What is a short Sale? The situation is that the property owner (house or land) owes more than the property is worth in the current real estate marketplace and the bank has agreed to accept less than is owed as the payoff.
The motivator for the lender is that the owner cannot pay his debt and a short sale is less expensive than foreclosing. The owner cannot make any money from a Short Sale. Though the owner will take a credit report hit, it will hopefully be for a shorter period of time than had the bank foreclosed.
It’s a making lemonade from lemons scenario: the goal is to diminish the pain for all parties all as much as is possible.
Typically, the lender’s Loss Mitigation department handles Short Sales. They will evaluate the situation. An appraisal or a BPO (Broker’s Price Opinion) is used to determine current market value so that the shortfall can be estimated.
For buyers of a Short Sale property, it can be Opportunity Time but this is definitely a proceed with caution situation.
What can go wrong?
It’s a slow process. four to five months is not unusual. Multiple layers of approval may be necessary. If there are also junior lien-holders such as a second mortgage holders or HOA (Homeowners Association), they may need to approve the Short Sale too. Since these are in a secondary position and unlikely to get paid when there is a shortfall, they may prevent a Short Sale. If there is mortgage insurance on the loan, the insurer is also likely to be a party to Short Sale negotiations as they may be asked to pay out a claim to offset the lender's loss in the short sale.
Not surprisingly, short sale deals have a high failure rate and often do not close in time to prevent foreclosure when they are not handled by a knowledgeable and experienced professional Short Sale negotiators: Realtors who are Short Sale certified (SFR, a National Association of Realtors® designation given to Realtors® who have completed the mandated education requirements), loss mitigation specialists, and real state attorneys who specialize in Short Sales are often brought in to handle Short Sale transactions.
Both lender and owner/borrower must consent to a short sale. But just because a property is listed for sale as a Short Sale, that does not mean that negotiations are not ongoing. The borrower may be able to save his home by bringing past due payments current or he may not be willing to agree to the terms the bank wants and he may force foreclosure. If the bank feels the sales price is too low, they may say no to an Offer. Any short sale listing includes a warning that the bank must approve the sale. Lastly, a property could still go into foreclosure while the potential buyer is doing inspections and appraisals so the buyer also has risks. "Bank Approved Short Sale" on the listing indicates that, at the least, the bank is willing to consider a short sale position.
Depending on the deal made, there may be tax consequences for the owner of the property so it is important to consult an attorney and a CPA before agreeing to the lender's proposal. By nature, all short sales will have a deficiency balance. Laws governing the right of the lender to pursue a borrower for the deficiency balance vary state to state. States considered recourse states allow the lender to pursue. Non-recourse states generally prevent this, though some allow pursuit of deficiency though set forth limits on the amount that can be pursued. If a lender can legally pursue the deficiency and does not specifically waive its right to pursue the deficiency, the borrower is at risk for a deficiency judgement. Once a short sale has been completed, a Chapter 7 bankruptcy is a possible remedy the borrower can use to remove the risk of the deficiency or discharge the judgment itself.
Short sale success rates vary from state to state and from bank to bank. Some banks are easier to work with than others. Taking ownership of a Short Sale property can take 6 months and any buyer needs to take a longer than normal time frame into consideration since the earnest money will be tied up during the process.
Short Sales are complicated. If you are a buyer interested in researching Short Sales and Foreclosure properties, make sure you are working with an SFR certified Realtor. ®