Five years ago I had never heard the term ‘short sale’, now I hear it almost every day. Even if you own
your home free and clear knowing what a short sale is and how it works will keep you up to date in today’s real estate market. Currently of the roughly 50 million households in the U.S. 2.5 million are in foreclosure and 7.2 are delinquent. A related number which encompasses many of these households are the 11 million homeowners (Corelogic) who owe more than what their home is worth. In order for these people to sell their house and move on they either have to come to the closing with money or negotiate with the bank who hold the mortgage.
The Basics: Wikipedia.com definition – A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.
Owners Perspective: These would be sellers are stuck. They would like to (need to) sell but for any number of reasons (bought for too much, negative amortizing loans, second loans, etc.) they cannot find a price a buyer will pay for the home and pay off the existing loans and the closing costs. Convincing the lender is not an easy job. First of all there must be a compelling hardship where the seller absolutely cannot keep up the payments nor come up with cash to close. Once all of the documentation is complete a package including the sales contract signed by buyer and seller is sent to the bank for approval. This is the tough part, it takes patience. It can take up to 5 or 6 months but usually no fewer than 8 weeks to get an answer from the bank. If the short sale is approved, the sale goes through at a lower amount the sellers credit is hurt (although not as bad as a foreclosure) and the bank still has the right to claim and try to collect a deficiency.
Buyers Perspective: Short sales provide a unique value opportunity. Many times banks approve a price which is a great deal for the buyer. The main downside for a buyer is the uncertainty. The bank has the right to accept other offers so even if you were the first offer in to the bank, by the time they get around to reviewing it there may be multiple offers. It might take two or more months to figure out that the bank will not approve the list price of the house. Buying a short sale is not for someone who has a certain date in mind or is not willing to be patient while the weeks tick by without any word. There is no countdown, there are no numbers. You hear when you hear and the news is not always what you had hoped for. For the right buyer it is a good opportunity but it is certainly not for everyone.
