“In real estate, there is no shortage of concepts to confuse buyers and sellers. With today’s still topsy turvy market, short sales have become much more viable and interesting to buyers. A short sale is when a property is sold for less than the amount owed on the mortgage, but that sale has been approved by the lender. This article will explain what short sales are, and why pursuing a short sale property may be worth your time and money. For sellers, short sales are a last-ditch effort to avoid foreclosure. For buyers, they might find a pretty good deal.
Is there a catch? As with everything else in real estate, the answer is most likely “yes.” Short sales have a lot of rules and regulations—and they come with a timeline. It is not uncommon for real estate agents to assist or participate in short sales. Read our guide so you can be a savvy, know-it-all buyer and seller. Learn how to work with the agent better, and what kind of timeline to expect before your short sale is completed. “
What is a Short Sale?
A short sale in real estate is when you sell your home for less than the amount you owe on your mortgage. Many homeowners who find themselves in a short sale situation are not there by choice, but because financial difficulties, such as job loss, divorce, or medical expenses, make it impossible to keep up with mortgage payments. These circumstances make a short sale a little more complex than a conventional home sale; in a short sale, the lender must agree to a reduced payoff to avoid starting the long and expensive process of foreclosure.
The process of a short sale starts when you list your home for sale as a short sale—ideally with the help of an experienced short sale realtor. Once you find a buyer, you’ll start collecting all the documents you’ll need for your short sale package: financial statements, bank statements, paystubs, a hardship letter, etc. Your lender will review your short sale offer and your financial health to decide whether to approve your short sale.
The bank plays a significant role in all of this because someone must agree to lose money on this deal. After you accept an offer from a buyer and submit your short sale package, your lender will send an appraiser to assess your property. Depending on the results of that assessment, the negotiations may start between the buyer, the seller, and the lender. If your lender approves your short sale, you will get a payoff statement and can start making moves to close.
Pros and Cons of Short Sales
A short sale may be subject to lower purchase prices than traditional properties. As a direct result of lower costs, it’s possible for college students to save more money than they might otherwise spend with a different valuation method. At the same time, the nature of wholesale deals suggests that prospective buyers may be able to negotiate better deals for themselves (on top of an already great price), perhaps even those with the cost of repairs factored into the final sales price.
The next advantage is simple: a short sale impact on your credit isn’t nearly as bad as a foreclosure. While your credit will take a hit, it won’t be anywhere near as bad as a foreclosure. As a result, you may be able to bounce back a little faster than you would have if your home was foreclosed by the bank.
Again, however, I want to point out that this process, depending on the lender, can take a very long time to get approved by the bank; that’s if it even gets approved at all. Until this point, I have only seen how it affects buyers, but what about the sellers? The process of negotiation can be nerve-racking enough, not to mention the added element of surprise when it comes to lender responses. Understanding these dynamics can be incredibly beneficial for both buyers and sellers when it comes to the sales process – short sales in particular.
Financial Implications for Sellers
One of the interesting things about being a seller in a transaction is the concept of debt forgiveness. This is often evident in distressed sales or in situations of bankruptcy. Oftentimes, a seller may be able to negotiate with their creditors to have some of their debt forgiven. This can make it so the sale functions as a clean slate for the seller. You likely won’t be receiving all of the proceeds from the sale. Logically, if the sale price is significant enough, the lender is probably intending on using the entirety of the realized sale price to help repay the debt on the asset. Depending on how the debt forgiveness is negotiated, that could mean that the seller is going to have to sell the asset and then walk away from it with absolutely no gain.
Beyond the simple trauma of making such a huge undertaking and not receiving any money in return, an asset or business sale takes a significant amount of time and effort. Most sellers, in the midst of going through a big sale, are also not financially very liquid because they are wanting to use the proceeds of the sale to charge any other opportunities or personal costs they might have. Thus, if you don’t receive any money on a sale, it could affect more than just your payoff.\n
Buying a Home After a Short Sale
The process for buying a home after a short sale is not always straightforward, and several factors could affect this timeline. Generally, you may need to wait 2–4 years after a short sale to become a homeowner again, but the precise timeline varies from buyer to buyer. This variance depends mostly on two things:
- Your credit score—A low credit score can keep you out of the housing market for quite a long time. Two popular types of mortgages—conventional and FHA—require a credit score of at least 620 or 580, respectively. Your credit score could dip by 160 points after a short sale. It may take longer than a year to raise your credit score from 500 to above 620 because your credit score doesn’t improve at a rate of 10 points every month (as nice as that would be). It could follow this trajectory if you pay down your debts and make regular payments toward your other financial obligations…but life doesn’t always work out as planned!
- Two to 4 years is not short, but “short” is subjective. As I mentioned earlier, not all lenders are the same. Some are, as Goldilocks would say, “just right.” Others require you to wait two years after a short sale to finance a home, but many may make you wait for 4 years. The loan you want—be it FHA, VA, or conventional—may also affect your timeline. There are so many other elements to consider that I can’t possibly list them all here. Care to take a guess at what they are? Consider taking this free quiz to test your knowledge about loans and credit. Speaking with a mortgage professional will give the buyer a bird’s eye view into specific lender requirements and give clients a possible game plan to work toward being a homeowner again. It’s essential to inform yourself and be proactive, thus increasing your chances of success in the business of real estate.
Closing Costs in a Short Sale
Closing costs in a short sale transaction are often a sticking point between buyer and seller. Closing costs can include title insurance, appraisal, attorney fees, and other costs associated with the transaction. Understanding your role can mean making or saving a lot of money in the transaction. Though closing costs are often born to some degree by the seller, in a short sale, the seller is already in some financial difficulty, hence the short sale.
Often, the seller may request that the buyer pay some or all of the closing costs to effect the sale. Conversely, the buyer may ask the seller for funds to effect the sale. The seller may assert that his or her financial situation is such that he can’t afford to produce additional funds. It becomes an opportunity for the person with good negotiation skills.
You will need the lender’s approval to close your short sale, so the lender will have a say.
Additionally, your bank, as lender, may have restrictions, guidelines if you will, related to loan costs and fees in a short sale transaction. These costs cannot exceed X dollars. Don’t decide to assume the lender’s position. Let the bank tell you its position. You could use it to your advantage.
The goal is to get both the buyer’s and the seller’s positions, and as lenders increasingly guard their fees and costs, you should build your case along those lines. By talking with your buyer and working with negotiation, you may be able to agree on a way these costs should be distributed that looks fair to both of you (and which still adheres to the requirements of your lender).
Both homeowners (sellers) and home buyers in today’s real estate market need to understand short sales. When a homeowner sells his/her home for less than is owed, with the approval of the lender, it is a short sale. The process can be complicated because it’ll involve a bit of negotiation with the lender, and whenever money is involved, the government wants its piece of your deal. So, to get you to click my article, below are some bullet points of stuff in it you might find interesting.
Selling homeowners will learn how they can negotiate and what they can expect in terms of legal issues.
Understanding upfront what credit ramifications and tax consequences exist.
Buyers might stumble upon an article like this expecting to find their dream home in less-than-great condition at a rock-bottom price. It isn’t likely to happen, but if it does, read about why it’s going to take forever to finalize the deal.
Here’s a link to a list of some stuff you’ll want to have ready to go before the negotiations begin!
By all means, engage a real estate professional to help you understand what you’re getting into and to help explain different options because each county and neighborhood in this slowly recovering market are likely to be slightly different. Working with a knowledgeable real estate agent can greatly improve your experience and ultimate success in this unique slice of the market.