Banks approve short sales on a voluntary basis. Because the bank takes a hit of several thousands of dollars when a loan goes bad, it typically tries to exhaust all other options for recouping its losses, including loan modification and foreclosure. A short sale has consequences for the seller too: diminished credit and, in some cases, the possibility of a deficiency judgment. Seller acceptance is typically the first step rather than the deciding factor in a short sale.
An offer to purchase real estate states the terms and conditions of a sale proposed by the buyer. When signed by both the buyer and seller, the offer becomes a legally binding contract. Closing is always contingent upon lender approval in a short sale. The sale's most important terms, including closing costs, the closing date and sale price, are ultimately up to the bank. Although the seller accepts your offer, the seller-signed contract doesn't guarantee bank approval.
You have a better chance of gaining bank approval of your offer if the sale price aligns with current home values. The bank orders an appraisal known as a broker price opinion -- BPO -- to determine the fair market value of the house in its current condition. The lender considers whether it can recoup more money through a short sale or by foreclosing. The bank accounts for the seller's portion of closing costs, which it pays on the seller's behalf, and any fees you ask the bank to cover. If the sale's net proceeds meet the bank's guidelines, it will likely approve the short sale.
A bank may respond to your offer with a counter or rejection. When the seller qualifies to short sale, but the offer falls short, the bank typically counter offers. When the seller doesn't qualify, either because he doesn't have a financial hardship or the bank prefers to modify or foreclose the loan, it rejects the offer outright. The seller's agreement to the original offer has little bearing on whether the bank accepts, but seller acceptance of the contract and short sale terms is always required. Seller participation in short sale is voluntary, and he may cancel the sale if he doesn't agree with the bank's short sale terms. For instance, the bank may require him to sign a promissory note that he can't afford to pay back as a condition of approval.
A bank can preapprove a short sale, telling the seller how much it wants for the home before it hits the market. Having a minimum list price and net proceeds amount facilitates the transaction for both the buyer and seller. A preapproved short sale price makes the sale conditional upon seller acceptance of the offer. An appropriate and timely bid on such a property cuts down on the transaction time because the lender no longer needs to qualify the seller.
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.