1. The Short Sale Process - Understanding How It Works
"How does a short sale work?" The lender agrees to allow the borrowers to sell the property for
market value. However, market value is typically less than what the borrower owes for the property.
There are several steps to a short sale. The first step is hiring a professional Real Estate Agent, who
specializes in short sales. The process starts when the Agent submits a third-party authorization form
to the lender, to act on behalf of the borrower along with a complete package. This package usually
consists of the following documents: two months of bank statements, last year's tax returns, a
hardship letter, 4506-T Form, RMA package, W-2's or a Profit and Loss, and utility bill for proof of
occupancy. Although this may sound confusing, a professional Real Estate Agent, who specializes in
short sales, is well aware of the necessary forms and should guide you through the process.
Once all the required documents are packaged to the lender, they can be sent for review. Upon
confirmation that all the documents have been received by the lender, the file is move to a negotiator.
The negotiator will negotiate the file by submitting the file to the investor that owns the note. The
investor will either accept or counter the short sale offer. This can be done manually or electronically
depending on the banking institution.
This process usually takes approximately three months to complete when there are no other "factors."
If there are any voluntary or involuntary liens, supplemental taxes or collection companies involved,
such "factors" will lengthen the negotiation process.
In many cases there are two mortgages, a first and a second lien secured by the Real Estate. Both
liens must be negotiated at the same time and two different packages will need to be submitted to two
different banking institutions.
Any recorded liens against the property will need to be paid-off before the bank will issue approval.
The bank will usually pay the pro-rated property taxes, but may not cover past supplemental taxes
and penalties.
If the second lien is held by an independent collection company, this may also result in additional
work and time delays. A collection company will usually want a higher percentage to settle the debt.
This can get complicated depending on whether the property was used for investment or has a
personal residence. If the property was used for investment, the remaining balance of the settled
second lien, known as a deficiency balance, will be reported to the IRS and the borrower will typically
receive a 1099 at the end of the tax year. Typically any settlement over $600 is reported to the IRS
for a 1099. You should consult your tax advisor about tax ramifications as a result of any Real Estate
transactions.
If the property is owner occupied, than the deficiency balance will often be forgiven, depending on
your state. Also, a primary residence may apply to HAFA (Home Affordable Foreclosure Alternative)
to receive a $3,000 credit from FreddyMac at the COE (Close of Escrow). This credit is used to assist
homeowners with the expenses of moving out. However, when this credit is present there is a
limitation to a second lien of 6% or $6,000.
If you are unable to negotiate the second lien because you are short on funds, the collection company

2. may accept a lien release. The collection company will accept a partial payment to temporarily
remove the second lien to close escrow. After the close of escrow they will re-post the unpaid
deficiency balance to your credit report. This tactic is often misused and abused by collection
agencies to collect more money from of the borrower after the close of escrow.
Lastly, make sure to get everything documented and in writing. Never transfer money or pay anything
until you have a settlement agreement in writing!
If you have any further questions regarding Short Sales or other Real Estate needs, please feel free
to contact me via phone or email below. I have been specializing in Short Sales, Foreclosures and
Luxury Homes in Agoura Hills, Calabasas, Hidden Hills, West Hills, Woodland Hills, Tarzana, Encino,
Sherman Oaks, Studio City, Toluca Lake, Burbank & Glendale for over 12 years. I hope my article
was helpful in answering your questions.
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