What is a short sale on a home? If you are thinking of entering the real estate market this way, then this is an excellent question with a complicated answer. Short sales are an industry within an industry, and you need to know what is going on if you are thinking of entering the market this way. Here are the major items that you need to know.
What is the definition of a short sale?
A short sale is a sale of property in which the lien holder, usually a bank, accepts that the proceeds of the sale will not cover the costs of the lien against the real estate. In short, a bank is trying to get rid of a property.
Is a short sale a foreclosure?
A short sale is not a foreclosure, although the two situations do tend to overlap more often than not. One of the primary reasons that a bank accepts short money is to keep from keeping a property on its books that has been defaulted on by a borrower.
A foreclosure is the process that the lien holder initiates in order to transfer the property back to itself because of the default of the borrower. In plain language, the foreclosure is what the bank does to take the property from the resident. A short sale is what the bank does to get the property into the hands of a new resident quickly.
Foreclosure sales are known as real estate owned property sales and follow a slightly different procedure. Also, there is nothing that says a lender cannot recover its full investment on a foreclosure sale. For the most part, the housing prices of short sales will be lower than on foreclosure sales.
Can a resident initiate a short sale or does it have to be a bank?
A resident can initiate a short sale, but this is not often done. In most cases, a bank will run interference if they feel as if a resident is about to default. Seller financing is another option that residents sometimes use; however, this is quite difficult if the seller is not in complete control of the title at that point.
What are the problems that occur with a short sale?
The first problem that may occur with a short sale is that the current resident does not want to leave the property. Because a short sale situation is usually contentious, the seller may have emotional distress that he takes out on the property. This leaves the potential for damage to the property much higher, and neglect is another issue entirely. If a resident does not have enough money to pay the mortgage, then he probably does not have enough money for the maintenance that should be routine or the repairs that must occur in emergency situations.
The home inspection therefore becomes very important in the event of a possible short sale. Banks and other lien holders will attempt to sell a property in an as is condition, or a condition of non-disclosure of the problems in the property. This means that you must conduct the proper research into the property and into the laws that require lenders to fix certain things in a house before selling it. Check for unpermitted renovations as well as damage and location based contingencies.
When you are looking around in the market for a short sale, keep your poker face on. If you fall in love with a property that a bank is already trying to hide information about, they may use your emotion for the property against you. If you fall in love with a property, keep it to yourself.
You should also pay attention to the price of the home versus its possible future value. Part of the reason that a bank chooses to short sell a house is that it does bot believe that it will ever get the value back.
What should I know about the politics of a short sale?
The short sale is always going to move slowly because of the potential of damage to the credit score of the seller. In order to speed up the process, you will need to invest in a real estate agent who knows how to make the banks move. When you vet your agent, look for someone with connections to the local banking industry, not just someone who hits you with a sales pitch about a low price.
What about the Making Home Affordable Plan?
The Making Home Affordable Plan is a government program for short sales that pays lenders a maximum of $1,000 to expand their use of short sales for underwater residents. This program may help lien holders provide residents with more options, and it may open up the market for short sales overall.
Short sales are great opportunities for the right buyer. If you are able to handle the additional responsibility and you are willing to do the extra research, then you may be able to grab a great property at a fraction of its full cost. Give yourself plenty of extra time to do the research and find the right agent for the best chance of success.
2 Point Highlight
In plain language, the foreclosure is what the bank does to take the property from the resident. A short sale is what the bank does to get the property into the hands of a new resident quickly.
Part of the reason that a bank chooses to short sell a house is that it does bot believe that it will ever get the value back.
