What is a Short Sale?
A short sale in real estate involves selling a property at an asking price below the amount due on the current owner’s mortgage. It typically signals a financially distressed homeowner who aims to sell the property before the lender seizes it in foreclosure. All of the proceeds of a short sale go to the lender, who may then choose to forgive the remaining balance or pursue a deficiency judgment, allowing it to recover the difference.
Key Takeaways
- A short sale usually indicates a homeowner in financial distress or a stagnant real estate market.
- Mortgage lender approval is required before a short sale can occur.
- The mortgage shortfall may be forgiven or collected from the borrower.
- The financial consequences of a short sale are generally less severe than a foreclosure for both seller and lender.
- For home buyers, short sales can present good opportunities if approached cautiously.
Understanding a Short Sale
Short sales usually occur when a homeowner is in financial distress and has missed one or more mortgage payments, often with foreclosure proceedings looming. These are more probable if real estate values have dropped, making the property worth less than the remaining mortgage balance. For example, if a home’s value falls to $150,000 and the remaining mortgage is $175,000, the deficiency balance is $25,000.
Lender Sign-Off
The process begins only after the mortgage lender consents to the short sale, often termed a pre-foreclosure sale. The homeowner needs to present documentation detailing why a short sale is a viable solution. The transactions are typically lengthy and paperwork-intensive, taking up to a year to process but are less detrimental to a homeowner’s credit rating than foreclosure.
Special Considerations
While short sales harm a person’s credit score, the impact is generally less severe than a foreclosure. However, not all short sales relieve the borrower of the remaining mortgage debt.
Short Sale vs. Foreclosure
Though both options mean the owner must part with the home, the timeframe and consequences vary. With a foreclosure, the lender seizes the home after continuous missed payments, and the process is usually faster because the lender seeks to liquidate the asset swiftly. In a short sale, the distressed homeowner stays in the property and may be eligible to purchase another home sooner.
Short Sale Alternatives
Consider discussing revised payment plans or loan modification options with your lender before conceding to a short sale. These alternatives could allow you to remain in your home while recovering financially.
The Short Sale Process
- Convince the Lender: Demonstrate genuine financial hardship to the lender for approval.
- Consult Professionals: Seek advice from attorneys, tax professionals, and real estate agents for managing the complex transaction.
- Set a Price: Ensure the asking price covers the necessary costs of selling the property.
- Gather Documents and Find a Buyer: Compile all necessary financial hardship documentation and locate a potential buyer.
- Submit Your Proposal: Present the buyer’s offer and your documentation detailing financial hardship to the lender for approval.
Short Sale Strategies for Buyers and Investors
Short sales offer lucrative chances for buyers to obtain properties at reduced prices. However, patience and meticulous attention to detail are crucial in navigating the slow, often cumbersome process.
Advantages and Disadvantages of a Short Sale
Pros
- Helps homeowners alleviate an unbearable debt.
- Reduces fees compared to a typical home sale.
- Allows buyers to purchase properties at a discount.
- Lenders may write off part of the debt as a loss.
Cons
- Fewer legal disclosures compared to a typical sale.
- Involves more paperwork.
- Can still impact the seller’s credit rating but less so than foreclosure.
Mistakes to Avoid
- Inspection: Short-sold homes may have undisclosed problems. Prospective buyers must conduct thorough inspections.
- Time Management: Ensure you have ample time to handle the complex process of a short sale before purchase.
It’s All in the Numbers
Optimize the purchase by evaluating costs against the After Repair Value (ARV) and factoring in repair, renovation, and carrying costs. Investors typically use a guideline where the total investment should not exceed a set percentage of the ARV, depending on market conditions.
The Bottom Line
An experienced real estate agent can significantly help buyers navigate the intricacies of short sales and negotiate effectively with banks. Always consult with a certified public accountant (CPA) for up-to-date information on tax laws relevant to real estate investing.
Related Terms: foreclosure, lien, deficiency balance, deed-in-lieu of foreclosure, loan modification.
References
- Ramsey. “What Is a Short Sale?”
- Fair Isaac Corporation. “Research Looks at How Mortgage Delinquencies Affect Scores”.
- NAR. “National Association of REALTORS Reaches Agreement to Resolve Nationwide Claims Brought by Home Sellers”.
- Rocket Mortgage. “What Is A Short Sale In Real Estate? A Guide To The Process”.
- HomeLight. “Where Can You Find Short Sale Homes? A Finder’s Guide for Buyers”.
- National Association of Realtors. “About SFR”.
