Speeding Up Short Sales

This week, new federal rules were implemented to expedite and streamline the short sale process–but not every short sale qualifies.
By: JUNE FLETCHER: wsj.com
Q: When I bid on a short sale, why does it take months to hear back from the seller's lender, even though the offer is close to the broker's price opinion? Would it speed things up if I added a provision that the offer becomes invalid after three months, or some other time period?

—Mountain View, Calif.
A: You won't need Zen-like patience to wait for a lender to approve your short sale bid any longer. That's because this week, new federal rules were implemented to give lenders financial incentives to expedite and streamline the short sale process.

But bear in mind that these rules don't cover all loans: Only those that aren't guaranteed by Freddie Mac or Fannie Mae, which have their own short-sale procedures. Moreover, the homeowner must be behind in payments or at risk of default; the unpaid principal balance must be equal to or less than $729,750, and the total mortgage monthly payment must be greater than 31% of the borrower's income. So if you're looking to buy someone's McMansion or vacation home, you may still face a lengthy wait.

For all these properties that don't fall under the new federal guidelines, the process is still likely to remain grueling, simply because it's complicated: Sellers have to document hardship. Brokers need to offer their opinion of the property's current value, based on comparable sales. Lenders need to determine whether their net proceeds from the short sale would exceed what they'd get if the property went into foreclosure, and must make sure that the proposed transaction is "arm's length" (that is, that the buyer isn't a friend or relative of the seller, or worse, a "rescue scammer," that is, someone who promises to "save" your house if you sign over the deed, or who promises to negotiate with your lender on your behalf for a fee. And all parties to the original loan, including investors who own even tiny pieces of it (there may be a long list), servicers and private mortgage insurers must sign off on the sale.

Furthermore, sometime during the process, one of the parties who are being asked to take a loss may insist that the sellers take a personal note to cover some of the debt after the sale goes through. In that case, the sellers may decide to let the property go into foreclosure instead of proceeding with the sale. Or the sellers' circumstances may change—for instance, they may go into bankruptcy—which could delay or halt the sale.

During this entire ordeal, the paperwork is handled by the lender's loss mitigation department, which is undoubtedly swamped with applications. Short sales are the number one category of distressed property, rising to 17.1% of all sales in February, according to the latest Campbell/Inside Mortgage Finance Survey.

So putting a time limit to your offer isn't going to do you any good. It's better simply to look for short-sale properties that fall under the federal guidelines or to concentrate on "pre-approved" properties that are being handled by experienced negotiators.