A Detailed Guide To Short Sale Homes
A Detailed Guide To Short Sale Homes
Whether the type of market is a “Seller’s Market” a “Buyer’s Market” or anything in between, home buyers will sometimes look for out-of-the-box opportunities when it comes to buying a home.
One form of out-of-the-box opportunity come by the way of “short sales.”
In this blog, you will learn what a short sale consists of, how to approach them, the pros, cons, and important points regarding them.
By the end, you’ll also gain an idea as to whether or not a short sale opportunity is the right one for you.
What Is A Short Sale
Simple Question – Not So Simple Answer
A Short Sale is a property being sold for less than the debt(s) against it, “forcing” the entities who have debts against the home (e.g., bank mortgage, home equity loan, mechanics lien, etc.) to potentially accept only a portion of what they are owed.
This can oftentimes occur when the homeowner(s) are not capable of keeping up with their mortgage payments or perhaps were part of a lawsuit that resulted in a lien against the property, perhaps the homeowner has a home equity loan and mortgage, when combined, exceeds the property value, or any other recorded debt against the property which would put the property into a “net negative” valuation.
For the sake of this blog post and for simplicity sake, we will assume that there is only one debt against the property, the mortgage bank (“LENDER”).
What Is The Homeowner's Role In A Short Sale?
The Homeowner And The Debt(s)
The homeowner has some responsibilities to the lender in regards to establishing a short sale situation:
- The homeowner should be prepared to prove their financial hardship to the institution(s) who have interest in the home, for example: Job Loss, Medical Expenses, Other Economic Difficulties.
- They need to get the lender’s approval to sell the home for less than what’s owed. (THIS is normally a lengthy process!)
- The homeowner may still be responsible for the remaining debt after the sale (though some lenders may forgive this debt).
It’s even more important that the homeowner be selective of the real estate agent and attorney used for this type of transaction. Though many attorneys are straightforward as to whether they are skilled at this type of transaction, real estate agents oftentimes are not.
Beyond that, there are still some additional considerations for a homeowner who is looking to explore a short sale:
- Credit Impact: There will likely be damage done to a homeowner who sells through a short sale process
- Taxes & Legal: In some cases, the forgiven debt (the difference between the mortgage balance and the sale price) could be considered taxable income by the IRS.
- Homeowners considering a short sale should consult a tax advisor and a real estate attorney to understand all legal and financial implications.
What is The Lender's Role In A Short Sale?
The Lender(s) Are The Key To The Transaction
The lender has the responsibility to ultimately decide on the final price the home can sell for, its terms, and whether or not they will actually approve the sale to begin with.
As mentioned earlier, the problem with short sales is that the lender is fully aware that they are taking a loss, and no one likes taking a loss. It’s up to the lender to do what they feel they can do to minimize the loss as best as possible, should a home sale be the agreeable option for the homeowner and the lender, together.
- The Lender has to agree to the short sale because they will receive less than the full mortgage balance, however, they know this may be better than a foreclosure process.
- The lender typically orders an appraisal or a BPO (Broker Price Opinion) to determine the current market value of the home to determine if a short sale makes sense for them.
The lender has to agree to the process and do a valuation of the property to protect itself during this type of transaction. The lender has to look out for its best interests and takes these measures to do so.
Pros, Cons, And Important Short Sale Points
The Important Elements Of The Short Sale
For those who are interested in the idea of a short sale, this summary of the pros, cons, and important points is a worthwhile read, so let’s jump right into it.
PROS:
- May create a “discount opportunity” for buyers.
- The long length of the process may deter buyer competition.
- Short Sale properties are sometimes stigmatized as “bad homes,” similar to foreclosures, removing some buyer competition.
CONS:
- Many listing agents are not experienced at Short Sales, creating unnecessary delays, or even a cancellation of sale.
- Your down payment money will be held in escrow for longer than a traditional sale.
- The Homeowner might accept an offer, but the lender may reject the offer well after.
- The Homeowner may accidentally miss steps of the process, creating problems.
- Bank appraisal may cause initial offer to be rejected well after it was made.
- Lender may abruptly reduce or cancel commissions to agents, causing buyers to potentially be responsible.
- The overall process may take up to a year or longer to complete.
- The risk of a short sale being cancelled due to economic recovery or other outside influence.
- There may be more than one lien against the property in addition to the lender, causing delays and additional parties to consider offer acceptance.
Important Points:
- Real Estate listing agents may advertise a listing price that isn’t “bank approved.”
- Lenders may require more than a low down payment.
- Homeowner’s economic problems may result in the property not being maintained.
- If property taxes haven’t been paid, it may cause further delays or issues.
All in all, short sales are intended for the patient and for those individuals who don’t mind their down payment monies be held for long periods of time.
Make sure to expect the unexpected and know that you may in for “the long haul” with these types of homes.
One of the biggest factors of these sales are the real estate agents, moreso the listing agent. If the listing agent has experience and is performing as they’re supposed to, then some crucial delays may be avoided.
