Short selling isn’t a new phenomenon in the stock market, although, its current form in the real estate market is relatively new. Whether you’ve been advised to steer clear of short sales, or you think they’re great, everyone agrees on one thing – a short sale is an extremely convoluted and time-consuming process.
Depending on your perspective – as a buyer or seller – short sales can be a great opportunity if executed properly. Let’s examine the intricacies surrounding short sales so you better understand the process, both from a seller’s and buyer’s point of view.
Definition
A short sale in real estate is when a lender allows a financially distressed homeowner to sell their property for an amount less than what is due on the mortgage. An example is if a person is selling their home for $200,000 when $250,000 is remaining on the mortgage. The difference of $50,000 is referred to as the ‘deficiency.’
In a successful short sale process, the lender usually agrees to release the lien on the property in exchange for a loan payoff from the sales proceedings. The lender may either forgive the deficiency or get a ‘deficiency judgment’ against the borrower, requiring them to pay it off at a later time. In some states, the deficiency must be legally forgiven in a short sale.
The Short Sales Process.
In a typical short-sale scenario, a home seller puts his or her property on the market. However, the property for sale is formally designated as a potential ‘short sale’ deal to potential buyers.
After a buyer agrees to the short-sale offer, the homeowner completes an application for short-sale status and submits it to the bank. Other documents including a hardship letter to show why you cannot fully repay the mortgage loan, along with tax returns and other information that will help you make a strong case for a short-sale are also submitted.
This is because before a short sale is initiated, the lender must sign off on the process. If the lender approves your application, an appraiser is sent to estimate the full value of your property against the short-sale offer. Based on the findings, the short-sale request is either accepted or rejected.
Banks typically do not approve short-sales if they believe more money can be made from a foreclosure.
Short Sale from a Home Seller’s Perspective
Before opting for a short sale, it is important for you to thoroughly examine all other available options. Talk to your lender to see if there’s a possibility for a revised payment plan or loan modification. Do you have private mortgage insurance (PMI)? If you purchased your home for less than 20 percent down, you most likely have one. See if your PMI company can help you advance funds to your lender to bring you up-to-date. You’ll eventually pay back later.
Benefits
Good for your credit score
When compared to a foreclosure, a short sale is highly preferable from a credit score point of view. In a foreclosure, the bank takes ownership of the home after the buyer is unable to make payments. When this happens, it damages your reputation as a credible debtor.
Many lending firms give much lower credit scores in the event of foreclosure compared to a short sale, effectively kicking you out of the game. In many instances after a foreclosure, you have to wait for a whopping seven years before you can secure another mortgage loan, compared to two if it’s a short sale.
Emotional Freedom
For many people, a home mortgage is usually the greatest financial investment in their lives. If you get into a financial crisis, short selling is a great way to avoid foreclosure, lift the mortgage payment burden off your shoulders, and get on with your life.
No additional cost
All fees associated with the sale of the house, including real estate agent commissions, legal works, and so on are covered by the bank.
Downsides
Dependent on the Lender
As we’ve highlighted, a short sale cannot be initiated without the full approval of the lender. So, the ultimate fate of your request doesn’t lie in your hands. The best you can do is submit a convincing application as to why a short sale is the best option and hope for the best.
No payout
When you short sell, you receive nothing from the profits. That means for your next home purchase, you have to come up with the entire down payment for your mortgage from scratch.
Short Sale from a Buyer’s Perspective
From a buyer’s point of view, a short sale presents many opportunities as well as drawbacks.
Benefits
Cheaper Price
When a house is listed on short sale mode, you know the homeowners are back on their payments. And from the lender’s perspective, a short sale is an opportunity to escape from the losses of the home loan. You can use this heightened motivation to sell to negotiate a deal that is below the traditional home sale price.
Furthermore, many people, especially first-time buyers are usually wary of a short sale due to the complexities involved. Lower demand means lesser competition for the home and that may translate to a reduced price.
However, you have to navigate the waters carefully as lenders are also looking to maximize their returns. Therefore, ensure you do your research properly by inspecting the home and comparing it with the prices of similar houses in the neighborhood to get the best deal.
Downsides
Time Wasted
Traditional home sales processes usually take less than 45 days to complete. On the other hand, the paperwork associated with short sales typically takes about 120 days, sometimes taking up to a year to finalize. Therefore, you have to be patient.
Buying Complexity
As a buyer, your first point of contact is the home seller. However, whatever short sale offer you agree upon isn’t final. The lender then evaluates the home value and may request for a higher sales price to recoup more on the home loan.
Responsibility for Repairs
In short sales, the buyer is responsible for all repairs the home may require. That’s why it is crucial to consult with a well-experienced real estate agent in a short-sale process. He or she will guide you in accurately evaluating the value of the home.
Moreover, hire a professional inspector to examine the property so you know the extent of repairs and maintenance required and if it’s something you can cope with before you pull the trigger.
Conclusion
Short sales present a perfect opportunity for homeowners to pay their mortgage in full. For buyers, it’s a great opportunity to make property purchases at a reduced price. However, to tap into its benefit, you have to carefully navigate the complex landscape of the short sale process. Let us help simplify the process for you – contact us HERE today.
