What is a Short Sale?

With the decline in the real estate market, many homeowners are finding that their house is not worth what it used to be.  They’re also learning that tapping that equity in their house has put them in a precarious position.  As the economy has continued to slow, many homeowners are finding that they can't keep up with their mortgage payments. Many folks in this position will opt for moving out and letting their house go into foreclosure. A foreclosure will stay on your credit history for 7-10 years. There are, however, other options.

A homeowner should start by communicating with their bank. You may be able to renegotiate the terms of your loan so that you can stay in the house.   A second option is bankruptcy.  Some forms of personal bankruptcy will allow you to keep your home. 

The other option is a short sale. A short sale is when a house sells but not for the amount owed to the bank. In many listings you will see language that states "subject to third party approval." That third party is the bank and that phrase usually indicates a short sale.

Depending upon the bank, the process can take anywhere from 30 days to six months once you have a buyer. The seller will need to start by writing a hardship letter to their bank explaining their situation.  The bank would then need to approve any offers that are presented.  While a bank tries to stay within the fair market value range, they will frequently accept a lower offer, taking into consideration the cost associated with the alternative, a foreclosure.  Once an offer is accepted your Realtor and attorney will work closely with your bank's loss mitigation department to complete the process.  Once a bank has accepted an offer they will frequently want to close immediately.

One Man’s Pain…

Like the old saying goes, one man’s pain is another’s gain.  For the buyer, short sales represent a chance to get a home for a good price. While the banks are willing to take a bit of a loss to just get the house off its rolls, they won't just give it to you. When purchasing a short-sale home you are usually buying the house as is. As the bank is already taking a loss, the last thing they want to do is be nickled-and-dimed over repairs.

Many of the homes you see that fall into the short sale category will have a lot of deferred maintenance.  For many homeowners living in a financial situation such as theirs, keeping their house clean and maintained is not a first priority.  Be prepared to put some elbow grease into most short sale purchases. 

Be prepared with your financing and to show proof of funds for any cash being brought to the transaction.  Have your pre-approval in hand before even looking at houses.  More importantly, be patient.  This can be a lengthy process.  Many of the banks were caught by surprise and didn’t have the staffs to man loss mitigation departments.  It is not uncommon for a potential buyer to wait several months for an answer.  And finally, be prepared to move when the time comes.  The bank may approval the deal on a Monday and expect a closing the following week. 

If you need to speak with someone about your current situation, please don’t hesitate to contact me at 973-697-7504 or via email at amcgibbon@andrewmcgibbon.com.

Disclaimer: Nothing in this article is intended to be legal advice.  An attorney should be consulted to help you select the choice that is right for your particular situation.