When talking with my clients about the condo market in Miami, one of the questions that constantly comes up is "What is a Short Sale?".  With the majority of attractively priced condo listings in Miami being short sales, it is important for a buyer to understand what a short sale is and the typical process involved in purchasing one.

In a short sale, the property owner is behind on their mortgage payment and wants to sell the property in an effort to avoid foreclosure, but can’t find a buyer willing to pay enough money for the property to cover the remaining principal on the mortgage.  The property owner then asks their lender if it is willing to accept less than what is owed on the mortgage.  Because the property owner needs the lender's approval before agreeing to the sales price, short sales can take months to complete as lenders try to figure out how big of a loss they are willing to take.  In some cases, even after months of analysis, a lender may decide it doesn’t want to do one at all.

Lenders have a department (typically called "loss mitigation") that processes potential short sale transactions.   Different lenders have varying tolerances for short sales and mitigated losses, with the majority of lenders having a pre-determined criteria for such transactions.  However, other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval.

Not every property owner is eligible for a short sale on his/her property.  To be eligible for a short sale, a borrower must demonstrate an inability to repay his/her loan and convince the bank that a short sale is a better alternative than foreclosure.  As a result, a lender will usually require the borrower to submit a lot of information in the form of a "short sale package" in order for the lender in order to consider the short sale.  The information required usually includes:

• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets.
• Hardship letter –  describes for the lender the reasons the borrower is in their current  financial position.  Letter is made to sound as sad as possible and is backed up with documentation such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor known as a Broker's Price Opinion (BPO).
• Preliminary HUD-1 settlement statement.  This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid.  This will be negative in the case of the short sale.
• Listing contract and purchase contract.

Many different individuals are involved in the short sale process such as the buyer, seller, buyers agent, listing agent, and the loss mitigator at the lender.  After the seller accepts the purchase price and the purchase contract is signed, it is the responsibility of the listing agent to work with the seller to put together the short sale package described above.  This process could be short or long depending on how competent the seller and listing agent are.  Once the short sale package is submitted to the lender, it takes several weeks for them to assign a loss mitigation officer to the transaction.

Once the loss mitigation officer is assigned, all parties now have a point of contact at the bank.  The officer will review the package and will inform the listing agent if the lender will agree to a short sale and at what price.  The entire process can take months to complete and is entirely dependent on the speed of the seller, listing agent, and the lender.

The short sale process can be frustrating to many, but don't fret, it is possible to purchase a short sale without having to wait several months.  As a buyer, if you purchase an "approved" short sale, you can significantly reduce the waiting time involved.  In an "approved" short sale, the package has already been submitted to the lender, a loss mitigation officer has been assigned, and a price has been set for the property.  For whatever reason, on the initial transaction, the buyer did not want to purchase the property at the price set by the lender and walked away from the contract.  You, as the new buyer, can accept the bank's price, or submit a lower offer to the loss mitigation officer who will approve or deny your request within a reasonable amount of time.

When attempting to buy a short sale, it is important to be reasonable with your expectations.  You might be able to get that condo property you want at a great price, but it will take time and effort from your buyer's agent.  To get a condo property at a great price without the wait, look for short sales that have already been approved by the lender.

Tags: buyers agent, foreclosure, lenders, loss mitigator, short sale