Short Sales
A short sale in real estate is not always a pleasant transaction and may not be for everyone. Yet, it is important for homeowners who can no longer afford to keep mortgage payments current, to know there are alternatives to bankruptcy or foreclosure proceedings. A short sale is a viable option, yet not all sellers and not all properties qualify for short sales.
On average, distressed properties make up 36% of today’s market. In my personal business, short sales represent one-third of my Buyers and Sellers. That’s how prominent short sales have become. So, what is a short sale?
A short sale is a situation when the seller (1) owes more money on the loan (and any other liens on the property) than the sale of the property will likely produce on the market and (2) is unable or unwilling to bring money to closing. In a short sale, the lender has not yet foreclosed on the property, which provides a window of opportunity for the homeowner to sell the property in order to at least partially satisfy the amount owed to the lender.
Why Short Sales are Preferable to Foreclosure
Short sales are considered preferable to foreclosures because short sales (1) lessen the impact a foreclosure can have on the surrounding community and (2) won’t damage the distressed owner’s credit as much as a foreclosure. Typically, the homeowner can rebound quicker with a short sale than full foreclosure or bankruptcy.
Short Sale Sellers
If you consider selling a short sale obtain legal advice from a competent real estate attorney and call your accountant to discuss short sale tax ramifications. As a real estate professional, I am not licensed as an attorney or an accountant and cannot provide you this type of advice. There are certain conditions pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, such as: the I.R.S. could consider debt forgiveness as income and there is not guarantee that lenders accepting short sales will not legally pursue a borrower for the difference between the amount owed and the amount paid. This can be called a deficiency judgement.
As a full time real estate professional I work with qualified attorney’s that can provide you the guidance and assistance you need at this challenging time. There will be a packet of information provided to you after your initial consult with the attorney. The packet will be made of requests and forms including, but not limited to: authorization forms, personal information form, financial information, hardship letter, bank statements, power of attorney.
Short Sale Buyers
Buyers pursue short sales to get a good deal. The good deal comes at a price, the price of the buyer’s patience and time. On average, only 6% of all buyers purchased a short sale within the past 12 months. Plus, purchasing a short sale property is not as easy as purchasing a traditional resale home. Although a property is listed with short sale terms, it does not mean the lender will accept your offer even if the seller does accept it.
Also note, the seller does not need to be in default for a lender to consider a short sale. It can be the current value of the market has fallen and the seller may owe more than what the home is worth, so a discounted price may bring the property in line with the market value not below it.
If there are two loans on the property, you could be faced with and additional challenge. The first mortgage lender’s position is protected by the second lender, unless the second lender does not want to foreclose. Example: If a seller owes $200,000 on the first mortgage and $50,000 on the second, offering $200,000 for the home leaves nothing for the second mortgage. The first has to legally provide the second with a minimum amount to gain their cooperation.
Give the Lender Time to Respond
Write an offer contingent upon lender’s acceptance. Provide the lender a time frame in which to respond, allowing you to cancel after the agreed upon time frame. Make it a realistic time, which can be identified through realtor to realtor discussions.
Why Banks Reject Short Sales
Banks demand great documentation from the seller, the attorney, the listing agent prior to approving a short sale. Not only do they require an initial set of documentation, they require updated documentation throughout the process. When a bank rejects an offer it is largely due to an offer price being too low. Banks request appraisals, order BPO’s to justify the purchase price. If the bank believes they can make more money by taking the property through the foreclosure proceedings, the bank will reject the offer.
Additional Short Sale Resource Links:
Article from the Chicago Tribune -When a Short Sale Can be a Plus for Associations