A “short sale” happens when a seller negotiates with a lender to sell their house for less than is owed on the mortgage as payment in full of the debt owed. It is an alternative to foreclosure or bankruptcy proceedings for owners who can no longer afford to keep mortgage payments current. Because by definition a short sale means the lender is accepting less than what is due on the loan, not all lenders will accept short sales or discounted payoffs. Furthermore, not all sellers nor properties qualify for short sales.
So how do they work? If you’re a seller thinking you can’t make your payments or you’re a buyer considering purchasing a home through a short sale, you should know about the process before proceeding. There are benefits and drawbacks for both sides of the equation. That isn’t to say that a short sale isn’t a possible solution to a sticky mortgage situation or that a home buyer can’t get a discount on a home that might otherwise be priced out of range. Here is a general idea of what happens through the course of short sale proceedings.
Pursuing a short sale is usually a last resort to stay out of foreclosure
. A homeowner first falls behind on payments, knows that they will be unable to make their next payment, or must move but can't sell the house for what they owe on it (this last scenario has been happening more and more lately as real estate values drop). At any rate, foreclosure proceedings haven’t started but one is looming. A short sale could be the solution. As I said before, not all properties or people qualify. When they do, a financial hardship that will cause mortgage payments to be missed must be proven before anything happens.
The next step is for them to call for help. The seller must discuss the situation with the mortgage company as soon as he or she knows they can't make a payment or soon won't be able to. Talking and being open with a mortgage company during times of financial difficulty is very important because “it never hurts to try.” Although all lenders have varying requirements, the seller will basically have to explain to his or her lender why they should approve the short sale and will have to disclose an accounting of assets, income and liabilities. The borrower will submit a wide array of documentation before they will consider it. However, lenders do have an interest in considering a short sale if it is possible for them to avoid the expensive and lengthy process of foreclosing on a property. It can cost upwards of $50,000!
So the lender now has considered all of the financial facts and if a buyer is found, for the right price the short sale will proceed. If they haven’t already been heavily advertising their home is for sale, now is the time when a flurry of marketing occurs. The seller must offer full disclosure, though. Sellers must notify buyers as quickly as possible that a home is a short sale listing. Some MLSs have places in the listing report where agents can indicate a home is a short sale.
Now be prepared to wait. Even if you have a buyer right away, it’s not uncommon for this process to take 40 to 80 days. This is part of the reason why full disclosure is necessary: buyers decide whether they're willing to wait for bank approval.
This is where the buyer steps in. First and foremost, if you’re a buyer looking at a short sale, seriously consider hiring a buyer's agent to represent you. Buying a home in general is a complicated process already and short sale can be even more-so. The seller has representation in the listing agent, so why shouldn’t you? They can also help you to make a reasonable offer.
Buyers must be prepared to buy a property that is being sold as-is and with no credits for repairs or fix-up. The bank or lender won't approve the sale if it is too far below the market value of the house. They’re sure to do their own broker price appraisal before accepting or countering an offer.
Since short sale properties are usually sold as-is, buyers should make their offers contingent on the outcome of an independent home inspection. Sellers are required by law to disclose material defects of which they are aware. Obviously, 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.
Buyers on a short sale should also 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.
There are benefits and pitfalls for both the sellers and the buyers 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 time frame 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. For buyers, short sale homes are often a better idea than purchasing a foreclosure property, as when a home stands empty without inhabitants or maintenance, a whole host of natural and man-made issues can arise that will require costly repairs.