Is a Short Sale Right for You?
What is a Short Sale? What can Sellers Expect?
(Buyers scroll down to the end of the page for info pertinent to you)
A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower or allowing the property to go into foreclosure. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. Neither side is “doing the other a favor;” a short sale is simply the most economical solution to a problem. Banks will incur a smaller financial loss than would result from foreclosure or continued non-payment. Borrowers are able to mitigate damage to their credit history, and partially control the debt. A short sale is typically faster and less expensive than a foreclosure. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Lenders often have loss mitigation departments that evaluate potential short sale transactions. The majority have pre-determined criteria for such transactions, but they may be open to offers, and their willingness varies. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from an appraisal, Broker Price Opinion (abbreviated BPO), or Broker Opinion of Value (abbreviated BOV).
Multiple levels of approvals and conditions are very common with short sales. Junior lien-holders – such as second mortgages, Private Mortgage Insurers (PMI Companies), and HOA (special assessment liens) – may need to approve the short sale. It is possible for junior lien holders to prevent the short sale. If the lender required mortgage insurance on the loan, the insurer will likely also be party to negotiations as they may be asked to pay out a claim to offset the lender’s loss in the short sale.
The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction. Not surprisingly, short sale deals have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional. Short sale negotiators, Realtors who are short sale certified (a National Association of Realtors designation), loss mitigation specialists, and real estate lawyers who specialize in short sales are often brought in to handle these deals. Quite often, the average consumer is not aware that the lien holder pays the Realtor commissions, often exacerbating the difficulties.
Once you get an approval, the statement that they will accept a “short payoff,” act quickly to pull the closing together. Most approvals have a time limit, many only 30 days. If you aren’t closed within that time, the deal could be over forever.
A Few Other Things You Should Know:
Short sales are a type of settlement, and they adversely affect a person’s credit report. The negative impact may be less than a foreclosure, but in some cases the effect is the same. Unlike bankruptcy line items, short sales DO show on a credit report like Experian, TransUnion, or Equifax and remain on your credit report for 7-10 years. Some people may have some credit available to them within 18 months or so. Depending upon other credit information, it is possible to obtain another mortgage 1–7 years after a short sale. While lenders sometimes forgive the remaining loan balance, other lien-holders likely will not.
By nature, all short sales will have a deficiency balance. Laws governing the right of the lender to pursue a borrower for the deficiency balance vary state to state. States considered recourse states allow the lender to pursue. Non-recourse states generally prevent this, though some allow pursuit of deficiency though set forth limits on the amount that can be pursued. If a lender can legally pursue the deficiency and does not specifically waive its right to pursue the deficiency, the borrower is at risk for a deficiency judgment.
Borrowers considering a short sale should be aware of this risk and ask every party involved in the process (Realtor, lender, third party, …) what can and will be done to protect against a deficiency judgment. Consult an attorney in the state where the property resides to determine specific risks.
Once a short sale has been completed, a Chapter 7 bankruptcy is a possible remedy the borrower can use to remove the risk of the deficiency or discharge the judgment itself.
Buyer Guide to Purchasing a Short Sale
So you see your dream home listed at a price that makes you think: WOW, THIS IS THE DEAL OF THE CENTURY! Buyers pursue short sales to get a good deal but may want to think twice about making an offer on a pre-foreclosure/ short sale home. It’s not as simple as many may believe, and very few can close in 30 days or less. Patience is key.
So the Million Dollar Question: What is a Short Sale?
A short sale means the seller’s lender is accepting a discounted payoff to release an existing mortgage. Just because a property is listed with short sale terms does not mean the lender will accept your offer, even if the seller accepts it. Be aware that the seller need not be in default — to have stopped making mortgage payments — before a lender will consider a short sale. A lender may consider a short sale if the seller is current but the value has fallen. The seller may owe more than the home is worth, so a discounted price might bring the price in line with market value, not below it.
If there are two loans, this presents a bigger challenge. For example, if a seller owes $160,000 on the first and $40,000 on the second, offering $150,000 not only shorts the first lien, but leaves nothing for the second. The first will need to give something to the second to gain its cooperation.
It’s one strike against you if the listing agent has never handled a short sale, but it’s even worse if your own agent has no experience in that arena. You need an experienced short sale agent with the proper back up such as Perrie and Associates in helping to facilitate and negotiate the short sale transaction. An agent with experience in short sales will help to expedite your transaction and protect your interests. You don’t want to miss any important detail due to inexperience or find out your transaction is not going to close on time because no one has followed up in a timely manner.
Again, please note: once the seller has accepted your offer, it needs to go to the lender for approval. You do not have a deal until the lender accepts. In addition, the lender will want to see that you have your own loan available and you are preapproved. Send a preapproval letter or proof of cash funds and a copy of your earnest money check with your offer.
Give the Short Sale Lender Time to Respond
Make your offer contingent upon the lender’s acceptance. Give the lender a time frame in which to respond, after which, you will be free to cancel. Allow for proper time in terms of requested closing date and be committed to the process for a certain amount of months.
Question: How Long Should I Wait for Short Sale Approval?
Answer: Every short sale is different and as much depends on the lender as it does on the listing agent and any third party that is helping to facilitate the process. On average, you should expect a 90 day time frame.
The short sale process, from submission to short sale approval, is generally as follows
•Submission of offer and complete short sale package from the seller to the lender.
•Bank acknowledges receipt – 2 – 10 days
•Bank orders a BPO or appraisal – 15 – 30 days
•File is reviewed — 30 to 45 days
•Negotiator is assigned — 30 to 45 days
•Level II negotiator may be assigned — 30 to 90 days
•File is approved, countered or rejected — 60 to 120 days
Reserve the Right to Conduct Inspections
Generally, the lender will not pay for customary items that a seller would pay. These include home protection plans for the buyer, buyer credits of any kind and pest / termite inspections. A buyer will be asked to purchase the property “as is,” which means no repairs. It is extremely important that a buyer obtain a home inspection and be aware of any necessary repairs prior to closing.
Don’t be Deterred!
Overall, short sales can be a great opportunity to find your new home at a competitive price. It is important to have a good understanding of the factors that lead to a successful short sale to make it an enjoyable and profitable experience. Furthermore, having an experienced Realtor that works with a team such as Perrie and Associates who knows how to handle short sales is a great way to ensure a smooth transaction. We hope that these tips will help you to remain knowledgeable and optimistic throughout the process.
