What is a short sale?
You have heard the term used, you have seen them advertised, but you still don’t have a good understanding for what it means?
Can you Sell your home with the expenses of the sale being absorbed by your lien holder?
Can you buy a short sale for less money than a traditional sale?
No worries let me explain in terms that might be easier for anyone buying or selling a property being sold as a Short Sale.
A. The seller of the property currently owes more on their mortgage than the house is worth in today’s market.
B. The seller has to qualify, in the eyes of their mortgage company (lien holder) as a person who legitimately cannot afford to live in the house any longer, they can no longer afford the payments and have experienced a “hardship”
C. The Seller aligns themselves with a real estate agent or a REALTOR (member of the National Association of Realtors) who specializes in Loss Mitigation, who will help prepare the necessary paperwork for their lender. ( ask if your agent is a LMC agent- Loss Mitigation Certified) The cost of the REALTORS brokerage fees are usually absorbed as part of the short sale.
D. Once the seller has proven a hardship and disclosed all their financial issues to their lenders satisfaction then…
E. The REALTOR provides the bank with an opinion of value that the Seller and REALTOR have agreed to list the property for
F. Then they Bank has to order an independent opinion of value for the house… ( the order of the last 3 items may be different depending on the sellers mortgage company/lien holder)
G. Then the house is placed on the market for sale…..through a REALTOR or Real estate agent and the house is placed in the Multiple Listing Service for that area. ( Remember not all licensees are REALTORS)
H. In the mean time the foreclosure process starts because the seller is likely not paying the mortgage.
I. The foreclosure and short sale process are separate and it is often a race to see who gets the house first (a buyer at an approved short sale or the bank buying it back at foreclosure) It is very important that at this point you as the buyer or the seller are on the look out for any notices to the owner of the property that indicate that the property is headed towards foreclosure. If a foreclosure auction is scheduled, it is likely that the house will be sold to a party OTHER than the current buyer. There would be no reversing this.
J. The Bank will only accept offers from PRE-APPROVED buyers, and the BANK often wants a SECOND Pre-Approval through their own mortgage department , although the buyer is not obligated to use the lien holders company for financing. If the buyer’s offer is CASH, then proof of funds must be provided.
K. The Buyer’s offer cannot be subject to the sale of property they currently own. If you are a buyer of a short sale and have a home to sell, then you must qualify to carry both your existing home and your new home ( the short sale) or you must sell your existing home first.
L. Once the buyer presents an offer it can take anywhere up to 6 months for the bank to respond and sometimes the foreclosure happens first and the buyer doesn’t get the house. This is why you would want to keep an eye on local papers in the community that the short sale is located.
M. The average time to close a short sale is 7-9 months. Could be longer but lenders are working on becoming more efficient with this process. The National Association of REALTORS and its members are working closely with lenders and lawmakers for guidelines to streamline this process.
N. Once an offer is presented and accepted by the sellers, then the buyer does their inspection, and signs the Purchase & Sale Agreement…. There is usually no negotiating after the inspection because the sellers often have no money to repair anything and their lien holder will not accept anything less than the buyers original offer…so if the inspection is horrible… usually the buyers only option is to withdraw from the transaction. If you have a bad inspection as a buyer, then it would be best to have photos and a copy of the home inspection along with cost estimates from licensed contractors to repair any serious structural or mechanical defects. That sometimes will help with the lein holder accepting a lower price than originally offered. No Guarantees
O. If the buyer chooses to stay with the house and their offer, it’s likely because they have negotiated such a good deal on price…and often one that is negotiated on facts and value and not emotion and feelings. A better price than a traditional sale, what do you think?
P. Then we wait, and wait and wait… for the bank/lien holder to review all the aspects of the offer and to approve how much SHORT they will be on the original loan amount. (how much debt they will forgive)
Q. If the bank/lien holder doesn’t accept the buyer’s offer and they don’t agree to forgive a portion of the seller’s debt, then the buyer could be out of luck, deposit is likely to be returned (unless otherwise stated in the agreement).
R. The lien holder/bank on occasion will counter offer, but not likely. However be prepared to respond quickly as a buyer, the lien holder/bank will want an almost immediate response.
S. If the bank accepts the offer and agrees to forgive a portion of the sellers debt (hence the term selling the house SHORT) then they will require an immediate closing within 30 days or they may require the buyer to pay more money so extend a closing beyond 30 days.
T. The house is to be delivered vacant and free of sellers belongings to the buyer at the time of the closing ( unless otherwise agreed upon) however note that the seller hasn’t been paying their mortgage, taxes and perhaps utilities… its very possible that they are not maintaining the house. (paint, lawn, snow removal, etc) Talk to your attorney about how you can best protect yourself from a seller who has all but abandoned the property. Even if you are willing to mow the lawn that has become 28″ high and address maintenance issues when you move in, your lender ( who is letting you borrow the money to make this purchase) may NOT allow it. They may expect the house to be in a certain condition at the time they conduct the appraisal for your Loan. Check with your Lender if you are a buyer of a short sale.
U. The tax consequences of a short sale are usually far less for the seller then a foreclosure or bankruptcy, which is why sellers lean towards short sales first. If you are a seller and considering a short sale be sure to check with your accountant or tax professional before making that decision.
V. If you are a seller and are uncertain about your options then please click on this ling for a copy of Protecting Your Investment, Published by the MA Association of REALTORS and with assistance of the MA Office of the Attorney General.
W. Still have questions? No problem Please email me firstname.lastname@example.org or click on Chat to talk to me directly.