WHAT IS A SHORT SALE IN REAL ESTATE & HOW DOES IT WORK?
Are you a budding real estate investor who is on the hunt for great deals on local homes? If so, you have probably heard about “short sale” homes, although it can take a bit of searching to find one. Let’s take a closer look at real estate short sales to learn how they work and when you might want to take advantage.
WHAT IS A REAL ESTATE SHORT SALE PROCESS?
A real estate short sale takes place when a property owner sells their home for less than they owe on it. This tends to take place in volatile markets where a substantial price increase took place with a rapid price decrease following after. This leaves a home mortgage with a high balance that exceeds the home’s value.
Whatever the case, the homeowner now owns a home with less value than their mortgage balance. The bank may approach their lender about a short sale, or the lender may force it on them. A short sale can take place even if a homeowner is still making their monthly mortgage payment on time, although that is somewhat rare.
A short sale is a real estate solution used to address financial hardship for a homeowner. What happens is that a homeowner, either on their own accord or under pressure from the bank, sells their home for less than they owe on it. This tends to take place in volatile real estate markets where a substantial price increase took place with a rapid price decrease following after.
A homeowner may be able to qualify for a short sale if their hardship is caused by some sort of disasters, such as losing their job, illness, or divorce. Often times banks will make you prove hardship by providing corresponding documentation of the aforementioned circumstances or events.
If the homeowner’s lender agrees to approve the short sale, the lender will allow the homeowner to sell their home for less than they owe on it. The bank then releases the lien on the property, allowing the homeowner to walk away without having to make up the difference between what is owed and what the sale price was.
Short sales are also sometimes used as a legal way of evicting tenants from a home they rent, although this practice is controversial and believed by some to be unethical.
A short sale is a way for people who are unable to pay the remaining balance on their mortgage to sell their home for less than what they owe and avoid foreclosure. The bank agrees because it doesn’t want any more losses than it already has. What the homeowner owes on the mortgage plus closing costs must be equal to the proceeds from the sale.
Typically a homeowner is approved for a short sale if they owe more than their home is worth and have little to no equity. Note that this is not always the case. If someone could afford their house after it sold, then they would just sell it as a regular sale.
WHAT IS THE SHORT SALE PROCESS?
The short sale process often depends on the bank. What is known is that short sales are often more processed than regular foreclosures, because there could be another family eager to buy before the home goes to auction.
A lot of banks will prefer a homeowner who has a steady income and low credit risk to sign up for their own modification program before they consider approving them for a short sale.
From a buyer’s perspective, a short sale is exactly the same as a regular home purchase. What is different, though, is that you have to be extra diligent when looking into whether or not a bank has approved a homeowner for a short sale. Banks may take several months to approve a request for a short sale.
The short sale process is about a borrower having to give up their home because they are in deep financial trouble. What happens is that the borrower’s bank, credit agency, and trustee work together to inform the borrower that their home is going into foreclosure and if they want to avoid the foreclosure process by selling their property then they have to do it on their own. The reason is that the market value of the house is less than what they owe on their mortgage.
If a homeowner has been delinquent on mortgage payments for 90 days or more, the lender is required to approve the sale of the home through a short sale before taking further action.
WHAT HAPPENS IF A HOME OWNER IS APPROVED FOR A FORECLOSURE SHORT SALE?
If you receive bank approval for a short sale, you will need to find new, permanent housing within three months. This deadline is important because you need to be out of the property by the time your bank officially forecloses on it, and you do not want to fall behind in that process.
The short sale transaction will then be completed, and the bank will allow you to move out. You will still owe any money left on your mortgage at the time of the short sale but you are no longer responsible for making future payments. The usual process is that the bank will accept whatever offers you receive in terms of cashback once they agree to a short sale. If you are the only bidder, then you will need to pay the difference in cash. If there are multiple bidders, then it is likely that they will accept one of your offers instead.
This means that the bank now owes you money because they have accepted an offer for more than what you actually owe them. They will be in touch with you on how to collect the balance of funds.
After the homeowner finds a place to live on their own, they are required to sign an affidavit stating that they have no ownership of any real estate for at least two years.
WHAT HAPPENS TO ANY MORE MONEY THAT IS LEFT OVER?
If the home sells for more than what is owed on it, any remaining money must be sent to the bank. The bank must ensure that the mortgage payoff amount has been met.
What happens if your home does not sell for much more than what is owed on it? When this occurs, you will be responsible to pay the difference in the end. What happens if you do not have this money? You may be required to either offer your overpayment as a down payment on another property or pay the difference in cash at closing.
WHAT ARE THE REQUIREMENTS FOR SHORT SALES?
There are three requirements for short sales. The first requirement is that there are no other liens or mortgages on the property. If there are any additional debts against the home, you will have to come up with this money at closing when selling your home. What is another requirement for short sales?
The second requirement is that the borrower must be able to provide proper documentation proving financial hardship. This will include copies of your completed application for Unemployment Benefits, pay stubs showing recent decreases in base pay, and any other information the bank may request to show your hardship. Some banks might even request a hardship letter along with your other documentation.
The third requirement is that the borrower must have a third party with no financial interest in the loan approve your request for a short sale. What this means is that you will need someone with the bank to sign off on your application, giving it their stamp of approval. This person does not need to be able to make up for your financial obligation.
THE DIFFERENCES BETWEEN A SHORT SALE AND FORECLOSURE
After the sale of a home, the borrowers will be responsible for paying back any difference in the outstanding amount and the price at which they sold. What about those who chose to foreclose? They will not need to pay this money as it is automatically forgiven once it becomes known as a foreclosure.
The foreclosure process differs from short sales because, in foreclosure, the owners are essentially giving up their rights to the property rather than working with their lender in order to sell the property for less than what is owed.
Short sales are still a very popular option when it comes to selling homes that are worth less than what is owed to them. What happens is that lenders typically agree to reduce the amount of debt remaining on a mortgage.
WHAT ARE THE PROS OF A SHORT SALE?
Short Sales can be beneficial to homeowners that have defaulted on their mortgage. Homeowners who get approved for a short sale will not have a foreclosure on their credit records and can qualify for another mortgage loan in the future.
Owners of homes that go through foreclosure lose out on any assistance programs available to them after they move out, such as relocation assistance or refinancing. With a short sale, homeowners don’t have to worry about the cumbersome remaining mortgage debt left after foreclosure that can often lead to bankruptcy.
This process will often lead to a mortgage payoff that absolves the homeowner of their debt. A short sale package can ensure that both the seller and buyer
WHAT ARE SOME OF THE CONS ASSOCIATED WITH A SHORT SALE?
After a short sale, homeowners will not be eligible for USDA Rural Housing Loans or FHA Loans and this could pose a problem in efforts to search for future housing.
Some lenders may use the short sale as a way to recover the money they lost through their mortgage payments, which can lead to wage garnishment by bill collectors looking to recoup their losses. It is important to make sure that a short sale is the right real estate solution for you.
STICK WITH REAL ESTATE AGENTS AND OTHER PROS WHEN BUYING A SHORT SALE
Without question, if you are considering buying a short-sale home you will want to work with an experienced real estate agent. Short sales take place due to a variety of circumstances, few of which are positive. You will want a real estate agent or professional who knows the ins and outs of the short sale process and will protect your interests. They can also help you understand what happens with the outstanding debt on the property.
Real estate agents can also help in other ways. They can be particularly helpful when it comes to negotiating with the lender and especially if you’re looking at a short sale that’s owned by an individual or small bank, they may not have staff who focus on selling foreclosures. Dealing with foreclosure situations is more of a specialty than general real estate business so working with an experienced real estate agent is crucial.
HOW TO FIND A REAL ESTATE AGENT WITH SHORT SALE EXPERIENCE?
One way to tell if the agent you want to work with is experienced with short sales is by asking. What they do know may surprise you. They know all about how lenders value properties, their offering prices, and what kind of response they get from other agents on property values.
The National Association of Realtors offers courses on short sales.
WHERE CAN I FIND A LIST OF SHORT SALES NEAR ME?
Your real estate agent can also provide you with a list of short sales in your area. Most are listed by the MLS, which stands for Multiple Listing Service. It is open to all licensed brokers and will provide you with up-to-date information pertaining to your search. What’s more, using an experienced agent will assure that all offers are made to the seller in a timely manner.
WHAT ARE THE BENEFITS OF BUYING A SHORT SALE PROPERTY?
The biggest benefit of buying a short sale home is that you can often negotiate significant savings by convincing the seller to accept an offer lower than what they are asking. What’s more, many short sales never make it to the housing market, so there’s a chance that you could find a real deal on a home that you can move into in short order. What’s more, if the loan amount is greater than what the house is worth, you may not need to bring any more money to closing.
Another benefit of buying a short sale home is that it often takes much longer for these homes to sell because sometimes they are in need of repairs or above market value. A short sale buyer should have a plan in place for repairs and have the time to wait until the seller is ready to accept their offer.
Real estate experts also advise a potential short sale buyer to provide a written letter to sellers laying out their case for being approved for the sale even though they cannot afford it. What’s more, you should do what you can to prove
TIPS FOR BUYING SHORT SALES
Sellers may be motivated to accept lower offers because of the hardship they are experiencing. The more motivated they are, the better your chances of getting an attractive price. Be ready to negotiate the best price possible.
Another tip is to get your financing in place before you offer. You will probably need to complete an application with the bank that holds the mortgage on the property, which you can do online or by phone, and get proof of funds for down payment costs if required.
Doing research ahead of time will also help. There are many websites devoted to short sale properties so. be sure to do explore the web for various short sale properties.
HOW TO DETERMINE IF A SHORT SALE IS RIGHT FOR YOU
If you are on a tight timeline to find a home, have less than perfect credit, are looking for more of a bargain or all of the above, then you may want to consider buying a short sale property. On the other hand, if you want to learn more about whether a short sale is right for you, you may want to work with a real estate agent and/or bank depending on your circumstance and position.
If you want to buy a short sale, it is important to determine if one would be right for your situation ahead of time. This way you can save yourself the headache and trouble of doing this process without adequate knowledge.
SHORT SALE STRATEGIES FOR POTENTIAL BUYERS AND INVESTORS
If you’re buying a short sale, or investing in one for your portfolio, or are thinking about it–there are several strategies that you should implement to increase the chances of success. It is important to note that they both require patience, but most importantly – knowledge. Not only do you need to learn about what kind of property
Some short sale strategies are:
- Start off by finding a property manager who specializes in short sales and has experience with the process. It is important that you find someone who has been involved with them before because when it really comes down to it when dealing with a bank or lender. You don’t want someone who is learning as they go.
- Understand the housing market. What areas are hot? What aren’t? What have been short sale properties that have sold in the neighborhood recently and what were they listed for prior to selling? What type of buyer is looking in your area–what short sale price point do they seem to be targeting?
MISTAKES TO AVOID WHEN BUYING A SHORT SALE HOME
When deciding to buy a house that is currently up for sale, buyers should do research about the property and take precautions during the closing process.
Unfortunately, there is no shortage of stories about short sale buyers who made a poor decision when trying to score an amazing deal. First, make sure all possible research has been done on the home you are looking at and its title history; this will ensure that any liens or other issues with your potential property won’t come back later as surprises down the line.
A thorough inspection can also protect against hidden structural damage which may lead one into thinking they’re buying something worth more than what’s actually available for the purchase price! Finally, remember: time IS crucial during these processes- don’t leave anything important until the last minute because things could slip through without enough consideration put towards them being finalized by others involved.
DOES SHORT SELLING OCCUR IN AN ADVANCING MARKET OR A RISING MARKET?
Short sales occur when the market is in decline and the property is worth less than what was already paid for it. What can be quite complicated about a short sale- or any other type of financial agreement, really- is that there are so many moving parts which need to keep up with one another in order to work properly! It’s easy to see why this process may be a bit nuanced as a whole.
SHORT SALE ALTERNATIVES
What are some short sale alternatives? The short sale alternatives (or options, such as they are) the bank will offer to borrowers who cannot make their mortgage payments and want out of their home is either a deed-in-lieu or a foreclosure. The former often goes hand-in-hand with a short sale; however, both of these terms essentially mean that the borrower is relinquishing the property and walking away from unpaid mortgage debt.
A FINAL WORD ON SHORT SALES
A short sale is a transaction in which the mortgage lender agrees to accept less than what they are owed from an individual or institution that owes them money. In exchange, the debtor gives up their ownership of property valued at more than the debt and any equity built upon it. This means you can purchase a home with enough cash upfront without having to wait for your loan approval process to move forward so long as you have some funds saved up outside of this deal.
As you can see, short sales have their pros and cons. If you are the one selling the home, you have likely been forced into a short sale due to your circumstances. If you are the one buying the home, you may be able to swing a great deal on it. Again, due to the circumstances short sales may or may not be right for you. Regardless, understanding how short sales work is a good idea.