How to Negotiate a Real Estate Short Sale

As a homeowner, the chain of events that can result in your foreclosure are financially and emotionally devastating. You may fall behind on your bills due to job loss, divorce, or a weak rental market that translates into lost investment property income. The situation is further complicated -- if you owe more on the home than it is actually worth. At that point, you may consider a short sale to avoid inflicting further damage upon your credit. Negotiating a short sale does require you to become familiar with the basics of the foreclosure process.

Mortgage Default and Pre-Foreclosure

In most cases, the bank will not agree to a short sale unless your mortgage actually falls into default. The mortgage is in default, after 30 days of missed payments. At that point, your default will be reported to the major credit bureaus and the foreclosure process begins with the pre-foreclosure stage. In pre-foreclosure, the mortgage is in default, but your home has yet to be seized and auctioned off. The pre-foreclosure stage generally grants you a total of 150 days to either bring the mortgage back current with cash flow or settle the home loan through a real estate sale. Again, you will coordinate a short sale, if your mortgage balance exceeds your property value.

The Short Sale Package

Before the bank considers a short sale, you must put together a package of documents that discloses your financial position. It is critical that you prove to the bank that you have exhausted all available economic resources in an attempt to meet your current mortgage terms. You should therefore eliminate discretionary spending from your budget and liquidate taxable brokerage accounts to raise cash for making mortgage payments, before you attempt to negotiate any short sale. The lender is not likely to approve of a short sale, if your financial statements reveal recent shopping sprees to New York City alongside $50,000 worth of Wal-Mart stock.

The bank is also likely to order a home appraisal and inspection as part of the short sale negotiations. The home appraisal should verify that the home has lost significant value and that the mortgage is consequently under water.

Short Sale Asking Price

To attract demand and expedite the short sale process, you should list your home at a 10 percent discount to market value in pre-foreclosure. Be advised that a prospective buyer may drive a hard bargain, if the home is in need of minor repairs because you lack the funds for general upkeep. With an offer on the table, the bank will function as the main catalyst to approve the deal. For the short sale to take place, the bank must agree to accept less money for the home than its outstanding mortgage balance due. After the short sale, you will walk away from the home -- with no cash.

Foreclosure

Be advised that the bank is not obligated to approve of any short sale -- if a prospective buyer were to actually materialize. The bank will publish a notice of sale after 180 days of missed payments, if no short sale or other mortgage settlement materializes during pre-foreclosure. The notice of sale announces a time and location for your home to be auctioned off. The foreclosure auction date generally arrives within 30 days of the notice of sale. Immediately after the foreclosure auction, the bank or the home's new private owner can file a 30-day notice to quit and eviction lawsuit -- to remove you from the premises.

How to Negotiate a Real Estate Short Sale, Sources:

Investopedia: Short Sell Your Home to Avoid Foreclosure

RealtyTrac: Property Foreclosure Overview and Foreclosure Process

CNNMoney: The 3 Stages of Foreclosures

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