I’ve heard at least 3 times this week, “Tell me what a short sale is again, Amy.” So…
A short sale is when a lender accepts less than the total amount owed to pay off the mortgage when the property is sold. The homeowner (aka borrower) must show a qualified hardship for the bank to consider doing a short sale. Just owing the bank more than you can sell your house for right now is not enough.
The homeowner has to provide proof of the hardship and detailed financial information to show they will be unable to fix their problem. When a seller has their home listed as a short sale or possible short sale it means they are telling real estate agents and potential buyers that the bank will have to approve the sale of the home after the seller/homeowner accepts an offer and probably don’t have any money for repairs.
Why would the bank agree to accept less than what is owed? The bank will work with people on short sales because short sales are often better than a foreclosure for the bank. On a foreclosure there are more costs (attorney fees, eviction proceedings, utility bills, cost to secure and re-key the home, property insurance) and more time involved to get the property off their books. In some cases, the bank retains the rights to pursue the seller/homeowner later to recoup the rest of the money.
As a seller, you have to spend a lot of time talking to the bank to work on a short sale. It means you don’t have to sit by and wait for the bank to foreclose on your home. You can call them and communicate to see if you qualify for a short sale. You can contact an experienced real estate professional for assistance. You might be able to lower your price to a realistic point to get your home sold so you can move on. As a seller you have to be proactive, even when the person at the bank may not be telling you the same thing you heard last week. You cannot get any money from the sale at closing, regardless of how much you’ve paid or how much you put as a down payment. Zero. A short sale will have a negative impact on your credit score, but hopefully it is less than a foreclosure. The impact on your score depends on when you make payments and if you made any partial payments. The difference in the amount owed and what the house sells for can be charged to you as income for tax purposes so you need to talk to a tax advisor to understand your options and liabilities.
As a buyer, you need to understand that you may make an offer on a home and that it can take weeks (and I mean many weeks) to hear back from the bank. You may have to be flexible on the closing date. As a buyer understand that you’re buying a property that needs some repairs or TLC and in many cases the seller and bank will not do them or give you money to have them done. That’s why you’re getting it at a low price to compensate for the risk and hassle. If you have a house to sell and want to buy a short sale, the bank is probably not going to let your buyer’s agent write in a clause that makes the purchase of the short sale home contingent on closing of your current home. You may need to move twice because the closings don’t coincide.
Short sales are not for the faint of heart, but they are an opportunity for a buyer and a seller to get what they want without having to wait and deal with a foreclosure.
I have a designation called the CDPE, which stands for Certified Distressed Property Expert. That means I have training in short sales and working with distressed properties. Years of market experience help, but the market is changing and you need a full-time committed real estate agent who knows the market and how to deal with the banks.
Amy Shair is a licensed real estate associate with almost 20 years experience in residential real estate in the Raleigh, Durham, Cary, Chapel Hill area of NC. She is affiliated with RE/MAX United in North Carolina. She can be reached at 919-469-6539 or firstname.lastname@example.org
Next blog post: Sellers: what short sales and foreclosures in your neighborhood do to the value of your home in 2010.