Short Sale
By Robert Reynolds
Frequently Asked Questions about a Real Estate Short Sale
Q: What is a real estate short sale?
A: A short sale is when a lender allows the borrower to sell their property for less than the amount owed on the loan. The seller turns the proceeds of the sale over to the lender, in full satisfaction of the debt. A short sale is generally done to prevent foreclosure on the property.
A lender will allow a short sale if they believe it will result in a smaller financial loss than a foreclosure.
Q: What are the Benefits of a real estate short sale for the seller?
A: The seller benefits from a short sale in that it prevents a foreclosure on their credit history. Typically, a short sale is quicker than a foreclosure and less costly, and the homeowner may find it less stressful. The borrower is also able to get out from under a debt that is no longer manageable.
In most cases, the negative consequences are relatively short lived.
Many homeowners are able to purchase another home within two to three years if they have a short sale on their credit history. Negative credit consequences for foreclosure last up to seven years.
Q: What are the Benefits of a real estate short sale for the lender?
A: Banks and other mortgage lenders have shareholders, who naturally want to see them make a profit, not take a loss. Too many losses on the books can indicate a company is in trouble, and it makes shareholders nervous!
By doing a short sale, the lender is able to clear away some bad debts, and recover at least a portion of the monies owed, before the borrower becomes totally insolvent and defaults entirely.
Also, agreeing to a sort sale means the lender won’t have to incur the time and expense of insuring and maintaining the home, putting it on the market, and waiting for a buyer. During a distressed real estate market, a home can stay active on the market for months and these costs begin to add up.
Q: What are the Disadvantages of a real estate short sale for the buyer?
A: Due to the circumstances of the sale, the potential buyer may have a few extra hurdles in negotiation before the deal can be sealed. The lender has to approve the selling price, closing costs, and other fine points, and they may not be as eager to accept the buyer’s offer. The current owner has to be given an opportunity to vacate the property, and closing can take 45-90 days to complete. It is a time consuming process that many buyers aren’t willing to wait out.
Also, short sale homes are offered “as is.” Lenders generally won’t pay for repairs discovered during a home inspection, pest inspection or the purchase process.
Q: What are the Disadvantages of a real estate short sale for the seller?
A: A borrower contemplating a short sale should be advised that it may not eradicate all of their debt. Unless they get the lender to agree to accept "payment in full without pursuit of any deficiency judgment” they can still owe the difference between the mortgage balance and the discounted amount of the sale. If a deficiency judgment is allowed, it may have a negative impact on the sellers credit history.
Credit ratings are negatively impacted by short sales as well, but the opinion of professionals varies as to the extent of the damage. Some quote the drop of points on a credit report to be between 200 and 300 points. More conservative experts estimate a drop of 80 to 100 points.
It is best to consult a real estate lawyer or tax advisor on these matters, before making the decision to do a short sale.
Q: What are the Disadvantages of a real estate short sale for the lender?
A: In a short sale, the lender loses money. The lender may lose money on the original loan amount and they lose money from any future interest payments. In addition, the lender uses time and resources during the short sale process.
Conclusion
A short sale is rarely beneficial for all parties involved and often has lasting consequences. Short sales devalue properties in a neighborhood, ruin a homeowners credit profile and can leave banks with a substantial loss on their investment. In addition, short sales may cause homeowners in the area to rush and sell their own homes to avoid taking a loss down the road, and new buyers avoid neighborhoods where the number of short sales is high. As a result housing sales can suffer. Distressed homes seem to self-perpetuate in neighborhoods. Before considering a short sale, consult with a real estate and credit professional.
