Short Sale Explanation
In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank’s loss mitigation or workout department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower’s financial situation.
A short sale typically is executed to prevent a home foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. A bank will typically determine the amount of equity (or lack thereof), by determining the probable selling price from a Broker Price Opinion BPO (also known as a Broker Opinion of Value (BOV)) or through a valuation of an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer.
Short sales are common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit. When it makes no business sense or is economically not feasible to retain an asset, businesses default on their loans (called bonds). It is not uncommon for business bonds to trade on the after-market for a small fraction of their face value in realization of the likelihood of these future defaults.
Summary Data on Short Sales
- Short Sales are About 15% of National Housing Market
- First-Time buyers are nearly half of Short Sale Buyers
- Short Sale Properties sell at 15 – 20% less than non-distressed properties
- Expect 2 Months for “yes” or “No” response to offers
- Three offers for every completed short sale
- Expect an Average of 4 Months on market
- 5% total commission is most common; 6% does happen
What should Homeowners who have challenges meeting mortgage payments do?
Homeowners having difficulty making their mortgage payments should talk to their mortgage servicer or a housing counselor as early as possible.The servicer may not be the same company that originated the homeowners mortgage. The servicer will work with their customers to find viable alternatives to foreclosure where possible. A servicer may own the loans they service and/or service the loans for investors so the ultimate decision as to what alternatives can be provided may not be up to the servicer.
and other options
Why are there short sales?
Homeowners have an involuntary hardship and can no longer afford their monthly mortgage payments and the property is worth less than what is owed.
Avoid stress of foreclosure sale; honorable exit to a difficult situation.
Homeowners can typically live in the home until the new owner closes, giving time to make other living arrangements.
Foreclosure is postponed and collection calls will stop once a written, signed offer is received and approved.
Short Sale impacts
Credit report will state “paid off in full for less than full balance.” Reestablishment of credit may be required to qualify for a new mortgage following a short sale.
There may be tax implications. The homeowner should speak with their tax advisers about the tax implications of a short sale.
What else homeowners should be aware of:
- Buyers cannot be anyone the homeowner has a close personal or business relationship with, including family and friends.
- Homeowners are responsible for making their mortgage payments while the home is on the market.
- Mortgages in bankruptcy require special consideration.
- Homeowners should speak with their mortgage company to discuss their options.
- Who would not be eligible buyers (cannot be anyone with a close personal or business relationship to the homeowners; family, friends, neighbors).
- How to possibly reduce the time line
- Notify the lender that is servicing the property as soon as the listing contract is signed. This allows the servicing company to complete the property valuation and borrower financial evaluation prior to receiving the offer. This significantly reduces the short sale decision time on a submitted offer.
- Allow the appraiser timely access to the property
- Due to the complex nature of the sale, the process does not follow those of a typical real estate transaction
What REALTORS need to know:
- A short sale approval is usually good for only 30 days
- If the closing does not occur within 30 days the entire short sale package may need to be resubmitted with updated information, and/or the approval process may need to start over.
- Buyer concessions must be approved by the investor.
Common Short Sale Obstacles:
- Unrealistic expectations
- Timeliness do not follow typical offer-to-close time line
- Price ‘low ball’ offers due to market conditions
- Excessive seller concessions and costs
- Offer does not meet investor guidelines
- Mortgage insurer requiring promissory note
- Processing delays
- Valuation delays
- REALTOR and customer required documents missing or not signed and dated properly
- Team not fully engaged
- Buyer’s REALTOR working short sale without homeowner engaged
- Buyer REALTOR is often considered an unauthorized third party
What can derail lender approval:
- Refuse to sign investor required promissory note
- Don’t provide access to the property
- Junior lien holders
- Will not approve transaction
- Unable to secure financing
- Unclear title
- Listing price: Too high or too low – either not generating enough offers or creating offers which are too low.