Anatomy of a short sale

Short sale definition: a home sale in which a seller negotiates with a lender to sell the house for less than is owed on the mortgage as payment in full of the debt owed.

1. You can't pay your mortgage. A homeowner falls behind on payments or knows that they have to move, but can't sell the house for what they owe on it, usually because they've refinanced too many times and market values have fallen. A short sale is usually a last resort for those who can't make their payment or anticipate not being able to make the payment, and keeps them out of foreclosure. You must show financial hardship that will prevent you from making your payment.

A short sale can affect your credit, but depending on how it is reported to the credit bureau it may not be as bad as a foreclosure.

2. Call for help. The seller must discuss the situation with the mortgage company as soon as it's known that he or she can't make a payment or soon won't be able to. Lenders have an interest in considering a short sale if they can avoid the lengthy and expensive foreclosure process, which some estimate can cost upward of $50,000.

3. Make your case. The seller must explain to his or her lender why they should approve the short sale; a hardship letter should include a full and current accounting of assets, income and liabilities. In some cases a lender won't review that until they have an offer.

4. Offer full disclosure. Sellers need to notify buyers as soon as possible that it is a short sale listing so they can decide whether they're willing to wait for bank approval. The Regional Multiple Listing Service now has a place in the listing report where agents can indicate that it is a short sale.

5. Get organized. Buyers must be organized and present a clean offer, but also must be prepared to buy a property that is being sold as-is and with no credits for repairs or fix-up. The bank or lender won't approve the sale if it is too far below the market value of the house -- they'll do their own broker price opinion and/or appraisal before accepting or countering an offer. Remember that a bank may not accept even a full-price offer because they don't offer the seller guidance on how to price it.

7. Set limits. Make the offer contingent upon approval of the short sale, including a time limit for approving the agreement if you think you might want to walk away from the purchase agreement at a certain point. However, setting a limit will not speed up the response time from the bank and if it's too short might cause them to ignore the offer.

8. Hire a pro. Short sale properties are usually sold as-is, so buyers should make the offer contingent on the outcome of an independent home inspection. Sellers are required to disclose material defects that they are aware of, but these houses often have deferred maintenance; the owners have stopped making their payments and have no incentive to do anything to the house because they'll make nothing on the sale.

9. Don't go it alone. Seriously consider hiring a buyer's agent to represent you. A short sale can be very complicated, and the listing agent works for the seller. Realtor Aaron Dickinson said that 30 to 40 percent of those sales eventually go through, but the rest fail because the bank is too slow or counters with a high price, or another buyer comes in with a higher bid.

Source: Aaron Dickinson, Edina Realty