Foreclosure is a fairly well understood process, but as “short sale” signs sprout like weeds, you may wonder what they are all about. When a lender agrees to accept a mortgage payoff amount that is less than what is owed in order to facilitate a sale of the property by a financially distressed owner, it’s called a short sale. The lender forgives the remaining balance of the loan.
Short sales are a mixed bag for the buyer, the seller and the lender.
If you’re a seller, a short sale is likely to damage your credit — but not as badly as a foreclosure. You’ll also walk away from your home without a penny from the deal, making it difficult for you to find another place to live.
The buyer gets the property at a reduced price, but the property in all likelihood has its share of problems — think fixer-upper — and will need to go through considerable red tape in order to make the deal happen.
What’s your home worth?
The lender takes a financial loss, but perhaps not as large a loss as it might if it forecloses on the property. Before you even start considering getting involved in a short sale, there are two situations in which an attempt at a short sale is almost certain to fail:
No default on loan — Lenders almost never will accept short-sale offers or requests for short sales until the borrower is far behind in payments and a notice of default has been issued.
Bankruptcy — If the seller has filed for bankruptcy, forget it. Few, if any, lenders will consider a short sale when the seller has filed for bankruptcy because negotiating a short sale is considered a collection activity and collection activities are prohibited in bankruptcies.
Can it work for you?
Buying a home in a short sale can be a hassle, so why should you consider it? It boils down to the bottom line. You will get the property for a substantial discount. Since the lender is eager to continue to get paid the money it loaned out, it may also offer favorable financing terms.
Since the sellers play an active role in the short-sale process, you will have their cooperation (and most likely won’t need to evict them upon taking possession of the home). This is not always the case with a property that has gone through foreclosure.
Whether you’ve become aware of the distressed situation on a property through an agent, a “for sale by owner” ad or word-of-mouth, this is not a do-it-yourself project. A short sale is one real-estate deal where you really need to get help from an experienced agent or attorney. Not all real-estate agents know how to handle a short sale, so make sure you consult with one who can demonstrate special training or a good track record with short sales.
Why lenders (might) agree.
It might seem counterintuitive for a lender to go along with a short sale. After all, a lender is legally entitled to pursue the full balance of the loan. When a homeowner falls behind on payments, the lender can (and often does) hold the borrower responsible for every penny owed. And yet more and more lenders are willing to consider approving a short sale.
Lenders are painfully aware of just how bad the current foreclosure crisis is. They know the cold reality is that a large number of struggling borrowers will end up losing their homes, and so they often see the advisability in accepting the inevitable and trying to minimize their losses. Yet some lenders seem to remain in denial. Foreclosure is an expensive and time-consuming process for a lender. By agreeing to a short sale, the lender wraps up this little mess quickly, and perhaps with less of a loss than it would have incurred with a foreclosure. Remember, after foreclosing, the lender owns the home and has to maintain it, insure it and pay taxes on it. So instead of receiving payments each month, the lender is now forking out money every month. Plus, short sales help the lender look good on paper — the property never gets listed as an actual foreclosure, which helps the lender’s numbers. Lenders see it as the lesser of two evils — if the numbers make sense for them.
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