Negotiating short sales is a crucial skill for real estate agents

Americans still want to become homeowners, even in the face of rising interest rates and a tightening market. More than half of Americans still look at Zillow listings at least once a week, suggesting that there’s a nearly bottomless appetite for homeownership out there, regardless of the challenges.

With some areas seeing rising prices and low supply, many would-be homeowners are looking into unconventional routes to homeownership — like short sales.

A short sale is when a property is sold for less than the amount owed on the mortgage. These sales have to be approved by the lender and are only undertaken when the homeowner can’t keep up with their mortgage payments. 

The role of the agent is even more prominent in a short sale than in a conventional sale, since it’s a complicated process that can take weeks or months and requires a lot of back-and-forth negotiation. 

Be sensitive to the seller’s circumstances

Remember that homeowners only pursue a short sale when they’ve exhausted every other avenue. They likely couldn’t find a loan modification that worked with their financial situation and are desperate to avoid foreclosure.

Many sellers turn to a short sale after a traumatic life event like a job loss or death in the family. You’ll need the seller’s full participation to get the lender to approve the short sale, so be sensitive to their circumstances as you move through the process. 

Understand your commission

In a conventional sale, the seller pays the agent’s commission. However, the lender determines how much commission the agent makes in a short sale. When the lender looks at a big loss, they may even reduce the agent commission to zero. 

For that reason, many agents specializing in short sales make it standard practice to negotiate a commission directly with the seller.

Some short-sale agents work on a flat fee basis instead of taking a percentage. Remember that the lender approvals and negotiation of a short sale can take quite a while — meaning that a short sale agent often works many hours for a reduced commission. 

Prepare the upside-down financials

Buyers must prove they’re financially stable enough to meet their mortgage obligations in a conventional home purchase. The opposite is true in a short sale.

In a short sale, the homeowner has to prove that their financial distress is significant enough that they won’t be able to continue making their mortgage payments.

Lenders won’t let a homeowner dump a property because it’s underwater. They’ll have to prove there are extenuating circumstances that make it impossible for them to continue making their mortgage payments — something like a family death, job loss or something similarly disruptive. 

The lender will want to examine the homeowner’s financials closely to confirm that they’re unable to keep paying. Make sure you secure a complete, signed financial dossier (including documents like tax returns and bank statements) from the homeowner that spells out their situation in clear detail so their application for a short sale can be quickly approved. 

Understand the lender incentives

Negotiating with a lender isn’t like dealing with an individual seller. When negotiating a sale between two individuals, the incentives are pretty clear: The buyer wants to get the sale price as low as possible. In contrast, the seller wants to maximize their profits, but this is not so when you’re negotiating a short sale with a lender.

A lender isn’t looking to maximize their benefits as much as they try to minimize their potential losses. That changes the complexion of the negotiation quite a bit.

They want to avoid the protracted costs of foreclosure, and they like to keep non-performing loans off their books. In addition to the homeowner’s financial documents we touched on above, you should clearly communicate to the lender how much you can save them by brokering the short sale. 

Nail the initial offer

Your initial offer on a short sale will rarely be accepted — but that doesn’t mean you shouldn’t put some effort into coming up with a fair, market-supported offer. If your first offer is excessively low, it may be dismissed without a counteroffer, leaving you and your client in an awkward spot. 

The lender probably knows they’re going to take a loss on the property, but that doesn’t mean they’ll let it go for pennies on the dollar. Do your research on comparable properties, consider the property’s condition, and submit a reasonable but competitive offer. Your objective here is to solicit a counteroffer, at which point the back-and-forth negotiation can start in earnest. 

Don’t forget about tight financing windows

As an experienced buyer’s agent, you know it’s always a good idea to have a buyer get their financing in order before they even hit the market. But this can be doubly important if your client is looking to buy a short sale.

Banks often impose a restricted closing window — one as short as 14 days in some cases — on a short sale, so a lot has to happen in a relatively short time. Many short sale experts suggest starting the financing process before the short sale file goes into final review. 

Make direct contact

Once the negotiating process starts, the real estate agent will negotiate directly with a lender employee. Usually, this will be someone who works in a bank’s loss mitigation department. 

Find out the name of the bank employee handling your short sale, and get their direct contact information, including their work phone number and email address.

Open a line of communication with them and talk things over with them. Most of the time, they’ll be willing to give you some idea of how much they need to let the property go, and you can put your counteroffers together accordingly. As with any sale, a little human touch goes a long way.

Luke Babich is the CSO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.