The Long and Short of Short Sales

The Long and Short of Short Sales

There is has been a national foreclosure crisis in America. Ten percent of homes have been facing foreclosure and out of those twenty per cent have been being sold by a short sale. What is a short sale? When a character is in foreclosure, when the bank or lender sells the character for less (short of) the balance due to them on the mortgage observe, then that is a short sale.

Short sales are made before a foreclosure takes place. Because of the fall in character values and the many one hundred per cent financing deals (no money down or less than twenty per cent down) done in the last few years, many homeowners are now “upside down” in their mortgages. This method their character is worth less than what they owe. Many of these homes will fall into foreclosure in the next few months or years.

When a character is in the pre foreclosure stage, the lender is often better off taking less than what is owed on the character than going by with the foreclosure and the costs involved, and then attempting to market the character. This can be a good situation for the homeowner facing foreclosure because they will usually lose money selling the home themselves having to make up the difference in the sale price and what is owed on the mortgage observe in addition as possible closing costs, inspection fees, taxes, and realtor commissions.

Short sales give homeowners an out their current financial crisis. They can also save having a foreclosure black mark on their credit score.

Homeowners facing foreclosure might have several options:

  • Refinance
  • Loan alteration
  • Forbearance/Repayment Plan
  • uncompletely Claim
  • Bankruptcy
  • Deed in Lieu (Also known as voluntary foreclosure)
  • character sale

A homeowner should analyze all options before making a decision on a short sale.

Lenders will not always agree to a short sale. Their considerations include:

  • If the mortgage is currently in default, or when default is imminent
  • They believe they can get or are offered an amount that is more than what they expect they could get in a foreclosure sale or auction (accounting for holding costs, taxes, and insurance on the character until the sale.)
  • Whether the short sale offer meets their specifications

edges do not want to own and continue character. That is not their business. edges are paper businesses, that is, they are in the business of loaning and collecting money. Also the average cost for a lender to go by a foreclosure is well over $50,000. Although lenders lose money in short sales, they are mitigating their losses. Most lenders have a Loss Mitigation Department that works to minimize losses from defaulted mortgage loans. This department does nothing but estimate loans gone bad to determine ways to recoup the most money possible.

Most short sales are a triple win situation. The seller gets out from under the character without a foreclosure on their credit report, the lender mitigates losses and a real estate agent gets paid. In most situations the homeowner does not pay anything for a short sale transaction. The lender waives their rights to a deficiency judgment against the homeowner and the short sale minimizes the homeowner’s shortfall on a 1099C which method the seller might avoid paying any income tax on transaction.

Here are the standard stages of foreclosure:

  1. After the borrower misses three monthly payments, the lender will begin foreclosure proceedings by issuing a Notice of Default (NOD) or Lis Pendens. The borrower has 28 days to respond to the NOD and if they do not, the lender will usually then pursue a default judgment.
  2. When a default judgment has been issued most often form the county court, then depending on state laws a Sheriff or Trustee will begin a Public Auction.
  3. The character will be appraised and public notice will be placed in a local newspaper with the date and time of the auction.
  4. Bidding is set to begin at two-thirds (66%) of the character’s appraised value and if approved by the lender then sold to the highest bidder.
  5. Often the bank or lender will keep the character (or buy the character back) and the character becomes a bank-owned or REO character.

The short sale course of action works like this:

  1. The seller lists the character for sale with a real estate agent for Fair Market Value (FMV). The fair market value is usually less than the mortgage balance owed or close to the same.
  2. When the character does not sell at FMV the price is lowered regularly, often every two weeks to encourage prospects and generate interest.
  3. When a buyer makes an offer with preapproval letter, the real estate agent prepares a short sales package for the lender’s Loss Mitigation Department.
  4. The lender will order a broker’s price opinion (BPO) to establish a fair value assessment. The lender would like to see the offer near or more than the BPO.
  5. If the bank agrees to the offer, the buyers will close on the character and if the lender does not agree they can send a counter offer just as any seller.

Not all real estate agents are educated in short sales. These types of negotiations are different and get be difficult. Novice agents make some shared mistakes that can prevent a deal from being reached. These mistakes include:

  • Contacting lenders for short sales without listing agreements or buyers
  • Listing short possible short sale character above the FMV.
  • Expecting the lender to provide a short sale package.
  • Not understanding what is required in a short sale package.
  • Sending a buy and sales Agreement without including the short sales package
  • Disregarding the importance of the interior Broker’s Price Opinion (BPO)
  • Underestimating the amount of time needed to complete a short sale transaction

Homeowners considering a short sale as an option must have a real estate agent with important short sale experience and preferably one that has worked with their particular lender.

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