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Short Sales

These days, declining market areas in the region have seen a rising amount of homeowners who are “upside down”—that is, they owe more money than their home is currently worth. To add to this problem, many of these homeowners have adjustable rate mortgages that have caused their payments to shoot up, making their mortgages unaffordable.

For many in this situation, foreclosure is the only option. But, if the homeowner can show proof of a newly occurring situation that has left them unable to pay their mortgage, then they can try to do a short sale on the property.

A short sale is when the bank agrees to allow the homeowner to sell their home for less than they owe, usually at the current market value. This sounds simple, but the process is often long and complex, and requires a real estate agent who is familiar enough with the process to coordinate the transaction between the lender, seller, and buyer.

Selling Your Home In A Short Sale

Buying Short Sale Properties

Learn More About the Legalities of Short Sale Transactions

Selling Your Home In A Short Sale

The Process

Why would a bank agree to a short sale? Well, for starters, in many cases the bank will be able to get more for the property than if they foreclosed on it and then sold it at auction. Adding to that, in a short sale the lender avoid the expensed incurred in the foreclosure process.

In order to complete a short sale, the borrower must provide proof of a newly occurring situation that has left them unable to make their mortgage payments. Some of these reasons include: divorce, recent illness, and unemployment. The reason cannot be something that the borrower concealed from the lender at the time they originally applied for the loan.

Sometimes, the lender will examine the debts the homeowner has incurred in order to determine the cause of their situation. If the homeowner's debts are greater than their assets due to extravagant expenses or the borrower living above their means, in some cases the lender will be less likely to cutting them a break.

Tax Issues

In many cases, a homeowner facing foreclosure may not be able to afford a short sale. Why? Because if the bank forgives the balance owed after the short sale is complete, than the IRS counts it as income.

The only way to avoid this is if the homeowner can prove they are “insolvent”—that is, their debts are bigger than their assets. A tax advisor should be consulted before considering doing a short sale. If the homeowner cannot afford the taxes due from the forgiven debt, they may be forced to go into foreclosure or declare bankruptcy.

Buying a Short Sale Property

Short sale transactions require more time and paperwork than the purchase of a regularly listed home. However, many buyers in the market have found great deals on properties that are listed as short sales.

Why? Properties listed as short sales are usually priced lower than other homes in the market. This is due to the fact that many of these homes are suffering from deferred maintenance because of the owner’s inability to afford the necessary improvements.

There are many things to take into account when making an offer on a property that is being offered as a short sale:

First, there are a lot of homes listed as short sales on the MLS (real estate listings), but they are not actually going through the short sale process with the seller’s lender. If they are not working with their bank, it is not a short sale. If something is listed as a short sale, ask for the contact information of the lawyer or bank representative that is handling the transaction--if they do not have one involved, it’s probably not a true short sale.
To make an offer on a short sale, usually you have to be pre-approved for a loan--this is different than being pre-qualified. Pre-qualification only requires you to give the broker or bank verbal or written info (loan application) on what your income, assets, debts, credit scores, etc. are. In contrast, pre-approval is when your loan application has been submitted to the lender offering you a loan, it has been underwritten and you have a conditional approval.
Short sales take a lot more time to close than regular listings—it is common for them to close in as many as 60 days (+/-).
The lender will likely have a checklist of requirements and paperwork required for the short sale process—make sure you get a copy before you submit your offer, so that you know what the requirements are.
Make sure you make the offer contingent on the short sale being approved by the lender and set a time frame for approval. Otherwise, you may be forced to wait for months before hearing from the bank, and will be unable to back out and start looking for other properties.
A letter to the seller is also advised requesting written confirmation that the lender has received the hardship letter and other documents as part of the short sale application.
When you make your offer, the bank must approve the offer, regardless of what the sales price the seller agrees to.
Chances are there will be multiple offers on the property.
Once you make your offer, sometimes a lender will come back with a higher counter offer--sometimes they will not accept any offer, and the homeowner will be forced into foreclosure.
If the bank comes back with a counter-offer, it does not necessarily mean that they are going to reject a lower price. Many lenders will counter to show their investors that they are trying to get as much as possible for the property, but if you counter their counter, you still have a chance.
Short sales are almost always sold as-is, so even if your home inspection finds something, you will usually have to fix it yourself. Regardless,
Having the seller pay closing costs almost never happens w/short sales.