I recently reviewed a blog that listed the top 10 reasons your short sale does not close. While I certainly applaud the successes and appreciate the encouragement this writer provides to help you understand the need to be organized, provide complete documentation, and communicate effectively with the parties involved (especially buyers) there is widespread misunderstanding and misinformation provided to agents, even experienced short sale agents.

As an attorney who has not only sold real estate (well, for a year and a half, that is), and has represented and dealt with servicing lenders and secondary market investors (SMI) over the last 20 years, I have a unique understanding of these entities and relationship with them. A number of those institutions have managers and executives who are friends of mine, and we have on numerous occasions discussed the issues causing short sales to not be approved.

Here are the top reasons that a short sale does not close. I will endeavor to prioritize them, but they will be based upon a nexus of the experience of our firm plus as described by my friends in the mortgage lender/SMI industry.

6.  Not submitting multiple offers. My contacts tell me that providing multiple offers have indeed helped them to see that the agent is doing all they can do to get the home sold. When there is a borderline case, the multiple offers can make the difference. An SMI contact told me that if the high offer is subject to inspection, an “as-is” offer may be selected, even if it is somewhat lower than the other. In addition, there is a side benefit: if the buyer walks that was chosen, there is another purchase contract that can carry the deal to close.

5. Not submitting a proposal. Organizing your request to approve a short sale has often made the difference between success and failure with the agents who work with our firm. The proposal should have specific features and I outline them at length in both of our publications. My SMI contacts state that properly drafted proposals are given very careful consideration and they have approved our format.

4. Causing the proposal to be tanked. Many agents still think that the servicing lender is the one who approves the short sale and they can actually negotiate with the negotiator for that servicing lender. However, most loan notes are actually owned by the SMI and most servicing contracts do not allow the servicing lender to approve the short sale. These servicing contracts sometimes do, sometimes provide limited authority, but in most cases the approval is from the SMI, or an MI carrier if that carrier has paid a claim. However, servicing lenders would rather foreclose than see the proposal approved (see my previous blog on the subject), so many times they will cause the proposal to be tanked if they can get away with it. So, any excuse will do: incomplete, mistakes, getting the personnel angry, etc, can cause your proposal to be tanked.

3. Not communicating adequately with parties. Buyers are patient…to a point. Same with cooperating agents. We provide weekly updates to all parties, more often when things happen. Buyers must be part of the process and be helped to hang in there when approval takes a long time. But this communication should not only be timely, it should provide the right information. Throughout the process, we educate the buyers and their agents about how short sales work and the issues involved. I make it a point to solicit feedback to make certain that our updates are interesting, understandable, and motivating.

2. Not meeting the definition of “hardship”. Just like a criminal case wherein each element of the criminal statute must be proved, in short sale cases the hardship letter and financial documents must prove each element necessary for a secondary market investor to render a finding of “hardship”, and approve the short sale. The hardship letter must contain certain elements, without which, the case will be rejected.

1. The most important reason that a short sale is not approved is not meeting the net to lender minimum threshold percentage of the fair market value. Formerly, secondary market investors utilized the short sale versus REO comparison analysis to approve or reject a short sale. However, almost all SMIs have changed over to the minimum threshold analysis. That analysis ignores the amount of the debt and focuses on proof of the current fair market value of the property. For different SMIs and even different products, there is a set minimum threshold percentage of the fair market value that must be received in order for the proposal to be approved. For example, all HUD backed loans with Fannie Mae must meet the net to lender amount that is 88% of the fair market value if the property was listed on the MLS within 30 days of the purchase contract; 86% if the contract is within 60 days of listing, and 84% if the purchase contract was date more than 60 days after the property was listed. Many agents erroneously believe they are still using the old comparison analysis.

So, the fact is this: if a proposal meets the definition of hardship, that hardship is supported by the financial documents, you do nothing to cause the servicing lender to tank the proposal, and the offer meets the minimum threshold net to lender percentage of the fair market value, it will be approved and if a qualified buyer remains, the transaction will close. Those are the top 6 reasons a case does or does not close.

This article has been published with permission of Ken Lawson, JD of TheLawsonGroup Mediation Services.  The opinions expressed herein are those of Ken Lawson and do not necessarily reflect the opinions of Bryan Ellis or WebWords Inc.  Similarly, publication of this article does not indicate endorsement of the content of this website by Ken Lawson.