longer amount of time to complete. The BPO is probably the most important factor used when a lender is considering a short sale. Honestly, these values can make or break the deal instantly. Bad, inflated BPO values are the number one killer of a short sale deal. Of course lenders will say they use other means to derive their market value of the asset, but the BPO value is the bread and butter value.

The Settlement Statement

The seller's mortgage lender will want to have an advance look at what's called the " Settlement Statement" or "HUD-1." The mortgage lender will be carefully reviewing:

• Commissions going to real estate brokers
• Where your financing is coming from (Cash? A loan?)
• Payments to cover outstanding liens and taxes
• Approximate date of the closing
• Any cash to the seller (a definite no-no)
• Any other expenses which may raise a red flag

Now if everything goes well, the lender will approve your short sale. While buying a home on a short sale can be frustrating and time consuming, your hard work can pay off in a home that's worth considerably more than you paid for it.

History of Short Sales

Lenders, Underwriters and Mortgage Servicers began to accept short sales (less than what is owed on a loan) with the inception of sub-prime lending in the 1990's. Any homeowner with less than perfect credit and little or no money down were at risk of finding themselves in a situation where the market value of the home is not enough to cover principle balances, late fees, attorney's fees and closing costs for those unable to make on-time payments (loan in default).

After calculating the rising costs of a foreclosure for the lender and mortgage servicers (Freddie Mac published the average loss per foreclosure in a lenders portfolio to be $58,477 in 2004), the short sale was conceived as the alternative solution to a foreclosure/REO property. Today, the average savings associated with a short sale compared to a foreclosure is estimated at $14,000 per property with a time savings of 6 months. For a lender, this provided a great financial incentive to develop programs, dedicate personnel and provide assistance to companies like the National Short Sale Center, Inc. Recently, short sales have been growing in popularity with lenders over the past 5 years as an alternative to convert default properties into short sales before suffering the financial losses associated with a foreclosure and REO.

Short Sales will only grow as an alternative to foreclosure in the future. Many high risking lending scenarios are present today. Homeowners placing 5% down, making interest-only payments, holding adjustable rate mortgages or in some cases placing 0%-3% down through government programs such as Nehemiah's down payment assistance, the government's new ADDI (American Dream Down payment Initiative) or FHA's HR 3755 will create an increased demand for short sales in the future and are projected to more than double the estimated volume of foreclosures within the next 3 years. This is why, in the past few years, lenders have begun to increase their focus on pre-foreclosure and REO properties