Short Sales in Colorado: The Complete Guide for Real Estate Agents
What is a short sale, and how does it work in Colorado? A short sale is when a homeowner sells for less than they owe and the lender agrees to accept the lower payoff. In Colorado the lender sets its required net from its own appraisal, and the deal closes only after every lien holder approves.
I sat in on a three hour CE class on short sales recently, taught by Tana Stevenson of Tana Short Sale Coordination, who has closed somewhere north of 1,500 of them since 2007. I took the whole thing down, and I want to give you the useful parts.
Here is why I think this matters right now. Every buyer who closed an FHA loan in the last two years put 3.5% down. It costs 8 to 10% to sell a house once you add commissions, title fees, and closing costs. Run that math. Those buyers were underwater the day they got their keys. When the market was climbing, appreciation covered it. It is not covering it right now.
So the calls are coming. And most agents I talk to in Denver Metro have either never done a short sale or did one back in 2010 and have blocked it out. This post is the whole process, start to finish, in the order you will actually encounter it.
I am an Account Executive with Chicago Title of Colorado, not an agent, not a lender, and not an attorney. My job is to make sure the agents I work with have the information and the title support to handle whatever walks through the door. Short sales are one of those things where knowing the process early saves you six months of unpaid work.
The Part Most Agents Get Wrong: Picking the File
Here is the single most valuable thing I heard all morning. The negotiator teaching the class said her success rate is around 95%, and she was blunt about why. It is not because she is a better negotiator than everyone else. It is because she says no to bad files.
Most agents lose money on short sales before they ever talk to a bank. They take a listing that was never going to close, spend six months on it, and never get paid.
So the skill is not closing short sales. The skill is qualifying them.
The 7 things to check before you take the listing
Is the seller actually engaged? This is number one and it is not close. Short sales generate a mountain of paperwork, and when the bank asks for something you need it back in 24 to 48 hours. If your seller shrugs and says "sell it if you can, I don't really care," walk. Same answer if it is a divorce and one party is going quiet on purpose to punish the other. You need both signatures. You will not get them.
How close is the foreclosure date? Under 30 days to the sale date, pass. FHA in particular gets difficult if there is no offer 37 days out. You can ask the seller to call the bank and request an extension, and if they get one, then you list it.
Who is actually on title? Pull an Owners and Encumbrances report immediately. The classic Colorado problem is a divorce where the attorney quit claimed one spouse off title but both are still on the loan. Both have to participate. You are dealing with the lender, and the lender does not care what the divorce decree says.
What kind of loan is it? FHA, VA, and conventional all behave differently and require different net amounts. FHA loans have a stamp right on the O and E. You can usually confirm from the mortgage statement too. This matters more than most agents realize, because each program has a published net requirement calculated off the bank's appraised value:
FHA: 88% of appraised value, days 1 to 30
FHA: 86%, days 31 to 60
FHA: 84%, days 61 to 120
VA: 84%
Fannie Mae conventional: 88%
Freddie Mac: Program specific, confirm with the servicer
Note that these are percentages of the appraised value, not the purchase price, and the number that matters is the net on the settlement statement after commissions and fees. That is the whole game, and it is why the appraisal matters as much as it does.
How many judgments are attached? More than one personal judgment and I would pass. Second and third mortgages will usually settle for something, because they know a foreclosure wipes them out completely. But a personal judgment is different. If someone has a $40,000 car loan attached to the house, they are not taking $1,500 to release it, because they can still chase the borrower personally after the sale.
Is the hardship real? Losing $50,000 in value is not a hardship. Divorce, job loss, death, or serious illness is. The cleanest test is a financial worksheet. If income minus real expenses comes out negative, you have a hardship. If they are $2,000 to the good every month, you do not.
Is there a bankruptcy in the picture? Not a dealbreaker, but you need to know where it sits. Filed and discharged, in the middle, or still being considered. Each one changes what you do next.
I broke this down further in a separate post on how to spot a short sale that will never close, because honestly it deserves its own read.
Where These Listings Come From
If you decide you want to work in this space, there are four sources.
The NED list. Notice of Election and Demand. This is the public foreclosure filing, and your title company can pull it for you. When someone lands on that list, their sale date is roughly three months out. That is enough runway to actually do the work.
Door knocking. The most successful agents in this niche are the ones willing to walk up. Mail does not work well here, because people who are not paying their bills generally are not opening their mail. If you do mail, use a postcard so the message is visible without them opening anything.
Distressed neighborhood farming. When a market softens, the outer ring softens first. Buyers consolidate toward the core.
Your sphere. The soft way to ask is "do you know anybody who is struggling with their mortgage?" rather than pointing at someone directly.
Chicago Title of Colorado can pull the NED list and run O and E reports for you, and I do this for agents across Denver Metro constantly. If you want to start looking at this seriously, that is the first call to make.
I wrote a full post on running the NED list as a lead source if that is the angle you care about most.
FHA Short Sales: The Program You Want to Understand
FHA is the most common short sale type on the board right now, and there is genuinely good news here. FHA has a pre foreclosure program, and if you catch a file before a foreclosure date gets set, it works in your favor.
How the pre foreclosure program works
If the loan is not yet in foreclosure, you submit the package, FHA orders an appraisal, and they issue an Approval to Participate letter. The ATP is the piece of paper you want. It states the appraised value and exactly what net FHA will accept:
88% of appraised value for days 1 to 30
86% for days 31 to 60
84% for days 61 to 120
So you get about 120 days. In writing, from the lender, before you ever have a buyer. That means when an offer comes in that hits the net, you can have an approval letter in about a week instead of three months.
If the loan is already in foreclosure, the process is nearly identical, you just do not get the ATP up front. They wait until you bring them an offer, then order the appraisal.
The FHA rules that trip people up
Home retention comes first. FHA will offer a loan modification before they will look at a short sale. Ask your seller directly, up front, whether there is any chance they want to keep the house. If yes, they should call the bank themselves before you spend a dollar listing it. I heard the same story from multiple agents in that class: they listed the property, did the work, the bank offered a mod, the seller took it, and the agent got nothing.
61 days past due. FHA will not review a short sale until the borrower is 61 days behind. You cannot tell someone to stop paying their mortgage. You can tell them the rule exists and let them make their own decision.
Wet signatures on two documents. The authorization letter and the hardship letter both need real ink. The banks compare the signature to the one on the mortgage. This is a direct response to how much fraud happened in the last cycle.
3% concession cap, and it cannot buy down the buyer's rate. The bank is taking a loss. They are not funding a rate buydown for a stranger. And they see both sides of the settlement statement three days before closing, so there is no working around it.
HOA gets the six month super lien only. No late fees, no interest, no attorney fees.
That last one is a real problem in Colorado condos right now, and I go deeper on it below.
The full breakdown is in my post on FHA short sales and the ATP letter.
What goes in the hardship letter
Put all of this in the first draft and you will save yourself about three weeks of the bank sending it back:
The date the hardship began
A clear statement that they are requesting a short sale review
A statement that they are opting out of all home retention options
A statement that they can no longer afford the mortgage
A statement about whether they own any other FHA insured properties
Physically signed and dated
The Bank Appraisal Is the Whole Ballgame
If you take one thing from this entire post, take this.
The bank orders a BPO or a full appraisal. That number sets the net they require. Once it is in their system, it is extremely difficult to move. The negotiator will tell you, correctly, that she is not the valuation professional and an appraiser already gave her a number.
So the appraisal is your one real chance to influence the outcome. And here is the part that feels backwards.
You want this appraisal to come in as low as possible.
Everything you have ever practiced as an agent is the opposite of this. Normally you meet the appraiser and talk up the property so your buyer's loan goes through. Not here. This appraisal has nothing to do with the buyer. The buyer's lender will order their own. This number does one job: it tells the bank how much money to demand. A low number helps your seller and hurts no one.
How to work the appraisal
Meet the appraiser at the property. Do not skip this. Do not just email.
Bring the bad comps and explain them. If the house down the street sold for $50,000 more, tell them why it is not comparable. Bigger lot, full remodel, whatever it is.
Bring your own comps from the same condition tier.
Bring the inspection if you have one. Roof issues, sewer issues, anything a walkthrough will not reveal. This is an as is value.
Bring the listing history. Price drops, showing counts, feedback saying it is overpriced. Part of what a house is worth is what someone will actually pay for it, and you have the receipts.
Turn off automatic showing access once the appraisal is ordered. Set it to "contact agent for access." Otherwise the appraiser books a showing through the app, walks the property, and leaves without ever talking to you. That is a real thing that happens.
More on this in why the bank's appraisal decides your short sale.
The Conversation to Have With Your Seller
Short sale sellers are usually going through the worst stretch of their life. Divorce, job loss, a death in the family. Your job is closer to counselor and resource than salesperson.
The single most useful thing you can explain is the difference between a short sale and a foreclosure, because most people, including a lot of agents, do not actually know.
The deficiency math
Round numbers to make it clean. Say they owe $400,000 and the house is worth $350,000.
If it forecloses: the bank spends roughly $30,000 to $50,000 on the foreclosure, and that gets added to what the borrower owes. Now the balance is around $450,000. The bank takes the house and sells it as a bank owned property, which is a fire sale, call it $300,000. The gap between what they recovered and what was owed is the deficiency. That is $150,000. In Colorado they can pursue it for six years.
If it short sells: the house sells for what it is worth, $350,000. The deficiency is $50,000 instead of $150,000. And on roughly 95% of approval letters, especially FHA and VA, there is language saying the lender will not pursue the deficiency at all.
The idea that you put the keys in the mailbox and walk away from a foreclosure is not real. You signed a promissory note. The debt survives.
What happens to the forgiven debt
The seller gets a 1099-C for the forgiven amount. Worst case they owe taxes on it. Paying tax on $50,000 beats owing $50,000, and it beats owing $150,000 by a lot.
There is also the Mortgage Forgiveness Debt Relief Act, which has been extended every year since 2008, usually in December and applied retroactively. Tell your seller to work with an accountant the year they close so it gets reported correctly.
I am not a tax professional and neither are you. Send them to one.
I walked through the whole comparison in short sale vs foreclosure: the math your seller needs to see.
Four more things to set up front
The foreclosure date will move, and it will move at the last minute. Usually about a month at a time, often the week before. As long as you are actively working the file and getting documents in, it gets pushed. Warn them, or they will panic every single month.
You will probably lose the first buyer. It is common. It is not a failure. And when it happens you know what the bank wants, which makes the next round much faster.
Retirement accounts are protected. Banks may ask for statements. They cannot make someone liquidate a 401k or IRA.
They need a plan for where they are going. The approval letter arrives with a 30 day close window. I heard about sellers who did not show up to closing because signing meant being homeless with nowhere to go. Have that conversation in month one, not month six.
Listing It Correctly
A few specifics that will save you real pain.
Listing agreement
Go a full year. Six months minimum. The worst possible outcome is your listing agreement expiring the week the approval letter shows up.
Do not discount your commission. Banks will generally allow 6% split between both sides. And here is the practical reason: at the end of these deals there is almost always a small gap of a few hundred dollars that somebody has to cover, and it usually comes out of commission. Give yourself the room.
Include the additional provisions language letting the seller out if their situation changes. FHA wants to see it.
MLS
Mark it as a short sale in the appropriate field.
Broker remarks must say sold as is. Your seller has no money for repairs and the bank does not own the property, so the bank legally cannot repair it either.
Broker remarks must say subject to third party lien holder approval.
Offers
Only one contract goes to the bank. This is not a bank owned property. Your seller still owns the house and still picks the offer. Use normal agent judgment.
Cash is not automatically king. What matters is getting close to fair market value and having a buyer who will wait.
If the property has condition issues, think hard about whether to accept FHA offers, since FHA will require repairs nobody can pay for.
Get hard dates on earnest money and inspection. Everything else runs on SSA plus days.
Define SSA in additional provisions as short sale acceptance by all third party lien holders.
Set the short sale acceptance deadline at 60 days if the buyer will agree, so you are not writing an amendment every two weeks.
The reason the inspection date matters so much: if the inspection happens early and turns up a roof or sewer problem, you now have ammunition for the appraiser. If it happens after approval, you find out about the roof two days after you finally got the golden ticket, and the buyer walks.
Full detail in how to write the listing agreement, MLS remarks, and offer.
The Problems You Will Actually Hit
Solar panels. This is the number one deal killer right now, and it did not exist in the last cycle. You are looking at a $60,000 lien, and the first mortgage will offer about $1,500 toward it. The solar company wants $30,000. Your best path is finding a buyer willing to assume the lease, which shrinks your buyer pool, which is itself an argument to make to the appraiser.
HOA arrears. Colorado is a super lien state, meaning the HOA sits ahead of the first mortgage for six months of dues. FHA pays that six months and nothing more. If someone has not paid HOA in a year and a half, you have a gap. Tell sellers early: if there is any way to keep paying HOA and water, do it, even if the mortgage goes unpaid.
The gap. This is the difference between what the first will allow and what a junior lien holder demands. If the first says $3,000 to the second and the second wants $5,000, you are $2,000 from closing. Do not lose the deal over it. Solve it with small contributions from the buyer, the buyer's agent, you, and adjustments to concessions. Prepare the buyer's agent for this in month one so it is not a surprise at the end.
Value came in too high. Hard to fix, not impossible. Submit your comps from the date of the appraisal, not today's comps. If the inspection found something significant, send contractor bids with the request.
Buyer walks after approval. Relist it, and put "previously approved at" plus the amount in the MLS. Never "approved at," because if the appraisal expires they may order a new one at a different number.
You need an extension. About a 50/50 shot. Push hard on the buyer's lender for clear to close three days before the approval letter deadline. In my experience and in that class, lenders treating a short sale like a normal transaction is the single most common reason these things blow up at the finish line.
The deal killers get their own post here: solar panels, HOA super liens, and closing the gap.
Do You Have to Do All This Yourself?
No. And this is worth knowing.
Short sale negotiators and coordinators do this work alongside you. They handle the bank, the paperwork, the follow up, and the negotiation while you stay in your lane as the listing agent.
Some title companies, including Chicago Title of Colorado, have a short sale coordination fee filed. That means the coordination runs through title fees rather than coming out of your pocket. If you are staring at your first short sale and wondering whether to take it, that is a conversation worth having before you sign the listing agreement, not after.
Frequently Asked Questions
Does a short sale hurt credit as much as a foreclosure?
No. The credit damage comes mostly from the missed payments, not from the short sale itself. Lenders also view a short sale more favorably, because the borrower worked through the process instead of walking away. Timelines for buying again vary by loan type and credit recovery, so send your client to a lender for a real answer.
Can a seller bring money to closing in a short sale?
Generally no. The seller cannot receive money and also cannot appear on the settlement statement bringing money in most programs. Some conventional lenders ask for a cash contribution, and those are usually very negotiable. FHA and VA typically do not.
How long does a short sale take in Colorado?
Plan on several months from listing to closing. An FHA file caught before foreclosure with an Approval to Participate letter in hand can move much faster once an offer arrives, sometimes an approval letter within a week. A file already in foreclosure with multiple lien holders takes considerably longer.
Can a buyer walk away from a short sale before approval?
Yes. Until the bank approves the offer, the buyer can terminate at any time for any reason. The dates on the Colorado short sale addendum do not change that, which is why over communicating with the buyer's agent is the single best tool for keeping a buyer on the property.
Is a deed in lieu better than a short sale?
Usually not for the seller. A deed in lieu is essentially a friendly foreclosure, and it does not reliably come with the deficiency release language that short sale approval letters typically include. It also ends the process early when there may still be months of runway to sell.
Want the Rest of This?
I turned this class into a full series. Start with whichever one hits closest to what you are dealing with right now:
If you want the one page listing appointment question list I pulled out of this class, message me and I will send it over.
Want more tools, tactics, and resources like this? Subscribe to my weekly emails at milehightitleguy.com. I share real estate marketing ideas, AI tools, and exclusive invites to upcoming classes and events across Colorado.
If you want an O and E pulled, the NED list for your farm area, or a conversation about whether a specific file is worth taking, reach out. That is what I am here for.
This content is for general informational and educational purposes only. It reflects my personal opinions and industry experience and is not legal, financial, or tax advice. Real estate laws, title regulations, lender programs, and market conditions change frequently, so verify independently and direct your clients to the appropriate licensed professional before making decisions.
Jerad Larkin The Mile High Title Guy Account Executive, Chicago Title of Colorado 303.630.9430 | Info@MileHighTitleGuy.com milehightitleguy.com
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