What Exactly is Involved in a Short Sale?

NOVEMBER 18, 2016

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The opportunity to get a great deal on a property through a short sale is very real. However, many times there’s no money to be saved in this type of real estate transaction, and the process can be a lot more complicated that your average contract.

Before you go out looking for short sales in an effort to get a deal on a home, there are a few things you should know about this unique scenario, and as always, be sure to team up with an experienced real estate agent to help you navigate these potentially murky waters.

What is a Short Sale?

Many people may confuse short sales with foreclosures, but they’re not the same thing. A foreclosure occurs when the lender takes possession of a home after the homeowner fails to make the mortgage payments. It’s essentially the last option for the lender who takes the home as collateral on the mortgage.

A short sale is arranged before the home goes into foreclosure when the lender and borrower both agree that this option is better than completely defaulting on the mortgage and entering foreclosure. When real estate prices either stagnate or even decline, and homeowners in these markets are unable to keep up with their mortgage payments, they may enter into a short sale.

With this type of arrangement, the net proceeds from the sale of the home will won’t entirely cover the amount that the homeowner still owes on the mortgage, but a sale can take place anyway. If the lender agrees to a short sale, the homeowner can sell the property and pay off part or all of the home loan balance with the net proceeds, depending on how much was still left to be paid back to the lender.

Short sales can be complicated and can take months to complete. Not only that, not every lender will necessarily agree to a short sale.

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The Process

Before a mortgage company considers a shorts sale, the homeowner needs to be having a hard time keeping up with the mortgage and is already in default. The lender needs to be advised of this financial distress or else the foreclosure process will start once the mortgage is in default.

A hardship letter will need to be submitted to the lender which specifies why such financial hardship has occurred, such as an illness or the loss of a job. Proof of income and assets will also need to be provided, including bank statements, investments, or other real estate.

Before the home is listed as a short sale, local real estate sales prices in the area that the home is located in will need to be verified. After a buyer is found, the seller will have to supply a copy of the listing agreement and purchase agreement to the lender. A short sale is only approved after all parties – including the buyer, seller, and lender – agree on all the terms of the contract.

What’s in it For the Buyer?

Obviously, a short sale can be beneficial for the seller because it helps to avoid full foreclosure on a credit report. Even lenders can benefit from a short sale transaction by recouping more of what the borrower owed on the home through a short sale compared to foreclosure, the latter of which tends to be more time-consuming and riddled with liabilities since many foreclosures often come with delinquent taxes, code violations, and problematic titles. Lenders more often would prefer to just write off the amount that the borrower owed on the mortgage as opposed to foreclosing.

But there’s obviously a potential benefit to the buyer as well: getting a home at a reduced price. If the lender is eager to go through with the short sale in order to get back the money loaned out, there may also be a chance of getting favorable financing terms.

Taking over possession of a property sold through a short sale is much easier compared to a foreclosure. You’ll have the seller’s cooperation with the short sale process, but that’s not necessarily the case with a foreclosure.

However, the property will likely have a fair share of problems and will have a lot of hurdles to overcome in order to make the deal happen. After finding a property and viewing it, you will need to do some in-depth research on it and find out about all the liens that may be on title and how much was left to pay on the mortgage. The lender will then require a detailed short sale application to be completed and submitted, and a proposal will need to be put together.

This all comes after the seller has submitted the necessary documents and information in order to convince the lender to go through with the short sale. If the seller makes it difficult to provide this information, the short sale won’t go through. Your real estate agent should push for full honesty from the seller’s agent before spending any more time on a particular property.

The Bottom Line

No matter how you find out about a potential short sale, this is a process that absolutely warrants the assistance of an experienced real estate professional. There’s definitely the potential to realize a sizable discount on the final price of a short sale, but you absolutely need to consult with an expert who comes into the game with a solid track record with short sales.  Call us today if we can help.

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