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July 30, 2014

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Five Minute Expert:

How to do a short sale

Selling a house through a short sale is about as fast and easy as swimming through a swamp.

The sales process can involve stacks of paperwork, back-and-forth calls and emails with bankers and real estate agents, and sudden changes in rules and procedures. Completing a deal can take months, maybe a year, all so an underwater borrower can get out of a house that plunged in value and a buyer can get a good deal.

In a short sale, a bank agrees to sell a house for less than what’s owed on the mortgage.

Most of the work falls on a seller, who has to convince the bank to eat its losses and sell the house. Buyers have fewer chores but can get just as frustrated, as they frequently must sit around waiting for third-hand information to trickle in, hoping the deal gets approved.

“They kind of sit back and wait — wait and pray,” local attorney Jamie Cogburn said.

A short sale can get derailed or delayed in any number of numerous ways, but if you’re looking to do a deal, here are some key steps to follow, as described by Cogburn.

How to sell

1. List your house. Wait for an offer from a buyer.

2. Submit a “complete package” to your lender, which includes tax returns, pay stubs, your family’s monthly budget, a “hardship letter” explaining why you want a short sale and documents from the prospective buyer showing he or she is preapproved for a mortgage loan or has enough cash to buy the house outright. The bank will want to see how much money the seller has and whether the proposed buyer can afford the house before it launches negotiations.

3. The bank will review the documents and make sure nothing is missing or out of date. If the bank sold the loan to an investor after issuing the mortgage, it will contact the note-holder and discuss the proposed sale. The bank also might order a broker price opinion from an outside real estate agent to assess the value of the house.

4. Negotiate with the bank. Up for debate is the sales price and whether the seller will be required to pay a portion of that price. Also be sure to ask for a waiver of deficiency, which certifies that a seller isn’t legally responsible for the amount owed on the loan.

5. Reach a deal with the bank, and start packing. Or don’t, if the sale falls through.

What to consider when negotiating

• If an underwater borrower has a lot of money or assets, the bank probably will want him or her to contribute more to the sales price.

• If the lender is a small bank or credit union, it may not agree to a waiver of deficiency, although it might in exchange for a bigger contribution toward the sales price.

• It might be wise to order a broker price opinion as part of the negotiation or request to review the bank’s to see how the lender came to its valuation.

• Make sure appraisers compare your house to similar-sized homes in the same subdivision, as the floor plans and amenities are likely the same.

How to buy

1. Submit an offer, and put a small portion of the proposed price into an escrow account. Send documents to the seller’s representative showing you are preapproved for a mortgage or proof that you have the cash to buy the house without a loan.

2. If the seller’s lender wants a higher price than you’ve offered, start negotiating.

3. Once you and the lender agree on a price, if you’re getting a loan, order an appraisal of the house. The buyer has to pay for it. Banks require appraisals to make sure they are lending the correct amount. They don’t want to lend $400,000, for instance, for a house that’s worth $200,000.

4. Once the sellers reach an agreement with their lender, finalize your mortgage or get your cash together. Transfer the funds into escrow and close the deal.

Sellers and buyers should watch out for these roadblocks

• Sometimes a lender about to approve a sale will try to auction a house online, ostensibly to find higher-paying, last-minute bidders. Not only will this delay your sale, but it could be laden with conflicts of interest. Financial regulators, for instance, have been investigating mortgage servicer Ocwen Financial Corp., which lists homes on Hubzu. The auction website is owned by an Ocwen spin-off, whose chairman reportedly owns stakes in both companies.

• Your mortgage lender, without your knowledge, may have bought insurance on your loan so it could recoup money in case you defaulted. If you short sell your house, there will be one more group to negotiate with — the mortgage insurer, which will want you to kick in money to help reduce its loss on the deal.

• Research prospective buyers to make sure they can, and want to, close the deal and aren’t just placing bids on multiple houses in hopes of landing one or two. Talk to the buyer’s real estate agent and review property records to see if the buyer has closed escrow on previous sales.

• Even after you spend months working on a short sale, your bank could sell the servicing rights for your mortgage to another company. If you’ve made enough progress completing the deal, your bank could give you a letter of approval for the short sale. That should speed up the sale with the new company, but it doesn’t always work that way, and not everyone gets the letter — meaning you might have to start the sale all over again.

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