It’s a question many real estate agents hear from clients: Why do short sales take so long?
Despite improving real estate markets, short sales and foreclosure sales will be with us for the foreseeable future. Many homeowners are still underwater, and at any time in the coming years, these folks may face a situation, such as a job transfer or divorce, requiring them to sell at a loss.
Short sales happen because the loan on the property is larger than the sale price minus all the sale expenses. With a short sale, the seller is asking the bank to take less than the amount owed.
Even if you’ve made an offer and the seller has accepted it, it’s not a done deal. The seller’s bank must approve the sale, and this is where the big delays can happen. Banks are losing money in a short sale and aren’t too keen on it. It’s understandable. Imagine that you loaned a friend $100, and he came to you later saying he could only pay you back $75. Would you cave in easily? Probably not.
It’s important to know that a buyer and their agent have no control over the process. The success of a short sale — and how long a short sale takes — relies heavily on a listing agent. If the listing agent isn’t experienced with short sales, you’re likely wasting your time. A good short sale listing agent will properly advise the seller and have a thorough knowledge of the bank and its process before your offer is accepted.
Here’s a look at why short sales can take so long, along with tips for what you can do about it.
The seller’s bank must review the short sale package
In order to approve the sale, the lender requests a complete short sale “package” from the seller. Much like the package you must submit to get a loan, the seller must submit their finances. The lender will want to see the seller’s debts and assets, review their credit score and the contract to purchase the home. After all, why would a bank approve a short sale if the seller had $1 million sitting in the bank?
What you can do: A good listing agent will have the short sale package in hand and even completed upfront. Once an offer is accepted, the agent can simply add the contract and buyer’s information and submit it.
Documents get lost, pages go missing, signatures are left blank
Most banks require hundreds of pages in the short sale package, and many of those pages require signatures from buyers, sellers and agents. If one page is missing or one signature left blank, the document doesn’t get processed. Often, the listing agent will fax in 100 pages and just wait. Sometimes it will take a month to get a response from the bank, informing the agent that things are missing.
What you can do: Be proactive. The listing agent should call the bank after submitting the short sale package, especially if sent by fax. Confirm that all documents have been received. Make sure to get the name and phone number of the person you speak to.
Some documents quickly become outdated
It could be weeks between the time the documents get “processed” and when the information hits the desk of a negotiator, who actually reviews and negotiates. Does one bank statement come at the beginning of the month while all the others come at the end? That one bank statement may soon be outdated, and the bank will require an updated one. If that’s the case, it could take the lender weeks to realize this and another week to contact the seller or their agent.
What you can do: Review the statement date on each credit card and bank statement so you’ll know if a new one will arrive soon. If so, send it over right away.
The lender wants more information
The lender may ask to see the buyer’s proof of funds, review the preliminary title report or request more verification of the seller’s hardship (job loss, divorce, job transfer). The negotiator could request just about any additional information.
What you can do: The seller and agent should be ready to respond, because a delay could add a few more weeks to the process. Try to imagine yourself as the bank and think of everything that might be asked for. Provide as much information as you can upfront.
2 loans complicate everything
The short sale process is difficult enough with one bank. Imagine two banks, each with its own processes, that don’t cooperate? It could set everyone back months. The second lender may request more information before approval. Or, the second lender may issue an approval good for 30 days. If lender No. 1 approves on day 31, the seller must go back to the first lender to get re-approved.
What you can do: Understand the approval timelines for each bank and anticipate deadlines.
The deal could die at the last minute
Once the bank has a complete package and you get a negotiator on the phone, there is light at the end of the tunnel. After all this time, the negotiator may counter the buyer on price. Or they may only approve the sale if the seller contributes money. They could always ask for the commission to be lowered. No matter what they say, the bank’s request could kill a deal in the moment. And there’s no way to anticipate exactly what they will come back with.
What you can do: Don’t think the bank will simply approve a low offer. If the seller has money in the bank, they need to be prepared to contribute or you may have to come up with more money. Sometimes the bank is just looking at its bottom line and doesn’t care how everyone gets there. Buyers, sellers and agents must work together to make the deal work.
Foreclosure trumps everything
Time and again, all parties wait and wait and follow along the process — only to see the sale denied. What’s worse is that sometimes the foreclosure department at the same bank does not work in conjunction with the short sale department. A good offer for a short sale may be on the table, but the seller may be six months behind on payments, causing the foreclosure process to kick in. And the foreclosure process can trump everything. When this happens, the buyer no longer has a deal on the table because the seller, forced into foreclosure, is no longer the seller. In a foreclosure, the home belongs to the bank.
How to speed up a short sale
The best way to expedite a short sale approval, and therefore your escrow, is to be certain the seller’s real estate agent is experienced with short sales. The seller’s agent interfaces with the bank 24/7. If the agent isn’t experienced in short sales, chances are this process will drag on and on.
An experienced short sale agent will know how certain banks work, what to anticipate and how to best work through the bureaucratic process. But even the most experienced short sale agent can come up against brick walls or challenges they just can’t overcome. If you see a short sale home you love but don’t have much confidence in the listing agent, try not to fall too deeply in love with it. You’ll only be disappointed if the sale doesn’t go through.