Short Sales: Frequently Asked Questions (FAQ)
What is a Short Sale?
Short Sale is the term used in the real estate business to describe a situation where there is more debt owing against a property than the property is worth. In other words, the owner can not sell the property unless the creditors ("Third Parties") agree to accept a payment that is less (or "short") of the amounts actually owed to those Third Parties.
Why would a lender agree to take a loss on real property?Lenders are in the business of lending out money, not acquiring real property. They are required to keep their REO (real estate owned) inventory below a certain percentage of their assets. When they foreclose and receive a property in their portfolio they work as quickly as possible to sell or turn it around. The foreclosure process is very costly. The lender will determine the current market value of the property and then contract with a real estate professional to market the property. Regardless of the amount originally owed, the home can only be sold at market value. Lenders can mitigate losses and reduce expenses by selling the property pre-foreclosure.
Why does it take so long to close a short sale?A normal real estate transaction can close at will once the contract is fully executed. In the short sale, all agreements are “subject to lien holder approval”. Since the seller is requesting a discounted pay off from the lien holder all parties must allow the lien holder to complete an evaluation to determine if the loss is justifiable. The lender wants to mitigate their losses and so the process can delay closing for several months.
If the client files a bankruptcy should he still complete the short sale?One of the main goals in the completion of the short sale is to minimize the damage to the credit of the individual. It is true that a Bankruptcy is disastrous to ones credit. Adding a foreclosure is financial suicide. Why should an individual be afflicted with both? There are methods available to have the property released from the assets included in the bankruptcy allowing the sale to be completed.
How long after the short sale before an individual can purchase another home?A person’s ability to purchase another home is dependent upon several factors. Credit is only one of the factors. A lender is most interested in the borrower’s ability to repay the loan. If the problems that led to the Short Sale are behind and there are at least twelve to twenty four months of good credit with three or more credit accounts, he should be able to purchase with minimal down payment at a competitive interest rate.
Can you short sale a property that has multiple liens?Liens against a property are prioritized according to date and time of recording. When a property is sold “short” the loan in first position is paid the majority of the proceeds. All others are pretty much happy to get what they can. Lien holders are willing to negotiate.
How does a short sale affect the credit of the borrower? There are as many opinions about this question as there are attorneys. When a borrower fails to pay as agreed and falls 30-60-90 days behind he is considered in default. When the lender files a “Notice of default”, which is recorded with the county recorder, this begins the foreclosure process. At this point, the majority of the damage to ones credit is done. It is actually considered a positive step if the borrower sells the property. The credit scores will recover faster, with a loan “settled for less than was owed” than it will with a completed foreclosure.
Who is eligible for a Short Sale?You need to sell your property, but you owe more than the property is worth. In order to get your lien holders to accept less or “short “you need to prove a hardship. Which could be caused by a significant loss of income, loss of employment, employment relocation that requires a move of over 60 miles, major medical expenses, increase in family size (new baby), divorce or overburdened, etc?
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