Basically, a short sale is a sale is a property that sells for less than the balance owing on its mortgage. A short sale can be an underwater home, an apartment building or even vacant land. If there is a mortgage balance that is greater than the market value of the home, that property is a short sale. The term Short Sale means that the homeowner is ‘short’ the funds to maintain the mortgage. It has nothing to do with the time it takes to sell the home. In fact, it’s just the opposite. Short sales can be very lengthy.
A Short Sale is up to the Mortgage Holder
Not every property may qualify for a short sale in a bank’s eyes. A bank must agree to grant a short sale. Banks are under no obligation to approve a short sale. Banks will allow a short sale only if the bank feels that it is in their own best interests to approve a short sale.
The bank might approve the short sale if they will make more money through the short sale than to foreclose. Remember that as a mortgage holder, the bank will make the final decision. However, it is estimated that banks could save 25% to 30% on foreclosure costs to allow a short sale over a foreclosure. However, there may be investor issues that makes it more profitable for the mortgage holder to foreclose.
The Process for a Short Sale
There are 4 essential ingredients to a short sale. In most cases, it is necessary for the homeowner to be in a hardship position meaning that they are unable to continue the mortgage payments. Some reasons for this may be a loss of income, illness, death in the family, and so on. This is also referred to as an ‘underwater’ home.
It is important to understand that it is not a hardship to the homeowner if the property is worth less than they owe. It’s a disappointment, for sure, but if they are able to pay the mortgage they are not eligible for a short sale. There is a BIG “however” in that sometimes a short sale is still possible.
The 4 essential ingredients are:
An underwater home
A willing short sale bank
A seller with a hardship
A buyer willing to purchase the home
What Role Do Real Estate Agents Play in a Short Sale?
Some real estate agents throw homes on the market that will never close as a short sale. That’s because the agents do not always qualify the short sale sellers. Some agents place unrealistic price tags on the short sale, which the bank will never accept. Here is what a Real Estate Agent SHOULD make happen in a short sale.
- Determine the type of short sale. There are many types of short sales, from Fannie Mae HAFAs to regular, non-GSE HAFAs to a traditional short sale, and a few more in between. As a side note, HAFA is a government sponsored program that is meant to make a short sale quicker. But remember that it is a government sponsored program and has its own set of troubles. HAFAs will be covered in the next blog post.
- Gather the required paperwork and submit the short sale package to the bank. Sometimes agents outsource this part of the process or they might hire a third-party to negotiate the short sale.
- Help the seller to price the short sale home. The price needs to be attractive enough to entice a buyer to wait for short sale approval but high enough to satisfy the bank’s BPO.
- Put the home on the market. The agent must submit all offers received to the seller. Some offers will be lowball offers because buyers don’t know any better.
- Negotiate the short sale. Sometimes sellers will hire a lawyer to do the short sale, but often it’s the agent who negotiates with the bank on behalf of the seller.
- Submit the short sale approval letter to the seller. Most sellers want a release of liability and no deficiency to do a short sale. State laws tend to govern the terms in the approval letters.
Sellers should always get legal and tax advice before completing a short sale.