A short sale is an agreement between a home seller and their lender in the beginning stages of foreclosure. It allows a home or property to be sold for less than the existing outstanding loan balance.
Over the past several years, short sales have become increasingly common, especially since banks are more eager to avoid the costly foreclosure process since the 2008 real estate bubble. Though the entire process often turns out to be a long and frustrating ordeal, short sales typically end up resulting in a win-win for all parties involved, as the seller no longer bears a debt, the buyer purchases the property at a substantially discounted price, and the bank also benefits in the long run.
Whether you are the buyer or the seller, there are many factors to keep in mind when it comes to short sales. Here are some important notes for all consumers to keep in mind:
Eligibility
There are several requirements that need to be met in order to avoid foreclosure through a short sale, including the ability to prove financial hardship, such as job loss, divorce, or medical bills. Most banks require paperwork to approve and some homeowners might need to show why it is that they can no longer afford their monthly payments (i.e. a readjusted ARM rate that is now unaffordable) or that they have been deemed ineligible for a loan modification.
Necessary Documents Needed
The documents necessary to process a short sale typically depends on the particular lender. Most, however, will at least require a hardship letter detailing the circumstances behind the short sale, as well as a signed, valid purchase and sales contract, a preliminary HUD-1 settlement statement, and a preliminary estimate of proceeds to the lender. There may be additional requests for more detailed information on the financial condition of the seller, such as bank statements, paycheck stubs, personal financial statements, and monthly budget assessment, amongst other things.
Working with an Agent
Time is of the essence during any short sale, so finding an agent is necessary. Because of the complex nature of any short sale transaction, it is strongly recommended that both buyer and seller work with a real estate professional who has a track record in successful short sales. With the right experience and connections, agents can identify and help resolve possible hurdles, help put together a viable offer, protect the buyer’s interests, and negotiate the best deals.
Length of Time
“Short sale” is a misleading name as this sales purchase process usually takes much longer than a regular purchase. The seller often ends up coming up short on the loan payoff, most short sales can take from four to nine months to close, and sometimes even longer. Plus, the seller’s mortgage lender needs to thoroughly review a seller’s short sale request by gathering the required documentation and doing bottom-line reviews, which can take a long time to complete before a short sale is approved. Furthermore, difficult negotiations that take place between the parties involved, such as junior-lien holders and the seller, often delay the process.
Benefits of a Short Sale
Who benefits from a short sale and how do each of the different parties benefit? For home sellers, they’ll avoid foreclosure as well as the many headaches that come with it. Buyers will get to purchase a property at a fair market value and avoid having to deal with the risks of buying a foreclosed property. Mortgage lenders can mitigate their losses by avoiding the process of foreclosing and reselling the property, while all other parties such as the listing agent, buyer’s agent, appraisers, mortgage brokers, and the title or insurance companies will be able to earn a profit from a short sale transaction for services rendered.
Pitfalls of a Short Sale
With benefits also come pitfalls. With short sale properties, there is, of course the long sales process that usually ends up being difficult to pin down with a firm closing date. There are always extra steps to be taken as well, even after the seller’s mortgage lender(s) agree to the short sale, including junior-lien holders such as second mortgages, HELOC lenders, and other special assessment liens that may need to approve the short sale. If a buyer happens to be bound by a specific timetable to buy a home, a short sale is not at all ideal.
What’s more is that the approving lender rarely agrees to pay for any extras that a regular seller would normally agree to. This usually ends up meaning higher closing costs for the buyer.
There are also other roadblocks which can derail a short sale. With extra research, a buyer should be able to uncover the possible obstacles and plan for them. And of course, there is always the risk of having to buy any property only on an “as is” basis. Just like foreclosures, some short sale properties are in need of repair — sometimes extensive repair—and since most homeowners in the process are experiencing financial hardship, chances are that maintaining the home wasn’t high on their priority list.
Let Us Help!
Still wondering how you can get in on a good short-sale deal? Well, for starters, it takes a certain amount of patience and fortitude, not to mention a whole lot of luck. For further help and assistance for all your short sale and real estate needs, draw on the power of the Peak Corporate Network and its inclusive range of services. Contact us today!
