A Short Sale, also known as a Pre-Foreclosure Sale, occurs when a borrower/homeowner is trying to sell their home, typically due to a financial hardship such as job loss, divorce, etc. and the market has declined enough to where the debt owed on the property is greater than what the property will bring at a sale. This would result in the lender(s) being asked to take less than what is owed.
A seller may be willing to proceed with a short sale in an effort to salvage their credit, as much as possible, from the sale of the home before it goes into foreclosure. REMEMBER: Although a seller may be willing to sell their property for less than what is owed, the lender may not, and this is where the complications occur that Buyers should be aware of:
- 1) If the seller does accept your offer, the offer is then sent to the lender(s) for their approval (This is mandatory – the sale cannot take place without the lender(s) approval).
2) Short sales are difficult transactions. They require extensive negotiations with the lender, and can take months to get lender(s) approval – if it comes at all. This delay is caused by multiple decision makers needing to approve the Short Sale, and often results in many Buyers walking away in frustration.
3) Different lenders have different criteria as to what price they will accept, the costs they will pay, and the proof required from the homeowner(s) to determine whether they are candidates for a short sale.
4) Another problem with “Short Sales” is how poorly many agents handle them, especially with respect to pricing. When a home is obviously priced so low that the bank will never approve the price, something is wrong. (The listed price of the home can be irrelevant to what the lender(s) are willing to accept, many sellers/agents will list a property at a ridiculously low price just to solicit offer’s because lender’s typically will not start the short sale process until an offer is in hand). Today with the Internet, Buyers can see these listings and because the agent is not required to disclose to the public that they are short sales, Buyers think they are “normal” listings that they can buy today – They are NOT and they CANNOT. Agents are not required to disclose to the public that a listing is a short sale. They only need to disclose it to other agents. As such, agents have gotten creative calling these listings “pre-foreclosures” on websites as an attempt to draw calls from Buyers hungry for “deals”. Some short sales do sell, and sometimes they are good deals, but a headache for the 80% of the time they DO NOT go through, and in the process of marketing them, the public sure can get confused-and frustrated.
Why are lenders are leery of Short Sales?
Lenders are not real keen on forgiving debt. Mortgage investors want to make money, not lose it. This tends to make lenders and investors hesitant to approve short sales. Although they don’t want to foreclose on a home and carry the cost of that, they also don’t want to lose money by selling short. At first glance, a short sale might seem like a win-win for everyone involved. In such an arrangement, the borrower sells the home for less than the amount owed, with the lender forgiving the difference. The sale releases borrower/homeowner from their obligations. For mortgage holders, it can be less costly than foreclosing — and could provide protection against future price drops. For Buyers, it can be a chance to buy a home at an attractive price. Short sales — which were rare when the housing market was booming — can also be a good way for lenders and investors to minimize losses. They typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure, according to a recent analysis. The costs of foreclosure can include not only legal fees, but also taxes, insurance and the expense of maintaining the home until the property is sold and repairing any property damage. As the housing market continues to weaken, the number of short sales is edging upward. Short sales currently account for about 18% of home sales, according to the National Association of Realtors. But it can be extremely difficult to get these deals completed.
What needs to be done before the bank gives a response to a Short Sale?
- Seller is expected to show some proof of a financial hardship. They will need to produce financial statements and cooperate with all parties.
- Submit all the required information needed to the lender(s). Evaluating a short-sale package/offer takes time.
- The Mortgage servicer must first determine whether the homeowner really can’t continue meeting the loan payments, then order an appraisal or Broker Price Opinion of the home’s value.
- Mortgage servicers need to determine if the offers that are being submitted are at fair market value. This becomes a challenge when the lender(s) have no idea what the market conditions are in your area, as many of the mortgage servicers are in different states.
- The Mortgage servicer must also determine whether the Buyers have sufficient funds and/or the ability to get a loan.
- Mortgage servicers also try to ensure that the proposed sale is an “arm’s length” transaction between two parties rather than, say, a sale to a relative on sweet terms.
- If all those hurdles are cleared, the servicer may still need to get approval from the investor that owns the loan and provide an analysis showing that the investor will be better off accepting a short sale than with another solution.
- If the borrower has multiple loans on the property additional complications arise; In that case, both parties must approve the deal — which is a challenge when the sales price may not even be enough to cover the mortgage balances.
What is a Foreclosure?
A foreclosure on the other hand is completely different. This is a home owned by a bank or lending institution. They want to sell it, they have an established price based on an appraisal and can give Buyers an answer in a matter of days-not months. These are fantastic opportunities for Buyers in today’s market as they represent highly motivated sellers with prices that now are almost always the lowest in a tract. Whenever you see “bank owned”, “foreclosure” or “REO” that is a property to investigate. But there can be dangers to! – These homes are always sold “as-is” and often need repairs, but at least there is not the painful process of the short sale to go through in attempting to buy one. Many times foreclosures are properties that were short sales that did not get approved and went to trustee sale. For the patient Buyers, sometimes they can then buy it as a foreclosure if the short sale process did not pan out.
IN A “SHORT SALE” SITUATION THE SELLER DOES NOT RECEIVE ANY PROCEEDS FROM THE SALE.