A. Advantages to Seller 1. Seller may avoid foreclosure/bankruptcy. 2. Could minimize impact to seller's credit rating. 3. Ideally, the seller will not need to bring any money to the settlement table and will not owe any money. (However, this will not always be the case.)
B. Disadvantages to Seller 1. No guarantee that the lender and other creditors will allow the short sale under acceptable terms. 2. If debt is forgiven, there is a potential taxable gain for the seller. 3. The short sale process can be overwhelming and embarrassing. 4. The process may take too long and may discourage buyers and/or foreclosure may take place before short sale processing can be done.
C. Typical Prerequisites for Lender to Consider a Short Sale 1. Seller has a legitimate substantial hardship - e.g., loss of job/income, divorce, death. 2. Seller is in a default payment situation, but lender has not begun the foreclosure process. 3. Seller has prepared a short sale package (see below). 4. Seller has provided written authorization for agent or attorney to communicate with creditor(s).
D. Typical Short Sale Package 1. Short Sale Application (obtain from lender). 2. Hardship letter describing Sellers’s situation. 3. Financial documentation, including: a. Two years of tax returns b. Two years of W-2s c. Two months of bank statements d. Two months of pay stubs 4. Broker Price Opinion (BPO) for the property.
E. Agent Considerations 1. Potential short sale must be disclosed. 2. Agent should advise seller and/or buyer client of the need for the third-party approval, possible time issues, and other downsides. 3. Commission may be reduced on both listing and seller side. 4. Potential commission reduction should be disclosed to all brokers and parties. 5. Settlement of short sale may not take place due to third-party approval process. 6. Agent must be a facilitator, not a negotiator, of the seller's outstanding debts. 7. Process will be time-consuming for the agent, (more so that a typical transaction).