Understanding the Steps in a Short Sale Purchase

Short Sale Purchases Unpredictable and Difficult to Schedule

The short sale purchase starts out the same way as a traditional purchase. As with a traditional purchase, you look around, figure out what you'd like and can afford, and then you make an offer. If you're well organized and a decisive sort of person, you can accomplish this work in a few hours or few days.

After the point at which you make your offer, unfortunately, the short sale process suddenly gets very complicated and painfully slow. This is because when the seller is trying to price the property for less than the mortgage balance, the lender needs to accept the offer since the lender will lose money on the sale.

Mortgage lenders respond differently to the short sale offer. But in general terms, most resemble the process that Bank of America uses. Bank of America first does a "quick-and-dirty" assessment of the short sale offer to determine whether to spend time and money on the offer.

This "quick-and-dirty" assessment takes at least a few days and maybe a month. (A lot of the timing appears to depend on how organized the seller's real estate agent is.)

In the initial assessment, the lender verifies that the short sale offer is "in the ballpark" and that the property is eligible for a short sale transaction. (Some properties aren't eligible.) But here's the key thing to remember: At this stage, the bank is simply assessing whether they should even attempt to "do the deal" on the table or wait for a better offer.

You may wait a few weeks at this stage-and learn only then that your offer won't be looked at. Alternatively, you may wait a few weeks and learn that your offer is being considered.

One factor, by the way, that the bank considers in its initial assessment is your financial capacity.You probably will need to prove you can finance the purchase (usually by being pre-qualified with the bank) or that you already have the funds available for a cash purchase.

After your short sale offer passes the initial assessment testing, the bank begins the process of formally considering the transaction. Essentially, what the lender does at this point is collect the data needed to answer the question, "should we allow a short sale transaction or should we foreclose?"

While you've already probably been waiting weeks and weeks at this point and are ready to pull your hair out, this "formal consideration," unfortunately, is where things really slow down.

As a first step, for example, the bank will probably require the seller to provide personal financial information to prove a short sale is better than a foreclosure. The bank will want recent pay stubs, perhaps tax returns and maybe bank statements to prove that the seller really deserves a short sale.

Again, remember that essentially, the bank is attempting to answer the question, "Short sale or foreclosure?" at this stage. Also, note that with a foreclosure in some states, the bank may be able to get a court order that says the seller needs to make up the shortfall. (This is a called a deficiency judgment.) Finally, note that in many states some past due amounts like homeowners dues may get wiped out if the bank goes through foreclosure. Accordingly, and not surprisingly, the bank is careful in its analysis.

The bank may also order an appraisal to get a third-party or a new, more up-to-date assessment of the property value.

All of this fiddle-faddling takes time. If your short sale transaction was everyone's top priority, for example, the work would take takes several days at least- and your short sale transaction is no one's top priority except yours. Accordingly, this formal consideration will take weeks or even longer if someone in the process (the seller or the real estate agent) is disorganized.

Let me make a really critical observation here: Several weeks and potentially several months have passed since you made your offer at this point. No kidding. And you not only haven't had any ability to predict when you might be able to close the transaction-you also don't actually even know if the proposed short sale transaction will be accepted. You're still in limbo land.

And just to bring up this related point: You might think that the bank should be able to get its act together and respond, but probably the bank has thousands and thousands of people just like you waiting in line for an answer.

Finally, often at the point you're ready to throw in the towel, the bank will respond to your offer.

It's possible they'll reject it-perhaps because the price is too low (after further consideration) or maybe because the seller's finances don't meet the bank's requirements for a short sale transaction. And rejection means you restart the process.

It's probably more likely (especially if you're smart and the real agent is smart) that the bank will either accept your offer or will counter-offer. In other words, if you've offered $100,000 for some property, the bank may say "okay, we accept your offer." Or the bank may say "we want $110,000."

Either way, you will need to respond to their acceptance or counter-offer very quickly.

If you do agree to purchase the property (and you can probably just walk away at this point), the bank submits the transaction to the investor who provided the original money that was used for the mortgage. Typically, the investor takes a week or two to formally accept the short sale transaction (which basically means they're agreeing to take a big loss on the investment).

You can probably assume the investor will accept the offer if you've gotten this far. (The bank is essentially working for the investor and so the bank knows what's acceptable-basically what the bank has been doing up to this point is assuring the proposed short sale transaction will be acceptable to the investor.)

At this point, the short sale process has taken months of your time. But at long last the real estate purchase process begins to work like a traditional purchase. Once the investor accepts the transaction, the process should move very quickly. You might need to get the bank to process your mortgage application. You should inspect the property to make sure after several months of sitting there that it's still what you want. And then of course the escrow company processes the transaction.

One final note, though: You really won't be able to predict when the short sale transaction hits the final, accelerated stage. The investor approval, for example, may come at just the worst possible timing for your job or your family: during the holidays, the first day of a long-awaited family vacation, during your work's busy season and so on.

Next Section: Additional Short Sale Complications and Issues

Additional Information for Shortsale Investors

If you want additional information about how tax laws work for a short sale investment or for an individual running a business based on short sale investing, you may also be interested in one of my downloadable e-books shown below:

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One of the most powerful tactics for saving small business taxes is maximizing your deductions. You can literally save thousands in taxes each year.

Using an S corp for your real estate investing? To maximize savings, you need to minimize the salary paid to shareholders. But this decision is tricky.