The global economy went through a low between the years 2008 and 2012, so much so that the period is called the Great Recession. During this period, a lot of homes that went on sale were short-sale homes.

While the real estate market does not seem to be doing as poorly now, the pandemic the world has been experiencing has definitely shaken things up, and the chances of short sales making a comeback cannot be ruled out.

But what exactly is a short-sale property? Is it a good idea to buy a short-sale home? We’re going to take you through everything you need to know about short-sale homes.

What is the meaning of a short sale?

home value

The definition of a short sale is the sale of a home for which the mortgage company has agreed to close a mortgage for an amount less than the borrowed sum. Simply put, the lender agrees to take less than what is owed to them by the borrower, and this is recovered by selling the property.

While in most cases, the lender agrees to write off the difference amount (it is a requirement in some states), the lender can also pursue a deficiency judgment, requiring the borrower to pay back at least a part of the remaining amount due.

In most cases, there are two factors that influence lenders and homeowners to agree upon a short sale.

  1. The homeowner is extremely behind on the mortgage payments and has no hope to pay the debt on the mortgage.
  1. Housing market fluctuations have ensured that the value of the real estate property in question has dropped below the existing mortgage balance. This naturally means the homeowner has negative equity in the property and has no option but to sell the house.

For the short sale of a property to happen, the homeowner must prove beyond the shadow of a doubt that they can no longer afford mortgage payments due to financial constraints, and the lender must agree to forgo the balance between the amount owed on the mortgage and the amount the sale will fetch.

The purchase price of the home being sold must be in line with the current property prices in that neighborhood, and the fact that it is a short sale must be disclosed in advance.

However, you should not confuse a short-sale property with the foreclosure of a home.

Difference between a foreclosure and a short sale

avoid foreclosure

There is a major difference between the foreclosure process and a short sale.

In the case of a foreclosure sale, the mortgage lender repossesses a property with the goal of selling it and recovering the debt. This means the entire process of the sale and all the proceedings are initiated by the mortgage company. The sale of foreclosed homes can happen either by auction or through a real estate agent.

The short sale process is based on the premise that the lender cannot recover what is owed since the sale price of the property is lower than the owed amount. So, instead of dealing with the red tape and due process of foreclosure, the lender chooses to let the homeowner sell the property for its current value and close the mortgage.

This means that the sale process is initiated by the homeowner, but is closely monitored by the lender. In fact, the sale cannot happen unless it has the lender’s approval.

Read more: Why auction a house instead of selling?

So is a short sale beneficial at all?

Short sales have their benefits and their negatives for the lender, buyers, and sellers. However, let us begin by understanding that since any money received from a short sale will definitely not cover the mortgage due to the lender or the costs of selling the property, everyone owed money has to accept that they will be making a loss off of the deal. 

For sellers, a short sale means they walk away from the sale with virtually nothing. All the money from the sale goes to the lender. However, a short sale, while it will show up on the seller’s credit report, is likely to be less damaging than a foreclosure sale, just as long as the lender can report to the credit bureaus that the debt has been in full.

For buyers, the positive is that they get to buy the property at a greatly reduced price. However, in most cases, these properties are derelict or are fixer-uppers at the very least. Then, there is the red tape and additional expenses. For example, a lender may demand that the buyer bear the closing costs, something that falls upon the seller’s shoulders in regular home sales.

And finally, while the lender typically does have to bear a financial loss, it may be less of a loss than foreclosing on the property.

Is it a good idea to short sell your home?

home selling tips

A short sale is a desperate move. If you cannot keep up with your mortgage payments and if the value of homes in your neighborhood is depreciating instead of appreciating, a short sale may be the only way for you to control the damage to your credit score.

However, considering the complex nature of short sales and the red tape involved with it, the process can take from a few weeks to several months. And there is no guarantee that the sale will go through in the end.

So, if you are dealing with a short sale, here are some tips to help you increase your chances of a successful sale.

Read more: When will housing prices drop

Tips to help with a short sale

  1. Write a compelling hardship letter, explaining why you absolutely cannot afford your mortgage payments and explaining in detail the financial hardships you are facing. 

Keep in mind that if your lifestyle looks like you’re spending too much on other things instead of paying your mortgage, the sale will definitely sail. A person who is out of employment and genuinely going through a hard time is likely to find sympathy.

  1. You need to show proof of income and your assets for the past two years. If your bank statement shows that you have a retirement fund and other savings, the lender will not let your debt slide.
  1. You will need to agree to a home inspection and a comparative market analysis to prove beyond doubt that the value of your home and other homes in your neighborhood have indeed dropped to lower than what you owe the lender,
  1. Determine the number of existing liens on the property. While the IRS will expect full payment on back taxes, they will be forgiving about liens being unpaid at the time of the sale of your home.

Read more: Why do I keep getting offers to buy my house

Buying a short-sale home

buying a short sale home

If you’re looking at investing in short sale homes, here’s the process.

  1. Begin by identifying possible short sale properties. You can do this by browsing online listings, courthouse ads, or even by using an experienced real estate agent. Remember that if the homeowner seems to have a lot of equity in the home, the bank is more likely to choose foreclosure than a short sale.
  1. Spend some time inspecting the property and calculating how much you may need to spend on renovations.
  1. You also need to spend some time doing research on the home and the neighborhood. Irrespective of whether you buy a home to flip it or to live in it, the bottom line is that your investment should always appreciate in value.
  1. Be sure the homeowner comes clean about the liens and mortgages due on the property.
  1. Figure out how you will pay for the home. If you have a good credit score, the current lender may be willing to offer you a mortgage on the property. This would be ideal since it will help close the short sale transaction faster, which is beneficial for the lender and for you.
  1. Have your real estate agent start the sale process with the loan mitigation department of the lender, after getting the current homeowner to sign a notarized authorization letter allowing the lender to discuss the mortgage with you.
  1. Assemble the purchase proposal, including the sale and purchase deeds, the seller’s letter of hardship, a settlement statement, a description of the liabilities involved with the purchase, and a property value statement.
  1. As with all real estate transactions, expect some bargaining while you negotiate and close the deal. 

Pro tips

  1. Make sure you insist on a home inspection before you close the deal. A fixer-upper may be a lot worse than it looks.
  2. Remember that short sale transactions can take longer than regular home sales. So be ready to wait for the deal to go through.
  3. Buying a house emotionally because it seems to look good is not very advisable. A real estate transaction is primarily a financial transaction. So make sure you’re investing in the short sale home after all due consideration.

Read more: Buying a home during a recession

What is a short sale home? was last modified: October 31st, 2022 by Narayan Shrouthy
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