What Is a Short Sale? Guide To The Short Sale Process

What is a short sale

Short sales were popular from 2008 to 2012, but they are now uncommon in today’s thriving real estate market. Nonetheless, short sales may return to the home buying market. A short sale can result in a terrific deal on a house, but it usually requires a lot of grit and patience, as well as a lot of luck. Here’s a guide through the short sale process and mortgage in the real estate industry.

What is a Short Sale?

A short sale, also known as a pre-foreclosure sale, occurs when you sell your home for less than the amount owed on your mortgage. If your mortgage servicer agrees to a short sale, you can sell your house and use the money to pay off a portion of your mortgage balance. You may be needed to make a financial contribution toward the balance depending on your circumstances, but after the short sale is completed, you will be relieved of your obligation to pay any remaining balance—this is known as a “deficiency waiver.”

How Does a Short Sale Work

You won’t be able to just buy a house for a low price with a short sale. Here’s a primer on purchasing a short-sale home:

  • The lender must concur: The lender must first agree to the short sale. In the case of a typical home sale, the earnings would be used to pay down the initial loan. In a short sale, the home sells for less than the seller owes, therefore the lender does not receive the whole amount of money. As a result, the sale must be approved by the original lender.
  • The vendor must demonstrate that they have no other choice: The vendor must demonstrate some kind of hardship. If they can demonstrate that they will be unable to continue making mortgage payments and will eventually default, the lender is more likely to comply, particularly if the lender does not want to go through the foreclosure process and then sell the home on their own.
  • The price of a residence must be in line with the market’s worth: In many circumstances, short sales are completed because the market is in decline and the home’s value has fallen proportionately. The price paid by the buyer must usually be market value.
  • Short sales must be reported: Finally, if a home is listed for less than the amount owed on the mortgage, the difference must be mentioned upfront. Potential buyers should be aware that the home’s sale price is less than the mortgage balance, so they will have to negotiate with a lender in addition to dealing with the seller.

How Long Does It Take to Complete a Short Sale Process?

A short sale can be completed in a matter of weeks or months. Short sales take longer to complete since they are more complicated deals. Furthermore, the original lender must analyze the short sale offer to see whether it will be accepted. If the lender believes that continuing through the foreclosure process will net them more money, they may reject the short sale arrangement.

Working with a real estate agent who has experience with short-sale transactions might help you save time. A short sale is one type of real estate transaction in which you should seek the assistance of an expert agent or attorney. Because not all real estate brokers are qualified to manage a short sale, make sure you talk with one that has particular training and a proven track record. Having a real estate agent on your side who understands all about a short sale and has negotiated with others will improve your chances of closing the deal.

Steps to Buying a House Through a Short Sale Process

According to Bobbi Dempsey, co-author of “The Complete Idiot’s Guide to Buying Foreclosures,” a typical short sale process entails a series of stages, often in this order.

  1. Locate prospective short sales.
  2. Examine the property.
  3. Conduct your research.
  4. Locate all liens and mortgages.
  5. Determine the funding
  6. Make contact with the lender.
  7. Fill out the lender’s short sale application if one is required.
  8. Compile the proposal.
  9. Terms should be negotiated.
  10. Complete the transaction

Step #1: Locate prospective short sales.

Check online listings, courthouse listings, and legal ads, or utilize an experienced buyer’s agent to find pre-foreclosures in your region.

First, figure out how much is owed on the house in relation to its estimated value. If it appears to be high, it is an excellent choice since it implies that the seller may have difficulty selling it for enough to cover the loan. Pass on homes where the owner has a lot of equity in the home; the lender will most likely prefer to foreclose and resell at a lower price.

Step #2: Go over the property.

Assess its condition and provide an approximate estimate of how much it will cost to repair or upgrade. Many “regular” customers will not consider it if it needs work, which is beneficial for you.

Step #3: Conduct your research.

How much is the property worth? What is the possible profit? You’ll want to benefit from the sale if you’re an investor or even a homeowner who plans to reside in the home for a short period of time.

Step #4: Locate any liens or mortgages.

Inquire with the seller or the agent about the liens on the property and which lender is the primary lien holder. Before closing the sale, confirm this information with a title search to ensure there are no unreported liens on the property.

Step #5: Determine funding.

This is essential. You must plan how you will pay for the property. If you have strong credit, your current lender may be ready to give you a loan. They may be able to expedite the loan application process because they already have a lot of your information in the short sale paperwork.

It is critical to recognize that in a short sale, you must be able to move rapidly. Once an agreement is reached, it is usual for the lender to want a close in as little as 20 days. It is too late to begin looking for a mortgage.

Step #6: Make contact with the lender.

You or your agent should contact the lender’s loss mitigation department — or possibly the resource recovery department — rather than the collection or customer service department, which is exclusively concerned with recouping past-due loan payments.

One of the most difficult first problems is locating the decision-maker. You must first have the homeowner write and sign an authorization letter (notarization is normally required), which authorizes the lender to discuss the mortgage status with you.

Step #7: Fill out the lender’s short sale application if one is required.

Many lenders offer a special application for short sale requests. Find out what paperwork they need to contemplate a short sale if they don’t have a short sale application.

Step #8: Put the proposal together.

In general, the proposal consists of a package of materials that includes the application and authorization letter, as well as:

  • Purchase and sale agreement
  • Letter of Suffering
  • Property valuation statement
  • A thorough breakdown of the expenses and liabilities
  • Statement of Settlement

Step #9: Agree on the terms

It is not uncommon for the lender to reject your offer or to counteroffer. As with any real estate deal, you should determine your absolute maximum limit ahead of time, and don’t be afraid to walk away if the lender refuses to meet your amount.

Step #10: Complete the transaction.

Get everything in writing and formally recorded once you’ve reached an arrangement that all three parties — you, the seller, and the lender — can live with. Ascertain that the seller knows all of the terms of the transaction. Following that, the property will be yours.

Tips for Buying Through Short Sales

#1. Acquire repair quotes:

Even if the property is being sold “as-is,” you should still have it examined and get repair estimates. Having this information on hand will not only help you decide if the home is worth purchasing, but it will also provide you with greater negotiation power with the lender. If you can demonstrate that the property is in worse shape than it appears, you will have a better chance of convincing the lender to sell at a cheaper price.

#2. Make sure your offer is realistic:

While lenders are motivated to sell, they also want to maximize their profit from the deal. If you make a low-ball offer or request contingencies, your offer is unlikely to be accepted.

#3. Provide as much cash as possible:

Lenders are seeking a sure thing after losing money on a hazardous venture. Lenders will leap at your offer if you can pay in cash. If not, the higher your down payment, the more secure and appealing your offer will appear. (Remember, if you need financing, you must get preapproved before making an offer.)

#4. Offer to cover the seller’s closing costs:

While the lender normally pays the commission and any other fees owed by the seller, proposing to pay them will make your offer more appealing. If there are other purchasers interested in the home, this offer will provide you with an advantage because it will allow the lender to recoup more money.

#5. Enlist the assistance of a real estate professional:

When it comes to short sales, real estate agents are invaluable resources. Short sales are complicated procedures, and with lenders making all of the decisions, you must have representation. An experienced agent will be able to investigate the property, advise you on its value, negotiate a better price, and guarantee that your interests are safeguarded.

Benefits of a Short Sale

Short sales can be advantageous to all parties involved. They increase purchasers’ investment options while minimizing the financial consequences that both lenders and sellers would face if the properties went into foreclosure. Let’s look at the advantages for both buyers and sellers.

Buyer Benefits of a Short Sale

  • Price reduction: While the short sale property will be priced at market value, the lender is greatly incentivized to sell in order to reduce the bank’s losses. As a result, purchasers can frequently obtain a better price on the home than they would if it were purchased in a traditional sale.
  • There is less competition in the market: Short sales are significantly more complicated than typical sales due to the lender’s involvement in the transaction. Because most purchasers are unfamiliar with short sales, they tend to avoid them. When there are fewer potential buyers, there is less competition and a better chance of receiving an offer and having it accepted.

Short Sale Benefits for Sellers

  • Foreclosure avoidance: A short sale keeps a seller’s home from falling into foreclosure, which can be significantly more damaging to their credit score.
  • Debt absorption: The home buyer will pay off the majority of the seller’s debt.
  • Fee savings: In a conventional sale, the seller would be responsible for paying agent commissions, but in a short sale, the lender covers these expenses.
  • Possible debt forgiveness: The lender may accept the proceeds of the short sale and write off the remaining debt as a loss. In these instances, the seller is not held liable for any debt that remains after the short sale.
  • Housing market reentry: Under the correct circumstances, a short sale allows the seller to reenter the market and acquire a mortgage quickly with an FHA loan. To do so, you must have had no late mortgage or installment payments in the year preceding the short sale, as well as no late mortgage or installment payments in the year preceding the short sale application for the new mortgage.

The Downsides of a Short Sale

Despite the advantages, there are a number of disadvantages associated with short sales. The short sale process is complicated and time-consuming, which increases the risk of the transaction and has a financial impact on buyers, sellers, and lenders.

Here is a list of some of the challenges that both buyers and sellers experience during a short sale process.

Buyers Challenges

  • Time-consuming: Because of the lender’s involvement, a short sale normally takes longer than a standard sale. The prime lender and any junior lienholders involved will take their time negotiating and concluding the agreement in order to reclaim as much money as possible. Remember that the longer the short sale process takes, the more lienholders there are. Furthermore, the seller may postpone the sale because they are second-guessing their decision or are lacking the necessary documents.
  • Increased risk: Because a short sales offer is “as-is” without conventional disclosures, such as a seller’s disclosure, the buyer is not always aware of the condition of the home or the quality of the deal. Furthermore, there is no assurance that the sale will close, so the buyer may risk wasting time and money on a home that they will be unable to purchase in the end.
  • More homework: A short sale necessitates a significant amount of upfront preparation on the part of the buyer. Researching the genuine value of the home, locating all liens on the property, and identifying any difficulties with the property’s condition are all necessary steps in assessing whether the purchase is worthwhile.
  • Property condition: Because short sale sellers are often in financial distress, their properties are in worse condition than the average home offered on the market. As a result, the buyer frequently has to spend significantly more money on repairs and enhancements.

Short Sale Pitfalls for Sellers

  • No negotiating power: Although the seller actively participates in the sale of the property, the lender is the only one who has the authority to negotiate the purchase price of the home.
  • Profitability: Because a seller owes money to the lender, they will not receive any of the earnings from the sale of their home.
  • Credit score harm: A short sale can seriously harm a seller’s credit score. The higher your credit score, the greater the hit. Short sales, on the other hand, tend to lower sellers’ credit scores by fewer points than foreclosures.
  • Delay in acquiring a new mortgage: After a short sale, the seller must wait for a certain length of time before qualifying for a new mortgage. Outside of an FHA loan, the waiting time might range between 2 and 7 years.
  • Deficiency judgment: In some cases, the lender will sue the seller to recover the outstanding debt after a short sale. If a seller gets sued, their credit score will suffer a similar blow to that of a foreclosure. This short sale process, however, is not legal in all states.

What is the Duration of a Short Sale on Your Credit Report?

If you are the one selling in a short sale, it will most likely appear on your credit report, but not in the way you might anticipate. The phrase “short sale” will not appear on the report, but if you were late on payments or did not completely pay off your mortgage, the account associated with the short sale will have bad marks that might stay on your credit report for seven years.

Common Errors Made By Short Sale Buyers

#1. Leaving the home inspection out

A home inspection assists you in identifying concerns that you might otherwise overlook, such as needed repairs or maintenance. If you discover a serious flaw, you may wish to back out of the sale. Better yet, have a contractor or house engineer on hand in case the inspection reveals a difficult problem—they can provide vital insight into the cost of repair, allowing you to make a more informed decision about the sale.

A typical disclosure statement would specify whether a home is in a flood plain or if any unpermitted renovations were performed. Bank-owned properties, on the other hand, frequently sell as is, with no disclosure, so buyers must conduct additional research on the property.

#3. Leaving insufficient time for closing

Closing on a home can take time under regular circumstances, and closing on a short sale often takes longer. Make sure to include this extra time in your plans.

#4. Falling in love with a lousy home

Real estate is an emotional market; it’s easy to fall in love with a house once you start seeing yourself living there. However, keep in mind that you are basically conducting a financial transaction.

What’s the Difference Between a Foreclosure and a Short Sale?

While selling a house as a short sale is not ideal, many experts feel that it is preferable to take more drastic actions like foreclosure. When a homeowner falls behind on mortgage payments, the lender repossesses the home, typically against the homeowner’s consent, and then attempts to make a sale. Depending on state rules, the homeowner may face a deficiency judgment if the amount received by the mortgage company from the sale is less than the mortgage obligation outstanding. In other words, the now-former homeowner may still owe money on his or her mortgage.

Short sales are more common than foreclosures. Even during economic downturns, such as the 2011 housing crisis, rates soared to only 3.6 percent. The rate is currently hovering around 1%.

People frequently mix up foreclosure and a short sale, and while they share certain similarities in that both typically occur to distressed homeowners, the process and outcomes are vastly different. For one thing, the foreclosure process is generally expedited because lenders are eager to recuperate the costs incurred by the unpaid mortgage.

A foreclosure also has a negative impact on a person’s credit score and credit report. As a result, those who go through it must often wait at least five years before they can qualify for a new house loan.

Conclusion

A short-sale home can be an amazing way to get a house for less money. In many circumstances, short-sale homes are in good shape, and while the purchase price may be more than a foreclosure, the costs of making the home marketable may be substantially lower, and the seller’s disadvantages may be less severe.

Buyers and sellers, however, must be willing to wait due to the lengthy process of the short sale. An expert real estate agent can assist you in determining a reasonable short sale offer and negotiating with the bank.

Because tax laws are complicated and constantly changing, you should consult with a certified public accountant (CPA) who is familiar with real estate investing and the related tax laws to ensure you have complete and up-to-date information.

It can mean the difference between profiting and losing money on an investment.

Short Sale FAQs

How does a short sale work?

In a short sale, the homeowner initiates the sale of the home, but the home must be worth less than the amount owed on the mortgage in order for the short sale to be feasible.

Is a short sale worse than a foreclosure?

Short sales have less of an impact on a credit record than foreclosures. A foreclosure occurs when a residence is seized and placed up for sale by an investor or bank. Every mortgage deal includes a lien on the property that allows the bank to take control of the homeowner who fails to make mortgage payments.

Can you make money on a short sale of a house?

A short sale means you will not profit from the sale of the home; the bank or mortgage lender will receive the entire sales profits.

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