In the field of real estate, our entire world is created by transactions; transactions between buyers, sellers, and lenders.
A short sale is one of those transactions.
Despite the name, short sales are neither short nor simple.
Short sales are complicated. They are not for everyone and not always applicable in certain situations. Confusion lies in what a short sale is, how it works, when it is applicable in the field of real estate, and who are the parties that benefit from a short sale.
Short Sale? What is it?
A short sale, also known as a short payoff, is a transaction between buyer, seller, and lender. Short sale is a sale of an encumbered property where the mortgage lender accepts the net proceeds at closing in full satisfaction of a greater amount of the mortgage debt.
How does it work?
A homeowner can start the process of a short sale via submission of a short sale package to their lender. As well as providing proof of no financial assets that would contradict their capabilities of making mortgage payments.
At the beginning, a sale is only executed when the mortgagee or lienholder accepts an amount that is less than what is owed. It could also occur when a sale is an arm’s length transaction, usually preferred over foreclosure.
No short sale proceeds without a lender’s approval.
Usually due to the complex intricacies of short sale transactions, the deals fall through often. Most lenders’ approval processes for short sales are paperwork intensive, requiring more time to close compared to other sales.
What is a Certified Distressed Property Expert?
Consulting with an expert agent is the best option to increase the chances of closing a short sales deal and avoiding foreclosure.
Realtors with a CDPE have a designated expertise in providing available foreclosure alternatives. These specialized agents have access to resources and networks in order to clear any obstacles impeding a professional transaction. In certain cases, these agents can help sell a home quickly in any sale depending on the situation; turning a home into cash and doubling the sales volume compared to non-CDPE agents.
Benefits of hiring a CDPE:
- Expertise in foreclosure and short sales
- Shorter processing times
- Knowledge of handling distressed property situations and clients
Finding the right expert in short sales is key to guiding you through these not so typical real estate transactions. Easing the burden on the seller and clarifying situations between parties to provide a smooth closing.
Are Short Sales Common?
Between 2008 to 2012, short sales resurfaced becoming a commonplace trend through the recovery stage of the Great Recession.
Short sales during this time were the result of the financial fallout through massive inflated real estate prices and the lack of job opportunities for the unemployed and underemployed homeowners.
Short sales was a homeowners’ alternative to a foreclosure sale when a mortgage was greater than the amount of the property value that encumbered their home.
Is a Short Sale Similar to a Foreclosure?
A short sale is the lesser of two evils when compared to a foreclosure.
Short Sale – is initiated by the seller in order to unload the distressed property before foreclosure to prevent damage to their credit. Usually only approved by lenders when a foreclosure is unavoidable.
Foreclosure – is initiated by the lender, repossessing a home when the owner can no longer make payments. A requirement after a foreclosure is for homeowners to wait seven years before obtaining any more mortgage loans.
In the end, short sales are voluntary, while a foreclosure is forced.
Who Benefits from a Short Sale?
The Seller – is likely to accrue some damages to their credit and will not profit from the deal at the end of the day. On the other hand, a short sale can be less damaging and forestall foreclosure and the negative impacts on credit ratings.
The Buyer – receives the property at a reduced rate, however the initial deal needs to go through red tape to be approved. They might also be required, by the lender, to pay additional closing costs normally assigned to the seller.
The Lender – will be hit with a financial loss, but not as large of a loss if the property is foreclosed. They have the opportunity to recoup more of their investment compared to a foreclosure. And the responsibility of repossession and property upkeep does not fall on the lender until the property is sold.
The outcome of benefits per party depends on the situation and the condition of the sellers and the distress subsequent properties are in.
With any transaction, a good deal is never guaranteed.
***In connection with this blog, we are releasing our upcoming fifth book, World Class Short Sale Agent. Check out our new book on July 6!***