8. Assemble the proposalThe proposal generally consists of a package of materials including the application and authorization letter, plus:
- The purchase and sale contract -- signed by you and the seller -- to buy the property for a specified price. The lender is not going to entertain tentative offers. You're not going to get the chance to ask the bank, "Would you take X number of dollars?" In most cases, this also means posting a sizable amount of money to demonstrate your desire and ability to go through with the transaction if it is accepted. If you can't make a sizable down payment, the lender would have no reason to believe you can do any better than the last owner. It's also very important to the buyer that the contract be contingent upon all lenders approving the short sale in writing.
- A hardship letter. It's important to remember a lender will not even discuss a short sale until the homeowner has fallen behind on payments -- usually 90 days. The lender must be convinced taking a smaller loss now is better than a bigger loss later. To make that case, start with a letter written by the seller giving an overview of the seller's desperate situation. The lender must recognize the seller's inability to pay the loan -- immediately and in the foreseeable future -- and that the situation is irreversible. The seller should supply as much evidence and documentation as possible, such as divorce papers, evidence of job loss, delinquent accounts, utility shut-off notices, car repossession paperwork, last two years' tax returns, recent pay stubs and recent bank statements. If the lender thinks the seller has money or assets stashed away, it will never go along with a short sale.
- A statement of the property's value. This can be an appraisal or a broker's price opinion. The lower the estimate of the property's current market value, the better it will be for you. You want to show the lender that the seller would not be able to get enough for the home via a normal sale to satisfy the loan. Compile a list of all the negatives and problems of the home that negatively affect the value and make it undesirable to the average buyer and tougher for the lender to resell. The longer a lender must hold onto a property, the more expensive it becomes. If the lender realizes the property will bring them nothing but headaches, it will be more likely to OK a short sale. Richard Geller, of MortgageReliefFormula.com, who has participated in hundreds of short sales, says this part is critical. "Many short sales are turned down because the lender doesn't think the offer is high enough." He advises doing this before the lender does a valuation. "There are ethical and legitimate ways to get a low valuation and if you show this to the lender to start with your offer won't look so low." Geller adds, the offer to the lender can be below the amount of valuation. "The offer can be 85 percent in areas that are slow, but not terribly distressed and as low as 50 percent in really distressed areas."
- Detail the costs and liabilities. You want to show the lender it would be much better off letting you take the property off its hands. If you can convince the lender the home is a money pit, all the better. Take photos of any damages and get estimates of the repair costs. Note: This is also a good opportunity for you to take an honest look at the property, and decide if you are willing and able to invest the time and money required to fix it up. Remember: A short sale is always an as-is sale. The lender is not going to pay for or otherwise be responsible for any repairs. But, for example, if the lender forecloses, there's a good chance it will be forced to make repairs just to get the house resold. That's one of the liabilities the lender may face.
- A settlement statement. This statement (which can be prepared by a closing agent or real estate lawyer) outlines the purchase price, the closing costs and any other costs or fees involved in the transfer of the property. Often referred to as a net sheet and the information can be entered onto a HUD-1 Settlement Statement to show the final, negative result at closing.