Short Sales Explained
There has been a lot of talk these days about “short sales.” As these types of sales used to be more uncommon, they are a growing trend. Not everyone knows what a short sale is, though!
A “short sale” is what happens when a seller negotiates with their lender to sell a home for less than the debt owed on the mortgage. Short sales are an alternative to foreclosure or bankruptcy proceedings for owners who can no longer keep their mortgage payments current. Because it means the lender is accepting less than what is due, not all of them will be so keen to allow short sales or discounted payoffs. Furthermore, not all sellers or properties qualify for short sales.
If you’re a seller that can’t make your next payment or you’re a buyer thinking of purchasing a home through a short sale, know about the process before you do anything else. There are benefits and drawbacks for both sides of the transaction. That isn’t to say that a short sale isn’t a potential solution to a sticky mortgage situation or that a home buyer can’t get a deal on a home. Here is a general overview of what happens through the course of short sale proceedings.
A short sale is usually a last resort for home owners to stay out of foreclosure. The homeowner has fallen behind on payments, will be unable to make their next payment, or can't sell the house for what they owe on it, which has been happening more and more lately. Foreclosure proceedings haven’t started but it is looming. In this case, a short sale could be the solution if the property or borrower qualifies. To qualify, a financial hardship must be proven before anything happens.
The next step is for the homeowner, now the potential seller, to call for help. The seller must discuss the situation with the mortgage company as soon as it is known they can't make a payment. Talking openly with a mortgage company during times of financial difficulty is very important because they would rather have someone paying the mortgage than foreclose on the home. Although lenders have different requirements, the seller will have to explain to his or her lender why they should approve the short sale and will have to disclose their assets, income and liabilities. The borrower will submit a quite a bit of documentation before the short sale will be considered. Nevertheless, lenders do have an interest in considering a short sale if it helps them avoid the expensive and lengthy process of foreclosing on real estate.
After the lender has considered all of the financial facts and if a buyer is found, the short sale will proceed as long as the price is right. The home is usually heavily marketed in whatever ways are possible. The seller must offer full disclosure, though. Sellers must tell buyers without delay that a property is a short sale listing. Some MLSs have places in the listing report where agents can indicate a home is a short sale.
This is when the waiting game begins. Even if a buyer is found immediately, the approval process can take 40 to 80 days. Buyers need to decide beforehand whether they're willing to wait for bank approval.
If you’re a buyer looking at a short sale, seriously consider hiring a buyer's agent to represent you. The seller has a listing agent looking out for their best interests, so buyers should as well. Buying is generally a complicated process and short sale can be even more complex.
Buyers must be ready to buy a home being sold as-is, with no credits for repairs or improvements. Clearly, if a seller hasn’t had the money to make mortgage payments, odds are that maintenance has been pushed off. Owners have no incentive make improvements to the house anyway because they'll make nothing on the sale. Though sellers, by law, are required to disclose material defects of which they have knowledge buyers should still make their offers contingent on the outcome of an independent home inspection.
Buyers on a short sale should make their offer contingent upon the lender's acceptance. Give the lender a time frame in which to respond, after which, you will be free to cancel. This doesn’t guarantee action, however, if the lender is under no pressure to make a decision. The bank or lender won't approve the sale it the offer it receives is too far below the market value of the property. They’ll do their own broker price appraisal before accepting or countering an offer.
For both sellers and buyers, there are benefits and pitfalls when it comes to a short sale vs. foreclosure.
For the seller, both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit, whether it’s a foreclosure or a short sale. However, the waiting period to buy another home following these events is very different. Someone who has gone through a foreclosure will have to wait 24 to 72 months before a lender will offer them a decent interest rate. For those who have a short sale on their financial record, the timeframe is more in the ballpark of 24 to 36 months if they have been diligent about rebuilding their credit.
When it comes to short sales, you want to be the buyer, obviously. They have the most to gain from this transaction, as the buyer will likely purchase the property at or a bit below market value. This has a two-fold effect of lowering its future taxation by the tax assessor and the buyer’s mortgage payment is reduced because the loan is less. A drawback, however, is the buyer can often feel in limbo, waiting for an answer that could very well be no. Often this can be because the bank took to long to answer or countered with to high of a price. Then there are always other buyers in pursuit of a deal placing a higher bid. Short sale homes can be an even better deal compared to buying foreclosure homes, as when a house stands empty without occupant s or upkeep, a whole host of natural (water leakage) and man-made (stolen copper piping) issues can arise that will require costly repairs.