Important: The above Guidelines only apply if the Homeowner can establish there were Extenuating Circumstances that led to the default on their previous home loan.  If the lender decides Financial Mismanagement was involved, then different guidelines apply.

In the case of a Short Sale, a Homeowner establishes there were extenuating circumstances through a Hardship Letter and other financial documents. 

Based on the above guidelines, I believe we can safely say that if a Homeowner is concerned about their credit and future ability to purchase a home, then their primary objective in selling their home is to obtain approval of the Short Sale by their Lender(s).  

How Do We Obtain Approval for a Short Sale?

A better question might be, “Why would a Lender approve a Short Sale?”, and the answer is “because it is better for the Lender than the alternative”.

The alternative, of course, is to foreclose on the home. Why would it be better to accept a Short Sale? The short answer is Money, Time, and Risk.

Money: It is more costly for a Lender to foreclose on a home. There are attorney fees and filing fees involved, and it could easily cost a Lender $5,000 or more to foreclose as opposed to the expense of a short sell.  

Time: With a Short Sale, the Lender has an offer in hand. In a foreclosure, the Lender must pay the “time” costs until they receive an acceptable offer.  These include the interest costs to carry the loan, Insurance, HOA Fees, Taxes and maintenance costs for general upkeep.

Risk: Let’s assume that, after factoring in the additional costs above, the Lender believes they may be able to obtain more money in a foreclosure.  They must then consider the risk of waiting for another offer.  If they have a reasonable Short Sale offer, is it worth the risk of another decline in prices or what if Interest Rates go up? Will they be competing with more foreclosures?   

The key here is “reasonable”; if the sales price is within their internal guidelines, then they are most likely to approve the sale. What are their guidelines?

The guidelines vary by loan type, and they are based on a factor that is applied to the current market value of the home. To use those guidelines we must first determine the current market value of the home.

Lenders often use Realtors or Appraisers to give them an estimate of the home’s market value. They use the same information available to your Listing Agent, so assuming they all have similar skills, knowledge and experience, you would expect them to come up with similar estimates.  As usual, experience is crucial here, as overpricing or underpricing your home could result in a lost sale.

Once you have established market value, the Short Sale listing price is determined based on the guidelines.  The listing price will usually be below most of the comparable homes, but not necessarily by much. I usually recommend listing the home at a price that will allow some negotiation, as most Buyers expect that. 

As a Homeowner, you might be appalled at what is determined to be your home’s market value. After all, your home is worth much more than that!

That may be true, but your goal is to obtain an offer quickly, one that will be approved by the Lender.  You will not receive any of the proceeds from the sale.

In conclusion, to be successful in a Short Sale, you must consider the following when setting a listing price:

Competitive:            It must be priced low enough so that Buyers want to see the home.

Negotiable:              Allow some room for negotiations