Short Sales

A couple of years ago you would have been hard pressed to have found someone who could have adequately defined a “short sale” for you. Unfortunately, as a sign of the times, “short sale” seems to be ingrained within our our vernacular.

If you are considering selling your home in a short sale you’ll need to consult with an attorney, your mortgage company and probably a CPA – since there may be some forgiveness of debt as income issues. The following is a brief explanation from the purchaser’s side of a short sale.

A short sale occurs during the pre-foreclosure process. In a nutshell, the owner, who is in default on his mortgage payments, receives prior approval from the bank to sell the property for less than what is owed. The bank secured its loan with the home, so it makes sense that the bank would have final approval on selling the asset for less than the loan value.

It gets a little tricky when there are multiple loans on the property. Just remember, each loan has an order of debt payment; first mortgage, second mortgage, sometimes even a third mortgage. When the property is actually sold on the courthouse steps, in foreclosure, any mortgage subsequent to the first almost always gets the shaft.

Here are the advantages to the seller, bank and buyer:

Seller
If the owner is foreclosed on, he is still liable for the difference between what he owes on the mortgage and what the bank ultimately recovers from selling the property after foreclosure. If the owner has a $600,000 mortgage and the bank only gets $500,000 from selling the home, the owner is still on the hook for $100,000. In a short sale the owner can negotiate for forgiveness of the remaining debt. So the owner still has every reason to sell the home for as much as possible, since the bank is more likely to agree to a short sale as the the selling price gets closer to the loan amount.

Bank
The foreclosure process can be long and a short sale eliminates the hassle factor. The bank has to actually foreclose on the home, then take possession, then have somebody come in and clean up the place. The bank runs the risk of pipes freezing, vandalism, etc… The government only allows the bank to carry so many houses, so there will constant pressure to reduce the price. The bank could carry the house for many months and ultimately sell the home for less than what the owner could have received in a short sale.

Buyer
There is obviously an opportunity for a bargain. You’re still able to negotiate an inspection period and arrange for traditional financing.

Related posts:

1. Bait and Switch Short Sales
2. The Perils of Short-Sales
3. Pre-Foreclosure
4. Short Sale Primer
5. Georgia Home Buyer’s Closing Cost Calculator