What Does Short Sale Mean In Real Estate? Short Sales Explained!
When you’re looking for homes on sale and the budget isn’t that much, a short-sale property may work for you. A short sale might also be a good idea for a financially distressed homeowner. Whatever position you’re in now, a short-sale property may provide some advantages to the seller or the buyer.
At some point, short sale transactions aren’t that easy and require a lot of work to do since many factors are involved. When the seller isn’t qualified for a short sale or the lender won’t approve the short sale agreement, then it’ll not work.
A short sale timeline depends on different elements and will vary by state. It’s based on the actions of the homeowner (the seller), the bank (usually the lender), the difference between the value of the home and the mortgage value, and other factors.
In this article, you’ll know the concepts of a short sale that may help you better understand the logic behind this real estate transaction.
What is a Short Sale in Real Estate?
A short sale is a transaction in real estate where the troubled homeowner, usually someone who’s behind on mortgage payments, plans to sell the property for an amount that’s less than the original mortgage value.
The property buyer is the third party and the proceeds of the sale go to the lender. The lender agrees to a purchase offer from a new buyer, with a value less than owed by the original owner (seller). It’s the discretion of the lender to forgive the difference or enforce a pay deficiency against the borrower (homeowner). Nevertheless, the difference in a short-sale is forgiven in some states.
Understanding A Short Sale
In real estate, the term ‘short sale’ refers to a home being sold for the value that’s less than the balance remaining on the mortgage. For instance, a homeowner is selling a home for USD$200,000 while there’s still a USD$225,000 balance on the mortgage. The differential value of USD$25,000 is considered the deficiency.
Before the sale starts, the lender must decide to agree on a short-sale. The lender, usually the bank, requires documentation that supports the feasibility of the short-sale since the lender may lose a considerable amount of money if it doesn’t make sense. Hence, without the approval of the lender, a short-sale will not occur.
Short sales transactions are laborious, entails a lot of documentation, and may take a year to process. Still, short-sales provide a better impact on a homeowner’s credit score than with a foreclosure.
Short Sale Vs Foreclosure
For financially distressed homeowners, short sales and foreclosures are financial options for delayed mortgage payments. In both ways, the homeowner will be forced to leave the property, yet the duration and consequences vary in each condition.
Some features of foreclosure include:
- The act is initiated by the lender that’s seizing the home after the homeowner fails to mortgage payments. This is different from a short-sale as the homeowner is the one that executes the proposal.
- The lender orders appraisal and proceeds with selling the property.
- A foreclosure has shorter processing time compared with the short-sale since the lender is concerned only with liquidating the asset.
- A foreclosure is more detrimental than a short-sale because a foreclosure’s credit report lasts for seven years and may take a minimum of five years for a homeowner to purchase another home.
Putting the home into a foreclosure status allows the homeowner to walk away but carries grave consequences for their financial future like damaged credit records and bankruptcy. Processing a short-sale may be complicated and labor-intensive, but the payoff for the efforts involved can be worth it.What is a Short Sale in Real Estate? Find out now! #shortsale #realestate
How Does A Short Sale Work?
Short sales will take a long time to complete during the selling and buying process, and knowing the exact timeline is difficult to predict. Homeowners that are anticipating the short-sale timeline must be prepared to work with the details and accept that it’ll be a lengthy process.
To achieve a successful transaction, here are the essential steps needed:
- Convincing the Lender: In most cases, the lender will sympathize with an honest borrower. Hence, try to look responsible to the lender when your short-sale proposal is being reviewed.
During this time, the cause of financial trouble must be new, like loss of job, health problem, or divorce. Be careful with your choice of words because if the lender finds out they can benefit more from foreclosing your property than allowing a short-sale, then they might reject it.
- Consult Professionals: To facilitate a smooth transaction, it’s best to consult a tax professional, a real estate attorney, and an expert real estate agent. Even though the professional services are going to be costly, having them may prevent you from bigger and more complicated financial trouble.
- Setting a Price: When pricing, ensure to consider the cost of selling the property into the sum of money needed to get out of the situation.
In a down market condition, the seller can encounter a shortfall, in which the financial obligation is greater than the cash on hand. In some states, the lender may force you to pay the shortfall.
- Collect the Documents and Finding a Buyer: Secure the documents required to justify the financial hardship to the lender. The proof may include medical bills, bank statements, a divorce decree, or a termination notice from the previous employer.
It’s important to create a short-sale proposal that’ll qualify the lender’s judgment. The next step is to find a buyer for your home.
- Submit the Proposal to the Bank: If you found a buyer and the documents are completed, submit your proposal and the buyer’s offer to the bank. The proposal should include the letter of hardship and must have a convincing appeal to the bank. Otherwise, when they sense that you still have remaining assets to claim, then a short sale may not prosper. The lender’s review of the offer may take several weeks to months.
Once the process is completed and the lender approves the proposal, then you can leave your home without worries and complications. Even if a short-sale is better than a foreclosure, it can still influence your credit history since the deficiency in mortgage payments will still reflect as delinquent payments. Certainly, the consequence is less damaging than a foreclosure.
A short-sale may save the homeowner from grave consequences of delayed mortgage payments, but the process isn’t encouraged by financial institutions, to prevent acts of delinquency. The proposal of a short-sale will be favored only by the lender if and only if a genuine financial hardship is established.
The relevant inputs and necessary steps mentioned in this article may help the seller, the lender, and the buyer achieves the best solution to the financial challenges of the homeowner and provides great opportunities for buyers or investors.
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Popular Questions About Short Sales
Are there risks of buying a short sale home? Yes, there can be risks associated with buying a short-sale home. These risks include potential delays in the buying process. It can easily take 3 to 6 months for a short-sale to be approved or denied by the seller’s lender. Another potential risk is the price the seller and buyer agreed on could be denied, the lender may want more money. So a buyer can wait for months, maybe even a year, to find out the price they offered will not be accepted and they have to pay or start their home search all over again.
What is the process of a short sale? Normally, a seller will list their home for sale and find a buyer. Once the seller and buyer come to terms the seller will submit their “hardship package” to their lender for short-sale approval/denial. The lender will review the seller’s short-sale request, which on average takes 3-6 months, sometimes longer, sometimes shorter. If the bank approves the short-sale the clock starts ticking for the buyer to do their inspections, obtain financing, and close. Most short-sale approvals are good for 30 days, sometimes 60, so a buyer needs to be prepared to move.
Why is a short sale bad for the buyer? Short-sales aren’t necessarily bad for buyers. In most cases the only thing they have to lose during the short-sale approval/denial process is time. However, it ultimately depends on the contract and how it’s written.
Do You Need to Short Sale Your Wellington Florida Home?
If you owe more than your Wellington home is worth but need to sell contact Top Wellington Realtor, Michelle Gibson! She has been specializing in residential real estate, including short sales, since 2001 throughout Wellington Florida, and the surrounding area. Areas of service include Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more.
About the Author
Sharon Green is a successful blogger who is known for her informative, and witty pieces. Besides regularly updating her own blog with high-quality articles, Sharon collaborates with other online platforms to contribute content.