Many folks have heard the term “Short Sale” used recently amid the housing downturn of the past couple years. However, there is a lot of mystery involved as to what this is, exactly. I’m here to discuss several of the main concepts of these types of sales. If you watch the property market closely and have always wondered what the ins and outs are of these types of sales, hopefully this post will help you make sense of the process.
A short sale in the basic sense occurs when a property owner attempts to sell a property for less than they owe on it. This is usually due to some type of financial hardship on the part of the property owner or the inability to meet scheduled payments on the home. In essence, here is a rundown of the short sale process:
- Property owner is late on one or more mortgage payments or is able to prove the inability to pay in the near future
- Property owner or appointed attorney contacts lender and obtains a short sale packet that lists the requirements the lender has in order to approve the short sale
- Property owner lists the property for sale with a REALTOR at the home’s actual value
- Property owner agrees to an acceptable offer from an approved and willing buyer
- Property owner or appointed attorney contacts lender again with the contract and all short sale documents
- Lender appraises the property and either approves or denies the short sale or makes the buyers a counter-offer
There are many things that are often misunderstood about the short sale process. The first is usually the list price of the home. Many property owners feel that they can price the home for whatever amount they choose and the lender will approve the sale. In actuality, the lender usually will only approve the amount that the property is actually worth – determined by the appraisal. In many cases where the contract is for a price substantially less than the actual appraised value of the property, the lender will counter the contract at its actual value. The lender always has the final say in the value that they will accept for the property – not the seller.
Another aspect of the short sale that is often confusing is the addition of a second mortgage. If there is more than one mortgage on the property, both lenders must approve the short sale to release title to the property. In many cases, a second mortgage holder has a subordinate lien position on the property – this means that if the property goes into foreclosure, the primary lein holder will be paid first and whatever is left over then goes to the second lien holder (and on down the line). Because of this, it is often in the best interests of second mortgage holders to negotiate with the homeowner and allow the property to be sold BEFORE foreclosure – but the situationÂ puts them at a very weak negotiating position. Often, second mortgage holders are offered a $1,000 settlement on a loan for many tens-of-thousands of dollars. However, because the second mortgage holder must write off on the sale of the property, they do have a final say-so in the ability of the short sale to go forward. In several cases, second mortgage holders have forced property owners to sign personal notes of repayment in order to approve the short sale. When a second mortage is involved, often things become many times more complex.
If you are a homeowner and are having trouble making payments, a short sale may be an option to consider. You have to keep the following in mind: you will almost never get any money out of the property, you have to be able to prove some type of current of future financial hardship and depending on your circumstance, the short sale may or not be successful. Perhaps the two most important factors you should look for if you feel a short sale might benefit you are a real estate agent who knows the short sale process and will advise you properly and an attorney to help you get everything the lender needs together and negotiate with your mortgage holders.
For more information on short sales please call me directly at (630) 346-1041