You’d be hiding under a rock if you haven’t heard a ton about short sales in the news and everywhere else you look. From the radio ads, bus stop benches, and warnings about scam artists taking advantage of people there is A LOT of misinformation out there. I figured I’d put this short article together to help people understand exactly what a short sale is and some of the very basic information about them. This basically “Short Sales 101″ information that some of you may already know, but others may need to know…
The term “short sale” in the Real Estate world basically means selling a home for less than the balance of the loan that a bank or lender is owed. There is nothing mystic about what a short sale is. Just owing more on a home than you are able to sell it for on the open market, and needing the bank’s approval for them to take a loss for the difference.
For example: If Joe owns a home that he bought for $300,000 last June and now with market conditions is only worth $280,000, and needs to sell, he will have to get the lender’s approval to sell for that amount minus any Realtor commissions, closing costs etc. The sale will be “subject to” lender approval, which means the lender has the final say on whether the home will sell.
Keep in mind that just because Joe “needs” to sell, he doesn’t necessarily qualify to sell the home short. The lender is going to “qualify” the sale/owner/situation based on the “hardship” the owner is facing. Joe may be a candidate for a short sale, then again he may not. A borrower owing more than the value of the property won’t qualify as a hardship for that reason alone. Hardships usually fall into the range of events like divorce, job loss, ARM payment adjusting, etc.
Even with a legitimate “hardship” the lender is going to make sure that the Seller/Borrower has no other funds or assets that could be used to pay the amount that will be short. They may also send a 1099 to the borrower for the forgiven amount of the short sale and the borrower may then be taxed on the forgiven amount as earned income (there are many exeptions to this though).
There must always be a legitimate hardship before requesting a short sale. The lender will require proof of the financial standing of the borrower (w-2s, tax returns, bank statements, paystubs, etc.) to verify the that a short sale is necessary, and withholding information is not advised.
The other thing to remember is that some banks will not even discuss their willingness to accept a short sale until you have a contract with a buyer. You can to try and ask the lender about the short sale process when you first identify the need for one, but you may not get a straight answer. At this point you want to request a short sale package that may give you somewhat of a checklist of documents the lender will need with the short sale contract from the buyer. Better to start the paperwork process sooner than later since you may not want to wait around a few weeks until you get a short sale package together, and a buyer’s offer submitted, as this is just another avoidable delay.
For the Homeowner in Trouble:
If you are a homeowner with a legitimate hardship and situation, and are curious if a short sale may be your best option, seek the help of a Realtor who does short sales. There is a lot of legwork to do and most folks won’t even know where to start (some Realtors won’t either). The good news about utilizing the services of a Realtor is that the headaches, phone calls, and negotiations will pretty much be handled by them, AND you won’t be paying the commission, the lender will as part of the loss!! There isn’t much you can lose in this situation, and for the price you can’t beat it! Plus don’t forget you will need to have a Buyer for the home before you will get the approval for the short sale, so hiring a Realtor is definitely the way to go.
For the Home Buyer or Investor:
This may be another way to buy a property below market, and either enjoy the equity you earn in the home while you live there, or enjoy as a profit when you sell, or rent it out as an investment. This can be the “pre-pre-foreclosure” opportunity investors look for since the Homeowner may still be current on the loan at the time, but they know they will soon be in trouble. Here you may be able to help ease the burden the homeowner is facing through their hardship, and also be rewarded handsomely for it as well!! Plus as an investor there may not be as much competition in this arena for acquiring properties.
Just keep in mind that no matter how good the paperwork is when you submit the offer to the bank it will usually take at least 30-60 days for a response to an offer, and many times it could be 90-120 days. I guess you can look at it like this, if you have to wait a few weeks and can get a great price on a home it is time well spent!!
I want to Connect with YOU!