Understanding Short Sales

A short sale can take an unfortunate circumstance for the homeowner and the bank and turn it into a situation with enough of an upside to make the deal attractive to both parties. Short sales have escalated in recent years, in part because of changing market conditions and tax laws.

Beside the homeowner and the bank, there is a third party who may benefit even more – the homebuyer. The buyer of a short sale home will typically get a deal up to 20 percent below market value, although the home will usually be sold in “as-is” condition. The homebuyer should also be aware that the bank may initiate foreclosure proceedings while the short sale is progressing.

The Short Sale Defined

A short sale in real estate occurs when the bank holding the mortgage on a home agrees to accept less than the full amount owed on the mortgage when the home is sold. With the bank’s approval, the seller of the property agrees to sell the home at a lower price, even though the proceeds on the sale will not cover what is owed on the mortgage. In some cases, the homeowner may owe more than the selling price. The lender agrees to accept a percentage to pay off the mortgage loan from the homeowner or the new homeowner.

The Short Sale Advantage to the Lender

The obvious question is, why would lenders agree to a short sale that will provide less than what the owner agreed to pay on the existing mortgage? The answer is that the alternative for distressed homeowners is a long, drawn out and expensive foreclosure procedure. Short sales occur when the homeowner no longer has the resources to pay the monthly mortgage payment.

If the owner decides to stop making mortgage payments, the lender can foreclose on the property and home ownership then passes into the hands of the bank. This is a costly process that can take several months, and when it is over the lender still has to put the house up for sale. The bank will also have the responsibility of maintenance, taxes and association dues. The short sale alternative is faster, and any money the bank loses may be a tax write-off against earnings.

The Short Sale Advantage to the Homeowner

The homeowner benefits from a short sale because the procedure is an alternative to foreclosure, which can have dire consequences for the seller. After foreclosure the owners will find it harder to get credit, and if they do, their credit card rates can jump to as much as 30 percent. Also, they may have to wait a few years before having the ability to get a mortgage on a new home. Prospective employers may take a dim view of a foreclosure that shows up on a credit check.

In order to qualify for a short sale, the owner is generally required to demonstrate that he is behind on his payments, or that there is a financial hardship like illness or loss of a job that affects his ability to pay. Also, the homeowner must not have other assets that can be used to pay off the mortgage loan.

Initiating a Short Sale

It is a good idea for a homeowner interested in a short sale to enlist the services of a real estate agent experienced in short sales. The agent may put the homeowner in touch with attorneys and accountants who specialize in such matters. The home must be appraised to determine its current value, and then a real estate short sale proposal is presented to the asset department of the bank explaining why a sort sale is a good alternative. The proposal should contain the appraisal, the lender’s short sale application and a hardship letter explaining why the short sale is required.

A short sale can be initiated by the owner, or a real estate agent or attorney working in their behalf. A short sale can also be initiated by the potential buyer through an experienced real estate agent. Before making an offer, it makes sense for the buyer to inspect the property, become familiar with home values in the neighborhood, and find out about any lien or additional mortgages on the property.