"Breaking Down A Short Sale"
"Breaking Down A Short Sale"
What Is a Short Sale?
A short sale is when a homeowner sells his or her property for less than the amount owed on their mortgage. In other words, the seller is "short" the cash needed to fully repay the mortgage lender. Typically, the bank or lender agrees to a short sale in order to recoup a portion of the mortgage loan owed to them.
Short sales are becoming increasingly rare as the economy improves. They were much more prevalent during the Great Recession, when many U.S. homeowners were "underwater" on their home loans; i.e., they owed more on their homes than the homes were worth in value.
How a Short Sale Works
In a real world, short-sale scenario, a home seller puts his or her property on the market, while formally designating the home for-sale as a potential "short sale/subject lender" deal to any potential buyers.
Once a buyer agrees to make a short sale offer, the homeowner contacts his or her bank, and completes an application asking for short sale status on the home. There is no guarantee the bank will green light the application, but a short sale does eliminate many hassles associated with the mortgage loan, such as closing the books on the homeowner loan, and the bank or lender gets a portion of their loan repaid.
Home sellers involved in a short sales can expect to file several firms and documents to their mortgage lender. Those include a hardship letter stating why you can't fully repay your mortgage loan, along with the filing of records like pay stubs and tax returns that back your case as being unable to repay the home loan.
The bank will then review your application, send out an appraiser to estimate the full value of the property against the short sale offer, and then either approve or reject the short sale request.
Benefits of a Short Sale to a Home Seller
If the property seller is presented with a short sale opportunity, it's a good idea to thoroughly vet all the options on the table, and calculate the risks and opportunities and look at other relative personal financial options, before making a decision.
Nobody is saying a short sale is a perfect solution to a home seller who has suffered a financial setback and owns a home with where the mortgage exceeds the property's value - but it might be the best option.
Consider these benefits of a short sale:
1. Credit score advantages
A short sale is highly preferable from a personal credit score point of view, especially when weighed against any potential home foreclosure. Credit scoring firms take a dim view of a foreclosure, and will issue a credit score much lower than when a home seller turns to a short sale instead. That not only protects the seller's score, it keeps them "in the game" and better able to buy another home down the road, without the burden of a significant foreclosure-induced credit score decline.
2. Emotional advantages
In many instances, a home mortgage is the biggest financial event of a person's life - at least before retirement. The seller avoids a "worst case scenario" of foreclosure and can honestly say they sold their home and moved on with their life.
3. Saving on home sale fees
With a traditional home sale, the seller bears the burden of fees and charges, including real estate agent commissions, which can be 3%-to-6% of the total home sale. In a short sale, those fees and commission are paid by the bank.
Negatives of Short Sales to a Home Seller
Short sales can create issues for sellers such as:
1. No cash-out
A short sale means they won't earn any profit from the sale of the house - the bank or mortgage lender gets all the sales proceeds.
2. Dependence on the lender
Home sellers also need a green light from their lender on a short sale - they can't make that decision on their own.
3. Less cash for a future home purchase
Since the seller earns no profit on a home short sale, they won't be able to steer home sale assets toward the purchase of a new home. Instead, they'll be starting from scratch.
Benefits of a Short Sale to a Home Buyer
Home buyers can take good advantage of a short sale, as well, with several advantages:
1. Reduced price
Primarily, the big benefit is the increased odds of getting the home for a reduced price, knowing that the house is in short sale mode, and that the owners, and likely even the bank or lender in many cases, will want to sell the home and get out from under the home loan. As any real estate agent will say, a motivated seller is a seller who wants to cut a deal, so a low-ball offer has a better chance of being accepted in a short sale than in a traditional home sale negotiation.
2. Less competition
Many home buyers, especially first-time buyers not used to the complexities of the process, may not want to get involved with a short sale. That opens up the field for home buyers with more patience for a short sale, and who'll face less competition for the home.
Negatives of Short Sales to a Home Buyer
Short sales can have negative repercussions for buyers such as:
1. A longer home-purchase timetable
For buyers, the paperwork process is significantly longer in a short sale (usually up to 120 days) than in a traditional home sale (usually up to 45 days) and that may be a deal-breaker for home buyers.
2. Lender interference
Lenders may also get directly involved in the home price negotiations, often asking for a higher sales price than the home seller (including the insistence that the buyer make all or most of the closing fees), in order to recoup more money on the home loan.
3. The property may be in disrepair
It's also highly advisable for a short sale buyer to work with a real estate agent well-experienced in the short sale process. It's also strongly advised that a short sale buyer hire a home inspection professional to thoroughly examine the property, as short sellers may not have the financial resources to keep up with home maintenance and repairs.