Short sales have gotten more and more common in the past few years, since the real estate bubble popped and banks have become more eager to avoid the costly foreclosure process. While a short sale can be a long and frustrating ordeal, the end result is really a win for all of the parties involved. The seller is no longer saddled with that debt, the buyer gets the property at a bargain and even the bank often benefits in the end.
Whether you're selling or buying, there are a few things to keep in mind if you're considering a short sale. Let's take a look at some of the most important ones.
A short sale is not the same thing as a foreclosure. Unlike during a foreclosure, the homeowner is very much involved in a short sale. In fact, homeowners who decide to short sell are usually trying to avoid foreclosure by working out a deal with the bank. When you buy a foreclosed home, you sometimes have to worry about evicting the previous owners, and that's not a problem with a completed short sale.
For the seller, a short sale doesn't impact your credit in the same way that a foreclosure would. It's still a black mark on your credit score, but it doesn't damage your credit for as long. With a short sale, you can take out another home loan in as little as two years, whereas a foreclosure stays on your credit report for up to 10 years.
"Short sale" is sort of a misleading name. It doesn't refer to the time involved, but to the seller coming up short on the loan payoff. This is part of why short sales can take four to nine months to close, and sometimes even longer. The bank doesn't just come out and tell the seller how much it would accept for the house, so while the seller and buyer negotiate a price, the seller also has to get that price approved by the bank. Approval can take a long time, and if the bank rejects the first offer, it draws the process out even more.
In order to avoid foreclosure through a short sale, you have to meet several requirements:
- You must be upside down in your mortgage, meaning you owe more than the house is worth.
- You have to prove financial hardship, like getting laid off or divorced, or having substantial medical bills. The bank will require paperwork to prove that hardship.
- You need to show why you can no longer afford your monthly payment, such as if you had an ARM that's readjusted at a rate you can't afford.
- You can't be eligible for a loan modification.
The bank is going to want proof in writing that you meet all of these criteria. Getting approved for a short sale can be a long process in itself.
This isn't the time to go it alone: A real estate agent with experience in short sales can make a huge difference, especially if you're the seller. Short sales involve a lot of extra paperwork, and an agent who's familiar with all of the steps can help move things along as quickly as possible. These days, banks are receiving more short sale requests than ever, and it's highly likely that they'll process well-organized paperwork more quickly. Time is one of the most critical elements when you're short selling. If you don't find a buyer and move quickly, you can still face foreclosure.
A short sale can be a great bargain for you as a homebuyer, but proceed with caution. Less than a quarter of short sales actually close, and the back and forth between the buyer, the seller and the bank is a big part of the problem [source: Armour]. Many frustrated buyers end up walking away from short sales because they get fed up with the process. Even with so many foreclosures on the market, it's still tough to complete a short sale. Banks are working to streamline this process, but in the meantime, you should know what you're getting into when you put in an offer on a short sale.
Many sellers in the position to consider a short sale have other financial issues, including substantial debts, and filing for bankruptcy might seem like the right move. However, while filing for bankruptcy can help with many of these outstanding debts, it will hurt your ability to complete a short sale. Put simply: When you file for bankruptcy, banks and creditors are no longer allowed to collect from you. Because a short sale is technically a form of collection, it clashes with those bankruptcy rules. Talk to an expert to see what you can do to avoid ever declaring bankruptcy.
It might seem counterintuitive, since they're taking a loss on the property, but a short sale is often a win for the lender in the end. Foreclosure is expensive, and a short sale can help the bank save money on the property. If the bank forecloses, it has to pay to evict the tenant, maintain the house and pay any taxes until the house sells. The property becomes a liability. Short selling not only takes that liability off the bank's shoulders, but it also keeps a foreclosure off the lender's records, making them look better. A short sale can make the best of a bad situation for the bank.
Just like with foreclosures, many short sale properties are in need of repair -- sometimes extensive repair. Since the homeowner is experiencing financial hardship, chances are that maintaining the home wasn't high on the priority list. If you're considering purchasing a short sale, check out the property firsthand and hire an inspector you trust to look it over thoroughly. Many short sales are listed "as-is," so you can't ask the seller to repair any damage. In this case, you should factor in the cost of repairs when you're budgeting before you buy the property. It may still be a deal, but you need to know what you're getting into.
Remember, more than one lender may be involved in a short sale. It's common for a struggling homeowner to have a second mortgage or home equity line of credit, and you need those lenders to approve the short sale, as well. This can make the whole process more difficult, since often those "junior lenders" end up eating a big part of the loss. Of course, you'll want to deal with the main lender first, but don't forget to check for any other liens on the property. Skipping this step can lead to major difficulties later on in the process and will definitely slow things down.
When it comes to short sales, both sides of the process can be tricky. If you're the short seller, the bank can sue you for the loan balance on the home, so it's important to protect yourself. So-called "deficiency judgments," in which a borrower can't pay back a loan, are legal in most states, but not all. Talk to an experienced real estate agent or attorney to find out what the laws are in your state. In many cases, you can require that the bank waive the right to come after you for the difference as part of the short sale agreement.
For more information, check out the links on the next page.
When you can't afford your mortgage and don't want to foreclose, a short sale may seem like a good idea. Find out how short sales work at HowStuffWorks,
- Andriotis, AnnaMaria. "Are You Buying Into a Good Neighborhood?" SmartMoney. Dec. 15, 2010. (Feb. 25, 2011)http://www.smartmoney.com/personal-finance/real-estate/are-you-really-buying-into-a-good-neighborhood-1292360513981/
- Armour, Stephanie. "Home sellers frustrated as short-sale deals collapse." USA Today. Aug. 5, 2009. (Feb. 24, 2011)http://www.usatoday.com/money/economy/housing/2009-08-04-short-sales-mortgages_N.htm
- Bank of America. "Selling your home in a short sale." (Feb. 24, 2011)http://homeloanhelp.bankofamerica.com/en/short-sale.html
- Broemmel, Mike. "Short Sale Deficiency Judgment." San Francisco Chronicle. (Feb. 25, 2011)http://homeguides.sfgate.com/short-sale-deficiency-judgment-7220.html
- Dempsey, Bobbi. "10 steps to 'short sale' buying." Bankrate.com. Jan. 12, 2010. (Feb. 25, 2011)http://www.bankrate.com/finance/money-guides/10-crucial-steps-to-short-sale-buying-1.aspx
- MortgageOrb.com. "Survey Finds Short Sales Closings Can Take Up To Nine Months." Feb. 24, 2011. (Feb. 25, 2011)http://www.mortgageorb.com/e107_plugins/content/content.php?content.7899
- National Association of Realtors. "Is Inexperience Hampering the Short Sale Process?" REALTORMag. Jan. 28, 2011. (Feb. 24, 2011)http://www.realtor.org/rmodaily.nsf/pages/News2011012803