To Short Sale or Not to Short Sale?
What is a Short Sale?
To make this simple... a short sale is when a lender, who holds a note on a property, allows the owner of that property to sell their property "short" of what the seller owes their lender.
The most common reasons are a combination of the following:
- market value of the home is less than the mortgage owed
- employment and health hardships
- relocation out of the area
- interest rate changed / loan matured
- taxes and/or insurance increase
- condition of the property
The lender will not allow the seller to sell short JUST BECAUSE they want a new home. The seller must prove to the lender that they can no longer afford the home and will have no choice other than let it be foreclosed on. This usually means the seller is not paying the mortgage and is behind on payments.
As a seller, finding a buyer may be the only option other than foreclosure. It is also important to understand that the lender will try and 1099 the seller the amount the lender "forgave" the seller, to make the sale possible. This can cause the seller to owe the IRS taxes at the end of the year on that amount. A CPA should be hired by any seller who receives a 1099 for selling their home short, when doing taxes. Not ever buyer is going to want to deal with a short sale listing, so the buyer pool is much smaller than selling it conventionally.
As a buyer, one must be patient and be aware that the seller will more than likely be very flexible and sign a contract right away, but lender (3rd party) approval is required. It can take 30 to 120 days (if ever) to hear back from the seller's lender, whether or not the lender approved the terms of the short sale. It is recommend to not spend any money or do any inspections until an approval letter is received from the seller's lender(s), in case the sale is not approved. Some buyers may have to make repairs and turn power and water on themselves to simply have inspections done. Seller's rarely have the funds at this point to help with customary demands. In return, a buyer may be able to get a great deal on a home and help a seller avoid foreclosure at the same time.
The common steps to a "Short Sale" are:
- Seller advertise home for sale as a "Short Sale"
- Buyer and Seller complete a contract for sale and purchase
- Seller submits to lender for consideration & approval
- Lender sends out appraiser to do a BPO or Appraisal
- Lender decides if offer or foreclosure is in the Lender's investors best interest
- Either an approval letter is received, counter offer with new terms, denial, or nothing is relayed from lender
- Once approval letter is established, Buyer should carry on with inspections, obtain a loan if needed and set closing right away.
In a nut shell... this process is very complex with a lot of needed negotiating and follow up. Please feel free to comment on your experiences with short sales... Is it a DO or DON'T for you?