Today there is an abundance of commentary in the media on the nation’s housing market. Within the rhetoric you may hear a lot of jargon. Pundits love their jargon. But sometimes we forget that some of these terms like sub-prime mortgage, amortizations, or short sale are not common place for the average individual.
As I am currently working on a short sale real estate deal, I figured this would be a good time to discuss it.
So… What is a short sale?
The short version is the sale of a home when the owner owes more on the mortgage loan than what the home is actually worth. The situation of owing more on the mortgage than the value of the home has been coined as “being underwater”.
So lets break this down.
Say Sally Seller bought her home in 2006 for $200,000. Lets say she put $40,000 down so her loan balance is $160,000. Lets also assume that over the last 5 years she has paid down her principal by $10,000. Now 5 years later she wants to sell. She still has a loan balance of $150,000, but after speaking with her Realtor, she finds out that her home will likely only sell for $120,000.
Option 1- she could sell the house for $120,000 and write a check to the mortgage holder for $30,000.
Option 2- she could attempt a short sale.
Selling A Short Sale
Not anyone can just up and decide to sell their home through a short sale. They must prove to their lender that they can no longer pay their mortgage payments. It can’t be a situation where the owner would like to not make payments– but can’t make the payments. This inability to make payments may be due to a number of different hardships; loss of a job and exorbitant medical expenses are both common hardships that strain the ability to make mortgage payments.
Unfortunately, their is no standard short sale approval process as it differs from lender to lender. Consult a real estate professional for guidance when listing your home through a short sale, and make sure the Realtor is experienced in dealing with short sales. It is also a good idea to consult a tax professional and an attorney.
The decision to allow a short sale to happen or not ultimately lies with the lending institution. If the lender is receptive to a short sale, the home can then be listed as a possible short sale.
Selling through a short sale will hurt your credit, but is generally seen as a better option than going through a foreclosure. Again, it is a good idea to talk with a attorney, finance and tax professional before making a decision.
Buying A Short Sale
Buying a short sale is just like buying any other piece of real estate, but at times it certainly doesn’t seem like it. This is usually due to the first item below.
Be prepared to have a long wait.
With a common real estate sale, the buyer submits a purchase agreement to the seller to review. Generally the negotiation (if there is any) will only last a couple of days before the agreement is either accepted or voided. This is not true with a short sale.
The process is slightly different with a short sale. After the buyer presents the offer, like a traditional real estate sale, it has to be then accepted by the seller. However, after the seller accepts an agreement it has to be approved by the bank. Obtaining this approval can take weeks or even MONTHS. If you need to buy a home quickly, a short sale is probably not the best bet for you.
Don’t expect repairs to be made by the seller.
In short sale situations, the seller is not walking away from the transaction with any equity in the home. Because, the seller is not coming away with any money, they will likely be very unwilling to make or pay for any needed/wanted repairs.
If you can’t make your mortgage payments, a short sale may be an option.
If you want to buy a short sale home, remember that patience is a virtue and be prepared to be extra virtuous.