9 Short Sale Pitfalls to Avoid

Many short sale guidelines have recently changed.  In order to achieve short sale success within a reasonable timeframe, you need to be aware of these changes and understand what you can do as a short sale listing agent or investor to avoid the ten common pitfalls that cause delays, rejections and cancellations.

This article will give you the run down on what you need to know to submit a complete, clean, and accurate short sale package that will flow through the process uninterrupted, resulting in a fast, hassle-free approval and closing.  For too long now, many listing agents have had the idea that short sales take forever and therefore it is OK to be lax in how the requirements and processes are dealt with.  This has now become another short sale myth.  The fact is, these lenders are now under strict guidelines and as a result, these guidelines and timelines are now imposed on the sellers, the listing agents, short sale facilitators and negotiators.  The days of submitting a contract that is not reviewed and scrutinized, are over.  The days of sending in forms with missing information and lenders sliding them through, are over.  The Lender’s goal is not the seller or the buyer.  The Lender’s goal is to minimize loss and after having their hands slapped hard over the last few months, everyone in the short sale industry needs to realize the Lender’s goal is to minimize loss while abiding by the newly imposed guidelines!  As agents, you also have to comply or you will suffer the consequences of delays, denials and cancellations!

Time is money and short sale short cuts will now cost you both time and money.  If you want to feel like you are actually earning commissions on your short sale listings, pay attention!  Paying attention to the ten pitfalls to avoid will go a long way to getting you to the closing table a lot faster!

1.  Understanding as much as you can about short sales is key to a successful short sale closing.  Open communication with the parties involved throughout the short sale process is a key component to keeping your buyer and buyer’s agent engaged.  When you are a listing agent on a short sale property, oftentimes you get a buyer/buyer’s agent who is unfamiliar with short sales and the process.  The successful closing of a short sale property means educating all parties and delivering realistic timeline expectations to the buyer and their agent.  Short sales do take longer than traditional retail sales, so it is best to understand the needs and motivation of the buyer.  This can only happen if communication is open.  Does the buyer need to be in the new property in 30 days or does the buyer have time to wait for the short sale process.  How engaged is the buyer to this property?  Do they like it enough to wait or are they continuing to shop for other properties?  With short sale transactions, buyers occasionally walk because short sales take more time than a traditional sale.  The new changes shorten this gap, but it is important to know how serious the buyer is in the property!

2.  Lenders are now under strict timeline guidelines to shorten the length of time it takes to close a short sale transaction.  This means you should no longer assume a short sale takes nine to twelve months to complete.  If the lenders are on timelines, understand the burden also falls on you and your sellers.  If you are looking to take on a short sale listing, make sure your seller is on board, willing to cooperate, and prepared to provide the financial information required.  Many short sales are processed via an internet platform called The Equator System.  Tasks are computer generated and issued with strict due dates.  If tasks are not completed within the required timeframe, the short sale is cancelled.  If you have a seller unwilling to provide what is needed when it’s needed, you could find yourself starting the short sale over from the beginning multiple times.  Screen your sellers.  Make sure they are on board or you will find your commissions eaten up by repeat starts and delays.

3.  Know the disposition of your seller’s property.  How many liens are on the property?  Is there are 1st and 2nd mortgage?  Are there judgments and liens on the property?  Many sellers looking to sell their home as a short sale have gone through a terrible financial hardship, leaving the seller’s and the property vulnerable to judgments.  There is a good chance the property has liens tied to it.  Knowing what type of loan your seller has is important and so is knowing exactly what junior liens and/or judgments are against the property as this impacts the ability to sell the property as a short sale.  For instance, if your seller’s loan is an FHA loan, FHA will only contribute $1500 toward any subordinate lien and they will only contribute this money if the seller is willing to contribute their seller incentive towards subordinate liens.  If your seller has an FHA 1st mortgage and there are additional mortgages/liens against the property, you will need to provide evidence to the 1st mortgage holder that these liens will be released and satisfied before the mortgage lender will activate the short sale.  You need to know the disposition of your seller’s property!

4.  Before you submit a short sale package, find out if your seller’s lender has unique short sale forms they require.  Many lenders now have their own short sale forms they require to review a short sale package.  If you simply have your sellers fill out generic CDPE forms, you may find your short sale stalled and delayed because inappropriate forms were filled out.  Filling out the wrong forms causes redundancy, delays, and frustration.  Do your homework upfront and know what the lender requires.

5.  Know your seller’s loan type and the contractual requirements for that specific loan type and lender.  Different loan types require specific verbiage on both the Listing Agreement and the Contract.  If the specific verbiage is not added to the contractual documents, they will be rejected causing you to have to go back to all parties for additional signatures and initials on contracts and amends.  For instance, you can save a lot of time if you know your seller’s FHA loan will need the FHA Cancellation Clause on the Listing Agreement and Paragraph 2.2 of the contract needs to be omitted (crossed off and initialed by all parties) because it is not allowed on FHA short sales.

6.  Know when real signatures are required and e-signatures are not acceptable.  While today’s technology makes it very easy to have all parties ‘e-sign’ documents, certain lenders do not allow them!  You can certainly submit the short sale package with ‘e-signatures’, but the short sale file won’t make it to final underwriting until ‘live’, ‘wet’, ‘real’ signatures are planted on the contractual documents.  Bank of America and Wells Fargo do not allow e-signatures on contractual documents.  It will save time an aggravation down the road if you just get the real ‘John Hancock’ on the documents at the start of the transaction!  Check with the lender first to see if e-signatures are allowed.

7.  Short Sale Negotiators and Facilitators are NOT your transaction coordinators.  No one likes paperwork detail, but it is required in the short sale arena and you can save a lot of time getting it right the first time!  It is not the negotiator or facilitator’s job to fill in the blanks for missing information on the required documents your seller did not complete.  However, many agents assume that when they submit incomplete, unsigned and undated documents, the negotiator/facilitator will handle it.  Do not assume this!  They will return the documents to you to complete them OR they will submit incomplete documents that will be rejected later.  Delays will be caused either way.  Lenders are now forced to scrutinize documents previously pushed through and therefore, are rejecting documents for details such as loan numbers, dates and addresses being omitted, or financial worksheets not being completed.  It is definitely worth the few minutes it takes to double-check the documents before you have them submitted to the lender.  Sending in incomplete documents will cause delays far greater than the time it takes to review documents to insure they are complete and correct.

8.  Proof of active real estate licenses is being required.  Bank of America requires that a licensed real estate agent represent each short sale request.  To support this, the new Bank of America Third Party Authorization must contain the license information of the listing agent and proof that their real estate license is active in the state where they are doing business.  GMAC now requires license information not only from the listing and selling agents, but also from the brokers who employ them.  Be sure your license information is up to date, as you will be required to submit proof that it is!

9.  If your short sale deal is an investment deal, a ‘For Sale by Owner’ deal, or a deal that may not be an ‘Arm’s Length’ deal, make sure the selling lender will accept the short sale.  In most cases, lenders will not allow the seller to go forward with a short sale unless a licensed real estate agent represents them.  If you are an experienced realtor/investor looking to purchase a short sale without a selling agent, make sure the lender will allow you to represent yourself.  In many cases, lenders are requiring both buyers and sellers to be represented by licensed real estate agents.