Understanding Short Sales (with Elle Klein Garrison)

Short sales are complex and often occur in market downturns. Understanding their intricacies can help you effectively guide your clients, whether it's sellers facing financial hardship or buyers looking for potential investment opportunities. Based on insights from Elle Klein Garrison, this guide provides key information to navigate short sales successfully.


A detailed write-up is below the video!



What is a Short Sale? A short sale occurs when a lender agrees to accept less than the full amount owed on a property, often as an alternative to foreclosure. Despite the name, short sales are anything but short in terms of time and paperwork. Successfully closing a short sale requires patience, open communication, and a thorough understanding of the process.


Listing Agent Perspective

Pre-Listing Preparation

  • Assess the seller’s financial situation:
    • Are they behind on mortgage payments, or is it just a struggle to pay?
    • Some lenders require a homeowner to be delinquent before considering a short sale, while others may offer forbearance options.
  • Ensure the seller maintains open communication with their lender rather than avoiding calls or notices.
  • Obtain seller authorization to speak with the bank directly.

Listing Process & Documentation

  • Gather a comprehensive short sale package, including:
    • Authorization to speak to the bank
    • Hardship letter explaining the seller’s financial situation
    • Mortgage statements
    • Proof of income (or lack thereof)
    • Market analysis to justify pricing
    • Listing agreement and marketing plan
  • Discuss property pricing strategies:
    • Pricing should reflect market conditions, often on the lower end to attract interest.
    • Be aware that banks may counter with a higher listing price.

Communication with the Bank

  • The bank may set a required listing price and must approve all offers.
  • Regularly update the lender on marketing efforts and interest in the property.
  • Ensure the seller understands that banks may pause foreclosure proceedings during a short sale but can resume them at any time.

Property Preparation & Marketing

  • Condition of the home varies; some short sale homes are well-maintained, while others may have significant deferred maintenance.
  • Professional photos and staging are recommended if feasible but depend on the seller’s financial situation.
  • Include TXR 1918 to MLS docs, the Short Sale Addendum

Buyer Agent Perspective

Buyer Expectations & Timeline

  • Short sales are not quick transactions; they can take months to complete.
  • Ideal for investors or buyers with flexible timelines, but not for those needing to move quickly.
  • Short sales are typically sold as-is with no repairs.
  • FHA and VA loans may not work unless the property meets lender condition requirements.

Required Documentation

  • Buyer offers must include TXR 1918, the Short Sale Addendum

Additional Considerations

Multiple Liens & Negotiations

  • If a property has multiple liens (second mortgages, HOA liens, tax liens), additional negotiations may be required.
  • Each lienholder must agree to the short sale, adding complexity to the process.

Agent Compensation

  • Historically, banks have covered buyer agent commissions, often at 2.5% rather than 3%.
  • Post-NAR settlement, there is uncertainty about whether banks will continue paying buyer agent commissions.
  • Agents should negotiate commission terms upfront and set clear expectations in their listing agreements.

Debt Forgiveness & Tax Implications

  • Sellers should ask the lender if the remaining debt will be forgiven.
  • Any forgiven debt may be considered taxable income, so sellers should consult a tax professional.

Impact on Credit:

  • A short sale is generally less damaging to credit than foreclosure.
  • Making a mortgage payment during the short sale process may cause the bank to cancel the short sale agreement.

Whether representing a buyer or seller in a short sale, real estate agents must prioritize clear communication, thorough documentation, and patience. Sellers need guidance through a difficult financial situation, and buyers must be prepared for a lengthy and uncertain process. Leaning on experienced colleagues for advice can be invaluable when navigating short sales for the first time. By staying proactive, empathetic, and knowledgeable, agents can provide a critical service while successfully closing complex transactions.

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