Over the past ten years, a lot has happened in real estate. Even though it might be hard to believe, the mortgage crisis happened more than ten years ago. “Short sale” became a distinguishing phrase shortly after the collapse. Even if you worked in real estate, there’s a strong chance you had never heard of it prior to 2008. Short sales accounted for the majority of all real estate transactions in the years that followed. Even though the total number has significantly decreased recently, a sizable number of short sale transactions still take place every day. But what exactly is a short sale and how does it operate?
A short sale, commonly also known as a pre-foreclosure sale, is a transaction within the real estate industry that refers to a sale that occurs when a financially struggling homeowner sells their property for less than the original amount due on the mortgage. Some homeowners will decide to complete a short sale of their homes if they’re in fear of a pending foreclosure which could plummet their credit score. It will still potentially lower a person’s credit, but not as much as a foreclosure would.
The property buyer is a third-party entity and all proceeds go to the home’s original lender. The lender can then choose to either forgive the remaining balance or try to reach the selling homeowner for a deficiency judgment. A deficiency judgment requires the homeowner to settle the remaining balance. Some states will allow a short sale to forgive that difference.
How Does a Short Sale Work?
The lender must approve the decision to proceed with a short sale before the procedure can start. To guarantee they don’t suffer financial loss as the lending party, the lender must provide documentation of the reasons for the short sale. Short sales can be a drawn-out procedure that can take up to a year to complete because it is necessary to properly track them. A short sale cannot always eliminate the balance of a mortgage after they finalize it. The pledge to pay back the remaining components of the mortgage can still be enforced even though the lender’s original agreement to do so may be waived. Since lenders must approve borrowers who want to complete a short sale, they learn fast what they need to take care of.
Steps of the Short Sale Process
Before beginning the procedures needed to properly seal the deal, it is crucial to comprehend the short sale procedure. The closing process involves significant financial and legal requirements for both investors and homeowners. Here are the five fundamental processes involved in nearly every short sale transaction.
When speaking with homeowners who have fallen behind on their payments, one recurring topic is how quickly it occurs. Although entering into foreclosure does take some time, it is not a decision that is made instantly. The short sale procedure is often initiated by a financial crisis, a medical emergency, or an abrupt decrease in income. A few weeks of mortgage lateness quickly develop into a month, and in an instant, foreclosure papers are served. The abundance of foreclosures during the housing crisis forced lenders to develop alternatives, and many of those are still readily available.
Between loan modification or principal reduction, most lenders would much rather you stay in your home than go into foreclosure. The most common foreclosure alternative is a short sale. This is essentially the lender agreeing to accept less than the principal amount owed. For a homeowner, the stain of a short sale is less than a foreclosure or bankruptcy. For lenders, they can salvage something from a depreciating asset without having to add the property to their portfolio. Before anything can happen, the homeowner must accept their situation and decide to take some kind of action.
From the perspective of lenders, the short sale procedure is essentially the opposite of a conventional loan application. No matter how badly a homeowner might desire to short sell, the lender must first allow it. The homeowner must convince the lender that they can no longer afford the regular payments. This is before they can proceed with a short sale. Paystubs, tax returns, bank records, and a hardship letter are just a few of the documents the lender may require to prove a hardship.
A homeowner cannot simply leave their property because they want to, according to the lender. You don’t necessarily need to be three or four months behind on your mortgage payments for getting approval for a short sale. You just need to demonstrate that you are experiencing or will experience financial hardship. The lender will either accept or reject the short sale application once all items have been provided. If approved, they will proceed to the process’s property valuation phase.
The seller wants to get the most money possible for their sale, as with any real estate transaction. While the lender will not simply give the property away in a short sale, they are willing to sell it for less. They will hire a local real estate agent to provide a broker’s price opinion (BPO). Either that or they request an appraisal to determine fair market value. Nothing other than listing a property will ever accurately depict its worth, but these techniques will provide the lender with a clear picture of the situation.
If the property isn’t already on the market, the lender will make a price recommendation; if an offer has already been made, they will respond using this information. Similar to any other listing, whether it is a short sale or not, the seller has less negotiating power the more work that has to be done and the weaker the market.
BPOs and appraisals are frequently highly subjective. These valuation estimates may not be perfect, but they do influence how much the lenders believe the property is worth and, ultimately, how much they are willing to accept in a short sale. Following receipt of the report by the lender, they determine the lowest price at which they’re willing to sell the property and the bargaining process starts.
Partnering with a cash buyer and short sale negotiator who has experience negotiating distressed transactions will help you as a seller considering a short sale to place yourself in a strong bargaining position. They may take the initiative on your behalf and utilize their techniques, advice, and tactics to help you position yourself in the best possible light. Although short sale negotiating periods have significantly decreased, they might still take several months in the appropriate situation. You must be willing to negotiate if you pursue a short sale.
The short sale closing process resembles that of any other transaction once all parties agree on the terms of the acquisition. The fact that you might need to evict the homeowner from the property complicates matters a little. However, the buyer may benefit from financial incentives from the lender or legally binding contract provisions. The procedure for a short sale at the closing table is the same; there is just a little bit of extra paperwork for the attorney. You have done the majority of the job once the lender agrees with the asking price.
Before proceeding, it is important to review any state-specific laws regarding foreclosure and short sales. Whatever your position in the transaction, a short sale might be a good option in the proper circumstances. Before using the short sale process, make sure to conduct the necessary research and weigh all of your choices.
Interested in Selling?
We at A Team Marketing can help you if you want to sell your home. We buy homes cash and as-is, in any condition! Just give us a call at 855-66A-TEAM (855-662-8326) or fill out our contact form here!