What is a Short Sale?

---

You have heard the term used, you have seen them advertised, but you still do not have a good understanding of what a Short Sale is. Can you sell your home with the expenses being absorbed by your lender? Can you buy a short sale for less money than a traditional sale? Here's what it means to benefit from a Short Sale.

A Short Sale is when the seller of the property currently owes more on their mortgage than the house is worth in today’s market and sells the home to a buyer for less than current loan balance.  For the seller, the financial consequences of proactively initiating a Short Sale are usually far less damaging than a foreclosure or bankruptcy. For the lender, often a bank, the avoidance of a costly foreclosure is worth forgiving a portion of the debt.

The seller has to qualify, in the eyes of their mortgage company/lender, as a person who legitimately cannot afford to live in the house any longer. They cannot afford the payments and have experienced a “hardship”.

The seller aligns themselves with a real estate agent or a REALTOR. A REALTOR is a real estate agent that is a member of the National Association of REALTORS.  As such, not all real estate agents are REALTORS.  The seller will want to work with an agent or REALTOR that specializes in Loss Mitigation and is Loss Mitigation certified. This agent will help prepare the necessary paperwork for the lender.  The cost of a REALTORS brokerage fees are usually absorbed as part of the short sale.

Although the order of the process may be different according to the seller's lender, it typically follows that:

1) The seller proves a hardship and discloses all their financial issues to their lender's satisfaction.

 2) The REALTOR provides the lender with an opinion of value that the seller and REALTOR have agreed to list the property for.

3) The lender orders an independent opinion of value for the house. 

After this, 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. 

In the meantime, the foreclosure process starts because the seller is likely not paying the mortgage.  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 the buyer and 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 and there would be no reversing this.

The lender will only accept offers from pre-approved buyers and often wants a second pre-approval through their own mortgage department, though the buyer is not obligated to use the lender's company for financing. If the buyer’s offer is cash, then proof of funds must be provided.

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.

Once the buyer presents an offer it can take up to 6 months for the lender to respond.  Sometimes the foreclosure happens first in which case the buyer would not get the house. This is why it is important to keep an eye on local papers in the community that the Short Sale is located.

The average time to close a Short Sale is 7-9 months. It could be longer, but the National Association of REALTORS and its members are working closely with lenders and lawmakers for guidelines to streamline this process.

Once an offer is presented to and accepted by the seller, the buyer does their inspection and signs the Purchase & Sale Agreement.  Typically, there is not any negotiating after the inspection because the distressed seller often does not have funds to make any repairs and their lender would not accept anything less than the buyer's original offer. 

If the home inspection reveals undesirable conditions, usually the buyer's only option is to withdraw from the transaction. If the buyer elects not to withdraw, it is best for them to have photos and a copy of the home inspection along with cost estimates by a licensed contractor to repair any serious structural or mechanical defects. Occasionally, this will lead to the lender accepting a lower price than originally offered.  If the buyer chooses to stay with the house and their offer, it is likely because they have negotiated such a good deal on price.

The buyer and seller now wait for the lender to review all the aspects of the offer and to approve how "short" they will be on the original loan amount, meaning how much debt they will forgive.  If the lender does not accept the buyer’s offer or agree to forgive a portion of the seller’s debt, then the buyer's deposit is likely to be returned.

The lender on occasion will counter offer, but this is not typical. However, the buyer should be prepared to respond quickly as the bank will want an almost immediate response.  If the lender accepts the offer and agrees to forgive a portion of the seller's 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 for an extension beyond 30 days.

At the time of the closing, the house is to be delivered to the buyer vacant and free of the seller's belongings unless otherwise agreed upon.  However, it's very possible that the seller has not maintained the house - paint, lawn, snow removal, etc.  If this is the case, the buyer should speak with their attorney in order to best protect themselves from a seller who has all but abandoned the property.  Even if the buyer is willing to address maintenance issues upon moving in, their lender may not allow it. The lender may expect the house to be in a certain condition at the time the appraisal is conducted for the loan. 

In short, if you are a seller considering a Short Sale, be sure to work with an agent or REALTOR® that has experience in the often time consuming, complicated sale and consult with your attorney and tax professional before initiating the process. call me for a confidential discussion 781.844.8870