SHORT SALE A NEW TERM TO MOST OF US…… Short Sale, a new term to most of us has surfaced in the last two years and today represents 50% of real estate sales in the Southern California area. What is a Short Sale in real estate? Well, I felt it would be a good time to define the term and share it with all of you along with my Service For Life letter. Wikipedia, the free encyclopedia, defines the term as follows. A short sale occurs when the proceeds of a real estate sale fall short of the balance owed on the property.[1] In a short sale, the bank or mortgage lender agrees to discount a loan balance due to an economic or financial hardship on the part of the mortgagor. This negotiation is all done through communication with a bank's Loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender, sometimes (but not always) in full satisfaction of the debt. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Most Short Sales leave a deficiency balance for which the Mortgagor / Borrower is still liable. In 99% of all cases it is not a settlement-in-full. A deficiency balance will remain while the mortgage broker, real estate agent / broker, loan officers, title and closing agents still remain getting their profit. And no regulatory agency governs this hybrid transaction. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation. A short sale typically is executed to prevent a home foreclosure. Often a bank will choose to allow a short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Additionally, a short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. It does not extinguish the remaining balance unless settlement is clearly indicated on the acceptance of offer. Now that we have a definition where does it fit into real estate as we know it and what does it mean to a home owner? Well, a short sale is generally a preferance to a foreclosure. Why? Well lets say a home owner is having difficulty meeting the monthly payments on his home and when he obtains an estimated market value for the home he finds that he owes more than the home is worth. The home owner is up side down in the property. Given that, what are the home owners options? The home owner can stop making payments and wait for the lender to foreclose, or he can work with a realtor to implement a short sale. Why would the owner implement a short sale? Well for two reasons; one, if the property sells and the lender approves the short sale then the lender shows at closing that it is a settled mortgage versus a foreclosure. A foreclosure shows up on a background check and has an impact on the seller’s credit rating . Secondly, obtaing a conforming loan approval after a short sale takes approximately two to four years; where as, with a foreclosure it can be seven years or greater. Refering back to the definition of a short sale we see that a bank feels that they will save money on a short sale tranxaction versus a foreclosure action. The short sale offers both the home owner and the bank an opportunity to come out of a bad situation with a small benefit. The bank typically is better off . Or, the bank can offer the seller a Short Payoff. The short payoff leaves the seller with an IOU to the bank after the sale but the loan amount is considerably less than the original loan and the terms are better to deal with. The seller benefits from this type of closing because there is no impact to his or her’s credit rating. If you know of someone or you would like more information on short sales or short payoffs please contact me. In todays economy it is an action that should not be put off if there is a problem. |