How to qualify a prospect short seller.

So you found a prospect seller.  No matter the source of the lead, it's time to qualify the seller. Just because they want to sell, does not mean you necessarily want to get involved.

Short sales are a lot of extra work, and will take at least 4-5 months of your time and efforts. You want this sale to close, or you will waste a ton of your own time and frustration, so let's make sure you are dealing with the right client.

There are several questions you will need to ask and gauge the answers to determine your odds of success. I ask these questions at the very first conversation I have with the client, and if during this process I get a sense the sale will not close, I will refer out the client or simply decline to help them. 

QUESTIONS TO ASK THE HOMEOWNER:

Can you tell me more about your situation?

This is always the best way to get the conversation going. They all have a story and they want to tell it. You are looking for key information during this conversation:

  • What led to the default, or will imminently lead to default.
  • Whether they are current on payments.
  • What the hardship is they are facing.
  • Whether there are other decision makers involved (parties on title or mortgage). If there are, make sure they are on board as well.
  • How far along they are in the foreclosure process and if you still have time to help them (even a few weeks can sometimes be sufficient).

Who are the lienholders?


Obviously they will have at least a 1st mortgage or they wouldn't be talking to you. Ask who the lender is, and sometimes they will even know who the investor is. This will become important later.

Loan servicers and investors are almost always two different entities. They will know who they make the payment to, and sometimes who the investor is (especially if it is a VA or FHA loan). This is good info to know upfront, but you can also get it later, so no worries if they don't know who backs their loan. 

Do they have a second mortgage, or are their other liens against the home? Critical information!

If you are shorting more than one mortgage, the sale will be more complex and take longer. Still doable, but more work. If in addition they have judgment liens, or IRS liens, or HOA liens etc, the sale starts to become more and more complicated. It's a lot easier to short 1 lienholder than 3. Even 10 is doable, and sadly I have in fact done this, but once the liens start to add up you have to start debating whether this will be worthwhile for you. 

What is the address and condition of the property?

This will allow you to do a rough CMA before you see the home, to determine if they are in fact upside down in the loan. Sometimes you may be pleasantly surprised they are not.

How much do you owe on the mortgage(s)?

Important and for obvious reasons. You want to determine whether they are underwater or not. Sometimes they are borderline and you can approach the sale first as a traditional sale, before converting to a short sale. 

Keep in mind if they are upside down, it makes no difference whether it's by $10 or $1,000,000. Neither will keep them from getting approved. 

Often, especially when owners are in foreclosure, they have no idea what they owe. Loan balances grow incredibly quickly when owners fall behind on their payments and they usually underestimate the balance. When in doubt, have the seller request a payoff statement from the lender, or get a third party authorization and request it yourself.

What is your plan for where you will go next?

You want them to have an exit plan. Explain the short sale will take about 4-5 months total from list to close. They do not have to move out during the process, and for the most part it is advantageous for them to continue to occupy the home.

However, once you have an approval letter from the lender, you will only get 30-45 days to close in most cases. They need to have some kind of plan for future relocation in place. 

Very rarely when I come across this question I will be faced with a seller with no future plan at all. I help them establish one, or sometimes it becomes evident the seller is simply trying to buy an indefinite amount of time to stay in the home. This is very rare, but this is not a client you want. You can waste many months getting their sale approved, for them to turn around and decide to file bankruptcy or try another loan modification attempt, and have wasted all your time in the process and you will not close.

Your lender will likely need full financial disclosure for your short sale. Are you able to provide this?

Usually I phrase this more as a conversation than a question, but you need to establish whether the client will be cooperative with their documents. Although there are many Covid mortgage workout programs in place right now that limit short sale documentation, you can assume that for almost all short sales the client will need to not only establish a financial hardship via bank statements/tax returns/pay-stubs, affidavits etc, but get you those documents in a timely fashion. 

Short sales require lots of paperwork, and your sale won't move forward without them. If your seller won't cooperate, all your work will be for nothing.

Did you like the seller's answers?

YES? GREAT! Move forward to setting the appointment and taking the listing! 

NO? Consider whether the challenges presented are worth your efforts to try to overcome, and if not, refer out, or simply move on!

About the Author Minna Reid

Minna Reid is the Broker-Owner of Reid Real Estate Group LLC - a full service CT and FL residential brokerage.

Practicing since 2007, Minna specializes in selling property with complex legal and financial challenges, including short sales, probate sales and tax lien complications.

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