Q: What is a short sale?
A: A Short sale occurs when a seller needs to sell his property but owes more to pay off his loan than he will net when he sells the home.
Q: How is the lender involved?
A: The owner needs the lender to forgive the difference between the cost to sell the home (including the outstanding mortgage) and the sales price. There are some penalties to the seller in exchange for this “forgiveness”, particularly with the seller’s credit but it is less harmful to the seller’s credit than a foreclosure.
Q: How is this different from a foreclosure?
A: With a foreclosure, when the seller fails to make the mortgage payments, the bank will take ownership of the home through a legal process that may or may not include an eviction. With a short sale, the borrower still owns the property and gets permission to sell the home without having to pay the deficit.
Q: Does it harm the seller to sell a home through the short sale process? I don’t want to take advantage of someone like that.
A: A few years ago, I had a buyer client who did not want to even look at short sales due to a (misplaced) conviction that he did not want to take advantage of some poor seller in financial trouble. I unsuccessfully attempted to explain that the seller needs to short sale to go through to protect his credit from even more serious harm and to avoid a deficiency judgement and the taxes that come with a foreclosure. It is the seller’s choice to go through this process (in the hopes that the bank will agree to it) and buyers are actually helping in this case.
Q: Do short sales sell at a discount?
A: Generally, yes. In some cases these homes have been neglected for financial or other reasons. Many times you’ll see agents put very little into marketing because there is no guarantee the property will receive short sale approval and close. Because of these concerns, many buyers avoid these listings, which in turn decreases the value of the property and list price. Even many banks considering approving a short sale do not want short sales included in the comparables.
Q: Why would a buyer avoid such listings if they sell at a discount?
A: Some buyers do not have the time to wait for a bank’s response. An abnormally quick turn-around could take roughly 30 days to obtain an answer from the bank, but I’ve also seen cases where it took over two years to receive an answer, and even still the answer in that case was “No, we do not approve the deal.” Motivated buyers who need to move will pay more for the ability to move and make plans on their own schedules. Plus, interest rate locks are generally good for no more than 60 days which can be important to some buyers who fear a rise in rates and want to lock into today’s rate.
Q: What happens when there are two loans?
A: Both lenders must approve the deal. Should the home go into foreclosure, the first trust will be paid all money due on that loan before the second trust lender receives any money. This is why a second trust comes with a higher rate: the second trust lender takes on more risk. This complicates things to a much higher level. Sometimes one lender will agree to the deal and give 30 days to close, but by the time the second lender gives a response, the initial time period has expired and the process gets derailed. It’s not exactly “back to square one,” but getting both lenders to agree, at the same time, can be frustrating and sometimes impossible.