You must have encountered the term Short Sale in real estate numerous times. It’s when a homeowner has to sell their property for short since the current mortgage payment amount is more than the asking price. A short sale usually indicates the financial distress of a homeowner who has to sell the property before it gets seized.
The sale has to be approved by the mortgage lender in advance. And since all the proceeds are under a lender’s authority, they have two options regarding the remaining balance. Either they can make the owner pay a part or all of the difference with time or forgive it entirely. Let’s get into the details of how a short real estate sale works and its pros and cons for sellers and buyers.
About Short Sale in Real Estate and the Risk of Foreclosure
There usually are two options for a homeowner whose property is underwater or way behind on his mortgage payments – short sale or foreclosure, one riskier than the other. Either way, the owner will lose their home. But the consequences and timelines of both options are different.
A short sale happens when a homeowner has missed many mortgage payments and foreclosure risks. Foreclosure is bad news because it is the lender’s last option, where they will directly seize the property from the homeowner. Furthermore, the occupants will get evicted, and the owner has to wait for 2-7 years before they can buy a new home. So yes, the risk of foreclosure is huge and scary, which is why a short sale in real estate is a good option. However, it brings other challenges for the buyer, which we will discuss in a while.
In case of a short sale, the banks usually let go of the remaining balance because of the poor financial situation of the owner, even though it is a loss for them. So, along with potential tax liabilities, your credit score will also take a hit. We have discussed the procedure below if you decide to go with the option of a short sale.
What is the process of a short sale in real estate?
Following are the steps of a short sale procedure in real estate, which does not essentially go step-by-step as mentioned.
Convince the Lender First
Before you crack down on the whole process of the short sale, your first job is to convince the lender and see how likely he is to agree with you because not all lenders are corporative and would rather take the remaining amount from you.
Firstly, your financial trouble must be new and solid, like a recent divorce, loss of job, or an emergency health issue. It’s better than something you did not disclose previously to the lender when applying for a loan. Provide the lender any documentation or information they need, and be honest. Hire a successful real estate agent with short sales experience who can communicate successfully with the lender.
If the lender agrees after you answer certain financial questions, you can proceed forward. There is also a hardship letter that you have to submit, which will include the details of your reasoning for a short sale. The details must include relevant documents like copies of recent medical bills, termination notices from a job, a divorce decree, bank statements, etc.
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The lender will then send a valuation letter to the seller that will include an estimation of the fair market value of your property along with an expiry date.
Get Professional Consultation
The next step for you as a seller is to consult real estate professionals like estate agents, tax professionals, and attorneys. People often prefer to carry out the process of short sales on their own without hiring any consultants because they cannot afford one. But by doing so, you might get into bigger financial trouble – one you cannot recover from.
So, use the money from the property’s sale to pay for the professional services of these consultants. Some lenders might push you to get a qualified real estate representative for yourself. Once hired, the agent will set your home for sale after following certain home staging ideas and list it on the market.
Set a Reasonable Offer
The asking price of your property should also include the amount you need to dive out of the shortfall, which you might have to pay as per the bank’s requirements. After going through all the offers, your broker will submit the highest one to the lender and complete documentation. It will include the broker’s updates on the local market, an earnest money deposit, the buyer’s financial qualification details, and the purchase contract. It’s up to the lender to either approve the offer or submit a counteroffer.
Find an Eligible Buyer
You will have to find an eligible buyer if you don’t get any direct offer. To reach out to online buyers, you can utilize different social media management packages. Remember that a lender’s approval of your short sale after receiving details of the proposal is a must. Once you agree with the buyer, you will complete most of the work. The later proceedings are to be carried out by the terms set by the lender.
Submit the Paperwork in a Bank
Now that you have all the essential paperwork ready, you can submit your proposal to the bank. The proposal documentation should also include the hardship letter to protect your interests. It should be convincing enough that the bank finds it valid and appealing.
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Pros of Short Sale in Real Estate
There are pros of a short sale in real estate for buyers and sellers.
For Sellers – Avoid the Risk of Foreclosure
For sellers, a short sale is the best way to get rid of your mortgage debt and avoid foreclosure. Also, your credit score will suffer less damage, and you can soon purchase a home for your family compared to a foreclosure.
In case of short sales, sellers are usually under some financial distress which is why they are highly motivated to sell the property. It is their last hope to avoid the risks of foreclosure in the future. You, as a buyer, can take advantage of this situation. Also, the negotiations will be easier compared to the listings of the traditional market with top-dollar asking prices.
Striking a Bargain and Building Equity
Another great advantage for the buyer is that they might strike a bargain and get the property for below fair market value. It can be a good source of building equity fast. Use the money to renovate the place as a future investment. Later, with a gain in market prices, you can list the property for sale and get huge profits out of it.
Good Opportunity while Staying in Budget
When deciding to buy a house, you will make a budget first. If you come across a short-sale property, you will end up saving a great deal from your budget that you can later use for other real estate investments. In short, you will get to buy more while staying within your budget’s limits.
A House Inspection
If you want, you can get a house inspection of the property. Since you have decided to take a distressed route, it’s better to rule out any risks regarding the house’s condition.
There is less competition for such types of sales, so you do not need to worry about another buyer swapping in and taking away the deal.
Cons of Short Sale in Real Estate
Let us look at the cons of the short sale in real estate that both a buyer and a seller will eventually face.
It takes a Long Time.
The biggest disadvantage of short sales for both the buyer and the seller is that the processing and approval of the offer take a long time. You might end up waiting for a few months, even till the bank responds to the buyer’s request.
Short sales can be anything but short.
Additionally, the involvement and approval by the lender will also take up a lot of time. For the seller, it means keeping up with the updates and not letting the client go easily. For the buyer, it means you will not be getting the house for a while.
Less Room for Negotiations
The buyer has less room to negotiate. Your situation is already evident to the buyer, and they will use this upper hand when deciding the terms of concessions and pricing. So, you might have to pay for the closing costs at the end.
Short Sales are Sold As-is
Short sales are purchased and sold as-is without any renovations or changes. So you are more likely to get home not in its finest state. For precaution, get a detailed house inspection. If some structural damages cannot be fixed, back out of the deal immediately.
Difficult to Find
Short sales listings are difficult to find because they come about due to certain financial situations of the homeowner. So instead of looking for such listings, begin your house hunting with an open mind and look for other options.
For the Seller
Overall, a short sale in real estate is a preferable option as compared to the troubles of foreclosure. But do not expect all your financial problems to end after the sale since there is a good probability that the lender will ask you to pay the difference between the remaining mortgage and the selling price. Depending on the distress a homeowner is facing, a short sale brings less trouble and a better financial situation.
For the Buyer
As a buyer, you might not get as much profit from a short sale as you expect. The lender might reject your offer, or the bank processing will take a long time. During that period, there is also a possibility that the seller ends up fixing their finances. If that happens, they will back off the deal, and you will waste a lot of time and effort. Hence, a traditional home purchase will always be a better option, especially if you plan to live in that home.