Can You Negotiate a Short Sale? Here’s What to Know

A short sale is a real estate transaction where the proceeds from selling a property are less than the outstanding mortgage balance owed to the lender. In these situations, the lender agrees to accept a reduced payoff, allowing the sale to proceed. This process differs from a foreclosure, as it involves the homeowner’s cooperation to sell the property. Negotiation is central to a short sale, involving multiple parties working to reach a mutually acceptable agreement on the terms of sale and debt resolution.

Key Parties in Negotiation

Several parties play roles in a short sale negotiation. The homeowner, or seller, initiates the short sale, providing financial documentation to demonstrate a qualifying hardship. Lenders review the homeowner’s hardship application and approve or reject offers. This includes primary and secondary lienholders, such as those holding a second mortgage or home equity line of credit, as all must agree to the terms.

A buyer submits an offer to purchase the property, which is then presented to the lender. Their role is to propose terms acceptable to the lender. Real estate agents act as facilitators, managing communication between the homeowner, buyer, and lender, and assisting with offer presentation. They also market the property and navigate the transaction’s procedural aspects. Additionally, some homeowners may engage a short sale negotiator or an attorney to represent their interests directly with the lender, particularly with multiple lienholders.

Negotiable Aspects for Homeowners

Homeowners can negotiate several aspects with their lender during a short sale. A primary concern is the deficiency judgment, which is the difference between the outstanding mortgage balance and the short sale price. Homeowners often seek a full waiver of this deficiency, meaning the lender agrees not to pursue the remaining debt. Obtaining a “release of liability” from the lender protects the homeowner from future collection efforts related to the forgiven debt.

The forgiven amount from a deficiency waiver might be considered taxable income by the Internal Revenue Service (IRS), unless specific exclusions apply, such as insolvency or qualified principal residence indebtedness. For instance, if the homeowner is insolvent (liabilities exceed assets) at the time of debt forgiveness, a portion or all of the forgiven debt may be excluded from taxable income. Homeowners should consult with a tax professional to understand their tax liability implications. Relocation assistance, sometimes called “cash for keys,” is another negotiable aspect. Lenders may offer a payment, typically ranging from $3,000 to $10,000, to incentivize the homeowner to vacate the property promptly and cooperatively.

The homeowner’s hardship letter and supporting financial documentation are key to their negotiation. These documents, detailing reasons like job loss, medical emergency, or divorce, support requests for deficiency waivers or other concessions. While the focus is on financial relief, a homeowner’s agent may also negotiate minor terms of sale, such as a reasonable timeline for the homeowner to vacate the property after closing. The homeowner’s financial disclosures directly impact the lender’s willingness to grant concessions.

Negotiable Aspects for Buyers

Buyers can negotiate several elements when purchasing a short sale property, though lender approval adds complexity. The purchase price is negotiable, and buyers should submit a competitive offer reflecting the property’s condition and market value. While the homeowner accepts the offer initially, the lender must approve or reject it based on their valuation and the homeowner’s financial situation. The buyer’s offer must be acceptable to the lender’s loss mitigation department.

Closing costs are also negotiable, though lender requirements often dictate who pays for specific fees. Buyers can propose who covers expenses such as title insurance, escrow fees, and transfer taxes. However, lenders may have strict guidelines on which costs they will allow to be paid from the short sale proceeds, sometimes requiring the buyer to cover a larger share than in a traditional sale. Short sale properties are typically sold in “as-is” condition, meaning the homeowner will not make repairs.

Despite the “as-is” nature, buyers can negotiate for repairs or a price reduction based on inspection findings. This is often more challenging than in a traditional sale, as lenders focus on minimizing their loss and may be reluctant to approve additional expenses. The timeline for closing and standard contingencies, such as inspection, appraisal, and financing, are also negotiable. However, the lender approval process, which can take 90 to 180 days or longer, significantly impacts these timelines. Buyers must be prepared for extended waiting periods before a final decision is rendered.

The Negotiation Process

The short sale negotiation process begins when a buyer submits an offer to the homeowner’s real estate agent. This offer is then presented to the homeowner for acceptance. Once the homeowner accepts the offer, it is packaged with their hardship documentation, including financial statements, tax returns, and the hardship letter, and submitted to the lender for review. This submission initiates the lender’s evaluation.

The lender’s loss mitigation department reviews the entire short sale package. This includes assessing the homeowner’s financial situation, evaluating the proposed purchase price against the property’s market value, and often ordering an independent appraisal or broker price opinion (BPO) to determine the property’s current worth. This review period can be long, as the lender analyzes their potential loss and weighs options. During this phase, the lender may request additional documentation or clarification from the homeowner.

Following their initial review, the lender may issue a counter-offer or request revisions to the buyer’s offer or the homeowner’s proposed terms. This often involves an exchange between the lender, the homeowner’s agent, and the buyer’s agent, with adjustments to the price, closing costs, or other terms. The goal is to reach a mutually agreeable solution that satisfies the lender’s loss mitigation objectives while securing a buyer. Once all parties agree to the final terms, the lender issues a short sale approval letter, a formal document outlining the approved sale price and conditions. This letter allows the transaction to proceed to closing, similar to a traditional real estate sale, but under the specific terms approved by the lender.