Short Sale according to Investopedia: any sale of real estate that generates proceeds that are less than the amount owed on the property. A real estate short sale occurs when the lender and borrower decide that selling the property and absorbing a moderate loss is preferable to having the borrower default on the loan. It is therefore an alternative to foreclosure. To break it down, say you’re selling your home; however, the offer you get is so low, it won’t cover the total amount you owe on your mortgage. But you need to unload it, so you’ll take it. Simply put it this way, you end up “short” on paying back your lender, and the bank agrees to accept less than what’s owed on the loan.
The most recent data from real estate information company RealtyTrac shows that 5.1% of all single-family home and condo sales in early 2016 were short sales. Homeowners are pushed into a short sale by personal financial troubles which make it impossible for them to pay their monthly mortgage. One of the possible reason is that they find it hard to sell at a price that would enable them to pay off their loan – especially if local real estate market trends have driven down their home’s value. Lots of these sale happened in many communities across the nation during the housing bust of 2008.
Many experts argue it’s smarter than pursuing more drastic measures like bankruptcy or foreclosure. Here are some benefits of a short sale for a distressed home seller:
- Short sales do way less damage to a homeowner’s credit report and credit score than a foreclosure. This means they’ll be in better shape to apply for a mortgage and buy a new home down the road.
- Homeowners have the dignity of being able to sell their own home. This is no small thing.
- Short sales enable homeowners to stay in the home until the sale is completed. Foreclosures force homeowners to vacate.
- While a seller typically pays all real estate agent commissions and other closing costs, in a short sale the seller pays nothing; the bank foots the bill.
How to make it happen
It’s just like any other home sale:
- Contact a Realtor® (ideally one who specializes in short sales)
- List your home (mentioning it’s a “short sale/subject to lender”)
- Wait for offers to come in
But take note that once you accept an offer, things get tricky. You’ll need to get your bank’s approval/blessing – and since lenders lose money with short sales, they’re too picky and rarely eager to hop on board.
According to Marlene Waterhouse, a Realtor and the owner of Short Sale Solutions, “Some banks may even prefer to foreclose, since they not only assume ownership of the property but may receive bailout money from the homeowner’s mortgage insurance policy.” Some still prefer having a short sale, since owning and selling property are hassles it may prefer to avoid.
Banks will require you to submit some paperwork to assess whether to approve your short sale, including your offer letter as well as a “hardship letter” that has an explanation why you can no longer make your mortgage payments, along with financial documents such as income statements or medical bills to back that up. From this point on, they will most likely have your home appraised to determine if the offer you’ve received is fair enough. If it is, they may allow the deal to go through, although they may have some other demands.
Advantages of Buying a Short Sale
- Get a great deal
- Get a great mortgage rate
- Get through the process with ease (if you have an experienced real estate agent)
Disadvantages of Buying a Short Sale
- Long process
- Homes are sold “as-is”
- The seller can make changes that affect you (like stop making mortgage payments forcing the home into foreclosure)
- Risk of getting your offer rejected by the lender
A traditional sale takes 30 to 45 days to close after the offer is accepted. A short sale typically takes 90 to 120 days, or even longer. The reason for these holdups is that the lenders – which are stuck paying for closing costs that a seller would typically cover – will often counter with their own demands in an effort to raise their bottom line. There are some but’s and what if’s during the negotiation. Some buyers go ahead and negotiate, or some walk away if not satisfied with the terms of the deal. Ultimately, it’s really up to you to decide whether it’s worth it to absorb these extra costs. If you can’t decide by yourself, you can always ask your Realtor® to help you crunch the numbers.
Here are the 10 steps to buying a Short Sale according to MSN Real Estate site:
- Identify potential short sales.
- Do a quick inspection of the property.
- Research home values in the area.
- Find all liens and mortgages.
- Figure out the financing.
- Contact the lender through an experienced real estate agent.
- Complete the lender’s short sale application.
- Assemble the proposal.
- Seal the deal.
Bottom line here is; Short Sales can be a feasible solution for some. Done right, sellers, buyers, and the bank can all walk away happy.
Source: Realtor.com, RealtyTrac.com, quickenloans.com, realestate.msn.com
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